Real Estate Investments

(a) Acquisitions of Real Estate

For the year ended December 31, 2017, the Company purchased two communities consisting of 1,328 apartment homes for $273.0 million. The table below summarizes acquisition activity for the year ended December 31, 2017 ($ in millions):



Property Name	Location	Apartment Homes	Essex Ownership Percentage		Quarter in 2017	Purchase Price
Palm Valley⁽¹⁾	San Jose, CA	1,098	100	%	Q1	$	183.0
Sage at Cupertino⁽²⁾	San Jose, CA	230	41	%	Q1	90.0
Total 2017		1,328				$	273.0


⁽¹⁾	In January 2017, the Company purchased its joint venture partner's 50.0% membership interest in the Palm Valley co-investment for a purchase price of $183.0 million.

⁽²⁾

In March 2017, the Company converted its existing $15.3 million preferred equity investment in Sage at Cupertino into a 40.5% equity ownership interest in the property. The Company issued DownREIT limited partnership units to the seller for the remaining equity based on an estimated property valuation of $90.0 million and an encumbrance of $52.0 million of mortgage debt. Based on a consolidation analysis performed by the Company, the property was consolidated as the Company controls the entity.

The consolidated fair value of the acquisitions listed above were included on the Company's consolidated balance sheet as follows: $169.5 million was included in land and land improvements, $365.7 million was included in buildings and improvements, and $3.2 million was included in prepaid expenses and other assets, within the Company's consolidated balance sheets.

For the year ended December 31, 2016, the Company purchased four communities consisting of 753 apartment homes for $333.7 million.

(b) Sales of Real Estate Investments

For the year ended December 31, 2017, the Company sold one community, Jefferson at Hollywood, a 270 apartment home community located in Hollywood, CA consisting of 270 apartment homes for $132.5 million resulting in gains totaling $26.2 million. The table below summarizes disposition activity of operating communities for the year ended December 31, 2017 ($ in millions):



Property Name	Location	Apartment Homes	Essex Ownership Percentage		Ownership	Quarter in 2017	Sales Price		Gains
Jefferson at Hollywood	Hollywood, CA	270	100	%	EPLP	Q1	$	132.5	$	26.2
Total 2017		270					$	132.5	$	26.2

During 2016, the Company sold three communities consisting of 323 apartment homes for $80.8 million resulting in gains totaling $14.0 million, net of $4.4 million deferred tax on gain on sale of real estate.

In January 2016, the Company sold its former headquarters office building, located in Palo Alto, CA, for gross proceeds of $18.0 million, resulting in a gain of $9.6 million, which is included in the line item gain on sale of real estate and land in the Company's consolidated statement of income.

During 2015, the Company sold two communities, consisting of 848 apartment homes, for $308.8 million resulting in gains totaling $44.9 million, which are included in the line item gain on sale of real estate and land in the Company's consolidated statement of income. In March 2015, the Company sold two commercial buildings, located in Emeryville, CA for $13.0 million, resulting in gains of $2.4 million, which are included in gain on sale of real estate and land in the Company's consolidated statement of income.

As of December 31, 2017, the Company had no assets classified as held for sale.

As of December 31, 2016, Jefferson at Hollywood, a 270 apartment home community, located in Hollywood, CA, was classified as held for sale. The carrying value of $102.0 million is included in real estate assets held for sale, net, on the Company's consolidated balance sheet. See Section (b) above, Sales of Real Estate Investments, of this Note 3 for additional details on the sale of Jefferson at Hollywood in 2017.

(d) Co-investments

The Company has joint ventures and preferred equity 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 co-investments own, operate, and develop apartment communities.

In January 2017, the Company purchased its joint venture partner's 50% interest in the Palm Valley co-investment, for a contract price of $183.0 million. Prior to the purchase, an approximately $220.0 million mortgage encumbered the property. Concurrent with the closing of the acquisition, the entire mortgage balance was repaid and the property is now unencumbered. Palm Valley has 1,098 apartment homes, within four communities and is located in San Jose, CA. As a result of this acquisition, the Company realized a gain on remeasurement of co-investment of $88.6 million upon consolidation.

In March 2017, the Company converted its existing $15.3 million preferred equity investment in Sage at Cupertino, a 230 apartment home community located in San Jose, CA, into a 40.5% common equity ownership interest in the property. The Company issued DownREIT limited partnership units to the other members, including an affiliate of the Marcus & Millichap Company, based on an estimated property valuation of $90.0 million. See Note 5, Related Party Transactions, for additional details. At the time of acquisition, the property was encumbered by a $52.0 million bridge loan from the Company. The Company consolidates the property based on a VIE analysis performed by the Company.

In August 2017, a Company co-investment, Wesco I, LLC ("Wesco I"), sold Madrid, a 230 apartment home community located in Mission Viejo, CA, for $83.0 million, which resulted in a gain of $10.1 million for the Company, recorded in the consolidated statement of income as equity income from co-investments. Wesco I used $30.1 million of the proceeds to repay the loan on the property.

In August 2017, the Company formed a new joint venture entity, Wesco V, LLC ("Wesco V"), with an institutional partner. Each partner has a 50.0% ownership interest and an initial equity commitment of $150.0 million. The joint venture is unconsolidated for financial reporting purposes. Also in August 2017, Wesco V acquired 8th & Republican and 360 Residences. 8th & Republican, a 211 apartment home community located in Seattle, WA, was acquired for a total contract price of $101.3 million. The property was encumbered by a $55.0 million related party bridge loan from the Company, which was paid off in November 2017. See Note 5, Related Party Transactions, for additional details related to the related party bridge loan. 360 Residences, a 213 apartment home community, located in San Jose, CA, was acquired for a total contract price of $133.5 million. In connection with this acquisition, Wesco V assumed $57.9 million of mortgage debt, with an effective interest rate of 3.4% and a maturity date of May 2022.

In October 2017, the Wesco I joint venture operating agreement was amended to extend the venture. As part of the amendment, the Company and joint venture partner agreed to a promote of $38.0 million. The Company agreed to contribute the promote to the joint venture, resulting in an increase in the Company’s ownership interest in Wesco I to approximately 58.0%.

In November 2017, the Company formed a new joint venture entity, BEX III, LLC ("BEX III), with an institutional partner. Each partner has a 50.0% ownership interest. The joint venture is unconsolidated for financial reporting purposes. Also in November 2017, BEX III acquired The Village at Toluca Lake, a 145 apartment home community, located in Burbank, CA, for a total contract price of $59.0 million. The property is encumbered by a $29.5 million related party bridge loan from the Company, which accrues interest at 3.5% and is scheduled to mature in March 2018. See Note 5, Related Party Transactions, for additional details related to the related party bridge loan.

In December 2017, a Company co-investment, BEXAEW, LLC ("BEXAEW"), sold two apartment home communities located in Seattle, WA for aggregate consideration of $160.3 million, which resulted in a gain of $34.8 million for the Company, recorded in the consolidated statement of income as equity income from co-investments. BEXAEW used $66.2 million of the proceeds to repay the loan on the property.

The carrying values of the Company’s co-investments as of December 31, 2017 and 2016 are as follows ($ in thousands):



	Weighted Average Essex Ownership		December 31,
	Percentage⁽¹⁾		2017		2016
Membership interest/Partnership interest in:
CPPIB	54	%	$	500,287	$	422,068
Wesco I, III and IV, and V	53	%	214,408		180,687
Palm Valley ⁽²⁾	50	%	—		68,396
BEXAEW, BEX II and BEX III ⁽³⁾	50	%	13,827		67,041
Other	52	%	51,810		43,713
Total operating and other co-investments, net			780,332		781,905
Total development co-investments, net	50	%	73,770		157,317
Total preferred interest co-investments (includes related party investments of $15.7 million and $35.9 million as of December 31, 2017 and December 31, 2016, respectively - FN 5 - Related Party Transactions for further discussion)			265,156		222,053
Total co-investments			$	1,119,258	$	1,161,275


⁽¹⁾	Weighted average Essex ownership percentages are as of December 31, 2017.


⁽²⁾	In January 2017, the Company purchased its joint venture partner's 50.0% interest in Palm Valley and as a result of this acquisition, the Company consolidates Palm Valley.


⁽³⁾	As of December 31, 2017, the Company's investment in BEX II was classified as a liability of $36.7 million.

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



	December 31,
	2017		2016
Combined balance sheets:⁽¹⁾
Rental properties and real estate under development	$	3,722,778	$	3,807,245
Other assets	110,333		121,505
Total assets	$	3,833,111	$	3,928,750
Debt	$	1,705,051	$	1,617,639
Other liabilities	45,515		74,607
Equity	2,082,545		2,236,504
Total liabilities and equity	$	3,833,111	$	3,928,750
Company's share of equity	$	1,155,984	$	1,161,275



	Years ended December 31,
	2017			2016			2015
Combined statements of income: ⁽¹⁾
Property revenues	$	312,841		$	289,011		$	260,175
Property operating expenses	(110,583		)	(99,637		)	(93,067		)
Net operating income	202,258			189,374			167,108
Gain on sale of real estate	90,663			28,291			14
Interest expense	(62,844		)	(46,894		)	(44,834		)
General and administrative	(9,091		)	(7,448		)	(5,879		)
Depreciation and amortization	(118,048		)	(103,986		)	(103,613		)
Net income	$	102,938		$	59,337		$	12,796
Company's share of net income ⁽²⁾	$	86,445		$	48,698		$	21,861


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


⁽²⁾	Includes the Company's share of equity income from co-investments and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments. Includes related party income of $1.9 million, $3.4 million, and $3.7 million for the years ended December 31, 2017, 2016, and 2015, respectively.

Operating Co-investments

As of December 31, 2017 and 2016, the Company, through several joint ventures, owned 10,810 and 11,274 apartment homes, respectively, in operating communities. The Company’s book value of these co-investments was $780.3 million and $781.9 million at December 31, 2017 and 2016, respectively.

Development Co-Investments

As of December 31, 2017 and 2016, the Company, through several joint ventures, owned 814 and 1,427 apartment homes, respectively, in development communities. The Company’s book value of these co-investments was $73.8 million and $157.3 million at December 31, 2017 and 2016, respectively.

In 2017, the Company entered into a joint venture to develop Ohlone, a multi-family community comprised of 269 apartment homes located in San Jose, CA. The Company has a 50% ownership interest in the development which has a projected total cost of $136.0 million. Construction began in the third quarter of 2017 and the community is expected to open in the third quarter of 2019. The Company has also committed to a $28.9 million preferred equity investment in the project, which accrues an annualized preferred return of 10.0% and matures in 2020.

In 2015, the Company entered into a joint venture to develop 500 Folsom, a multi-family community comprised of 545 apartment homes located in San Francisco, CA. The Company has a 50% ownership interest in the development which has a projected total cost of $415.0 million. Construction began in the fourth quarter of 2015 and the property is projected to open in the second quarter of 2019.

Preferred Equity Investments

As of December 31, 2017 and 2016, the Company held preferred equity investment interests in several joint-ventures which own real estate. The Company’s book value of these preferred equity investments was $265.2 million and $222.1 million at December 31, 2017 and 2016, respectively, and is included in the co-investments line in the accompanying consolidated balance sheets.

During 2017, the Company made commitments to fund $153.8 million in eight preferred equity investments. These investments have initial accrued preferred returns ranging from 9.5%-11.3%, with maturities ranging from March 2020 to August 2024. As of December 31, 2017, the Company had funded $77.5 million of the $153.8 million commitment.

During 2016, the Company funded $116.1 million in five preferred equity investment. These investments have initial accrued preferred returns ranging from 10.0%-12.0%, with maturities ranging from November 2019 to November 2020.

In April 2017, the Company received cash of $12.6 million from the partial redemption of a preferred equity investment in a joint venture that holds a property located in Seattle, WA. The Company recorded a reduction of $12.4 million in its preferred equity investment. The Company recognized a gain of $0.3 million as a result of this early redemption, which is included in equity income from co-investments in the consolidated statements of income.

In August 2017, the Company received cash of $11.7 million for a full redemption of a preferred equity investment class and $6.9 million for a partial redemption of another preferred equity investment class in a joint venture that holds a property in San Jose, CA. The Company's remaining preferred equity investment in this joint venture was $13.4 million as of December 31, 2017.

In October 2017, the Company received cash of $5.1 million for the full redemption of a preferred equity investment class in a joint venture that holds property in Concord, CA. The Company recorded a reduction of $5.0 million in its preferred equity investment. The Company recognized a gain of $0.1 million as a result of this early redemption, which is included in equity income from co-investments in the consolidated statements of income.

(e) Real Estate under Development

The Company defines development projects as new communities 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, 2017, the Company's development pipeline was comprised of five consolidated projects under development, two unconsolidated joint venture development projects and various consolidated predevelopment projects, aggregating 1,982 apartment homes, with total incurred costs of $557.0 million.