Real Estate and Lease Intangibles

The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of December 31, 2014 and 2013 (amounts in thousands):



	2014			2013
Land	$	6,295,404		$	6,192,512
Depreciable property:
Buildings and improvements	17,974,337			17,509,609
Furniture, fixtures and equipment	1,365,276			1,214,220
In-Place lease intangibles	511,891			502,218
Projects under development:
Land	466,764			353,574
Construction-in-progress	877,155			635,293
Land held for development:
Land	145,366			341,389
Construction-in-progress	39,190			52,133
Investment in real estate	27,675,383			26,800,948
Accumulated depreciation	(5,432,805		)	(4,807,709		)
Investment in real estate, net	$	22,242,578		$	21,993,239

The following table summarizes the carrying amounts for the Company's above and below market ground and retail lease intangibles as of December 31, 2014 and 2013 (amounts in thousands):



Description	Balance Sheet Location	2014			2013
Assets
Ground lease intangibles – below market	Other Assets	$	178,251		$	178,251
Retail lease intangibles – above market	Other Assets	1,260			1,260
Lease intangible assets		179,511			179,511
Accumulated amortization		(8,913		)	(4,364		)
Lease intangible assets, net		$	170,598		$	175,147

Liabilities
Ground lease intangibles – above market	Other Liabilities	$	2,400		$	2,400
Retail lease intangibles – below market	Other Liabilities	5,270			5,500
Lease intangible liabilities		7,670			7,900
Accumulated amortization		(2,258		)	(1,161		)
Lease intangible liabilities, net		$	5,412		$	6,739

During the years ended December 31, 2014 and 2013, the Company amortized approximately $4.3 million and $3.6 million, respectively, of above and below market ground lease intangibles which is included (net increase) in property and maintenance expense in the accompanying consolidated statements of operations and comprehensive income and approximately $1.1 million and $2.7 million, respectively, of above and below market retail lease intangibles which is included (net increase) in rental income in the accompanying consolidated statements of operations and comprehensive income.

The weighted average amortization period for above and below market ground lease intangibles and retail lease intangibles is 49.8 years and 2.8 years, respectively.

The following table provides a summary of the aggregate amortization expense for above and below market ground lease intangibles and retail lease intangibles for each of the next five years (amounts in thousands):



	2015			2016			2017			2018			2019

Ground lease intangibles	$	4,321		$	4,321		$	4,321		$	4,321		$	4,321
Retail lease intangibles	(939		)	(896		)	(540		)	(71		)	(71		)
Total	$	3,382		$	3,425		$	3,781		$	4,250		$	4,250

Archstone Acquisition

On February 27, 2013, the Company, AvalonBay Communities, Inc. (“AVB”) and certain of their respective subsidiaries completed their previously announced acquisition (the “Archstone Acquisition” or the "Archstone Transaction") from Archstone Enterprise LP (“Enterprise”) (which subsequently changed its name to Jupiter Enterprise LP), an affiliate of Lehman Brothers Holdings Inc. (“Lehman”) and its affiliates, of all of the assets of Enterprise (including interests in various entities affiliated with Enterprise), constituting a portfolio of apartment properties and other assets (the “Archstone Portfolio”).

The Company acquired assets representing approximately 60% of the Archstone Portfolio which consisted principally of high-quality apartment properties in major markets in the United States. The acquisition allowed the Company to accelerate the completion of its strategic shift into coastal apartment markets. Pursuant to the Archstone Transaction, the Company acquired directly or indirectly, 71 wholly owned, stabilized properties consisting of 20,160 apartment units, one partially owned and consolidated stabilized property consisting of 432 apartment units, one partially owned and unconsolidated stabilized property consisting of 336 apartment units, three consolidated master-leased properties consisting of 853 apartment units, four projects in various stages of construction (two consolidated and two unconsolidated) for 964 apartment units and fourteen land sites for approximately $9.0 billion. During the year ended December 31, 2013, the Company recorded revenues and net operating income ("NOI") of $514.7 million and $352.8 million, respectively, from the acquired assets.

The consideration paid by the Company in connection with the Archstone Acquisition consisted of cash of approximately $4.0 billion (inclusive of $2.0 billion of Archstone secured mortgage principal paid off in conjunction with the closing), 34,468,085 Common Shares (which shares had a total value of $1.9 billion based on the February 27, 2013 closing price of EQR common shares of $55.99 per share) issued to the seller and the assumption of approximately $3.1 billion of mortgage debt (inclusive of a net mark-to-market premium of $127.9 million) and approximately 60% of all of the other assets and liabilities related to the Archstone Portfolio. The cash consideration was funded with proceeds from the issuance of 21,850,000 Common Shares (which shares had a total value of approximately $1.2 billion based on a price of $54.75 per share) in the November/December 2012 public equity offering, asset sales of approximately $4.5 billion that were completed during the year ended December 31, 2013, the Company's $750.0 million unsecured term loan facility (which was subsequently paid off in the second quarter of 2014) and the Company's revolving credit facility.

The Company owns the building and improvements and leases the land underlying the improvements under long-term ground leases that expire beginning in 2042 and running through 2103 for nine of the operating properties acquired and discussed above. These properties are consolidated and reflected as real estate assets while the ground leases are accounted for as operating leases. The Company also leases the three master-leased properties discussed above to third party operators and earns monthly net rental income.

The Company accounted for the acquisition under the acquisition method in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations (“ASC 805”), and the accounting for this business combination is complete and final. The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed, which the Company determined using Level 1, Level 2 and Level 3 inputs (amounts in thousands):




Land	$	2,239,000
Depreciable property:
Buildings and improvements	5,765,538
Furniture, fixtures and equipment	61,470
In-Place lease intangibles	304,830
Projects under development	36,583
Land held for development	244,097
Investments in unconsolidated entities	230,608
Other assets	195,260
Other liabilities	(108,997		)
Net assets acquired	$	8,968,389

The allocation of fair values of the assets acquired and liabilities assumed has changed from the allocation reported in “Note 4 – Real Estate and Lease Intangibles” in the Notes to Consolidated Financial Statements included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 27, 2014. The changes to our valuation assumptions were based on more accurate information concerning the subject assets and liabilities and resulted from information not readily available at the acquisition date, final purchase price settlement with our partner in accordance with the terms of the purchase agreement and reclassification adjustments for presentation. None of these changes had a material impact on our Consolidated Financial Statements. The Company's assessment of the fair values and the allocation of the purchase price to the identified tangible and intangible assets/liabilities at March 31, 2014 was its final and best estimate of fair value. As a result, the Company did not make any changes to its allocation of fair values of the assets acquired and liabilities assumed subsequent to the allocation reported in "Note 4 – Real Estate and Lease Intangibles" in the Notes to Consolidated Financial Statements included in Part I of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 8, 2014.

The fair values of investment in real estate were determined using internally developed models that were based on market assumptions and comparable sales data as well as external valuations performed by unrelated third parties. The market assumptions used as inputs to the Company’s fair value model include construction costs, leasing assumptions, growth rates, discount rates, terminal capitalization rates and development yields. The Company used data on its existing portfolio of properties and its recent acquisition and development properties, as well as similar market data from third party sources, when available, in determining these inputs (Level 2 and 3). The fair value of Noncontrolling Interests was calculated similar to the investment in real estate described above. The fair value of mortgage debt was calculated using indicative rates, leverage and coverage provided by lenders of similar loans (Level 2). The Common Shares issued to an affiliate of Lehman Brothers Holdings Inc. were valued using the quoted market price of Common Shares (Level 1).

The following table summarizes the acquisition date fair values of the above and below market ground and retail lease intangibles, which we determined using Level 2 and Level 3 inputs (amounts in thousands):



Description	Balance Sheet Location	Fair Value
Ground lease intangibles – below market	Other Assets	$	178,251
Retail lease intangibles – above market	Other Assets	1,260

Ground lease intangibles – above market	Other Liabilities	2,400
Retail lease intangibles – below market	Other Liabilities	8,040

As of December 31, 2014, the Company has incurred cumulative Archstone-related expenses of approximately $99.0 million, of which approximately $13.5 million of this total was financing-related and approximately $85.5 million was merger costs. During the year ended December 31, 2014, the Company expensed nominal amounts of direct merger costs. During the years ended December 31, 2013 and 2012, the Company expensed $19.9 million and $5.6 million, respectively, of direct merger costs primarily related to investment banking and legal/accounting fees, which were included in other expenses in the accompanying consolidated statements of operations and comprehensive income. During the years ended December 31, 2014 and 2013, the Company also expensed $4.3 million and $54.0 million, respectively, of indirect merger costs primarily related to severance and retention obligations, office leases and German operations/sales that were incurred through our 60% interest in unconsolidated joint ventures with AVB, which were included in (loss) from investments in unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income. Finally, during the years ended December 31, 2013 and 2012, the Company expensed $2.5 million and $8.4 million, respectively, of financing-related costs, which were included in interest expense in the accompanying consolidated statements of operations and comprehensive income.

Unaudited Pro Forma Financial Information

Equity Residential

The following table illustrates the effect on net income, earnings per share – basic and earnings per share – diluted as if the Company had consummated the Archstone Acquisition as of January 1, 2012 (amounts in thousands, except per share amounts):



	Year Ended December 31,
	2013		2012

Total revenues	$	2,485,438	$	2,317,699
Income (loss) from continuing operations (1)	203,286		(54,940		)
Discontinued operations, net	2,074,072		720,361
Net income	2,277,358		665,421
Net income available to Common Shares	2,183,756		622,424
Earnings per share - basic:
Net income available to Common Shares	$	6.07	$	1.74
Weighted average Common Shares outstanding (2)	359,688		356,984
Earnings per share - diluted (1):
Net income available to Common Shares	$	6.05	$	1.74
Weighted average Common Shares outstanding (2)	375,861		356,984


(1)	Potential common shares issuable from the assumed conversion of OP Units and the exercise/vesting of long-term compensation shares/units are automatically anti-dilutive and therefore excluded from the diluted earnings per share calculation as the Company had a pro forma loss from continuing operations for the year ended December 31, 2012.


(2)	Includes an adjustment for Common Shares issued to the public in November/December 2012 and to an affiliate of Lehman Brothers Holdings Inc. in February 2013 as partial consideration for the Archstone Acquisition.

ERP Operating Limited Partnership

The following table illustrates the effect on net income, earnings per Unit – basic and earnings per Unit – diluted as if the Operating Partnership had consummated the Archstone Acquisition as of January 1, 2012 (amounts in thousands, except per Unit amounts):



	Year Ended December 31,
	2013		2012

Total revenues	$	2,485,438	$	2,317,699
Income (loss) from continuing operations (1)	203,286		(54,940		)
Discontinued operations, net	2,074,072		720,361
Net income	2,277,358		665,421
Net income available to Units	2,273,798		651,548
Earnings per Unit - basic:
Net income available to Units	$	6.07	$	1.74
Weighted average Units outstanding (2)	373,421		370,837
Earnings per Unit - diluted (1):
Net income available to Units	$	6.05	$	1.74
Weighted average Units outstanding (2)	375,861		370,837


(1)	Potential Units issuable from the assumed exercise/vesting of the Company's long-term compensation shares/units are automatically anti-dilutive and therefore excluded from the diluted earnings per Unit calculation as the Operating Partnership had a pro forma loss from continuing operations for the year ended December 31, 2012.


(2)	Includes an adjustment for Common Shares issued to the public in November/December 2012 and to an affiliate of Lehman Brothers Holdings Inc. in February 2013 as partial consideration for the Archstone Acquisition. Concurrent with these transactions, ERPOP issued the same number of OP Units to EQR.

For the years ended December 2013 and 2012, acquisition costs of $19.9 million and $5.6 million, respectively, and severance/retention and other costs of $54.1 million and none, respectively, related to the Archstone Acquisition are not expected to have a continuing impact on the Company's financial results and therefore have been excluded from these pro forma results. The pro forma results also do not include the impact of any synergies or lower borrowing costs that the Company has or may achieve as a result of the acquisition or any strategies that management has or may consider in order to more efficiently manage the Company's operations, nor do they give pro forma effect to any other acquisitions, dispositions or capital markets transactions (excluding the equity offering in November/December 2012 which proceeds were used for the Archstone Acquisition) that the Company completed during the periods presented. These pro forma results are not necessarily indicative of the operating results that would have been obtained had the Archstone Acquisition occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

Other

During the year ended December 31, 2014, the Company acquired the entire equity interest in the following from unaffiliated parties (purchase price in thousands):



	Properties	Apartment Units	Purchase Price
Rental Properties – Consolidated	6	1,353	$	469,850
Land Parcels (two)	—	—	28,790
Total	6	1,353	$	498,640

The Company also acquired the 95% equity interest it did not previously own in one unconsolidated development project with an anticipated stabilized real estate value of $87.5 million at completion and an adjusted purchase price of $64.2 million. The Company paid cash of approximately $44.8 million and issued the Series P Preference Units with a liquidation value of approximately $18.4 million to complete the buyout (see Note 3). The Company recognized a revaluation loss of approximately $3.5 million, which is included in loss from investments in unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income, in conjunction with this buyout.

In addition to the Archstone Acquisition described above, during the year ended December 31, 2013, the Company acquired the entire equity interest in the following from unaffiliated parties (purchase price in thousands):



	Properties	Apartment Units	Purchase Price
Rental Properties – Consolidated	1	322	$	91,500
Land Parcel (one)	—	—	16,500
Total	1	322	$	108,000

During the year ended December 31, 2014, the Company disposed of the following to unaffiliated parties (sales price in thousands):



	Properties	Apartment Units	Sales Price
Consolidated:
Rental Properties	10	3,092	$	466,968
Land Parcels (three)	—	—	62,602
Unconsolidated:
Rental Properties (1)	1	388	62,500
Total	11	3,480	$	592,070

(1) The Company owned an 85% interest in this unconsolidated rental property. Sale price listed is the gross sale price.

The Company recognized a net gain on sales of real estate properties of approximately $212.7 million, a net gain on sales of unconsolidated entities of approximately $4.9 million (included in loss from investments in unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income) and a net gain on sales of land parcels of approximately $5.3 million on the above sales.

During the year ended December 31, 2013, the Company disposed of the following to unaffiliated parties (sales price in thousands):



	Properties	Apartment Units	Sales Price
Consolidated:
Rental Properties	94	29,180	$	4,459,339
Land Parcels (seven)	—	—	99,650
Other (1)	—	—	30,734
Unconsolidated:
Land Parcel (one) (2)	—	—	26,350
Total	94	29,180	$	4,616,073

(1) Represents a 97,000 square foot commercial building adjacent to our Harbor Steps apartment property in downtown Seattle that was acquired in 2011.

(2) Sales price listed is the gross sales price. EQR's share of the net sales proceeds approximated 25%.

The Company recognized a net gain on sales of discontinued operations of approximately $2.0 billion and a net gain on sales of land parcels of approximately $12.2 million on the above sales.