(13) Equity Based Compensation Plans

Stock Options and Restricted Stock

The Essex Property Trust, Inc. 2004 Stock Incentive Plan provides incentives to attract and retain officers, directors and key employees. The Stock Incentive Plan provides for the grants of options to purchase a specified number of shares of common stock or grants of restricted shares of common stock. Under the Stock Incentive Plan, the total number of shares available for grant is approximately 1,200,000. The 2004 Stock Incentive Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee is comprised of independent directors. The Compensation Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100% of the fair market value of the common stock on the grant date. The Company's options have a life of seven to ten years. Option grants for officers and employees fully vest between one year and five years after the grant date.

Stock-based compensation expense for options and restricted stock under the fair value method totaled $2.0 million, $1.5 million, and $1.0 million for years ended December 31, 2012, 2011 and 2010 respectively. Stock-based compensation capitalized for options and restricted stock totaled $0.3 million for the year ended December 31, 2012, and $0.2 million for each of the years ended December 31, 2011 and 2010. The intrinsic value of the options exercised totaled $2.9 million, $3.8 million, and $2.9 million, for the years ended December 31, 2012, 2011, and 2010 respectively. The intrinsic value of the options outstanding and fully vested totaled $9.9 million, $10.6 million, and $7.7 million, for the years ended December 31, 2012, 2011 and 2010, respectively.

Total unrecognized compensation cost related to unvested share-based compensation granted for stock options totaled $3.2 million as of December 31, 2012. The unrecognized compensation cost is expected to be recognized over a period of 1 to 5 years for the stock option plans.

The average fair value of stock options granted for the years ended December 31, 2012, 2011 and 2010 was $12.64, $14.49 and $18.39, respectively. The stock options granted during the fourth quarter of 2012 included a $75 cap on the appreciation of the market price over the exercise price. The stock options granted during 2011 and through the third quarter of 2012 included a $100 cap on the appreciation of the market price over the exercise price. The fair value of stock options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:

	2012	2011	2010
Stock price	$143.95	$131.87	$107.21
Risk-free interest rates	1.16%	2.23%	3.50%
Expected lives	5 - 10 years	10 years	10 years
Volatility	20.05%	19.63%	22.00%
Dividend yield	3.26%	3.29%	3.85%

A summary of the status of the Company's stock option plans as of December 31, 2012, 2011, and 2010 and changes during the years ended on those dates is presented below:

	2012					2011					2010
				Weighted-					Weighted-					Weighted-
				average					average					average
				exercise					exercise					exercise
	Shares			price		Shares			price		Shares			price
Outstanding at beginning of year		415,020		$	109.71		300,642		$	88.11		378,542		$	82.08
Granted		263,113			143.95		197,500			131.87		18,214			107.21
Exercised		(41,603	)		77.21		(83,122	)		84.24		(78,381	)		63.97
Forfeited and canceled		(13,096	)		128.36		-			0.00		(17,733	)		105.40
Outstanding at end of year		623,434			125.96		415,020			109.71		300,642			88.11

Options exercisable at year end		250,620			107.12		219,820			92.31		265,770			86.28

The following table summarizes information about stock options outstanding as of December 31, 2012:

	Options outstanding					Options exercisable
	Number		Weighted-			Number
	outstanding		average	Weighted-		exercisable		Weighted-
	as of		remaining	average		as of		average
Range of	December 31,		contractual	exercise		December 31,		exercise
exercise prices	2012		life	price		2012		price
$51.01 - 79.05		34,973	3.0 years	$	69.97		34,973	$	69.97
79.25 - 125.84		144,498	3.9 years		99.10		130,498		98.69
126.73 - 155.34		443,963	7.9 years		139.10		85,149		135.31
		623,434	6.7 years		125.96		250,620		107.12

During 2012, 2011, and 2010 the Company issued 1,614, 1,540, and 14,415 shares of restricted stock, respectively. The unrecognized compensation cost granted under the restricted stock program of $1.9 million as of December 31, 2012 will be recognized straight-line over a period of 1 to 7 years.

The following table summarizes information about restricted stock outstanding as of December 31, 2012, 2011 and 2010 and changes during the years ended:

	2012					2011					2010
				Weighted-					Weighted-					Weighted-
				average					average					average
				grant					grant					grant
	Shares			price		Shares			price		Shares			price
Unvested at beginning of year		35,219		$	98.57		44,877		$	102.46		37,727		$	99.43
Granted		1,614			149.68		1,540			134.44		14,415			109.62
Vested		(8,641	)		106.69		(9,532	)		104.91		(6,126	)		102.27
Forfeited and canceled		(3,270	)		102.00		(1,666	)		94.35		(1,139	)		93.92
Unvested at end of year		24,922			104.52		35,219			98.57		44,877			102.46

Long Term Incentive Plan – Z Units

The Company has adopted an incentive program involving the issuance of Series Z Incentive Units and Series Z-1 Incentive Units (collectively referred to as "Z Units") of limited partnership interest in the Operating Partnership. Vesting in the Z Units is based on performance criteria established in the plan. The criteria can be revised at the beginning of the year by the Board's Compensation Committee if the Committee deems that the plan's criterion is unachievable for any given year. The sale of Z Units is contractually prohibited. Z Units are convertible into Operating Partnership units which are exchangeable for shares of the Company's common stock that have marketability restrictions. The estimated fair value of a Z Unit is determined on the grant date and considers the company's current stock price, the dividends that are not paid on unvested units and a marketability discount for the 8 to 15 years of illiquidity. Compensation expense is calculated by multiplying estimated vesting increases for the period by the estimated fair value as of the grant date less its $1.00 per unit purchase price.

Stock-based compensation expense for Z Units under the fair value method totaled approximately $2.1 million, $1.5 million and $2.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Stock-based compensation capitalized for Z Units totaled approximately $0.5 million, $0.3 million, and $0.6 million, for the years ended December 31, 2012, 2011, and 2010, respectively. The intrinsic value of the unvested Z Units totaled $20.8 million as of December 31, 2012. Total unrecognized compensation cost related to the unvested Z Units under the Z Units plans totaled $7.3 million as of December 31, 2012. The unamortized cost is recognized up to 14 years subject to the achievement of the stated performance criteria.

The issuance of Z Units is administered by the Compensation Committee which has the authority to select participants and determine the awards to be made up to a maximum of 600,000 Z Units. Effective January 1 of each year for each participating executive who remains employed by the Company if the Company has met a specified "funds from operations" per share target, or such other target as the Compensation Committee deems appropriate, for the prior year, up to a maximum conversion ratchet of 100%. Z units issued in 2011 and 2010 are discussed below.

During 2010, the Operating Partnership issued 108,000 Series Z-1 Incentive Units (the "2010 Z-1 Units") of limited partner interest to twenty executives of the Company. The conversion ratchet (accounted for as vesting) of the 2010 Z-1 Units into common units, increased to 20 percent effective January 1, 2011 because the Company achieved the FFO minimum target of $4.75 per diluted share in 2010. Once the units are vested, Z-1 Unit holders receive quarterly distributions of approximately the dividend rate paid on common shares. Each year thereafter, vesting of the 2010 Z-1 Units will be consistent with the Company's annual FFO growth, but is not to be less than zero or greater than 14 percent.

During 2011, the Operating Partnership issued 46,500 Series Z-1 Incentive Units (the "2011 Z-1 Units") of limited partner interest to fourteen executives of the Company in exchange for cash from eight executive officers of the Company, and a capital commitment from the remaining six executives of $1.00 per 2011 Z-1 Unit. The 2011 Z-1 Units are convertible one-for-one into common units of the Operating Partnership (which, in turn, are convertible into common stock of the Company) upon the earlier to occur of 100 percent vesting of the units or the year 2026. The conversion ratchet (accounted for as vesting) of the 2011 Z-1 Units into common units, increased to 10 percent effective January 1, 2012 because the Company achieved the FFO minimum target of $5.65 per diluted share in 2011. Each year thereafter, vesting of the 2011 Z-1 Units will be consistent with the Company's annual FFO growth, but is not to be less than zero or greater than 14 percent. The 2011 Z-1 Unit holders are entitled to receive approximately the same as dividends distributed to common stockholders on vested units.

The following table summarizes information about the Z Units outstanding as of December 31, 2012 ($ in thousands):

	Long Term Incentive Plan - Z Units
							Aggregate							Weighted-
							Intrinsic					Weighted-		average
	Total			Total			Value		Total			average		Remaining
	Vested			Unvested			of Unvested		Outstanding			Grant-date		Contractual
	Units			Units			Units		Units			Fair Value		Life
Balance, December 2009		288,651			105,881		$	8,751		394,532		$	39.36	8.2 years
Granted		-			108,000					108,000
Vested		37,629			(37,629	)				-
Cancelled					(4,350	)				(4,350	)
Balance, December 2010		326,280			171,902			19,463		498,182			54.15	11.2 years
Granted		-			46,500					46,500
Vested		44,520			(44,520	)				-
Converted		(191,718	)		-					(191,718	)
Cancelled		-			(3,863	)				(3,863	)
Balance, December 2011		179,082			170,019			23,719		349,101			58.17	12.3 years
Granted		-			-					-
Vested		28,163			(28,163	)				-
Converted		(16,541	)		-					(16,541	)
Cancelled		-			(1,813	)				(1,813	)
Balance, December 2012		190,704			140,043		$	20,800		330,747		$	58.44	11.3 years