Real Estate Investments

(a) Acquisitions of Real Estate

For the year ended December 31, 2014, in addition to the BRE merger, the Company purchased six communities consisting of 1,480 units for $460.7 million.

For the year ended December 31, 2013, the Company purchased six communities consisting of 1,079 units for $349.1 million.

(b) Sales of Real Estate Investments

During 2014, the Company sold four communities consisting of 594 units for $120.4 million resulting in gains totaling $43.6 million.

During 2013, the Company sold three communities consisting of 363 units for $57.5 million resulting in gains totaling $29.2 million.

During the first quarter of 2013, the Company sold a land parcel held for future development located in Palo Alto, California for $9.1 million, which resulted in a gain of $1.5 million.

During 2012, the Company sold two communities consisting of 264 units for $28.3 million resulting in gains totaling $10.9 million.

The Company has joint venture investments in co-investments which are accounted for under the equity method. The co-investments’ accounting policies are similar to the Company’s accounting policies. The joint ventures own, operate, and develop apartment communities. The Company also has preferred equity investments included in co-investments which are accounted for under the equity method.

Palm Valley Apartments

On October 31, 2014, the Company acquired a 50% interest in Palm Valley Apartments ("Palm Valley") located in San Jose, California for $180 million. The property is encumbered by a $220 million mortgage loan, bearing interest at 5.6% per annum and maturing in February 2017, of which Essex’s pro-rata share is approximately $110 million. As of December 31, 2014, Palm Valley Apartments had an aggregate undepreciated carrying value of approximately $370.8 million.

Wesco I and Wesco III

Wesco I and III are 50/50 programmatic joint ventures with an institutional partner. Under the terms of Wesco I's and III’s operating agreements, Essex is entitled to asset management, property management, development and redevelopment service fees. Essex is entitled to its 50% pro rata share of the income or loss generated by these entities and upon the achievement of certain performance measures, is entitled to promote income. The Company has contributed $270 million to Wesco I and III. As of December 31, 2014, Wesco I owned nine apartment communities with 2,713 units with an aggregate undepreciated carrying value of approximately $682.4 million and Wesco III owned six apartment communities with 993 units with an aggregate undepreciated carrying value of approximately $230.7 million.

Wesco IV and BEXAEW

On April 1, 2014, in connection with the merger, the Company acquired a 50% interest in Wesco IV and a 50% interest in BEXAEW LLC (“BEXAEW”). Wesco IV and BEXAEW’s remaining 50% interest is owned by institutional partners. Wesco IV and BEXAEW expect to utilize debt targeted at approximately 50% and 60%, respectively, of the cost to acquire and improve real estate. Under the terms of Wesco IV’s and BEXAEW’s operating agreements, Essex is entitled to asset management, property management, development and redevelopment service fees. Essex is entitled to its 50% pro rata share of the income or loss generated by these entities and, upon the achievement of certain performance measures, is entitled to promote income. As of December 31, 2014, Wesco IV owned five apartment communities with 1,116 units with an aggregate undepreciated carrying value of approximately $297.9 million. As of December 31, 2014, BEXAEW owned nine apartment communities with 2,723 units with an aggregate undepreciated carrying value of approximately $519.2 million.

Essex Apartment Value Fund II, L.P.

The Company contributed $75.0 million to Essex Apartment Value Fund II, L.P. (“Fund II”), which represents a 28.2% interest as general partner and limited partner. As of December 31, 2014, Fund II was in liquidation.

During the year ended December 31, 2014, Fund II sold the two remaining communities for gross proceeds of $47.3 million and the Company recognized promote income of $9.5 million. In connection with the 2014 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $0.2 million. The total gain on the sales was $23.3 million, of which the Company’s pro rata share was $6.6 million, net of internal disposition costs.

During the year ended December 31, 2013, Fund II sold five communities for gross proceeds of $320.4 million. In connection with the 2013 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $0.4 million. The total gain on the sales was $146.8 million, of which the Company’s pro rata share was $38.8 million, net of internal disposition costs.

During the year ended December 31, 2012, Fund II sold seven communities for gross proceeds of $413.0 million. In connection with the 2012 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $2.3 million. The total gain on the sales was $106.0 million, of which the Company’s pro rata share was $29.1 million.

Expo

In December 2010, the Company entered into a 275 unit development joint venture in Seattle, Washington with a partner who contributed a land parcel during the first quarter of 2011 in return for a 50% interest in the venture and the Company contributed cash equal to the value of the land in return for a 50% interest in the joint venture. As of December 31, 2014 the aggregate undepreciated carrying value was approximately $65.3 million.

Canada Pension Plan Investment Board – Joint Venture Developments

The Company has entered into seven development joint ventures with the Canada Pension Plan Investment Board (“CPPIB”) to develop seven apartment communities. For each joint venture the Company holds a 50% to 55% non-controlling interest in the venture and will earn customary management fees and may earn development, asset property management fees and may also earn a promote interest. These co-investments are not variable interest entities since they have sufficient equity without additional subordinated support, and the Company and CPPIB jointly have the power to direct activities that most significantly impact the co-investments’ economic performance. Each of the co-investments between the Company and CPPIB has a single general partner, which is a subsidiary consolidated by the Company. However, the Company, as general partner of the co-investments, does not control the co-investments because the limited partners have substantive participating rights. Therefore, the presumption of control by the Company as general partner is overcome by the rights held by CPPIB, and the Company records the co-investments with CPPIB on the equity method of accounting.

As of December 31, 2014, the Company and CPPIB have seven active developments projects comprised of 1,424 units for total estimated costs of $650.0 million. At December 31, 2014, the total remaining estimated costs to be incurred on these projects was $205.0 million of which the Company’s portion of the remaining costs were $111.3 million.

Connolly Station, a 309 unit community in Dublin, California, a development joint venture with CPPIB, stabilized its operations in the first quarter of 2014.

Epic is a development joint venture with CPPIB in San Jose, California. Phase I, a 280 unit community, stabilized its operations in the fourth quarter of 2013 and Phase II, a 289 unit community, stabilized its operations in the second quarter of 2014. Epic – Phase III is currently under development.

The Huxley and The Dylan

In 2011, the Company entered into two development joint ventures with a regional developer for the construction of The Huxley and The Dylan, two communities with 371 units and approximately 30,950 square feet of retail located in West Hollywood, California. The regional developer contributed the land and the Company contributed approximately $14.8 million in cash for a 50% interest in the ventures. The joint ventures obtained bond financing for the project in the amount of $114.4 million with maturity dates of October 2046 and December 2046 and entered into an interest rate swap transaction with respect to the bonds that terminates in September 2016 and December 2016 and that effectively converts the interest rate to the Securities Industry and Financial Market Association Municipal Swap Index (“SIFMA Municipal Swap Index”) plus 150 basis points through December 2016. The Huxley stabilized its operations in the second quarter of 2014. As of December 31, 2014 the aggregate undepreciated carrying values of The Huxley and The Dylan were approximately $72.2 million and $74.1 million respectively.

One South Market

In May 2013, the Company entered into a development joint venture to develop a 312 unit community in San Jose, California. The Company holds a 55% non-controlling interest in the venture and will earn customary development, asset, and property management fees and may also earn a promote interest. The co-investment is not a variable interest entity since it has sufficient equity without additional subordinated support, and the Company and the partner jointly have the power to direct activities that most significantly impact the co-investment economic performance. The co-investment has a single general partner, which is a subsidiary consolidated by the Company. However, the Company, as general partner of the co-investment, does not control the co-investments because the limited partner has substantive participating rights. Therefore, the presumption of control by the Company as general partner is overcome by the rights held by the limited partner, and the Company records the co-investments on the equity method of accounting.

As of December 31, 2014, the project’s total estimated costs were $145.0 million. At December 31, 2014, the total remaining estimated costs to be incurred on this project were $25.0 million of which the Company’s portion of the remaining costs was $13.8 million.

Century Towers

In July 2014, the Company entered into a joint venture to develop Century Towers, a multifamily community containing 376 apartment homes located in San Jose, California. The Company has a 50% ownership interest in the development which has a projected total cost of $172 million. The joint venture has obtained a $90 million construction loan that floats at LIBOR plus 175 basis points for a three year term with two one-year extension options. Construction began in the third quarter of 2014 and the property is expected to open in the first quarter of 2017. The Company has also committed to a $27 million preferred equity investment in the project, which accrues an annualized preferred return of 8.1%. The Company will earn customary development, asset, and property management fees and may also earn a promote interest. The co-investment is not a variable interest entity since it has sufficient equity without additional subordinated support, and the Company and the partner jointly have the power to direct activities that most significantly impact the co-investment economic performance. The co-investment has a single general partner, which is a subsidiary consolidated by the Company. However, the Company, as general partner of the co-investment, does not control the co-investments because the limited partner has substantive participating rights. Therefore, the presumption of control by the Company as general partner is overcome by the rights held by the partner, and the Company records the co-investments on the equity method of accounting.

As of December 31, 2014, the project’s total estimated costs were $172 million. At December 31, 2014, the total remaining estimated costs to be incurred on this project were $132 million, of which the Company’s portion of the remaining costs was $66 million.

Preferred Equity Investments

During the fourth quarter of 2014, the Company received cash of $101.0 million for its share of the redemption of a preferred equity investment related to a property located in San Francisco, California. The Company recorded $5.3 million of income from penalties due to the early redemption of this preferred equity investment which is included in equity income from co-investments in the consolidated statements of income.

In 2013, the Company received the redemption of $22.8 million of preferred equity related to three properties located in Los Angeles, California. The Company recorded $0.9 million of income from redemption penalties due to the early redemption of these preferred equity investments.

In 2013, the Company restructured the terms of a preferred equity investment with a related party entity on a property located in Anaheim, California, reducing the rate from 13% to 9%, while extending the maximum term by one year. The Company recorded a $0.4 million restructuring fee related to the restructured investment.

In 2012, the Company made a $14 million preferred equity investment in an apartment community located in Cupertino, California to a related party entity. The investment has a preferred return of 9.5% and matures in May 2016. The preferred equity agreement provides for up to $4 million of additional funding for renovation costs.

The carrying values of the Company’s co-investments, all accounted for under the equity method of accounting, as of December 31, 2014 and 2013 are as follows ($ in thousands):



	2014		2013
Membership interest/Partnership interest in:
Wesco I and III	$	188,404	$	181,098
Fund II	696		4,166
Expo	7,352		12,041
The Huxley	11,471		11,224
Connolly Station	46,653		45,242
Epic Phase I and II	122,968		106,845
Wesco IV	86,289		—
BEXAEW	73,771		—
Palm Valley	70,186		—
Total operating co-investments	607,790		360,616
Membership interest in:
Limited liability companies with CPPIB that own and are developing Epic Phase III, Mosso I and II, Park 20, The Emme, The Owens and Hacienda	268,016		149,451
One South Market	30,919		17,115
The Dylan	7,874		7,321
Century Towers	13,121		—
Total development co-investments	319,930		173,887

Membership interest in Wesco II that owns a preferred equity interest in Park Merced with a preferred return of 10.1%	—		94,711
Preferred interest in related party limited liability company that owns Sage at Cupertino with a preferred return of 9.5% (matures in May 2016)	16,571		15,775
Preferred interest in a related party limited liability company that owns Madison Park at Anaheim with a preferred return of 9% (matures in September 2020)	13,824		13,824
Preferred interest in related party limited liability company that owns an apartment development in Redwood City with a preferred return of 12% (matures in July 2016 with one one-year extension option)	10,396		9,455
Preferred interest in a limited liability company that owns an apartment development in San Jose with a preferred return of 12% (matures in August 2016 with one one-year extension option)	10,011		8,865
Preferred interest in a limited liability company that owns 8th & Thomas with a preferred return of 10.0% (matures in June 2018 with one one-year extension option)	13,145		—
Preferred interest in a limited liability company that owns Newbury Park with a preferred return of 12.0% (matures in January 2019)	13,150		—
Preferred interest in a limited liability company that owns Century Towers ⁽¹⁾ (matures in August 2019)	12,357		—
Preferred interest in a limited liability company that owns an apartment development in San Jose with a preferred return of 9% (matures in January 2023)	19,237		—
Total preferred interest investments	108,691		142,630
Total co-investments	$	1,036,411	$	677,133

(1) The Company has committed to a total preferred equity investment in the project of $27.0 million at an effective preferred return rate of 8.1%. As of December 31, 2014 the Company has made a preferred equity investment of $12.0 million.

The combined summarized financial information of co-investments is as follows ($ in thousands):



	December 31,
	2014		2013
Balance sheets:
Rental properties and real estate under development	$	3,426,574	$	1,953,328
Other assets	107,902		61,578
Total assets	$	3,534,476	$	2,014,906
Debt ⁽¹⁾	$	1,677,089	$	690,132
Other liabilities	91,579		125,479
Equity	1,765,808		1,199,295
Total liabilities and partners' equity	$	3,534,476	$	2,014,906
Company's share of equity	$	1,036,411	$	677,133



	Years ended December 31,
	2014			2013			2012
Statements of operations:
Property revenues	$	188,548		$	100,402		$	130,128
Property operating expenses	(71,419		)	(37,518		)	(55,990		)
Net operating income	117,129			62,884			74,138
Gain on sale of real estate	23,333			146,758			106,016
Interest expense	(39,990		)	(24,155		)	(34,959		)
General and administrative	(6,321		)	(5,344		)	(3,697		)
Equity income from co-investments ⁽²⁾	26,798			18,703			18,051
Depreciation and amortization	(74,657		)	(36,831		)	(47,917		)
Net income	$	46,292		$	162,015		$	111,632
Company's share of net income ⁽³⁾	$	39,893		$	55,865		$	41,745


(1)	Includes preferred equity investments held by the Company.


(2)	Represents income from Wesco II's preferred equity investment in Park Merced.


(3)	Includes the Company's share of equity income from co-investments, income from preferred equity investments, gain on sale of co-investments, co-investment promote income, and income from early redemption of preferred equity investments.

(d) Real Estate under Development

The Company defines development activities as new properties that are being constructed, or are newly constructed and are in a phase of lease-up and have not yet reached stabilized operations. As of December 31, 2014, the Company had two consolidated development projects, ten unconsolidated joint venture development projects, and various consolidated predevelopment projects, aggregating 2,920 units for an estimated total cost of $1.5 billion, of which $420.0 million remains to be expended. The Company’s portion of the remaining costs was $250.0 million.