(3) Real Estate Investments

(a) Acquisitions of Real Estate

For the year ended December 31, 2012, the Company purchased eleven communities consisting of 2,052 units for $551.1 million.

During the first quarter of 2012, the Company acquired Bon Terra, a 60 unit community located adjacent to Delano in Redmond, Washington for $16.0 million. The Company also acquired Reed Square, a 100 unit community located in Sunnyvale, California for $23.0 million.

During the second quarter of 2012, the Company purchased the joint venture partner's membership interest in the co-investment Essex Skyline at MacArthur Place, a 349 unit premier high-rise apartment community located in Santa Ana, California, for a total purchase price of $85.0 million. The Company recorded promote income of $2.3 million included in interest and other income on the consolidated statements of operations, earned as a result of achieving certain performance hurdles as defined in the joint venture agreement. Upon the acquisition of partner's membership interest, the property was consolidated and a gain on remeasurement of the Company's co-investment interest of $21.9 million was recorded equal to the amount by which the fair value of the Company's previously owned noncontrolling interest exceeded its carrying value. The secured $80.0 million loan was repaid early as part of this transaction.

Also during the second quarter 2012, the Company purchased Park Catalina, a 90 unit property located in the Koreatown submarket of Los Angeles, California for a total purchase price of $23.7 million. In addition, the Company purchased The Huntington, a 276 unit property located in Huntington Beach, California for a purchase price of $48.3 million. The Company assumed a $30.3 million loan secured by the property at a fixed rate of 5.7% for seven years. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, the Company recorded a $4.3 million loan premium to reflect the debt at fair value. This results in an effective interest rate for this loan of 3.3%.

During the third quarter of 2012, the Company purchased Montebello, a 248 unit property located in Kirkland, Washington, for a purchase price of $52.0 million from a related party entity. The Company assumed a $26.5 million mortgage loan secured by the property at a fixed rate of 5.6% for eight years. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, the Company recorded a $4.1 million loan premium to reflect the debt at fair value. This results in an effective interest rate for this loan of 3.1%.

Also during the third quarter 2012, the Company acquired Park West, a 126 unit apartment community located in San Francisco, California, for $31.6 million. The Company intends to renovate the exterior of the community for $8 million. In addition, the Company acquired Domaine, a 92 unit property located in Seattle, Washington for $34.0 million. In connection with the purchase, the Company assumed a $14.6 million loan at a fixed rate of 5.7% for an 8 year term. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, the Company recorded a $2.4 million loan premium to reflect the debt at fair value. This results in an effective interest rate for this loan of 3.0%.

During the fourth quarter 2012, the Company acquired Ascent, a 90 unit community located in Kirkland, Washington, for $15.9 million and Willow Lake Apartments, a 508 unit property located in San Jose, California for $148.0 million. Also during the fourth quarter 2012, the Company purchased Bennett Lofts (formerly Q Lofts), a 147 unit apartment community located in San Francisco, California, for a total purchase price of $96.0 million. Approximately 75% of the property was acquired in December for $73.8 million, and the remainder was purchased in January 2013 for $22.2 million.

For the year ended December 31, 2011, the Company purchased five communities for approximately $103.3 million, consisting of the following communities ($ in thousands):

Communities	Location	Purchase Price		Units
Delano	Redmond, WA	$	14,100		66
Bernard	Seattle, WA		13,800		63
Bellerive	Los Angeles, CA		27,000		63
Santee Village	Los Angeles, CA		17,000		73
1000 Kiely	Santa Clara, CA		31,400		121
Total 2011 purchases		$	103,300		386

(b) Sales of Real Estate investments

For the year ended December 31, 2012, the Company sold $28.3 million of real estate which resulted in a gain of $10.9 million.

During the first quarter of 2012, the Company sold Tierra Del Sol/Norte, a 156 unit community located in San Diego, California for $17.2 million for a gain of $7.0 million. The Company also sold Alpine Country, a 108 unit community located in San Diego metropolitan area, for $11.1 million for a gain of $3.9 million.

During the second quarter of 2011, the Company disposed of Woodlawn Colonial, a 159-unit community located in Chula Vista, California for $16.0 million which resulted in a gain of $5.2 million. The property was purchased in 2002 as part of the John M. Sachs, Inc. merger.

During the third quarter 2011, the Company sold the View Pointe land parcel located in Newcastle, Washington for net proceeds of $1.4 million and a gain of $0.2 million.

During the fourth quarter of 2011, the Company sold the Clarendon office building in Woodland Hills, California for $7.4 million which resulted in a gain of $3.2 million on the sale.

No communities were held for sale as of December 31, 2012 or 2011.

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.

Wesco I, LLC

Wesco, I LLC ("Wesco I") is a 50/50 programmatic joint venture with an institutional partner for a total equity commitment of $300.0 million. Each partner's equity commitment is $150.0 million. Wesco I will utilize debt as leverage equal to approximately 50% of the underlying real estate. The Company has contributed $150.0 million to Wesco I, and as of December 31, 2012, Wesco I owned nine apartment communities with 2,713 units with an aggregate carrying value of $660.5 million.

During the third quarter 2012, Wesco I acquired Riley Square (formerly Waterstone Santa Clara) for $38.3 million from a related party entity. The property contains 156 units and is located in Santa Clara, California. Wesco I assumed a $17.5 million mortgage loan secured by the property at a fixed rate of 5.2% for a term of 8 years. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, Wesco I recorded a $2.3 million loan premium to reflect the debt at fair value. This results in an effective interest rate for this loan of 3.1%.

During the fourth quarter 2012, Wesco I acquired Madrid, a 230 unit community located in Mission Viejo, California for an undisclosed price (per an agreement with the seller). Also during the quarter, Wesco I acquired Pacific Electric Lofts for an undisclosed amount (per an agreement with the seller). The property contains 314 units along with 22,100 square feet of retail.

For the year ended December 31, 2011, the Company purchased five communities under the Wesco I joint venture for approximately $429.2 million, consisting of the following communities ($ in thousands):

Communities	Location	Purchase Price		Units
Arbors Parc Rose	Oxnard, CA	$	92,000		373
Redmond Hill	Redmond, WA		151,300		882
Reveal	Woodland Hills, CA		132,900		438
Briarwood	Fremont, CA		27,800		160
The Woods	Fremont, CA		25,200		160
Total 2011 purchases		$	429,200		2,013

Wesco III, LLC

During 2012, the Company entered into a 50/50 programmatic joint venture, Wesco III LLC ("Wesco III"), with an institutional partner for a total equity commitment from the parties of $120.0 million. Each partner's equity commitment is $60.0 million. Wesco III will utilize debt as leverage equal to approximately 50% of the underlying real estate. The Company has contributed $10.0 million to Wesco III, and provided a $26.0 million short term bridge loan to Wesco III at a rate of LIBOR + 2.5%.

During the fourth quarter 2012, Wesco III acquired Haver Hill, a 264 unit community located in Fullerton, California for $45.6 million.

Essex Apartment Value Fund II, L.P.

Essex Apartment Value Fund II, L.P. ("Fund II"), has eight institutional investors with combined partner equity contributions of $265.9 million. The Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilized debt as leverage equal to approximately 55% upon the initial acquisition of the underlying real estate. Fund II invested in apartment communities in the Company's targeted West Coast markets with an emphasis on investment opportunities in the Seattle metropolitan area and the San Francisco Bay Area. As of October 2006, Fund II was fully invested and closed for any future acquisitions or development. As of December 31, 2012, Fund II owned seven apartment communities.

During the fourth quarter 2012, Fund II sold seven communities for gross proceeds of $413.0 million, consisting of the following communities ($ in thousands):

Communities	Location	Purchase Price		Units
Parcwood	Corona, CA	$	42,200		312
Regency Tower	Oakland, CA		31,000		178
Studio 40-41	Studio City, CA		56,300		149
Tower @ 801	Seattle, WA		50,100		173
Cielo	Chatsworth, CA		33,100		119
Echo Ridge	Snoqualmie, WA		26,500		120
The Enclave	San Jose, CA		173,750		637
Total 2012 sales		$	412,950		1,688

In conjunction with the sale of the assets, the Company incurred a prepayment penalty on debt obligations of $2.3 million during the fourth quarter 2012 for its pro-rata share of Fund II's debt. The total gain on the transaction was $106 million, of which the Company's pro rata share was $29.1 million.

Canada Pension Plan Investment Board – Joint Venture Developments

The Company has entered into four development joint ventures with the Canada Pension Plan Investment Board ("CPPIB") to develop four apartment communities. For each joint venture the Company holds a 55% non controlling interest in the venture and will earn customary management fees and may earn development, asset, and property management fees. The Company 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 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.

The following are the CPPIB development joint ventures:

		Ownership			Estimated		Construction
Development Projects - CPPIB Joint Venture	Location	%	Units		Total Cost		Start

Epic - Phase I and II	San Jose, CA	55%		569	$	191.6	Aug-11
Connolly Station (fka Linc)	Dublin, CA	55%		309		94.5	Aug-11
Folsom and Fifth	San Francisco, CA	55%		463		250.0	Jun-12
Elkhorn	San Mateo, CA	55%		197		76.1	Aug-12
Total - CPPIB Joint Venture Development Projects				1,538	$	612.2

The Huxley and The Dylan (formerly Fountain and Santa Monica at La Brea) – Joint Venture Developments

During the third quarter 2011, the Company entered into a development joint venture with a regional developer for the construction of The Huxley, a 187 unit community with approximately 18,200 square feet of retail located in West Hollywood, California. The regional developer contributed the land and the Company contributed approximately $9.0 million in cash for a 50% interest in the venture. The joint venture obtained bond financing for the project in the amount of $54.5 million with a maturity date of October 2046 and entered into an interest rate swap transaction with respect to the bonds that terminates in September 2016 that effectively converts the interest rate to the Securities Industry and Financial Market Association index ("SIFMA") plus 150 basis points through December 2016.

In the fourth quarter 2011, the Company entered into another development joint venture with the same regional developer for the construction of The Dylan, a 184 unit apartment community with approximately 12,750 square feet of retail located in West Hollywood, California. The 50/50 joint venture was created with the contribution of $5.8 million by the Company and the contribution of entitled land by the regional developer. The joint venture secured bond financing in the amount of $59.9 million, maturing in December 2046. The joint venture entered into a total return swap agreement that effectively converts the interest rate to SIFMA plus 150 basis points through December 2016.

The bond financing for these two development projects have joint and several liability for the joint venture partners. Additionally, if either partner fails to make capital contributions to one of these joint ventures in certain instances, then the ownership interest of the defaulting partner in the other joint venture may be reduced.

Expo (formerly Queen Anne) – Joint Venture Development

During December 2010, the Company entered into a development joint venture 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. The 275-unit community is under development in Seattle, Washington. The Expo joint venture obtained a $45.0 million construction loan at a rate of LIBOR plus 195 basis points, due July 2014, with two one-year extension options exercisable at the joint venture's option.

Preferred Equity Investments

During the second quarter 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.

During the first quarter 2011, the Company invested $9.7 million as preferred equity investments in two apartment communities located in downtown Los Angeles. The investments are for ten years with a preferred return of 9% for five years, increasing to a minimum of 10% and a maximum of 12.5% thereafter.

During the second quarter of 2011, the Company completed a $13.0 million preferred equity investment in an entity owning an apartment community located in downtown Los Angeles. The Company's preferred return is 10% and the Company's investment has a five-year term.

During the third quarter of 2011, the Company sold its preferred stock investments in MyNewPlace.com, a real estate technology company for net proceeds of $1.6 million and a gain of $0.9 million.

During the fourth quarter of 2011, the Company entered into a 50/50 joint venture with an institutional partner, Wesco II, LLC ("Wesco II"), which in turn closed a $175 million preferred equity investment in Park Merced, a 3,221-unit apartment community located in San Francisco, California. The preferred equity investment has a stated term of 7 years and a preferred return of 10.1%. The investment cannot be repaid during the first two years, and there is a prepayment penalty in the third through the fifth year of the investment. The community is encumbered with a $450 million senior mortgage loan with a fixed interest rate of 3.83% due in 2018. The senior loan represents roughly a 60% loan to value, and the projected debt service coverage is approximately 110% including Wesco II's preferred equity investment (unaudited).

The carrying values of the Company's co-investments as of December 31, 2012 and 2011 are as follows ($ in thousands):

	2012		2011
Investments in joint ventures accounted for under the equity method of accounting:

Membership interest in Wesco I	$	143,874	$	75,588
Partnership interest in Fund II		53,601		64,294
Membership interest in Wesco III		9,941		-
Membership interest in a limited liability company that owns Essex Skyline at MacArthur Place		-		24,063
Total operating co-investments		207,416		163,945

Membership interests in limited liability companies that own and are developing Epic, Connolly Station, Folsom and Fifth, and Elkhorn		186,362		62,897
Membership interest in a limited liability company that owns and is developing Expo		18,752		17,981
Membership interests in limited liability companies that own and are developing The Huxley and The Dylan		16,552		15,194
Total development co-investments		221,666		96,072

Membership interest in Wesco II that owns a preferred equity interest in Parkmerced with a perferred return of 10.1%		91,843		88,075
Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles with preferred returns of 9% and 10%		22,807		22,792
Preferred interests in related party limited liability company that owns Sage at Cupertino with a preferred return of 9.5%		14,438		-
Preferred interest in a related party limited liability company that owns Madison Park at Anaheim with a preferred return of 13%		13,175		12,528
Total preferred interest investments		142,263		123,395
Total co-investments	$	571,345	$	383,412

The combined summarized financial information of co-investments, which are accounted for under the equity method, is as follows ($ in thousands):

	December 31,
	2012		2011
Balance sheets:
Rental properties and real estate under development	$	1,745,147	$	1,659,078
Other assets		168,061		63,847
Total assets	$	1,913,208	$	1,722,925

Debt	$	820,895	$	900,095
Other liabilities		91,922		48,518
Equity		1,000,391		774,312
Total liabilities and partners' equity	$	1,913,208	$	1,722,925

Company's share of equity	$	571,345	$	383,412

	Years ended
	December 31,
	2012			2011			2010
Statements of operations:
Property revenues	$	130,128		$	106,386		$	54,699
Property operating expenses		(55,990	)		(43,066	)		(24,098	)
Net operating income		74,138			63,320			30,601

Gain on sale of real estate		106,016			-			-
Interest expense		(34,959	)		(27,843	)		(13,619	)
General and administrative		(3,697	)		(1,748	)		(709	)
Depreciation and amortization		(47,917	)		(44,412	)		(20,850	)
Net income (loss)	$	93,581		$	(10,683	)	$	(4,577	)

Company's share of net income (loss)	$	41,745		$	(467	)	$	(1,715	)

(d) Real Estate for Development

The Company defines development activities as new properties that are being constructed, or are newly constructed and, in the case of development communities, are in a phase of lease-up and have not yet reached stabilized operations. As of December 31, 2012, the Company had two consolidated development projects, and seven unconsolidated joint venture development projects aggregating 2,495 units for an estimated total cost of $928.4 million, of which $463.9 million remains to be expended.

As of December 31, 2012, the Company had two consolidated predevelopment projects and one unconsolidated predevelopment joint venture project consisting of 449 units for a total cost of $59.6 million. In addition, the Company owned one land parcel held for future development or sale as of December 31, 2012. The Company expects to fund the development and predevelopment pipeline by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.