AVB 10-K Annual Report Dec. 31, 2009

AVALONBAY COMMUNITIES INC

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10-K 1 w77522e10vk.htm FORM 10-K e10vk

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		77-0404318 (I.R.S. Employer Identification No.)

2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive office)

(703) 329-6300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Common Stock, par value $.01 per share		New York Stock Exchange

(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

The aggregate market value of the registrant’s Common Stock, par value $.01 per share, held by nonaffiliates of the registrant, as of June 30, 2009 was $4,435,004,264.

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of January 31, 2010 was 81,546,465.

Documents Incorporated by Reference

Portions of AvalonBay Communities, Inc.’s Proxy Statement for the 2010 annual meeting of stockholders, a definitive copy of which will be filed with the SEC within 120 days after the year end of the year covered by this Form 10-K, are incorporated by reference herein as portions of Part III of this Form 10-K.

TABLE OF CONTENTS


	PART I
		PAGE

ITEM 1.	BUSINESS		1

ITEM 1a.	RISK FACTORS		8

ITEM 1b.	UNRESOLVED STAFF COMMENTS		17

ITEM 2.	COMMUNITIES		17

ITEM 3.	LEGAL PROCEEDINGS		31

ITEM 4.	[RESERVED]		32

	PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		33

ITEM 6.	SELECTED FINANCIAL DATA		35

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		38

ITEM 7a.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		58

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		60

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		60

ITEM 9a.	CONTROLS AND PROCEDURES		60

ITEM 9b.	OTHER INFORMATION		60

	PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		61

ITEM 11.	EXECUTIVE COMPENSATION		61

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		61

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPEND ENCE	62

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES		62

	PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULE		63

SIGNATURES			70

PART I

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including in the section entitled “Forward-Looking Statements” included in this Form 10-K. You should also review Item 1a., “Risk Factors,” for a discussion of various risks that could adversely affect us.


ITEM 1.		BUSINESS

General

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland corporation that has elected to be treated as a real estate investment trust, (“REIT”), for federal income tax purposes. We engage in the development, redevelopment, acquisition, ownership and operation of multifamily communities in high barrier to entry markets of the United States. These barriers to entry generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply. Our markets are located in New England, the New York/New Jersey metro area, the Washington DC Metro area, the Midwest, the Pacific Northwest, and the Northern and Southern California regions of the United States. We focus on these markets because we believe that over the long-term, a limited new supply of apartment homes and lower housing affordability in these markets will result in higher growth in cash flows relative to other markets.

At January 31, 2010, we owned or held a direct or indirect ownership interest in:

•

164 operating apartment communities containing 47,631 apartment homes in ten states and the District of Columbia, of which, 140 were consolidated communities containing 42,108 apartment homes, three communities containing 983 apartment homes were held by joint ventures in which we own an interest, and 21 communities containing 4,540 apartment homes were owned by the Funds (as defined below). Seven of the consolidated communities containing 2,615 apartment homes were under redevelopment, as discussed below;

•

seven communities under construction that are expected to contain an aggregate of 2,438 apartment homes when completed; and

•

rights to develop an additional 28 communities that, if developed in the manner expected, will contain an estimated 7,180 apartment homes.

We generally obtain ownership in an apartment community by developing a new community on vacant land or by acquiring an existing community. In selecting sites for development or acquisition, we favor locations that are near expanding employment centers and convenient to transportation, recreation areas, entertainment, shopping and dining.

Our consolidated real estate investments consist of the following reportable segments: Established Communities, Other Stabilized Communities and Development/Redevelopment Communities. Established Communities are generally operating communities that were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year such that year-over-year comparisons are meaningful. Other Stabilized Communities are generally all other operating communities that have stabilized occupancy and operating expenses during the current year, but that had not achieved stabilization as of the beginning of the prior year such that year-over-year comparisons are not meaningful as well as communities that are planned for disposition during the current year. Development/Redevelopment Communities consist of communities that are under construction, communities where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up. A more detailed description of these segments and other related information can be found in Note 9, “Segment Reporting,” of the Consolidated Financial Statements set forth in Item 8 of this report.

Our principal financial goal is to increase long-term stockholder value through the development, acquisition, operation and, when appropriate, disposition of apartments in our markets. To help fulfill this goal, we regularly (i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire an interest in apartment communities in high barrier to entry markets with growing or high potential for demand and

high for-sale housing costs, (iii) selectively sell apartment communities that no longer meet our long-term strategy or when opportunities are presented to realize a portion of the value created through our investment and redeploy the proceeds from those sales, and (iv) endeavor to maintain a capital structure that is aligned with our business risks with a view to maintaining continuous access to cost-effective capital. Our time-tested strategy is to be leaders in customer insight, market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing US submarkets. A substantial majority of our current communities are upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.

During the three years ended December 31, 2009, excluding activity for the Funds (as defined below), we acquired one apartment community. This community’s financial results are consolidated for financial reporting purposes. During the same three-year period, excluding dispositions in which we retained an ownership interest, we disposed of 19 apartment communities, disposed of one investment in a real estate joint venture and completed the development of 30 apartment communities and the redevelopment of 10 apartment communities.

During this period, we also realized gains from the sale of a community owned by AvalonBay Value Added Fund, L.P. (“Fund I”), an institutional discretionary investment fund, which we manage and in which we own a 15.2% interest. Fund I acquired communities with the objective of either redeveloping or repositioning them, or taking advantage of market cycle timing and improved operating performance. From its inception in March 2005 through the close of its investment period in March 2008, Fund I acquired 20 communities. Fund I sold one community in 2008.

In September 2008, we formed AvalonBay Value Added Fund II, L.P. (“Fund II”), an additional institutional discretionary investment fund which we manage and in which we currently own a 31.3% interest. After adding additional equity commitments in the second quarter of 2009, a total of five institutional investors and the Company collectively committed $400,000,000, of which our commitment is $125,000,000. During 2009, Fund II acquired two communities. A more detailed description of Fund I and Fund II (collectively, the “Funds”) and the related investment activity can be found in the discussion under Item I., “Business — General — Financing Strategy” and Note 6, “Investments in Real Estate Entities” of the Consolidated Financial Statements in Item 8 of this report.

During 2009, we sold seven real estate assets, resulting in a gain in accordance with U.S. generally accepted accounting principles (“GAAP”) of $65,946,000.

A further discussion of our development, redevelopment, disposition, acquisition, property management and related strategies follows.

Development Strategy. We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. As one of the largest developers of multifamily rental apartment communities in high barrier to entry markets of the United States, we identify development opportunities through local market presence and access to local market information achieved through our regional offices. In addition to our principal executive office in Alexandria, Virginia, we also maintain regional offices, administrative offices or specialty offices in or near the following cities:

•

Boston, Massachusetts;

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Chicago, Illinois;

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Long Island, New York;

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Los Angeles, California;

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New York, New York;

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Newport Beach, California;

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San Francisco, California;

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San Jose, California;

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Seattle, Washington;

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Shelton, Connecticut;

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Virginia Beach, Virginia; and

•

Woodbridge, New Jersey.

We will be moving our principal executive office to Arlington, Virginia by June 2010.

After selecting a target site, we usually negotiate for the right to acquire the site either through an option or a long-term conditional contract. Options and long-term conditional contracts generally allow us to acquire the target site shortly before the start of construction, which reduces development-related risks and preserves capital. However, as a result of competitive market conditions for land suitable for development, we have sometimes acquired and held land prior to construction for extended periods while entitlements are obtained, or acquired land zoned for uses other than residential with the potential for rezoning. For further discussion of our Development Rights, refer to Item 2., “Communities” in this report.

We generally act as our own general contractor and construction manager, except for certain mid-rise and high-rise apartment communities where we may elect to use third-party general contractors or construction managers. We generally perform these functions directly (although we may use a wholly owned subsidiary) both for ourselves and for the joint ventures and partnerships of which we are a member or a partner. We believe this enables us to achieve higher construction quality, greater control over construction schedules and significant cost savings. Our development, property management and construction teams monitor construction progress to ensure quality workmanship and a smooth and timely transition into the leasing and operating phase.

During periods where competition for development land is more intense, we may acquire improved land with existing commercial uses and rezone the site for multi-family residential use. During the period that we hold these buildings for future development, the net revenue from these operations, which we consider to be incidental, is accounted for as a reduction in our investment in the development pursuit and not as net income. We have also participated, and may in the future participate, in master planned or other large multi-use developments where we commit to build infrastructure (such as roads) to be used by other participants or commit to act as construction manager or general contractor in building structures or spaces for third parties (such as municipal garages or parks). Costs we incur in connection with these activities may be accounted for as additional invested capital in the community or we may earn fee income for providing these services. Particularly with large scale, urban in-fill developments, we may engage in significant environmental remediation efforts to prepare a site for construction.

Throughout this report, the term “development” is used to refer to the entire property development cycle, including pursuit of zoning approvals, procurement of architectural and engineering designs and the construction process. References to “construction” refer to the actual construction of the property, which is only one element of the development cycle.

Redevelopment Strategy . When we undertake the redevelopment of a community, our goal is to renovate and/or rebuild an existing community so that our total investment is generally below replacement cost and the community is well positioned in the market to achieve attractive returns on our capital. We have established a dedicated group

of associates and procedures to control both the cost and risks of redevelopment. Our redevelopment teams, which include key redevelopment, construction and property management personnel, monitor redevelopment progress. We believe we achieve significant cost savings by acting as our own general contractor. More importantly, this helps to ensure quality design and workmanship and a smooth and timely transition into the lease-up and restabilization phases.

Throughout this report, the term “redevelopment” is used to refer to the entire redevelopment cycle, including planning and procurement of architectural and engineering designs, budgeting and actual renovation work. The actual renovation work is referred to as “reconstruction,” which is only one element of the redevelopment cycle.

Disposition Strategy. We sell assets that no longer meet our long-term strategy or when market conditions are favorable, and we redeploy the proceeds from those sales to develop, redevelop and acquire communities and to rebalance our portfolio across or within geographic regions. This also allows us to realize a portion of the value created through our investments and provides additional liquidity. We are then able to redeploy the net proceeds from our dispositions in lieu of raising that amount of capital externally. When we decide to sell a community, we solicit competing bids from unrelated parties for these individual assets and consider the sales price of each proposal.

Acquisition Strategy. Our core competencies in development and redevelopment discussed above allow us to be selective in the acquisitions we target. Acquisitions allow us to achieve rapid penetration into markets in which we desire an increased presence. Acquisitions (and dispositions) also help us achieve our desired product mix or rebalance our portfolio. In September 2008, we formed Fund II, which serves as the exclusive vehicle through which we acquire additional investments in apartment communities until the earlier of September 2011 or until 90% of its committed capital is invested, subject to limited exceptions. As of December 31, 2009, Fund II had acquired two communities.

Property Management Strategy . We seek to increase operating income through innovative, proactive property management that will result in higher revenue from communities while constraining operating expenses. Our principal strategies to maximize revenue include:

•

strong focus on resident satisfaction;

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staggering lease terms such that lease expirations are better matched to traffic patterns;

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balancing high occupancy with premium pricing, and increasing rents as market conditions permit; and

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managing community occupancy for optimal rental revenue levels.

Constraining growth in operating expenses is another way in which we seek to increase earnings growth. Growth in our portfolio and the resulting increase in revenue allows for fixed operating costs to be spread over a larger volume of revenue, thereby increasing operating margins. We constrain growth in operating expenses in a variety of ways, which include the following, among others:

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we use purchase order controls, acquiring goods and services from pre-approved vendors;

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we purchase supplies in bulk where possible;

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we bid third-party contracts on a volume basis;

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we strive to retain residents through high levels of service in order to eliminate the cost of preparing an apartment home for a new resident and to reduce marketing and vacant apartment utility costs;

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we perform turnover work in-house or hire third parties, generally depending upon the least costly alternative;

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we undertake preventive maintenance regularly to maximize resident satisfaction and property and equipment life; and

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we aggressively pursue real estate tax appeals.

On-site property management teams receive bonuses based largely upon the net operating income (“NOI”) produced at their respective communities. We use and continuously seek ways to improve technology applications to help manage our communities, believing that the accurate collection of financial and resident data will enable us to maximize revenue and control costs through careful leasing decisions, maintenance decisions and financial management.

We generally manage the operation and leasing activity of our communities directly (although we may use a wholly owned subsidiary) both for ourselves and the joint ventures and partnerships of which we are a member or a partner.

From time to time we also pursue or arrange ancillary services for our residents to provide additional revenue sources or increase resident satisfaction. In general, as a REIT we cannot directly provide services to our tenants that are not customarily provided by a landlord, nor can we share in the income of a third party that provides such services. However, we can provide such non-customary services to residents or share in the revenue from such services if we do so through a “taxable REIT subsidiary,” which is a subsidiary that is treated as a “C corporation” and is therefore subject to federal income taxes.

Financing Strategy. We maintain a capital structure that provides financial flexibility to ensure we can select cost effective capital market options that are well matched to our business risks. We estimate that our short-term liquidity needs will be met from cash on hand, borrowings under our $1,000,000,000 revolving variable rate unsecured credit facility (the “Credit Facility”), sales of current operating communities and/or issuance of additional debt or equity securities. A determination to engage in an equity or debt offering depends on a variety of factors such as general market and economic conditions, including interest rates, our short and long-term liquidity needs, the adequacy of our expected liquidity sources, the relative costs of debt and equity capital and growth opportunities. A summary of debt and equity activity for the last three years is reflected on our Consolidated Statement of Cash Flows of the Consolidated Financial Statements set forth in Item 8 of this report.

We have entered into, and may continue in the future to enter into, joint ventures (including limited liability companies or partnerships) through which we would own an indirect economic interest of less than 100% of the community or communities owned directly by such joint ventures. Our decision whether to hold an apartment community in fee simple or to have an indirect interest in the community through a joint venture is based on a variety of factors and considerations, including: (i) the economic and tax terms required by a seller of land or of a community; (ii) our desire to diversify our portfolio of communities by market, submarket and product type; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance sheet strength; and (iv) our projection, in some circumstances, that we will achieve higher returns on our invested capital or reduce our risk if a joint venture vehicle is used. Investments in joint ventures are not limited to a specified percentage of our assets. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.

From its inception in 2005 until the investment period closed in March 2008, Fund I was the exclusive vehicle through which we invested in the acquisition of apartment communities, subject to certain exceptions. In September 2008, we formed Fund II. Fund II now serves as the exclusive vehicle through which we invest in the acquisition of apartment communities, subject to certain exceptions, until the earlier of September 2011 or until 90% of its committed capital is invested. These exceptions include significant individual asset and portfolio acquisitions, properties acquired in tax-deferred transactions and acquisitions that are inadvisable or inappropriate for Fund II. Fund II does not restrict our development activities, and will terminate after a term of ten years, subject to two one-year extensions. Fund II has equity commitments from five institutional investors who, with the Company, collectively committed $400,000,000, of which our commitment is $125,000,000. A significant portion of the investments made in the Funds by investors have been or will be made through an entity that qualifies, or that will qualify as a REIT and in which we also own an equity interest. As of January 31, 2010, Fund II has made two investments, for a total of $104,330,000 invested. In February 2010, Fund II purchased its third community for a purchase price of $31,250,000.

In addition, we may, from time to time, offer shares of our equity securities, debt securities or options to purchase stock in exchange for property.

Other Strategies and Activities . While we emphasize equity real estate investments in rental apartment communities, we have the ability to invest in other types of real estate, mortgages (including participating or convertible mortgages), securities of other REITs or real estate operating companies, or securities of technology companies that relate to our real estate operations or of companies that provide services to us or our residents, in each case consistent with our qualification as a REIT. In addition, we own and lease retail space at our communities when either (i) the highest and best use of the space is for retail (e.g., street level in an urban area) or (ii) we believe the retail space will enhance the attractiveness of the community to residents. As of December 31, 2009, we had a

total of 456,260 square feet of rentable retail space, excluding retail space within communities currently under construction. Gross rental revenue provided by leased retail space in 2009 was $8,915,000 (1.0% of total revenue). If we secure a development right and believe that its best use, in whole or in part, is to develop the real estate with the intent to sell rather than hold the asset, we may, through a taxable REIT subsidiary, develop real estate for sale. At present, through a taxable REIT subsidiary that is a 50% partner in Aria at Hathorne, LLC, we have an economic interest in the development of for-sale town homes that have a total projected capital cost of $23,621,000. This for-sale development is on a site that is adjacent to our Avalon Danvers community and that is zoned for for-sale development. Any investment in securities of other entities, and any development of real estate for sale, is subject to the percentage of ownership limitations, gross income tests, and other limitations that must be observed for REIT qualification.

We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. At all times we intend to make investments in a manner so as to qualify as a REIT unless, because of circumstances or changes to the Internal Revenue Code (or the Treasury Regulations), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT.

Tax Matters

We filed an election with our 1994 federal income tax return to be taxed as a REIT under the Internal Revenue Code of 1986 (“the Code”), as amended, and intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, we will not be taxed under federal and certain state income tax laws at the corporate level on our taxable net income to the extent taxable net income is distributed to our stockholders. We expect to make sufficient distributions to avoid income tax at the corporate level. While we believe that we are organized and qualified as a REIT and we intend to operate in a manner that will allow us to continue to qualify as a REIT, there can be no assurance that we will be successful in this regard. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which there are limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control.

Competition

We face competition from other real estate investors, including insurance companies, pension and investment funds, partnerships and investment companies and other REITs, to acquire and develop apartment communities and acquire land for future development. As an owner and operator of apartment communities, we also face competition for prospective residents from other operators whose communities may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the resident seeks. We also compete against condominiums and single-family homes that are for sale or rent. Although we often compete against large sophisticated developers and operators for development opportunities and for prospective residents, real estate developers and operators of any size can provide effective competition for both real estate assets and potential residents.

Environmental and Related Matters

As a current or prior owner, operator and developer of real estate, we are subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties resulting from environmental contamination or noncompliance at our communities. For some development communities, we undertake extensive environmental remediation to prepare the site for construction, which could be a significant portion of our total construction cost. Environmental remediation efforts could expose us to possible liabilities for accidents or improper handling of contaminated materials during construction. These and other risks related to environmental matters are described in more detail in Item 1a., “Risk Factors”.

We believe that more government regulation of energy use, along with a greater focus on environmental protection may, over time, have a significant impact on urban growth patterns. If changes in zoning to encourage greater density and proximity to mass transit do occur, such changes could benefit multifamily housing and those companies with a competency in high-density development. However, there can be no assurance as to whether or

when such changes in regulations or zoning will occur or, if they do occur, whether the multifamily industry or the Company will benefit from such changes.

Other Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-202-551-8090 for further information on the operation of the Public Reference Room. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov. In addition, you may read our SEC fillings at the offices of the New York Stock Exchange (“NYSE”), which is located at 11 Wall Street, New York, New York 10005. Our SEC filings are available at the NYSE because our common stock is listed on the NYSE.

We maintain a website at www.avalonbay.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the “Investor Relations” section of our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. In addition, the charters of our Board’s Nominating and Corporate Governance Committee, Audit Committee and Compensation Committee, as well as our Corporate Governance Guidelines and Code of Conduct, are available free of charge in that section of our website or by writing to AvalonBay Communities, Inc., 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia 22314, Attention: Chief Financial Officer. To the extent required by the rules of the SEC and the NYSE, we will disclose amendments and waivers relating to these documents in the same place on our website.

We were incorporated under the laws of the State of California in 1978. In 1995, we reincorporated in the State of Maryland and have been focused on the ownership and operation of apartment communities since that time. As of January 31, 2010, we had 1,877 employees.

ITEM 1a. RISK FACTORS

Our operations involve various risks that could have adverse consequences, including those described below. This Item 1a. includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements in this Form 10-K.

Development, redevelopment and construction risks could affect our profitability.

We intend to continue to develop and redevelop apartment home communities. These activities can include long planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in high-density urban areas. These activities may be exposed to the following risks:

•

we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring those opportunities;

•

occupancy rates and rents at a community may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities;

•

we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities;

•

we may incur costs that exceed our original estimates due to increased material, labor or other costs;

•

occupancy rates and rents at a community may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities;

•

we may be unable to complete construction and lease-up of a community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues;

•

we may be unable to obtain financing with favorable terms, or at all, for the proposed development of a community, which may cause us to delay or abandon an opportunity;

•

we may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with providing services to third parties (such as the construction of shared infrastructure or other improvements); and

•

we may incur liability if our communities are not constructed and operated in compliance with the accessibility provisions of the Americans with Disabilities Acts, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in imposition of fines, an award of damages to private litigants, and a requirement that we undertake structural modifications to remedy the noncompliance. We are currently engaged in litigation alleging noncompliance with these statutes. See Item 3., “Legal Proceedings.”

We project construction costs based on market conditions at the time we prepare our budgets, and our projections include changes that we anticipate but cannot predict with certainty. Construction costs may increase, particularly for labor and certain materials and, for some of our Development Communities and Development Rights (as defined below), the total construction costs may be higher than the original budget. Total capitalized cost includes all capitalized costs incurred and projected to be incurred to develop or redevelop a community, determined in accordance with GAAP, including:

•

land and/or property acquisition costs;

•

fees paid to secure air rights and/or tax abatements;

•

construction or reconstruction costs;

•

costs of environmental remediation;

•

real estate taxes;

•

capitalized interest;

	•		loan fees;

	•		permits;

•

professional fees;

•

allocated development or redevelopment overhead; and

•

other regulatory fees.

Costs to redevelop communities that have been acquired have, in some cases, exceeded our original estimates and similar increases in costs may be experienced in the future. We cannot assure you that market rents in effect at the time new development or redevelopment communities complete lease-up will be sufficient to fully offset the effects of any increased construction or reconstruction costs.

Unfavorable changes in market and economic conditions could hurt occupancy, rental rates, operating expenses, and the overall market value of our assets, including joint ventures and investments in the Funds.

Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our communities. The risks that may adversely affect conditions in those markets include the following:

•

plant closings, industry slowdowns and other factors that adversely affect the local economy;

•

an oversupply of, or a reduced demand for, apartment homes;

•

a decline in household formation or employment or lack of employment growth;

•

the inability or unwillingness of residents to pay rent increases;

•

rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs; and

•

economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and routine maintenance.

Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability.

We must develop, construct and operate our communities in compliance with numerous federal, state and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and regulations may include zoning laws, building codes, landlord tenant laws and other laws generally applicable to business operations. Noncompliance with laws could expose us to liability.

Lower revenue growth or significant unanticipated expenditures may result from our need to comply with changes in (i) laws imposing remediation requirements and the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions, (ii) rent control or rent stabilization laws or other residential landlord/tenant laws, or (iii) other governmental rules and regulations or enforcement policies affecting the development, use and operation of our communities, including changes to building codes and fire and life-safety codes.

Short-term leases expose us to the effects of declining market rents.

Substantially all of our apartment leases are for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.

Competition could limit our ability to lease apartment homes or increase or maintain rents.

Our apartment communities compete with other housing alternatives to attract residents, including other rental apartments, condominiums and single-family homes that are available for rent, as well as new and existing condominiums and single-family homes for sale. Competitive residential housing in a particular area could adversely affect our ability to lease apartment homes and to increase or maintain rental rates.

Attractive investment opportunities may not be available, which could adversely affect our profitability.

We expect that other real estate investors, including insurance companies, pension funds, other REITs and other well-capitalized investors, will compete with us to acquire existing properties and to develop new properties. This competition could increase prices for properties of the type we would likely pursue and adversely affect our profitability.

Capital and credit market conditions may adversely affect our access to various sources of capital and/or the cost of capital, which could impact our business activities, dividends, earnings, and common stock price, among other things.

In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected. We primarily use external financing to fund construction and to refinance indebtedness as it matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income. To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flows could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest rate or volatile economic environment. We believe that the lenders under our Credit Facility will fulfill their lending obligations thereunder, but if economic conditions deteriorate there can be no assurance that the ability of those lenders to fulfill their obligations would not be adversely impacted.

Insufficient cash flow could affect our debt financing and create refinancing risk.

We are subject to the risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. In this regard, we note that in order for us to continue to qualify as a REIT, we are required to annually distribute dividends generally equal to at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gain. This requirement limits the amount of our cash flow available to meet required principal and interest payments. The principal outstanding balance on a portion of our debt will not be fully amortized prior to its maturity. Although we may be able to repay our debt by using our cash flows, we cannot assure you that we will have sufficient cash flows available to make all required principal payments. Therefore, we may need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that a refinancing will not be done on as favorable terms, either of which could have a material adverse effect on our financial condition and results of operations.

Rising interest rates could increase interest costs and could affect the market price of our common stock.

We currently have, and may in the future incur, contractual variable interest rate debt, as well as effective variable interest rate debt achieved through the use of qualifying hedging relationships. In addition, we regularly seek access to both fixed and variable rate debt financing to repay maturing debt and to finance our development and redevelopment activity. Accordingly, if interest rates increase, our interest costs will also rise, unless we have made arrangements that hedge the risk of rising interest rates. In addition, an increase in market interest rates may lead purchasers of our common stock to demand a greater annual dividend yield, which could adversely affect the market price of our common stock.

Bond financing and zoning compliance requirements could limit our income, restrict the use of communities and cause favorable financing to become unavailable.

We have financed some of our apartment communities with obligations issued by local government agencies because the interest paid to the holders of this debt is generally exempt from federal income taxes and, therefore, the interest rate is generally more favorable to us. These obligations are commonly referred to as “tax-exempt bonds” and generally must be secured by mortgages on our communities. As a condition to obtaining tax-exempt financing, or on occasion as a condition to obtaining favorable zoning in some jurisdictions, we will commit to make some of the apartments in a community available to households whose income does not exceed certain thresholds (e.g., 50% or 80% of area median income), or who meet other qualifying tests. As of December 31, 2009, approximately 6.8% of our apartment homes at current operating communities were under income limitations such as these. These commitments, which may run without expiration or may expire after a period of time (such as 15 or 20 years) may limit our ability to raise rents and, in consequence, can also adversely affect the value of the communities subject to these restrictions.

In addition, some of our tax-exempt bond financing documents require us to obtain a guarantee from a financial institution of payment of the principal of, and interest on, the bonds. The guarantee may take the form of a letter of credit, surety bond, guarantee agreement or other additional collateral. If the financial institution defaults in its guarantee obligations, or if we are unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur under the applicable tax-exempt bonds and the community could be foreclosed upon if we do not redeem the bonds.

Risks related to indebtedness.

We have a Credit Facility with JPMorgan Chase Bank, N.A., and Wachovia Bank, N.A., serving together as syndication agent and as banks, Bank of America, N.A., serving as administrative agent, swing lender, issuing bank and a bank, Morgan Stanley Bank, Wells Fargo Bank, N.A., and Deutsche Bank Trust Company Americas, serving collectively as documentation agent and as banks, and a syndicate of other financial institutions, serving as banks. Our organizational documents do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, subject to compliance with outstanding debt covenants, we could incur more debt, resulting in an increased risk of default on our obligations and an increase in debt service requirements that could adversely affect our financial condition and results of operations.

The mortgages on those of our properties subject to secured debt, our Credit Facility and the indenture under which a substantial portion of our debt was issued contain customary restrictions, requirements and other limitations, as well as certain financial and operating covenants including maintenance of certain financial ratios. Maintaining compliance with these restrictions could limit our flexibility. A default in these requirements, if uncured, could result in a requirement that we repay indebtedness, which could severely affect our liquidity and increase our financing costs. Refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion.

Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to stockholders.

A decrease in rental revenue or other liquidity needs, including the repayment of indebtedness or funding of our development activities, could have an adverse effect on our ability to pay distributions to our stockholders. Significant expenditures associated with each community such as debt service payments, if any, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in income from a community.

The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other considerations.

The form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual

distribution requirements under the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.

We may choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.

We may distribute taxable dividends that are payable in part in our stock, as we did in the fourth quarter of 2008. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the trading price of our stock would experience downward pressure if a significant number of our stockholders sell shares of our stock in order to pay taxes owed on dividends. .

Debt financing may not be available and equity issuances could be dilutive to our stockholders.

Our ability to execute our business strategy depends on our access to an appropriate blend of debt and equity financing. Debt financing may not be available in sufficient amounts or on favorable terms. If we issue additional equity securities, the interests of existing stockholders could be diluted.

Difficulty of selling apartment communities could limit flexibility.

Federal tax laws may limit our ability to earn a gain on the sale of a community (unless we own it through a subsidiary which will incur a taxable gain upon sale) if we are found to have held, acquired or developed the community primarily with the intent to resell the community, and this limitation may affect our ability to sell communities without adversely affecting returns to our stockholders. In addition, real estate in our markets can at times be difficult to sell quickly at prices we find acceptable. These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the apartment communities in our portfolio promptly in response to changes in economic or other conditions.

Acquisitions may not yield anticipated results.

Subject to the requirements related to Fund II, we may in the future acquire apartment communities on a select basis. Our acquisition activities and their success may be exposed to the following risks:

•

an acquired property may fail to perform as we expected in analyzing our investment; and

•

our estimate of the costs of repositioning or redeveloping an acquired property may prove inaccurate.

Failure to succeed in new markets or in activities other than the development, ownership and operation of residential rental communities may have adverse consequences.

We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate opportunities arise. As noted above, we also own and lease ancillary retail space when a retail component represents the best use of the space, as is often the case with large urban in-fill developments. Also, as noted above in Item 1., “Business,” through a taxable REIT subsidiary that is a joint venture partner, we have a 50% economic interest in a for-sale development with a total estimated capital cost at completion of $23,621,000, on a site adjacent to one of our communities. We may engage or have an interest in for-sale activity in the future. Our historical experience in our existing markets in developing, owning and operating rental communities does not ensure that we will be able to operate successfully in new markets, should we choose to enter them, or that we will be successful in other activities. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to accurately evaluate local apartment market conditions; an inability to obtain land for development or to identify appropriate acquisition opportunities; an inability to hire and retain key personnel; and

lack of familiarity with local governmental and permitting procedures. We may be unsuccessful in owning and leasing retail space at our communities or in developing real estate with the intent to sell.

Land we hold with no current intent to develop may be subject to future impairment charges

We own parcels of land that we do not currently intend to develop. As discussed in Item 2., “Communities — Other Land and Real Estate Assets,” in the event that the fair market value of a parcel changes such that the we determine that the carrying basis of the parcel reflected in our financial statements is greater than the parcel’s then current fair value, less costs to dispose, we would be subject to an impairment charge, which would reduce our net income.

Risks involved in real estate activity through joint ventures.

Instead of acquiring or developing apartment communities directly, at times we invest as a partner or a co-venturer. Joint venture investments (including investments through partnerships or limited liability companies) involve risks, including the possibility that our partner might become insolvent or otherwise refuse to make capital contributions when due; that we may be responsible to our partner for indemnifiable losses; that our partner might at any time have business goals which are inconsistent with ours; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests. Frequently, we and our partner may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction.

Risks associated with an investment in and management of discretionary investment funds .

We formed Fund I which, through a wholly owned subsidiary, we manage as the general partner and in which we have invested approximately $50,000,000 at December 31, 2009, representing our total capital commitment, for an equity interest of approximately 15%. We have also formed Fund II which, through a wholly owned subsidiary, we manage as the general partner and to which we have committed $125,000,000, representing a current equity interest of approximately 31%. We have invested approximately $17,500,000 at December 31, 2009 in Fund II. These Funds present risks, including the following:

•

investors in Fund II may fail to make their capital contributions when due and, as a result, Fund II may be unable to execute its investment objectives;

•

our subsidiaries that are the general partners of the Funds are generally liable, under partnership law, for the debts and obligations of the respective Funds, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the Funds;

•

investors in the Funds holding a majority of the partnership interests may remove us as the general partner without cause, subject to our right to receive an additional nine months of management fees after such removal and our right to acquire one of the properties then held by the Funds;

•

while we have broad discretion to manage the Funds and make investment decisions on behalf of the Funds, the investors or an advisory committee comprised of representatives of the investors must approve certain matters, and as a result we may be unable to cause the Funds to make certain investments or implement certain decisions that we consider beneficial;

•

we can develop communities but have been generally prohibited from making acquisitions of apartment communities outside of Fund II, which is our exclusive investment vehicle until September 2011 or when 90% of Fund II’s capital is invested, subject to certain exceptions; and

•

we may be liable and/or our status as a REIT may be jeopardized if either the Funds, or the REITs through which a number of investors have invested in the Funds and which we manage, fail to comply with various tax or other regulatory matters.

Risk of earthquake damage.

As further described in Item 2., “Communities — Insurance and Risk of Uninsured Losses,” many of our West Coast communities are located in the general vicinity of active earthquake faults. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could materially and adversely affect our business and our financial condition and results of operations.

Insurance coverage for earthquakes can be costly due to limited industry capacity. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in management’s view, economically impractical.

A significant uninsured property or liability loss could have a material adverse effect on our financial condition and results of operations.

In addition to the earthquake insurance discussed above, we carry commercial general liability insurance, property insurance and terrorism insurance with respect to our communities on terms we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. If an uninsured property loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a community, as well as the anticipated future revenues from such community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. If an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with, or court ordered damages to, that third party. A significant uninsured property or liability loss could materially and adversely affect our business and our financial condition and results of operations.

We may incur costs and increased expenses to repair property damage resulting from inclement weather.

Particularly in New England and the Midwest, we are exposed to risks associated with inclement winter weather, including increased costs for the removal of snow and ice as well as from delays in construction. In addition, inclement weather could increase the need for maintenance and repair of our communities.

We may incur costs due to environmental contamination or non-compliance.

Under various federal, state and local environmental and public health laws, regulations and ordinances, we may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at our properties (including in some cases natural substances such as methane and radon gas) and may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination. These damages and costs may be substantial and may exceed any insurance coverage we have for such events. The presence of such substances, or the failure to properly remediate the contamination, may adversely affect our ability to borrow against, sell or rent the affected property.

In addition, some environmental laws create or allow a government agency to impose a lien on the contaminated site in favor of the government for damages and costs it incurs as a result of the contamination.

The development, construction and operation of our communities are subject to regulations and permitting under various federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and wastewater discharge. Noncompliance with such laws and regulations may subject us to fines and penalties. We do not currently anticipate that we will incur any material liabilities as a result of noncompliance with these laws.

Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building. These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs. We are not aware that any ACMs were used in the construction of the communities we developed. ACMs were, however, used in the construction of a number of the communities that we acquired. We implement an operations and maintenance program at each of the communities at which ACMs are detected. We do not currently anticipate that we will incur any material liabilities as a result of the presence of ACMs at our communities.

We are aware that some of our communities have lead paint and have implemented an operations and maintenance program at each of those communities. We do not currently anticipate that we will incur any material liabilities as a result of the presence of lead paint at our communities.

All of our stabilized operating communities, and all of the communities that we are currently developing, have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or ground water sampling. These assessments, together with subsurface assessments conducted on some properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operations. In connection with our ownership, operation and development of communities, from time to time we undertake substantial remedial action in response to the presence of subsurface or other contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an indemnity exists upon which we may be able to rely if environmental liability arises from the contamination or remediation costs exceed estimates. There can be no assurance, however, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that environmental liability arises.

Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions. To help limit mold growth, we educate residents about the importance of adequate ventilation and request or require that they notify us when they see mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware of its presence regardless of whether we or the resident believe a health risk is presented. However, we cannot provide assurance that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage. Our communities may also be affected by potential vapor intrusion risks resulting from subsurface soil or groundwater contamination by volatile organic compounds, which may require investigation or remediation and could subject the Company to liability.

Additionally, we have occasionally been involved in developing, managing, leasing and operating various properties for third parties. Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which relate to the release or presence of hazardous or toxic substances. We are not aware of any material environmental liabilities with respect to properties managed or developed by us or our predecessors for such third parties.

We cannot assure you that:

•

the environmental assessments described above have identified all potential environmental liabilities;

•

no prior owner created any material environmental condition not known to us or the consultants who prepared the assessments;

•

no environmental liabilities have developed since the environmental assessments were prepared;

•

the condition of land or operations in the vicinity of our communities, such as the presence of underground storage tanks, will not affect the environmental condition of our communities;

•

future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability; and

•

no environmental liabilities will arise at communities that we have sold for which we may have liability.

Failure to qualify as a REIT would cause us to be taxed as a corporation, which would significantly reduce funds available for distribution to stockholders.

If we fail to qualify as a REIT for federal income tax purposes, we will be subject to federal income tax on our taxable income at regular corporate rates (subject to any applicable alternative minimum tax). In addition, unless we are entitled to relief under applicable statutory provisions, we would be ineligible to make an election for treatment as a REIT for the four taxable years following the year in which we lose our qualification. The additional tax liability resulting from the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds available for distribution to our stockholders. Furthermore, we would no longer be required to make distributions to

our stockholders. Thus, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

We believe that we are organized and qualified as a REIT, and we intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as a REIT, or that we will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which there are only limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of this qualification.

Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property and on taxable income that we do not distribute to our shareholders. In addition, we may engage in activities that are not customarily provided by a landlord through taxable subsidiaries and will be subject to federal income tax at regular corporate rates on the income of those subsidiaries.

The ability of our stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.

There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

Our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock without stockholder approval and to establish the preferences and rights, including voting rights, of any series of preferred stock issued. The Board of Directors may issue preferred stock without stockholder approval, which could allow the Board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or a change in control.

To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals at any time during the last half of any taxable year. To maintain this qualification, and/or to address other concerns about concentrations of ownership of our stock, our charter generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Code, or beneficially as defined in Section 13 of the Securities Exchange Act) by any single stockholder of more than 9.8% of the issued and outstanding shares of any class or series of our stock. In general, under our charter, pension plans and mutual funds may directly and beneficially own up to 15% of the outstanding shares of any class or series of stock. Under our charter, our Board of Directors may in its sole discretion waive or modify the ownership limit for one or more persons, but is not required to do so even if such waiver would not affect our qualification as a REIT. These ownership limits may prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their shares of common stock.

Our bylaws provide that the affirmative vote of holders of a majority of all of the shares entitled to be cast in the election of directors is required to elect a director. In a contested election, if no nominee receives the vote of holders of a majority of all of the shares entitled to be cast, the incumbent directors would remain in office. This requirement may prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their shares of common stock.

As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law. Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even if they are in our stockholders’ best interests. In addition, other provisions of the Maryland General Corporation Law permit the Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that the entire Board is not up for reelection annually) that, if made or taken, could have the effect of discouraging or delaying a change in control.

ITEM 1b. UNRESOLVED STAFF COMMENTS

None.


ITEM 2.		COMMUNITIES

Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights (as defined below). Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The following is a description of each category:

Current Communities are categorized as Established, Other Stabilized, Lease-Up, or Redevelopment according to the following attributes:

	•		Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the year ended December 31, 2009, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2008, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

	•		Other Stabilized Communities includes all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.

	•		Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

	•		Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. For communities that we wholly own, redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community’s acquisition cost. The definition of substantial redevelopment may differ for communities owned through a joint venture arrangement, or by one of the Funds.

Development Communities are communities that are under construction and for which a certificate of occupancy has not been received for the entire community. These communities may be partially complete and operating.

Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we own land to develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

In addition, we own approximately 60,000 square feet of office space in Alexandria, Virginia, for our corporate office, with all other regional and administrative offices leased under operating leases. In the third quarter of 2009 we entered into a ten-year operating lease for approximately 50,744 square feet of office space in Arlington, Virginia, which will serve as the location for our corporate office by the end of the second quarter 2010. We are exploring alternatives to lease or sell the office space in Alexandria, Virginia.

As of December 31, 2009, communities that we owned or held a direct or indirect interest in were classified as follows:


	Number of		Number of
	communities		apartment homes
Current Communities

Established Communities:
New England		22		5,359
Metro NY/NJ		18		5,895
Mid-Atlantic/Midwest		15		6,088
Pacific Northwest		8		1,943
Northern California		15		4,432
Southern California		12		3,679

Total Established		90		27,396


Other Stabilized Communities:
New England		12		3,334
Metro NY/NJ		11		3,241
Mid-Atlantic/Midwest		13		3,616
Pacific Northwest		4		1,021
Northern California		11		2,989
Southern California		10		1,718

Total Other Stabilized		61		15,919


Lease-Up Communities		7		1,996

Redevelopment Communities		7		2,615


Total Current Communities		165		47,926


Development Communities		7		2,438


Development Rights		28		7,180

Our holdings under each of the above categories are discussed on the following pages.

Current Communities

Our Current Communities are primarily garden-style apartment communities consisting of two and three-story buildings in landscaped settings. As of January 31, 2010, these include 113 garden-style (of which 15 are mixed communities and/or include town homes), 22 high-rise and 29 mid-rise apartment communities.

Our communities offer a variety of quality amenities and features, including:

•

gourmet kitchens;

•

lofts and vaulted ceilings;

•

walk-in closets;

•

fireplaces;

•

patios/decks; and

•

modern appliances.

Other features at various communities may include:

•

swimming pools;

•

fitness centers;

	•		tennis courts; and

	•		wi-fi lounges.

We also have an extensive and ongoing maintenance program to continually maintain and enhance our communities and apartment homes. The aesthetic appeal of our communities and a service-oriented property management team, focused on the specific needs of residents, enhances market appeal to discriminating residents. We believe our mission of Enhancing the Lives of our Residents helps us achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses.

Our Current Communities are located in the following geographic markets:


	Number of				Number of apartment				Percentage of total
	communities at				homes at				apartment homes at
	1-31-09		1-31-10		1-31-09		1-31-10		1-31-09			1-31-10
New England		36		36		9,077		9,132		19.9	%		19.2	%
Boston, MA		24		25		6,460		6,683		14.2	%		14.0	%
Fairfield County, CT		12		11		2,617		2,449		5.7	%		5.2	%

Metro NY/NJ		31		32		9,353		10,255		20.4	%		21.5	%
Long Island, NY		7		6		1,732		1,732		3.8	%		3.6	%
Northern New Jersey		5		5		1,618		1,618		3.5	%		3.4	%
Central New Jersey		7		6		2,258		2,258		4.9	%		4.7	%
New York, NY		12		15		3,745		4,647		8.2	%		9.8	%

Mid-Atlantic/Midwest		30		27		9,213		9,409		20.2	%		19.8	%
Washington, DC		24		22		7,661		8,152		16.8	%		17.1	%
Chicago, IL		6		5		1,552		1,257		3.4	%		2.7	%

Pacific Northwest		11		12		2,746		2,964		6.0	%		6.2	%
Seattle, WA		11		12		2,746		2,964		6.0	%		6.2	%

Northern California		32		32		8,879		9,160		19.4	%		19.2	%
Oakland-East Bay, CA		8		9		2,394		2,833		5.2	%		5.9	%
San Francisco, CA		11		12		2,489		2,749		5.4	%		5.8	%
San Jose, CA		13		11		3,996		3,578		8.8	%		7.5	%

Southern California		24		25		6,460		6,711		14.1	%		14.1	%
Los Angeles, CA		12		12		3,345		3,345		7.3	%		7.0	%
Orange County, CA		8		9		1,896		2,147		4.1	%		4.5	%
San Diego, CA		4		4		1,219		1,219		2.7	%		2.6	%

		164		164		45,728		47,631		100.0	%		100.0	%

We manage and operate substantially all of our Current Communities. During the year ended December 31, 2009, we completed construction of 2,526 apartment homes in nine communities and sold 1,037 apartment homes in five communities. The average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 14.3 years. When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the average age of our Current Communities is 9.2 years.

Of the Current Communities, as of January 31, 2010, we own:

•

a full fee simple, or absolute, ownership interest in 124 operating communities, ten of which are on land subject to land leases expiring in October 2026, November 2028, July 2029, December 2034, July 2062, December 2073, April 2095, September 2105 and March 2142;

•

a general partnership interest in three partnerships that each own a fee simple interest in an operating community;

•

a general partnership interest and an indirect limited partnership interest in both Fund I and Fund II. Subsidiaries of Fund I own a fee simple interest in 19 operating communities, and subsidiaries of Fund II own a fee simple interest in two operating communities;

•

a general partnership interest in two partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of nine communities;

	•		a membership interest in six limited liability companies that each hold a fee simple interest in an operating community, two of which are on land subject to land leases expiring in September 2044, and November 2089; and

	•		a residual profits interest (with no ownership interest) in a limited liability company to which an operating community was transferred upon completion of construction in the second quarter of 2006.

For some communities, a land lease is used to support tax advantaged structures that ultimately allow us to purchase the land upon lease expiration. We have options to purchase the underlying land for the leases that expire in October 2026, November 2028, July 2029, December 2034, April 2095 and March 2142. We also hold, directly or through wholly owned subsidiaries, the full fee simple ownership interest in the seven Development Communities, all of which are currently consolidated for financial reporting purposes and two of which are subject to land leases expiring in May 2105 and April 2106.

In our two partnerships structured as DownREITs, either AvalonBay or one of our wholly owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated our current common stock dividend amount. The holders of units of limited partnership interest have the right to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement and based on the fair value of our common stock. In lieu of a cash redemption by the partnership, we may elect to acquire any unit presented for redemption for one share of our common stock or for such cash amount. As of January 31, 2010, there were 15,351 DownREIT partnership units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)


																		Average
				Approx.				Year of	Average		Physical	Average						rental rate					Financial
		Number of		rentable				completion /	size		occupancy	economic occupancy						$ per		$ per			reporting
	City and state	homes		area (Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		at 12/31/09	2009			2008			Apt (4)		Sq. Ft.			cost (5)
CURRENT COMMUNITIES

*NEW ENGLAND*
Boston, MA
Avalon at Lexington	Lexington, MA		198		237,855		16.1	1994		1,201	91.9%		95.0	%		97.6	%		1,818		1.44			16,460
Avalon Oaks	Wilmington, MA		204		237,167		22.5	1999		1,163	96.1%		97.1	%		95.6	%		1,467		1.23			21,290
Avalon Summit	Quincy, MA		245		224,974		8.0	1986/1996		918	91.4%		96.0	%		97.1	%		1,361		1.42			17,694
Avalon Essex	Peabody, MA		154		201,063		11.1	2000		1,306	95.5%		96.3	%		96.3	%		1,572		1.16			22,023
Avalon at Prudential Center	Boston, MA		780		759,130		1.0	1968/1998		973	95.1%		93.8	%		97.5	%		3,005		2.90			157,333
Avalon Oaks West	Wilmington, MA		120		133,376		27.0	2002		1,111	96.7%		96.3	%		93.9	%		1,355		1.17			16,984
Avalon Orchards	Marlborough, MA		156		179,227		23.0	2002		1,149	97.4%		96.4	%		97.0	%		1,528		1.28			21,417
Avalon at Newton Highlands (8)	Newton, MA		294		339,537		7.0	2003		1,155	94.9%		96.1	%		96.2	%		2,149		1.79			57,258
Avalon at The Pinehills I	Plymouth, MA		101		151,629		6.0	2004		1,501	95.1%		95.0	%		95.9	%		1,909		1.21			20,008
Avalon at Crane Brook	Peabody, MA		387		433,778		20.0	2004		1,121	95.4%		95.6	%		96.4	%		1,383		1.18			54,961
Essex Place	Peabody, MA		286		250,473		18.0	2004		876	94.4%		93.9	%(2)		88.8	%(2)		1,235		1.32	(2)		35,411
Avalon at Bedford Center	Bedford, MA		139		159,704		38.0	2005		1,149	92.8%		95.5	%		95.3	%		1,738		1.45			24,804
Avalon Chestnut Hill	Chestnut Hill, MA		204		271,899		4.7	2007		1,333	95.1%		96.0	%		93.1	%		2,316		1.67			60,483
Avalon Shrewsbury	Shrewsbury, MA		251		274,780		25.5	2007		1,095	92.0%		94.7	%		95.0	%		1,361		1.18			35,760
Avalon Danvers	Danvers, MA		433		512,991		75.0	2006		1,185	96.1%		95.1	%		86.4	%		1,492		1.20			82,956
Avalon Woburn	Woburn, MA		446		486,091		56.0	2007		1,090	95.5%		96.4	%		96.7	%		1,590		1.41			83,327
Avalon at Lexington Hills	Lexington, MA		387		511,454		23.0	2007		1,322	95.6%		94.8	%		71.1	%(3)		1,877		1.35			86,984
Avalon Acton	Acton, MA		380		373,690		50.3	2007		983	94.5%		95.0	%		59.2	%(3)		1,312		1.27			62,883
Avalon Sharon	Sharon, MA		156		178,628		27.2	2007		1,145	98.1%		96.5	%		62.3	%(3)		1,618		1.36			30,221
Avalon at Center Place (11)	Providence, RI		225		233,910		1.2	1991/1997		1,040	93.3%		95.0	%		94.5	%		1,952		1.78			29,537
Avalon at Hingham Shipyard	Hingham, MA		235		298,981		12.9	2009		1,272	97.5%		80.1	%(3)		17.1	%		1,735		1.09	(3)		54,221
Avalon Northborough I	Northborough, MA		163		183,000		14.0	2009		1,123	97.6%		53.0	%(3)		N/A			3,626		1.71	(3)		25,030
Avalon Blue Hills	Randolph, MA		276		307,085		23.1	2009		1,113	82.3%		42.7	%(3)		N/A			7,314		2.80	(3)		45,316

Fairfield-New Haven, CT
Avalon Gates	Trumbull, CT		340		389,047		37.0	1997		1,144	95.6%		96.9	%		96.5	%		1,618		1.37			37,712
Avalon Glen	Stamford, CT		238		265,940		4.1	1991		1,117	95.8%		95.2	%		97.1	%		1,892		1.61			32,566
Avalon Springs	Wilton, CT		102		160,159		12.0	1996		1,570	95.1%		95.2	%		94.2	%		2,825		1.71			17,299
Avalon Valley	Danbury, CT		268		303,193		17.1	1999		1,131	98.9%		96.4	%		95.7	%		1,616		1.38			26,443
Avalon on Stamford Harbor	Stamford, CT		323		337,572		12.1	2003		1,045	93.8%		94.8	%		96.5	%		2,421		2.19			62,969
Avalon New Canaan (9)	New Canaan, CT		104		145,118		9.1	2002		1,395	97.1%		94.2	%		96.1	%		2,648		1.79			24,469
Avalon at Greyrock Place	Stamford, CT		306		334,381		3.0	2002		1,093	95.8%		95.3	%		96.3	%		2,097		1.83			70,844
Avalon Danbury	Danbury, CT		234		238,952		36.0	2005		1,021	97.4%		95.6	%		96.0	%		1,584		1.48			35,621
Avalon Darien	Darien, CT		189		242,533		32.0	2004		1,283	94.7%		93.7	%		94.7	%		2,433		1.78			41,598
Avalon Milford I	Milford, CT		246		230,246		22.0	2004		936	97.2%		97.9	%		96.2	%		1,441		1.51			31,501
Avalon Huntington	Shelton, CT		99		145,573		7.1	2008		1,470	91.9%		86.8	%		17.0	%(3)		2,029		1.20			25,214

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)


																		Average
				Approx.				Year of	Average		Physical	Average						rental rate					Financial
		Number of		rentable				completion /	size		occupancy	economic occupancy						$ per		$ per			reporting
	City and state	homes		area (Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		at 12/31/09	2009			2008			Apt (4)		Sq. Ft.			cost (5)
*METRO NY/NJ*

Long Island, NY
Avalon Commons	Smithtown, NY		312		385,290		20.6	1997		1,235	96.2%		94.5	%		95.0	%		2,060		1.58			34,105
Avalon Towers	Long Beach, NY		109		135,036		1.3	1990/1995		1,239	94.5%		96.0	%		97.4	%		3,551		2.75			21,594
Avalon Court	Melville, NY		494		601,342		35.4	1997/2000		1,217	97.4%		95.2	%		94.2	%		2,375		1.86			60,411
Avalon at Glen Cove South (11)	Glen Cove, NY		256		262,285		4.0	2004		1,025	93.8%		95.1	%		95.8	%		2,265		2.10			68,152
Avalon Pines I & II	Coram, NY		450		547,981		74.0	2005/2006		1,218	96.2%		94.7	%		95.8	%		1,958		1.52			71,712
Avalon at Glen Cove North (11)	Glen Cove, NY		111		100,851		1.3	2007		909	97.3%		95.3	%		96.8	%		2,076		2.18			39,944

Northern New Jersey
Avalon Cove	Jersey City, NJ		504		640,467		11.0	1997		1,271	96.4%		96.1	%		96.1	%		2,719		2.06			93,581
Avalon at Edgewater	Edgewater, NJ		408		438,670		7.6	2002		1,075	97.1%		95.8	%		96.3	%		2,290		2.04			75,438
Avalon at Florham Park	Florham Park, NJ		270		330,410		41.9	2001		1,224	95.6%		96.3	%		95.8	%		2,576		2.03			42,115
Avalon Lyndhurst	Lyndhurst, NJ		328		352,462		5.8	2006		1,075	93.9%		96.1	%		94.9	%		2,023		1.81			80,984

Central New Jersey
Avalon Run (7) & Run East (8)	Lawrenceville, NJ		632		718,101		36.1	1994/1996		1,136	95.7%		95.7	%		95.1	%		1,484		1.25			76,725
Avalon Watch	West Windsor, NJ		512		496,141		64.4	1988		969	93.8%		96.0	%(2)		96.0	%		1,393		1.38	(2)		36,111
Avalon at Freehold	Freehold, NJ		296		317,416		40.3	2002		1,072	94.6%		96.2	%		96.2	%		1,708		1.53			34,826
Avalon Run East II	Lawrenceville, NJ		312		341,292		70.5	2003		1,094	97.1%		95.5	%		96.0	%		1,753		1.53			52,238
Avalon at Tinton Falls	Tinton Falls, NJ		216		240,747		35.0	2007		1,115	96.3%		95.9	%		56.3	%(3)		1,756		1.51			41,045

New York, NY
Avalon Gardens	Nanuet, NY		504		617,992		62.5	1998		1,226	96.2%		96.9	%		97.0	%		2,082		1.64			55,579
Avalon Green	Elmsford, NY		105		115,038		16.9	1995		1,096	96.2%		97.3	%		97.4	%		2,327		2.07			13,951
Avalon Willow	Mamaroneck, NY		227		240,459		4.0	2000		1,059	96.0%		97.1	%		98.0	%		2,188		2.01			47,603
The Avalon	Bronxville, NY		110		148,335		1.5	1999		1,349	97.3%		96.1	%		97.7	%		3,660		2.61			31,579
Avalon Riverview I (11)	Long Island City, NY		372		352,988		1.0	2002		949	94.9%		96.8	%		96.8	%		3,139		3.20			95,234
Avalon Bowery Place I	New York, NY		206		162,000		1.1	2006		786	97.0%		95.5	%		96.2	%		4,037		4.90			92,810
Avalon Riverview North (11)	Long Island City, NY		602		519,092		1.8	2007		862	93.9%		96.2	%		92.2	%(3)		2,746		3.06			169,329
Avalon on the Sound (11)	New Rochelle, NY		412		415,369		2.4	2001		1,008	96.4%		96.7	%		96.2	%		2,204		2.11			117,354
Avalon on the Sound East (11)	New Rochelle, NY		588		622,999		1.7	2007		1,060	94.9%		96.1	%		79.6	%(3)		2,270		2.06			179,654
Avalon Bowery Place II	New York, NY		90		73,624		1.1	2007		818	96.0%		94.1	%		97.1	%		3,554		4.09			55,766
Avalon White Plains	White Plains, NY		407		379,555		0.1	2009		933	86.0%		54.3	%(3)		14.2	%		2,477		1.44	(3)		150,431
Avalon Morningside Park (11)	New York, NY		295		243,157		0.8	2009		824	93.2%		89.5	%(3)		25.5	%		2,857		3.10	(3)		109,654
Avalon Charles Pond	Coram, NY		200		176,000		39.0	2009		880	96.5%		50.5	%(3)		N/A			4,382		2.51	(3)		48,078

*MID-ATLANTIC/MIDWEST*

Baltimore, MD
Avalon at Fairway Hills I, II, & III (7)	Columbia, MD		720		724,027		59.0	1987/1996		1,006	95.4%		96.3	%		94.6	%		1,335		1.28			52,948
Avalon Symphony Woods (SGlen)	Columbia, MD		176		179,880		10.0	1986		1,022	94.9%		92.8	%(2)		88.8	%(2)		1,328		1.21	(2)		13,828
Avalon Symphony Woods (SGate)	Columbia, MD		216		214,670		12.7	1986/2006		994	98.2%		92.0	%(2)		90.3	%(2)		1,257		1.16	(2)		41,752

Washington, DC
Avalon at Foxhall	Washington, DC		308		297,876		2.7	1982		967	92.9%		95.3	%		96.3	%		2,307		2.27			45,086
Avalon at Gallery Place I	Washington, DC		203		184,157		0.5	2003		907	96.1%		96.8	%		96.7	%		2,577		2.75			49,045
Avalon at Decoverly	Rockville, MD		564		551,292		34.8	1991/1995/2007		977	94.9%		95.7	%		96.2	%		1,487		1.46			63,524
Avalon Fields I	Gaithersburg, MD		192		197,280		5.0	1996		1,028	95.8%		97.9	%		96.7	%		1,407		1.34			14,541
Avalon Fields II	Gaithersburg, MD		96		100,268		5.0	1998		1,044	96.9%		96.3	%		97.0	%		1,584		1.46			8,333
Avalon Knoll	Germantown, MD		300		290,544		26.7	1985		968	96.3%		96.0	%		96.5	%		1,236		1.23			9,003
Avalon at Rock Spring (9) (11)	North Bethesda, MD		386		387,884		10.2	2003		1,005	96.9%		97.5	%		96.8	%		1,779		1.73			82,586

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)


																		Average
				Approx.				Year of	Average		Physical	Average						rental rate					Financial
		Number of		rentable				completion /	size		occupancy	economic occupancy						$ per		$ per			reporting
	City and state	homes		area (Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		at 12/31/09	2009			2008			Apt (4)		Sq. Ft.			cost (5)
Avalon at Grosvenor Station	North Bethesda, MD		497		472,001		10.0	2004		950	94.8%		96.9	%		97.0	%		1,798		1.84			82,452
Avalon at Traville (8)	North Potomac, MD		520		575,529		47.9	2004		1,107	95.6%		96.5	%		97.0	%		1,777		1.55			70,102
Avalon Fair Lakes	Fairfax, VA		420		354,945		24.3	1989/1996		845	95.5%		95.7	%		93.3%	(2)		1,382		1.57			37,886
Avalon at Ballston — Washington Towers	Arlington, VA		344		294,954		4.1	1990		857	95.1%		95.8	%		96.2	%		1,809		2.02			39,215
Avalon at Cameron Court	Alexandria, VA		460		478,068		16.0	1998		1,039	96.1%		96.4	%		96.2	%		1,878		1.74			44,582
Avalon at Providence Park	Fairfax, VA		141		148,282		9.3	1988/1997		1,052	97.9%		96.3	%		96.7	%		1,558		1.43			11,942
Avalon Crescent	McLean, VA		558		613,426		19.1	1996		1,099	97.0%		97.0	%		96.5	%		1,850		1.63			57,921
Avalon at Arlington Square	Arlington, VA		842		628,433		20.1	2001		746	95.1%		96.6	%		96.8	%		1,876		2.43			113,679

Chicago, IL
Avalon at Danada Farms (8)	Wheaton, IL		295		351,206		19.2	1997		1,191	95.3%		96.5	%		96.2	%		1,417		1.15			40,030
Avalon at Stratford Green (8)	Bloomingdale, IL		192		237,124		12.7	1997		1,235	95.3%		96.0	%		96.7	%		1,425		1.11			22,253
Avalon Arlington Heights	Arlington Heights, IL		409		352,236		2.8	1987/2000		861	93.6%		95.7	%		96.2	%		1,495		1.66			56,986

*PACIFIC NORTHWEST*
Seattle, WA
Avalon Redmond Place	Redmond, WA		222		219,075		8.4	1991/1997		987	94.1%		92.0	%		86.4	%(2)		1,358		1.27			31,922
Avalon at Bear Creek	Redmond, WA		264		296,530		22.2	1998		1,123	91.7%		94.4	%		96.6	%		1,380		1.16			36,283
Avalon Bellevue	Bellevue, WA		200		170,965		1.7	2001		855	94.0%		93.3	%		94.8	%		1,555		1.70			31,093
Avalon RockMeadow (8)	Bothell, WA		206		246,683		11.2	2000		1,197	91.8%		94.4	%		95.2	%		1,260		0.99			25,032
Avalon WildReed (8)	Everett, WA		234		266,580		23.0	2000		1,139	95.7%		95.3	%		95.8	%		1,100		0.92			23,132
Avalon HighGrove (8)	Everett, WA		391		428,962		19.0	2000		1,097	94.6%		93.9	%		94.8	%		1,108		0.95			39,942
Avalon ParcSquare (8)	Redmond, WA		124		131,706		2.0	2000		1,062	94.4%		93.0	%		96.9	%		1,611		1.41			19,542
Avalon Brandemoor (8)	Lynwood, WA		424		465,257		27.0	2001		1,097	95.1%		95.1	%		95.1	%		1,162		1.01			45,691
Avalon Belltown	Seattle, WA		100		95,201		0.7	2001		952	95.0%		93.1	%		95.3	%		1,757		1.72			18,499
Avalon Meydenbauer	Bellevue, WA		368		333,502		3.6	2008		906	96.2%		92.2	%		48.1	%(3)		1,616		1.65			89,365

*NORTHERN CALIFORNIA*
Oakland-East Bay, CA
Avalon Fremont	Fremont, CA		308		386,277		14.3	1994		1,254	96.8%		97.1	%		96.3	%		1,677		1.30			57,311
Avalon Dublin	Dublin, CA		204		179,004		13.0	1989/1997		877	95.1%		96.7	%		96.7	%		1,473		1.62			28,694
Avalon Pleasanton	Pleasanton, CA		456		366,062		14.7	1988/1994		803	94.5%		95.3	%(2)		96.8	%		1,371		1.63	(2)		66,026
Avalon at Union Square	Union City, CA		208		150,320		8.5	1973/1996		723	92.8%		95.9	%		96.7	%		1,243		1.65			22,924
Waterford	Hayward, CA		544		452,043		11.1	1985/1986		831	90.8%		91.8	%		93.9	%		1,250		1.38			62,190
Avalon at Willow Creek	Fremont, CA		235		191,935		13.5	1985/1994		817	96.2%		96.8	%(2)		97.0	%		1,457		1.73	(2)		36,493
Avalon at Dublin Station	Dublin, CA		305		300,760		4.7	2006		986	92.8%		94.1	%		67.6	%(3)		1,691		1.61			84,380
Avalon Union City	Union City, CA		439		428,730		6.0	2009		977	85.7%		42.5	%(3)		N/A			2,120		0.92	(3)		118,740

San Francisco, CA
Avalon at Cedar Ridge	Daly City, CA		195		141,411		7.0	1972/1997		725	90.3%		95.5	%(2)		97.0	%		1,621		2.13	(2)		29,141
Avalon at Nob Hill	San Francisco, CA		185		108,712		1.4	1990/1995		588	97.8%		96.0	%		96.8	%		1,921		3.14			28,192
Crowne Ridge	San Rafael, CA		254		222,685		21.9	1973/1996		877	96.9%		95.6	%		96.8	%		1,479		1.61			33,100
Avalon Foster City	Foster City, CA		288		222,364		11.0	1973/1994		772	94.1%		95.0	%		97.1	%		1,585		1.95			44,191
Avalon Towers by the Bay	San Francisco, CA		227		285,881		1.0	1999		1,259	94.3%		96.1	%		97.5	%		3,025		2.31			67,055
Avalon Pacifica	Pacifica, CA		220		186,800		21.9	1971/1995		849	94.1%		95.1	%		97.0	%		1,650		1.85			32,481
Avalon Sunset Towers	San Francisco, CA		243		171,854		16.0	1961/1996		707	94.2%		94.2	%		96.3	%		1,975		2.63			28,890
Avalon at Diamond Heights	San Francisco, CA		154		123,566		3.0	1972/1994		802	90.3%		93.2	% (2)		95.9	% (2)		1,901		2.21	(2)		28,933
Avalon at Mission Bay North	San Francisco, CA		250		240,368		1.4	2003		961	93.6%		96.3	%		96.0	%		3,122		3.13			93,148
Avalon at Mission Bay III	San Francisco, CA		260		261,361		1.5	2009		1,005	85.0%		46.3	%(3)		N/A			3,078		1.42	(3)		146,913

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)


																		Average
				Approx.				Year of	Average		Physical	Average						rental rate					Financial
		Number of		rentable				completion /	size		occupancy	economic occupancy						$ per					reporting
	City and state	homes		area (Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		at 12/31/09	2009			2008			Apt (4)		$ per Sq. Ft.			cost (5)
San Jose, CA
Avalon Campbell	Campbell, CA		348		329,816		10.8	1995		948	94.5%		94.5	%		96.9	%		1,686		1.68			60,672
CountryBrook	San Jose, CA		360		322,992		14.0	1985/1996		897	96.9%		94.9	%		95.9	%		1,489		1.58			52,874
Avalon on the Alameda	San Jose, CA		305		320,464		8.9	1999		1,051	94.1%		96.7	%		97.3	%		2,037		1.87			56,939
Avalon Rosewalk	San Jose, CA		456		459,162		16.6	1997/1999		1,007	94.5%		95.8	%		96.4	%		1,699		1.62			79,972
Avalon Silicon Valley	Sunnyvale, CA		710		659,729		13.6	1997		929	95.4%		96.8	%		96.1	%		1,955		2.04			123,527
Avalon Mountain View (9)	Mountain View, CA		248		211,552		10.5	1986		853	94.8%		90.6	%(2)		88.0	%(2)		1,859		1.97	(2)		58,883
Avalon at Creekside	Mountain View, CA		294		215,680		13.0	1962/1997		734	96.3%		97.0	%		97.6	%		1,515		2.00			43,657
Avalon at Cahill Park	San Jose, CA		218		221,933		3.8	2002		1,018	95.4%		96.7	%		97.6	%		2,020		1.92			52,747
Avalon Towers on the Peninsula	Mountain View, CA		211		218,392		1.9	2002		1,035	95.7%		97.0	%		97.3	%		2,639		2.47			65,811
Countrybrook II	San Jose, CA		80		64,554		3.6	2007		807	100.0%		95.2	%		96.8	%		1,442		1.70			18,005

*SOUTHERN CALIFORNIA*

Orange County, CA
Avalon Newport	Costa Mesa, CA		145		122,415		6.6	1956/1996		844	95.9%		95.3	%		96.3	%		1,644		1.86			10,441
Avalon Mission Viejo	Mission Viejo, CA		166		124,770		7.8	1984/1996		752	95.2%		93.5	%		95.4	%		1,270		1.58			14,120
Avalon at South Coast	Costa Mesa, CA		258		210,922		8.0	1973/1996		818	96.9%		94.0	%		94.4	%		1,377		1.58			26,027
Avalon Santa Margarita	Rancho Santa Margarita, CA		301		229,593		20.0	1990/1997		763	95.4%		93.1	%		96.7	%		1,333		1.63			24,527
Avalon at Pacific Bay	Huntington Beach, CA		304		268,720		9.7	1971/1997		884	94.4%		94.2	%		96.1	%		1,512		1.61			33,233
Avalon Warner Place	Canoga Park, CA		210		186,402		3.3	2007		888	93.3%		94.1	%		57.2	%(3)		1,583		1.68			52,742
Avalon Anaheim Stadium	Anaheim, CA		251		302,480		3.5	2009		1,205	95.6%		49.2	%(3)		4.8	%		2,267		0.93	(3)		97,813

San Diego, CA
Avalon at Mission Bay	San Diego, CA		564		402,320		12.9	1969/1997		713	95.2%		94.6	%		95.0	%		1,433		1.90			66,886
Avalon at Mission Ridge	San Diego, CA		200		208,125		4.0	1960/1997		1,041	95.0%		92.3	%		94.9	%		1,652		1.46			22,666
Avalon at Cortez Hill	San Diego, CA		294		227,373		1.4	1973/1998		773	94.9%		93.4	%		96.4	%		1,506		1.82			34,745
Avalon Fashion Valley	San Diego, CA		161		186,766		10.0	2008		1,160	92.6%		68.4	%		15.3	%(3)		2,380		1.24			64,540

Los Angeles, CA
Avalon at Media Center	Burbank, CA		748		532,264		14.1	1961/1997		712	95.2%		94.5	%		95.6	%		1,440		1.91			77,725
Avalon Woodland Hills	Woodland Hills, CA		663		597,871		18.2	1989/1997		902	89.6%		83.9	%(2)		76.9	%(2)		1,500		1.40	(2)		107,901
Avalon at Warner Center	Woodland Hills, CA		227		195,224		7.0	1979/1998		860	96.5%		94.2	%		94.7	%		1,554		1.70			27,564
Avalon Glendale (11)	Burbank, CA		223		241,714		5.1	2003		1,084	96.4%		94.5	%		94.2	%		2,271		1.98			41,567
Avalon Burbank	Burbank, CA		400		360,587		6.9	1988/2002		901	88.0%		88.1	%(2)		96.7	%(2)		1,878		1.84	(2)		91,653
Avalon Camarillo	Camarillo, CA		249		233,267		10.0	2006		937	95.2%		93.6	%		94.5	%		1,513		1.51			48,738
Avalon Wilshire	Los Angeles, CA		123		125,193		1.6	2007		1,018	94.3%		94.1	%		94.7	%		2,582		2.39			46,876
Avalon Encino	Los Angeles, CA		131		131,220		2.0	2008		1,002	96.2%		76.9	%		15.7	%(3)		2,475		1.79			61,815

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)


																		Average
				Approx.				Year of	Average		Physical	Average						rental rate					Financial
		Number of		rentable				completion /	size		occupancy	economic occupancy						$ per					reporting
	City and state	homes		area (Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		at 12/31/09	2009			2008			Apt (4)		$ per Sq. Ft.			cost (5)
DEVELOPMENT COMMUNITIES

Avalon Irvine	Irvine, CA		279		243,157		4.5	N/A		872	N/A		N/A			N/A			N/A		N/A			76,104
Avalon Walnut Creek (9) (11)	Walnut Creek, CA		422		448,384		5.3	N/A		1,063	N/A		N/A			N/A			N/A		N/A			98,820
Avalon Norwalk	Norwalk, CT		311		312,018		4.5	N/A		1,003	N/A		N/A			N/A			N/A		N/A			50,771
Avalon Fort Greene	Brooklyn, NY		631		498,632		1.0	N/A		790	N/A		N/A			N/A			N/A		N/A			259,672
Avalon Towers Bellevue (11)	Bellevue, WA		396		330,194		1.5	N/A		834	N/A		N/A			N/A			N/A		N/A			73,799
Avalon Northborough II	Northborough, MA		219		271,150		17.7	N/A		1,238	N/A		N/A			N/A			N/A		N/A			18,901
Avalon at West Long Branch	West Long Branch, NJ		180		192,357		10.4	N/A		1,069	N/A		N/A			N/A			N/A		N/A			2,219

UNCONSOLIDATED COMMUNITIES

Avalon at Mission Bay North II (9)	San Francisco, CA		313		291,556		1.5	2006		931	92.3%		95.2	%		95.0	%		2,986		3.05			N/A
Avalon Del Rey (9)	Los Angeles, CA		309		284,387		5.0	2006		920	94.2%		94.3	%		92.7	%		1,972		2.02			N/A
Avalon Chrystie Place I (9)(11)	New York, NY		361		266,940		1.5	2005		739	99.0%		95.5	%		96.9	%		4,138		5.34			N/A
Avalon Juanita Village (10)	Kirkland, WA		211		209,335		2.9	2005		992	91.5%		91.6	%		95.3	%		1,661		1.53			N/A
Avalon at Redondo Beach (6)	Redondo Beach, CA		105		86,075		1.2	1971/2004		820	97.1%		93.3	%		94.3	%		1,906		2.17			N/A
Avalon Sunset (6)	Los Angeles, CA		82		71,037		0.8	1987/2005		866	97.6%		93.4	%		96.5	%		1,863		2.01			N/A
Civic Center (6)	Norwalk, CA		192		174,378		8.7	1987/2005		908	96.9%		92.5	%		93.6	%		1,584		1.61			N/A
Avalon Paseo Place (6)	Fremont, CA		134		106,249		7.0	1987/2005		793	96.3%		96.9	%		94.8	% (2)		1,453		1.77			N/A
Avalon Yerba Buena (6)	San Francisco, CA		160		159,604		0.9	2000/2006		998	93.1%		95.7	%		97.1	%		2,784		2.67			N/A
The Springs (6)	Corona, CA		320		241,440		13.3	1987/2006		755	95.3%		86.0	%		87.7	%		1,017		1.16			N/A
Avalon Skyway (6)	San Jose,CA		348		287,918		18.4	1994/2007		827	98.6%		96.7	%		97.7	%		1,460		1.71			N/A
South Hills Apartments (6)	West Covina, CA		85		107,150		5.3	1966/2007		1,261	94.1%		94.6	%		88.0	% (2)		1,636		1.23			N/A
Avalon Lakeside (6)	Wheaton, IL		204		162,821		12.4	2004		798	93.1%		96.0	%		96.2	%		985		1.18			N/A
Avalon at Poplar Creek (6)	Schaumburg, IL		196		178,490		12.8	1986/2005		911	95.9%		95.8	%		91.3	%		1,159		1.22			N/A
Avalon Lombard (6)	Schaumburg, IL		256		201,924		13.2	1988/2006		789	95.7%		97.2	%		96.2	% (2)		1,069		1.32			N/A
Middlesex Crossing (6)	Billerica, MA		252		188,915		13.0	2007		750	95.6%		96.8	%		96.0	%		1,250		1.61			N/A
Weymouth Place (6)	Weymouth, MA		211		154,957		7.7	1971/2007		734	99.1%		92.6	%		95.8	% (2)		1,124		1.42			N/A
Avalon Columbia (6)	Columbia, MD		170		180,452		11.3	1989/2004		1,061	96.5%		96.8	%		96.3	%		1,479		1.35			N/A
Avalon Cedar Place (6)	Columbia, MD		156		152,923		11.4	1972/2006		980	94.2%		97.0	%		86.8	% (2)		1,211		1.20			N/A
Avalon Centerpoint (6)	Baltimore,MD		392		312,356		6.9	2005/2007		797	91.9%		93.8	%		90.5	%		1,439		1.70			N/A
Avalon at Aberdeen Station (6)	Aberdeen, NJ		290		414,585		16.8	2002/2006		1,430	94.5%		96.4	%		96.5	%		1,759		1.19			N/A
Avalon at Rutherford Station (6)	East Rutherford, NJ		108		131,937		1.5	2005/2007		1,222	100.0%		96.6	%		95.2	%		2,222		1.76			N/A
Avalon Crystal Hill (6)	Pomona, NY		168		215,203		12.1	2001/2007		1,281	96.5%		96.6	%		95.2	%		1,982		1.49			N/A
The Hermitage (12)	Fairfax, VA		491		165,948		13.5	2009		338	95.3%		94.2	% (3)		N/A			1,355		3.78	(3)		N/A
Avalon Bellevue Park (12)	Bellevue, WA		220		373,843		1.8	2009		1,699	85.0%		88.9	% (3)		N/A			1,339		0.70	(3)		N/A


(1)		We own a fee simple interest in the communities listed, excepted as noted below.

(2)		Represents a community that was under redevelopment during the year, which could result in lower average economic occupancy and average rental rate per square foot for the year.

(3)		Represents a community that completed development or was purchased during the year, which could result in lower average economic occupancy and average rental rate per square foot for the year.

(4)		Represents the average rental revenue per occupied apartment home.

(5)		Costs are presented in accordance with GAAP. For current Development Communities, cost represents total costs incurred through December 31, 2009. Financial reporting costs are excluded for unconsolidated communities, see Note 6, “Investments in Real Estate Entities.”

(6)		We own a 15.2% combined general partnership and indirect limited partner equity interest in this community.

(7)		We own a general partnership interest in a partnership that owns a fee simple interest in this community.

(8)		We own a general partnership interest in a partnership structured as a DownREIT that owns this community.

(9)		We own a membership interest in a limited liability company that holds a fee simple interest in this community.

(10)		This community was transferred to a joint venture entity upon completion of development. We do not hold an equity interest in the entity, but retain a promoted residual interest in the profits of the entity. We receive a property management fee for this community.

(11)		Community is located on land subject to a land lease.

(12)		We own a 31.3% combined general partnership and indirect limited partner equity interest in this community.

Development Communities

As of December 31, 2009, we had seven Development Communities under construction. We expect these Development Communities, when completed, to add a total of 2,438 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $813,300,000. You should carefully review Item 1a., “Risk Factors,” for a discussion of the risks associated with development activity and our discussion under Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion of our 2010 outlook for development activity.

The following table presents a summary of the Development Communities. We hold a direct or indirect fee simple ownership interest in these communities except where noted.

Total

Number of

capitalized

apartment

cost (1)

Construction

Initial

Estimated

homes

($ millions)

start

occupancy (2)

completion

stabilization (3)

1. Avalon Irvine

279

77.4

Q4 2007

Q2 2009

Q1 2010

Q3 2010

Irvine, CA

2. Avalon Fort Greene

631

306.8

Q4 2007

Q4 2009

Q1 2011

Q3 2011

New York, NY

3. Avalon Walnut Creek (4)

422

151.7

Q3 2008

Q2 2010

Q1 2011

Q3 2011

Walnut Creek, CA

4. Avalon Norwalk

311

86.4

Q3 2008

Q2 2010

Q2 2011

Q4 2011

Norwalk, CT

5. Avalon Towers Bellevue

396

126.1

Q4 2008

Q2 2010

Q2 2011

Q4 2011

Bellevue, WA

6. Avalon Northborough II

219

36.3

Q4 2009

Q2 2010

Q1 2011

Q3 2011

Northborough, MA

7. Avalon at West Long Branch

180

28.6

Q4 2009

Q3 2010

Q1 2011

Q3 2011

West Long Branch, NJ

Total

2,438

813.3


(1)		Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. Total capitalized cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount.

(2)		Future initial occupancy dates are estimates. There can be no assurance that we will pursue to completion any or all of these proposed developments.

(3)		Stabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of development.

(4)		This community is being financed in part by third party, tax-exempt debt.

Redevelopment Communities

As of December 31, 2009, we had seven consolidated communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $118,400,000, excluding costs prior to redevelopment. We have found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect that actual costs may vary from our budget by a wider range than for a new development community. We cannot assure you that we will meet our schedule for reconstruction completion or restabilized operations, or that we will meet our budgeted costs, either individually or in the aggregate. We anticipate increasing our redevelopment activity related to communities owned by the Funds, as well as communities in our current operating portfolio. You should carefully review Item 1a., “Risk Factors,” for a discussion of the risks associated with redevelopment activity.

The following presents a summary of these Redevelopment Communities:

Total cost

Number of

($ millions)

Estimated

apartment

Pre-redevelopment

Total capitalized

Reconstruction

reconstruction

restabilized

homes

cost

cost (1)

start

completion

operations (2)

1. Avalon Woodland Hills

663

72.1

110.6

Q4 2007

Q2 2010

Q4 2010

Woodland Hills, CA

2. Avalon at Diamond Heights

154

25.3

30.6

Q4 2007

Q4 2010

Q2 2011

San Francisco, CA

3. Avalon Burbank

400

71.0

94.4

Q3 2008

Q3 2010

Q1 2011

Burbank, CA

4. Avalon Pleasanton

456

63.0

80.9

Q2 2009

Q4 2011

Q2 2012

Pleasanton, CA

5. Avalon Watch

512

30.2

49.9

Q2 2009

Q1 2012

Q3 2012

West Windsor, NJ

6. Avalon at Cedar Ridge

195

27.7

33.8

Q3 2009

Q1 2011

Q3 2011

Daly City, CA

7. Avalon at Willow creek

235

36.5

44.0

Q4 2009

Q1 2011

Q3 2011

Fremont, CA

Total

2,615

325.8

444.2


(1)		Total capitalized cost includes all capitalized costs projected to be or actually incurred to redevelop the respective Redevelopment Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, all as determined in accordance with GAAP.

(2)		Restabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of redevelopment.

Development Rights

As of December 31, 2009, we are evaluating the future development of 28 new apartment communities on land that is either owned by us, under contract, subject to a leasehold interest or for which we hold either a purchase or lease option. We generally prefer to hold Development Rights through options to acquire land, although for 14 of the Development Rights we currently own the land on which a community would be built if we proceeded with development. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add 7,180 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. At December 31, 2009, there were cumulative capitalized costs (including legal fees, design fees and related overhead costs, but excluding land costs) of $87,763,000 relating to Development Rights. In addition, land costs related to the pursuit of Development Rights (consisting of original land and additional carrying costs) of $237,095,000 are reflected as land held for development as of December 31, 2009 on the Consolidated Balance Sheet of the Consolidated Financial Statements set forth in Item 8 of this report. In addition, we control certain land that is held for development under a 99-year land lease agreement, with future minimum obligations of approximately $6,500,000 per year.

The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. Initial development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development costs are charged to expense. During 2009, we incurred a charge of approximately $5,842,000 of pre-development cost for development rights that were not yet probable of future development at the

time incurred, or for pursuits that we determined would not likely be developed. We also incurred a charge of $21,152,000 on three land parcels that were held for development that we do not currently intend to develop.

You should carefully review Section 1a., “Risk Factors,” for a discussion of the risks associated with Development Rights.

The table below presents a summary of these Development Rights:


				Total
		Estimated		capitalized
		number		cost
	Location	of homes		($ millions) (1)
1.	Rockville Centre, NY Phase I		210	$	78
2.	Greenburgh, NY Phase II		288		77
3.	Seattle, WA		204		58
4.	Lynnwood, WA Phase II		82		18
5.	Plymouth, MA Phase II		92		20
6.	Wilton, CT		100		30
7.	Wood-Ridge, NJ Phase I		266		60
8.	San Francisco, CA		173		65
9.	New York, NY		691		307
10.	Boston, MA		180		97
11.	Rockville Centre, NY Phase II		139		51
12.	Shelton, CT		251		66
13.	Roselle Park, NJ		249		54
14.	Garden City, NY		160		51
15.	Wood-Ridge, NJ Phase II		140		32
16.	Brooklyn, NY		861		443
17.	Rockville, MD		239		57
18.	Andover, MA		115		26
19.	Huntington Station, NY		424		100
20.	North Bergen, NJ		164		47
21.	Dublin, CA Phase II		487		145
22.	Seattle, WA II		272		81
23.	Cohasset, MA		200		38
24.	Stratford, CT		130		22
25.	Tysons Corner, VA		338		87
26.	Greenburgh, NY Phase III		156		43
27.	Yaphank, NY		343		57
28.	Hackensack, NJ		226		48


	Total		7,180	$	2,258


(1)		Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.

Land Acquisitions

We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 2009, we acquired the following two land parcels for development for an aggregate purchase price of approximately $11,951,000:

Estimated

Total

number

capitalized

Gross

of apartment

cost (1)

Date

acres

homes

($ millions)

acquired

1. Avalon Northborough II

8.3

219

February 2009

Northborough, MA

2. Avalon Willoughby West (2)

4.2

861

443

September 2009

New York, NY

Total

12.5

1,080

479


(1)		Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.

(2)		This represents a portion of the aggregate land purchase that we will transact under a non-cancelable commitment related to this expected development, as discussed in Note 8, “Commitments and Contingencies,” of the Consolidated Financial Statements set forth in Item 8 of this report.

Other Land and Real Estate Assets

At December 31, 2009 we own land that we do not currently intend to develop with an aggregate carrying basis under GAAP of $96,356,000. We believe that the current carrying basis of these assets is such that there is no charge for impairment, or further charge in the case of assets previously impaired. However we may be subject to the recognition of further impairment charges in the event that there are indicators of such impairment, and we determine that the carrying basis of the assets is greater than the current fair value, less costs to dispose.

Recent Disposition Activity

We (i) sell assets that do not meet our long-term investment strategy or when capital and real estate markets allow us to realize a portion of the value created over the past business cycle and (ii) redeploy the proceeds from those sales to develop, redevelop and acquire communities. Pending such redeployment, we will generally use the proceeds from the sale of these communities to reduce amounts outstanding under our Credit Facility. On occasion, we will set aside the proceeds from the sale of communities into a cash escrow account to facilitate a non-taxable, like-kind exchange transaction. From January 1, 2009 to January 31, 2010, we sold our interest in six wholly owned communities, containing 1,332 apartment homes. The aggregate gross sales price for these assets was $225,125,000.

Insurance and Risk of Uninsured Losses

We carry commercial general liability insurance and property insurance with respect to all of our communities. These policies, and other insurance policies we carry, have policy specifications, insured limits and deductibles that we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. You should carefully review the discussion under Item 1a., “Risk Factors,” of this Form 10-K for a discussion of risks associated with an uninsured property or liability loss.

Many of our West Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault and the Hayward Fault. We cannot assure you that an earthquake would not cause damage or losses greater than

insured levels. We have in place with respect to communities located in California and Washington, for any single occurrence and in the aggregate, $75,000,000 of coverage. Earthquake coverage outside of California and Washington is subject to a $100,000,000 limit each occurrence and in the aggregate. In California the deductible each occurrence is five percent of the insured value of each damaged building. Our earthquake insurance outside of California provides for a $100,000 deductible per occurrence except that the next $350,000 of loss per occurrence outside California will be treated as an additional self-insured retention until the total incurred self-insured retention exceeds $1,400,000.

On December 31, 2009, we elected to cancel and rewrite our property insurance policy for a 16 month term in order to take advantage of updated earthquake loss projections and declining insurance premium rates. As a result, our property insurance premium decreased by approximately 24% with no material changes in coverage. We expect to renew this policy when it expires on May 1, 2011.

In August 2009, we renewed our general liability policy and worker’s compensation coverage for a one year term, and experienced a decrease in the premium on these policies of approximately 25%, with no material changes in the coverage. These policies are in effect until August 1, 2010.

Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. In December 2007, Congress passed the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”) which is designed to make terrorism insurance available through a federal back-stop program until 2014. In connection with this legislation, we have purchased insurance for property damage due to terrorism up to $250,000,000. Additionally, we have purchased insurance for certain terrorist acts, not covered under TRIPRA, such as domestic-based terrorism. This insurance, often referred to as “non-certified” terrorism insurance, is subject to deductibles, limits and exclusions. Our general liability policy provides TRIPRA coverage (subject to deductibles and insured limits) for liability to third parties that result from terrorist acts at our communities.

An additional consideration for insurance coverage and potential uninsured losses is mold growth. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and the Company’s related prevention and remediation activities, please refer to the discussion under Item 1a., “Risk Factors — We may incur costs due to environmental contamination or non-compliance,” elsewhere in this report. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities.

We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) that protect the Company, up to $5,000,000 per occurrence, from employee theft of money, securities or property.

ITEM 3. LEGAL PROCEEDINGS

As previously reported, we are involved in litigation alleging that communities constructed by us violate the accessibility requirements of the Fair Housing Act (“FHA”) and the Americans with Disabilities Act. The Equal Rights Center (“ERC”) filed a complaint against us on September 23, 2005 in the U.S. District Court, District of Maryland with respect to 100 properties. In November 2009, we settled this litigation by entering into a court approved consent decree. Under the consent decree we will inspect and, if necessary, remediate up to 8,250 apartment units and related public and common areas at our communities. We expect that the remediation resulting from the inspections, which should occur over approximately a four year period, will enhance and/or extend the useful life of the applicable communities and will therefore be capitalized. Although we will not be able to determine the exact remediation or associated costs until inspections are completed, we do not believe that the remediation costs will be material to the Company.

On August 13, 2008 the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the Company and the joint venture (CVP I, LLC) in which it has an interest that owns Avalon Chrystie Place. The lawsuit alleges that Avalon Chrystie Place was not designed and constructed in accordance with the accessibility requirements of the FHA. The Company designed and constructed Avalon Chrystie Place with a view to compliance with New York City’s Local Law 58, which for more than 20 years has been New York City’s code regulating the accessible design and construction of apartments. After the filing of its answer and affirmative defenses, during the fourth quarter of 2009 the plaintiff served the Company with discovery requests relating to communities owned by the Company nationwide. The Company objected to these discovery requests as being overly broad, as the plaintiff’s complaint made factual allegations with regard to Avalon Chrystie Place only. A magistrate judge agreed with the Company and limited discovery to Avalon Chrystie Place. The plaintiff is appealing the magistrate judge’s ruling. Due to the preliminary nature of the Department of Justice matter, including whether the scope of their suit will be extended to other properties, we cannot predict or determine the outcome of that matter, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision or settlement.

On August 1, 2008, we filed a lawsuit in the Superior Court of the State of Washington in the County of King ( Avalon DownREIT V, L.P. v. Grand-Glacier, LLC et al) relating to our assertion that the homeowners association in which our former Avalon Wynhaven community is a part systematically overcharged us for various shared costs. We sold this property in 2008 and agreed to indemnify the buyer for annual association fees to the extent they exceed an amount that we each agreed was reasonable. The defendants have filed a cross-claim against Avalon DownREIT V, L.P. seeking foreclosure of the property and satisfaction of all amounts alleged to be due. We intend to vigorously pursue our claim and defend against the counter claim. We are negotiating a settlement of this litigation on terms that are not material to the Company’s operations or financial condition, but we cannot predict if or when we will settle this litigation, or the terms of a final judgment or settlement.

In addition to the matters described above, we are involved in various other claims and/or administrative proceedings that arise in the ordinary course of our business. While no assurances can be given, we do not believe that any of these other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on our operations.

ITEM 4. [RESERVED]

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NYSE under the ticker symbol AVB. The following table sets forth the quarterly high and low sales prices per share of our common stock for the years 2009 and 2008, as reported by the NYSE. On January 31, 2010 there were 648 holders of record of an aggregate of 81,546,465 shares of our outstanding common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.


	2009						2008
	Sales Price				Dividends		Sales Price				Dividends
	High		Low		declared		High		Low		declared
Quarter ended March 31	$	61.87	$	35.38	$	0.8925	$	105.98	$	79.78	$	0.8925
Quarter ended June 30	$	66.71	$	45.48	$	0.8925	$	107.37	$	87.65	$	0.8925
Quarter ended September 30	$	78.75	$	49.98	$	0.8925	$	109.45	$	82.97	$	0.8925
Quarter ended December 31	$	87.79	$	66.91	$	0.8925	$	96.68	$	41.43	$	2.7000

At present, we expect to continue our policy of paying regular quarterly cash dividends. However, the form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.

Dividends declared for the quarter ended December 31, 2008 included a special dividend, declared in December 2008, of $1.8075 per share (the “Special Dividend”) in conjunction with the fourth quarter 2008 regular dividend of $0.8925 per share. These dividends were paid in cash and common shares. The Special Dividend was declared to distribute a portion of the excess income attributable to gains on asset sales from the Company’s disposition activities during 2008. The Special Dividend was declared to qualify for the dividends paid deduction for tax purposes and minimize corporate level income taxes for 2008 and reduce federal excise taxes.

In February 2010, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of 2010 of $0.8925 per share. The dividend will be payable on April 15, 2010 to all common stockholders as of March 31, 2010.

Issuer Purchases of Equity Securities


					(c)		(d)
					Total Number of		Maximum Dollar Amount
					Shares Purchased		that May Yet be Purchased
	(a)		(b)		as Part of Publicly		Under the Plans or
	Total Number of		Average Price Paid		Announced Plans or		Programs
	Shares Purchased		per Share		Programs		(in thousands)
Period	(1)		(1)		(2)		(2)
Month Ended October 31, 2009		—	$	—		—	$	200,000

Month Ended November 30, 2009		—	$	—		—	$	200,000

Month Ended December 31, 2009		180	$	86.59		—	$	200,000


(1)		Includes shares surrendered to the Company in connection with employee stock option exercises or vesting of restricted stock as payment of exercise price or as payment of taxes.

(2)		As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Company’s $500,000,000 Stock Repurchase Program. There is no scheduled expiration date to this program.

Information regarding securities authorized for issuance under equity compensation plans is included in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

The following table provides historical consolidated financial, operating and other data for the Company. You should read the table with our Consolidated Financial Statements and the Notes included in this report (dollars in thousands, except per share information).


	For the year ended
	12-31-09		12-31-08			12-31-07			12-31-06			12-31-05
Revenue:
Rental and other income	$	844,254	$	807,656		$	721,644		$	633,674		$	578,444
Management, development and other fees		7,328		6,568			6,142			6,259			4,304

Total revenue		851,582		814,224			727,786			639,933			582,748


Expenses:
Operating expenses, excluding property taxes		261,752		248,862			222,332			196,349			178,819
Property taxes		83,809		73,937			67,240			59,500			57,819
Interest expense, net		150,323		114,910			92,175			103,910			120,670
(Gain) loss on extinguishment of debt, net		25,910		(1,839	)		—			—			—
Depreciation expense		209,746		183,748			157,895			139,075			136,409
General and administrative expense		28,748		42,781			28,494			24,767			25,761
Impairment loss — land holdings		21,152		57,899			—			—			—

Total expenses		781,440		720,298			568,136			523,601			519,478


Equity in income of unconsolidated entities		1,441		4,566			59,169			7,455			7,198
Gain on sale of land		4,830		—			545			13,519			4,479

Income from continuing operations		76,413		98,492			219,364			137,306			74,947
Discontinued operations:
Income from discontinued operations		13,974		27,353			33,894			32,402			41,715
Gain on sale of communities		63,887		284,901			106,487			97,411			195,287

Total discontinued operations		77,861		312,254			140,381			129,813			237,002


Net income		154,274		410,746			359,745			267,119			311,949
Net (income) loss attributable to redeemable noncontrolling interests		1,373		741			(1,585	)		(573	)		(1,481	)

Net income attributable to the Company		155,647		411,487			358,160			266,546			310,468
Dividends attributable to preferred stock		—		(10,454	)		(8,700	)		(8,700	)		(8,700	)


Net income attributable to common stockholders	$	155,647	$	401,033		$	349,460		$	257,846		$	301,768

Per Common Share and Share Information:

Earnings per common share — basic:
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)	$	0.97	$	1.15		$	2.65		$	1.73		$	0.88
Discontinued operations attributable to common stockholders		0.97		4.06			1.78			1.74			3.24

Net income attributable to common stockholders	$	1.94	$	5.21		$	4.43		$	3.47		$	4.12

Weighted average shares outstanding — basic ⁽¹⁾		79,951,348		76,783,515			78,680,043			74,125,795			72,952,492

Earnings per common share — diluted:
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)	$	0.96	$	1.15		$	2.62		$	1.69		$	0.87
Discontinued operations attributable to common stockholders		0.97		4.02			1.76			1.73			3.18

Net income attributable to common stockholders	$	1.93	$	5.17		$	4.38		$	3.42		$	4.05

Weighted average shares outstanding — diluted ⁽²⁾		80,599,657		77,578,852			79,856,927			75,586,898			74,759,318

Cash dividends declared ⁽³⁾	$	3.57	$	3.57		$	3.40		$	3.12		$	2.84


⁽¹⁾		Amounts include unvested restricted shares. Please refer to Note 1, “Organization and Basis of Presentation - Earnings per Common Share” of the Consolidated Financial Statements set forth in Item 8 of this report for a discussion of the calculation of Earnings per Share.
⁽²⁾		Weighted average common shares outstanding — diluted for 2008 includes the impact of approximately 2.6 million common shares issued under the special dividend declared on December 17, 2008.
⁽³⁾		Does not include the special dividend of $1.8075 per share, which was declared on December 17, 2008, and paid in the form of shares of the Company’s common stock.


	For the year ended
	12-31-09			12-31-08			12-31-07			12-31-06			12-31-05
Other Information:
Net income attributable to the Company	$	155,647		$	411,487		$	358,160		$	266,546		$	310,468
Depreciation — continuing operations		209,746			183,748			157,895			139,075			136,409
Depreciation — discontinued operations		8,540			15,704			23,830			25,054			26,888
Interest expense, net — continuing operations (1)		176,233			113,071			92,175			103,910			120,670
Interest expense, net — discontinued operations		681			3,297			6,057			7,136			6,428

EBITDA (2)	$	550,847		$	727,307		$	638,117		$	541,721		$	600,863


Funds from Operations (3)	$	313,241		$	315,947		$	368,057		$	320,199		$	271,096
Number of Current Communities (4)		165			164			163			150			143
Number of apartment homes		47,926			45,728			45,932			43,141			41,412

Balance Sheet Information:
Real estate, before accumulated depreciation	$	8,360,091		$	8,002,487		$	7,556,740		$	6,615,593		$	5,940,146
Total assets	$	7,457,605		$	7,174,353		$	6,736,484		$	5,848,507		$	5,198,598
Notes payable and unsecured credit facilities	$	3,974,872		$	3,674,457		$	3,208,202		$	2,866,433		$	2,334,017

Cash Flow Information:
Net cash flows provided by operating activities	$	378,600		$	386,855		$	454,874		$	351,660		$	306,248
Net cash flows used in investing activities	$	(333,559	)	$	(266,309	)	$	(809,247	)	$	(511,371	)	$	(19,761	)
Net cash flows (used in) provided by financing activities	$	(4,285	)	$	(75,111	)	$	366,360		$	162,280		$	(282,293	)

Notes to Selected Financial Data

(1)		Interest expense, net includes any loss or gain incurred from the extinguishment of debt.

(2)		EBITDA is defined as net income before interest income and expense, income taxes, depreciation and amortization from both continuing and discontinued operations. Under this definition, EBITDA includes gains on sale of assets and gain on sale of partnership interests. Management generally considers EBITDA to be an appropriate supplemental measure to net income of our operating performance because it helps investors to understand our ability to incur and service debt and to make capital expenditures. EBITDA should not be considered as an alternative to net income (as determined in accordance with GAAP), as an indicator of our operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. Our calculation of EBITDA may not be comparable to EBITDA as calculated by other companies.

(3)		We generally consider Funds from Operations, or “FFO,” as defined below, to be an appropriate supplemental measure of our operating and financial performance because, by excluding gains or losses related to dispositions of previously depreciated property and excluding real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates, FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in the Consolidated Statements of Operations and Other Comprehensive Income included elsewhere in this report.

		Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ^â (“NAREIT”), we calculate FFO as net income or loss computed in accordance with GAAP, adjusted for:

	•		gains or losses on sales of previously depreciated operating communities;

	•		extraordinary gains or losses (as defined by GAAP);

	•		cumulative effect of change in accounting principle;

	•		depreciation of real estate assets; and

	•		adjustments for unconsolidated partnerships and joint ventures.

FFO does not represent net income in accordance with GAAP, and therefore it should not be considered an alternative to net income, which remains the primary measure, as an indication of our performance. In addition, FFO as calculated by other REITs may not be comparable to our calculation of FFO.

		FFO also does not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A presentation of GAAP based cash flow metrics is provided in “Cash Flow Information” in the table on the previous page.

		The following is a reconciliation of net income to FFO (dollars in thousands, except per share data):


	For the year ended
	12-31-09			12-31-08			12-31-07			12-31-06			12-31-05
Net income attributable to the Company	$	155,647		$	411,487		$	358,160		$	266,546		$	310,468
Dividends attributable to preferred stock		—			(10,454	)		(8,700	)		(8,700	)		(8,700	)
Depreciation — real estate assets, including discontinued operations and joint venture adjustments		221,415			203,082			184,731			165,982			163,252
Distributions to noncontrolling interests, including discontinued operations		66			216			280			391			1,363
Gain on sale of unconsolidated entities holding previously depreciated real estate assets		—			(3,483	)		(59,927	)		(6,609	)		—
Gain on sale of previously depreciated real estate assets		(63,887	)		(284,901	)		(106,487	)		(97,411	)		(195,287	)

Funds from Operations attributable to common stockholders	$	313,241		$	315,947		$	368,057		$	320,199		$	271,096


Weighted average shares outstanding — diluted		80,599,657			77,578,852			79,856,927			75,586,898			74,759,318
FFO per common share — diluted	$	3.89		$	4.07		$	4.61		$	4.24		$	3.63

(4)

Current Communities consist of all communities other than those which are still under construction and have not received a certificate of occupancy.


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Forward-Looking Statements” included in this report. In addition, our actual results or developments could differ materially from those projected in such forward-looking statements as a result of the factors discussed under “Forward-Looking Statements” as well as the risk factors described in Item 1a, “Risk Factors,” of this report.

Executive Overview

Business Description

We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier to entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments, because a broad potential resident base should help reduce demand volatility over a real estate cycle. However, throughout the real estate cycle, apartment market fundamentals, and therefore operating cash flows, are affected by overall economic conditions. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier to entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. Barriers to entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply.

We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Midwest, the Pacific Northwest, and the Northern and Southern California regions of the United States. Our time-tested strategy is to be leaders in customer insight, market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing US submarkets. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.

Financial Highlights and Outlook

For the year ended December 31, 2009, net income available to common stockholders was $155,647,000 compared to $401,033,000 for 2008, a decrease of 61.2%. The decrease is primarily due to the reduced number of communities sold and amount of gains related to these sales in 2009 as compared to the prior year, coupled with the loss recognized on the tender offer completed in October 2009, offset somewhat by a decrease in charges for land impairments and abandoned pursuit costs. Detail of the impacts for the land impairments, abandoned pursuits as well as the charge for the tender offer and certain other non-routine items is provided in the following table.

Non-Routine Items
Decrease (Increase) in Net Income and FFO
(dollars in thousands)


	Full Year			Full Year
	2008			2009
Land impairments	$	57,899		$	21,152
Abandoned pursuits (1)		6,611			1,139
Severance and related costs		3,400			4,500
Federal excise tax		3,200			515
(Gain) loss on unsecured notes repurchase		(1,839	)		25,910
Gain on sale of land		—			(4,830	)
Joint venture income adjustment (2)		—			(1,294	)
Legal settlement proceeds, net		—			(1,175	)
Preferred stock deferred offering expenses		3,566			—
Fund II organizational costs		1,209			—


Total non-routine items	$	74,046		$	45,917


Weighted Average Dilutive Shares Outstanding		77,578,852			80,599,657


(1)		For purposes of non-routine classification, abandoned pursuits includes costs we expensed for individual pursuits in excess of $1,000 in a given quarter.


(2)		Includes our promoted interest of $3,894 in joint venture, and our pro rata portion of an impairment charge on a community in an unconsolidated joint venture of $2,600.

Apartment fundamentals continued to be challenged during 2009. Job losses exceeded our expectations during the year, resulting in more than expected downward pressure on rental revenue. Our Established Community portfolio experienced a decline in year-over-year rental revenue of 3.7%, comprised of a decrease in rental rates of 3.1% and in economic occupancy of 0.6%. This decrease in revenues and an increase in operating expenses resulted in a decline in our Established Community portfolio NOI of 7.1% in 2009 from the prior year.

We expect Earnings per share — diluted (“EPS”) will decrease to $1.73 for 2010 from $1.93 in 2009, driven primarily by a decline in revenue and NOI from our Established Communities in 2010 as compared to the prior year. The recession, coupled with the short term nature of apartment leases, continues to adversely impact current operating fundamentals. The expected decline in our 2010 NOI is attributable largely to the effect of job losses experienced during the past two years. Employment is a leading demand driver, and we expect continued weak employment conditions to contribute to revenue declines in 2010. The impact of job losses on our results for 2010 may be somewhat offset by (i) the expected continued weakness in the for-sale housing market during 2010, (ii) growth in those age groups that have historically demonstrated a higher propensity to rent and (iii) constrained levels of new supply. Our current financial outlook for 2010 provides for a decline in rental revenue of between 3.0% and 4.5% in our Established Community portfolio resulting in a projected NOI decline for our Established Communities of 5.0% to 7.0%.

We were again active in the capital markets in 2009, raising in excess of $1,700,000,000 through the issuance of secured and unsecured debt, assets sales, sales of common equity in the public markets, and capital commitments for Fund II. We have used the proceeds received to fund our development and redevelopment activities, to acquire an indirect interest in assets through Fund II, to repay higher cost secured and unsecured debt, and to repay floating rate debt, while retaining substantial cash balances for general corporate purposes. Our focus on raising capital includes consideration for managing the maturity risk associated with our secured and unsecured debt obligations. Our 2009 activity includes the issuance of over $800,000,000 of secured financing and $500,000,000 of unsecured notes in September 2009 in two $250,000,000 tranches, one maturing in 2017 and the second maturing in 2020. A portion of the proceeds was used to repurchase $310,100,000 principal amount of some or all of the amounts outstanding on unsecured notes maturing over the next three years, effectively extending the duration of debt maturities while reducing interest costs. We believe that our relatively modest level of secured and unsecured debt will continue to provide financial flexibility to access capital on attractive terms.

The funds raised from dispositions consist of the proceeds from the sale of five communities for a gross sales price of $179,675,000. We anticipate our level of disposition activity will be consistent in 2010, within the range of gross sales of $180,000,000 to $200,000,000, occurring primarily during the first half of the year

During 2009 we completed the development of nine communities for an aggregate total capitalized cost of $810,700,000. We started the development of two communities, which are expected to be completed for an estimated total capitalized cost of $64,900,000.

We expect an increase in investor demand for quality multifamily assets, due in part to the increased liquidity in the capital markets and constrained supply resulting from the decline in development activity in all markets. While we reduced our level of development during 2009 in response to the general deterioration in real estate and capital market conditions, we believe that our development activity will continue to create long-term value. During 2010, we expect to use our core competency in development to deliver new assets into the market for a recovery in apartment fundamentals that we expect in 2011 and 2012. We anticipate new development starts in 2010 with a total projected capitalized cost of $380,000,000. Consistent with this view, we also expect to increase redevelopment activity for our wholly owned communities in 2010, during which we expect to start redevelopment of seven wholly owned communities.

During 2010, we expect to disburse approximately $500,000,000 related to the seven communities under development at December 31, 2009, the new development starts, and anticipated acquisitions of land for future development. We expect approximately $50,000,000 of the projected 2010 disbursements will be funded from cash in escrow related to previously sourced tax-exempt debt. We believe that our current level of indebtedness, our current ability to service interest and other fixed charges and our current limited use of financial encumbrances (such as secured financing) will provide adequate access to the capital necessary to fund our development and redevelopment activities during 2010. We expect to meet our liquidity needs from the issuance of corporate securities (which could include unsecured debt and/or common and preferred equity) and secured debt, as well as from disposition proceeds, joint ventures or from retained cash. We believe that the current market provides for an opportunity to perform certain scheduled maintenance and repositioning activities at attractive costs due to a continued decline in costs for construction materials and labor.

We increase our direct and indirect interests in communities through development and acquisitions. While we grow principally through our demonstrated core competency of developing wholly owned assets from capital sources, we also acquire interests in additional assets, primarily through our investment in Fund II.

Fund I is a discretionary investment fund with nine institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund I and has invested approximately $50,000,000 in Fund I, representing a 15.2% combined general partner and limited partner equity interest. Fund I was our principal vehicle for acquiring apartment communities through the close of its investment period in March 2008. Subsidiaries of Fund I have 21 loans secured by individual assets with amounts outstanding in the aggregate of $436,410,000 with varying maturity dates (or dates after which the loans can be prepaid without penalty), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate.

Fund II is a second discretionary investment fund with six institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund II. Fund II was formed in August 2008 and, in the second quarter of 2009, we added equity commitments for Fund II, resulting in total equity commitments from five institutional investors and us of $400,000,000, of which our commitment is $125,000,000. Total equity commitments to Fund II in the second quarter of 2009 increased by $67,000,000 as a result of the following:

	•		a new institutional investor made an equity commitment of $75,000,000;

	•		an existing institutional investor increased its commitment by $17,000,000, based on terms of its existing commitment; and

	•		we decreased our commitment by $25,000,000 to $125,000,000, based on terms of our existing commitment, decreasing our equity interest to approximately 31%.

Fund II can employ leverage of up to 65%, allowing for a total investment capacity of approximately $1,100,000,000, and has a term that expires in August 2018, plus two one-year extension options. Fund II now serves as the exclusive vehicle through which we will acquire investment interests in apartment communities until August 2011 or, if earlier, until 90% of the committed capital of Fund II is invested, subject to limited exceptions. Fund II will not include or involve our development activities. We will receive, in addition to any returns on invested equity, asset management fees, property management fees and redevelopment fees. We will also receive a promoted interest if certain return thresholds are met.

In 2009, Fund II acquired two communities, Avalon Bellevue Park, a 220 apartment-home community located in Bellevue, Washington and The Hermitage, a 491 apartment-home community located in Fairfax, Virginia. Fund II has invested $104,330,000 as of December 31, 2009. Fund II has one loan secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable by Fund II. As of December 31, 2009, Fund II also has $30,200,000 outstanding under a credit facility that matures in December 2010.

In February 2010, Fund II acquired its third community, a 203 apartment-home community located in Gaithersburg, Maryland.

Communities Overview

Our real estate investments consist primarily of current operating apartment communities, Development Communities, and Development Rights. Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. Established Communities are generally operating communities that are consolidated for financial reporting purposes and were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, which allows the performance of these communities and the markets in which they are located to be compared and monitored between years. Other Stabilized Communities are generally all other consolidated operating communities that have stabilized occupancy and operating expenses during the current year, but had not achieved stabilization as of the beginning of the prior year. Lease-Up Communities consist of communities where construction is complete but stabilization has not been achieved. Redevelopment Communities consist of communities where substantial redevelopment is in progress or is planned to begin during the current year. A more detailed description of our reportable segments and other related operating information can be found in Note 9, “Segment Reporting,” of our Consolidated Financial Statements.

Although each of these categories is important to our business, we generally evaluate overall operating, industry and market trends based on the operating results of Established Communities, for which a detailed discussion can be found in “Results of Operations” as part of our discussion of overall operating results. We evaluate our current and future cash needs and future operating potential based on acquisition, disposition, development, redevelopment and financing activities within Other Stabilized, Redevelopment and Development Communities. Discussions related to these segments of our business can be found in “Liquidity and Capital Resources.”

NOI of our current operating communities is one of the financial measures that we use to evaluate community performance. NOI is affected by the demand and supply dynamics within our markets, our rental rates and occupancy levels and our ability to control operating costs. Our overall financial performance is also impacted by the general availability and cost of capital and the performance of newly developed and acquired apartment communities.

As of December 31, 2009, we owned or held a direct or indirect ownership interest in 172 apartment communities containing 50,364 apartment homes in ten states and the District of Columbia, of which seven communities were under construction and seven communities were under reconstruction. Of these communities, 24 were owned by entities that were not consolidated for financial reporting purposes, including 19 owned by subsidiaries of Fund I and two owned by subsidiaries of Fund II. In addition, we owned a direct or indirect ownership interest in Development Rights to develop an additional 28 wholly owned communities that, if developed in the manner expected, will contain an estimated 7,180 apartment homes.

Results of Operations

Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for 2009, 2008 and 2007 follows (dollars in thousands):


	2009			2008			$ Change			% Change			2008			2007			$ Change			% Change
Revenue:
Rental and other income	$	844,254		$	807,656		$	36,598			4.5	%	$	807,656		$	721,644		$	86,012			11.9	%
Management, development and other fees		7,328			6,568			760			11.6	%		6,568			6,142			426			6.9	%

Total revenue		851,582			814,224			37,358			4.6	%		814,224			727,786			86,438			11.9	%


Expenses:
Direct property operating expenses, excluding property taxes		214,507			191,690			22,817			11.9	%		191,690			171,968			19,722			11.5	%
Property taxes		83,809			73,937			9,872			13.4	%		73,937			67,240			6,697			10.0	%

Total community operating expenses		298,316			265,627			32,689			12.3	%		265,627			239,208			26,419			11.0	%


Corporate-level property management and other indirect operating expenses		37,559			39,874			(2,315	)		(5.8	%)		39,874			38,627			1,247			3.2	%
Investments and investment management expense		3,844			4,787			(943	)		(19.7	%)		4,787			4,763			24			0.5	%
Expensed development and other pursuit costs		5,842			12,511			(6,669	)		(53.3	%)		12,511			6,974			5,537			79.4	%
Interest expense, net		150,323			114,910			35,413			30.8	%		114,910			92,175			22,735			24.7	%
(Gain) loss on extinguishment of debt, net		25,910			(1,839	)		27,749			(1,508.9	%)		(1,839	)		—			(1,839	)		N/A
Depreciation expense		209,746			183,748			25,998			14.1	%		183,748			157,895			25,853			16.4	%
General and administrative expense		28,748			42,781			(14,033	)		(32.8	%)		42,781			28,494			14,287			50.1	%
Impairment loss		21,152			57,899			(36,747	)		(63.5	%)		57,899			—			57,899			N/A
Gain on sale of land		(4,830	)		—			(4,830	)		N/A			—			(545	)		545			(100.0	%)

Total other expenses		478,294			454,671			23,623			5.2	%		454,671			328,383			126,288			38.5	%


Equity in income of unconsolidated entities		1,441			4,566			(3,125	)		(68.4	%)		4,566			59,169			(54,603	)		(92.3	%)


Income from continuing operations		76,413			98,492			(22,079	)		(22.4	%)		98,492			219,364			(120,872	)		(55.1	%)

Discontinued operations:
Income from discontinued operations		13,974			27,353			(13,379	)		(48.9	%)		27,353			33,894			(6,541	)		(19.3	%)
Gain on sale of communities		63,887			284,901			(221,014	)		(77.6	%)		284,901			106,487			178,414			167.5	%

Total discontinued operations		77,861			312,254			(234,393	)		(75.1	%)		312,254			140,381			171,873			122.4	%


Net income		154,274			410,746			(256,472	)		(62.4	%)		410,746			359,745			51,001			14.2	%
Net (income) loss attributable to redeemable noncontrolling interests		1,373			741			632			85.3	%		741			(1,585	)		2,326			(146.8	%)

Net income attributable to the Company		155,647			411,487			(255,840	)		(62.2	%)		411,487			358,160			53,327			14.9	%
Dividends attributable to preferred stock		—			(10,454	)		10,454			(100.0	%)		(10,454	)		(8,700	)		(1,754	)		20.2	%

Net income attributable to common stockholders	$	155,647		$	401,033		$	(245,386	)		(61.2	%)	$	401,033		$	349,460		$	51,573			14.8	%

Net income attributable to common stockholders decreased $245,386,000 or 61.2%, to $155,647,000 in 2009 primarily due to the reduced number of communities sold and amount of gains related to these sales in 2009 as compared to the prior year and the loss recognized on the early repurchase of debt completed in October 2009. The overall decline in net income was mitigated by a reduction in charges for land impairments and abandoned pursuit costs between years. Net income attributable to common stockholders increased $51,573,000 or 14.8% in 2008 over the prior year period due primarily to gains from the sale of communities and year-over-year increases in community operating performance, partially offset by charges associated with land impairments and abandoned pursuits as well as increased costs for interest and depreciation.

NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses, including property taxes.

NOI does not represent cash generated from operating activities in accordance with GAAP. Therefore, NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI necessarily indicative of cash available to fund cash needs. Reconciliations of NOI for the years ended December 31, 2009, 2008 and 2007 to net income for each year, are as follows (dollars in thousands):


	For the year ended
	12-31-09			12-31-08			12-31-07
Net income	$	154,274		$	410,746		$	359,745
Indirect operating expenses, net of corporate income		30,315			33,010			31,285
Investments and investment management expense		3,844			4,787			4,763
Expensed development and other pursuit costs		5,842			12,511			6,974
Interest expense, net		150,323			114,910			92,175
(Gain) loss on extinguishment of debt, net		25,910			(1,839	)		—
General and administrative expense		28,748			42,781			28,494
Equity in income of unconsolidated entities		(1,441	)		(4,566	)		(59,169	)
Depreciation expense		209,746			183,748			157,895
Impairment loss — land holdings		21,152			57,899			—
Gain on sale of real estate assets		(68,717	)		(284,901	)		(107,032	)
Income from discontinued operations		(13,974	)		(27,353	)		(33,894	)


Net operating income	$	546,022		$	541,733		$	481,236

The NOI increases for both 2009 and 2008, as compared to the prior year period, consist of changes in the following categories (dollars in thousands):


	Full Year			Full Year
	2009			2008
Established Communities	$	(29,707	)	$	19,160

Other Stabilized Communities		14,228			44,722

Development and Redevelopment Communities		19,768			(3,385	)


Total	$	4,289		$	60,497

The NOI decrease in Established Communities in 2009 is due to the rental revenue declines as a result of the job losses experienced in 2008 and 2009, coupled with increases in community operating expenses. During 2009, we focused on minimizing rental rate declines, while maintaining occupancy of at least 94% in all regions.

We anticipate that rental rates and occupancy levels will decline in 2010 such that overall rental revenue will decline between 3.0% and 4.5%. The projected revenue decline is due to our expectation of continued job losses at least through the second quarter of 2010. Expense growth also impacts growth in NOI and we continue to monitor and manage operating expenses to constrain expense growth. We expect operating expenses to be flat in 2010 from prior year levels. As a result, we expect NOI for our Established Communities to decline between 5.0% and 7.0%. These projections are based on our outlook for employment conditions and apartment market fundamentals in 2010, both nationally and in the markets where we operate, as well as the individual demand/supply characteristics of each submarket in which we operate. There can be no assurance that our outlook for economic conditions and/or their impact on our operating results will be accurate, and actual results could differ materially. Please see “Risk Factors,” “Forward-Looking Statements” and other discussions in this report on Form 10-K for a discussion of factors which could affect our results of operations.

Rental and other income increased in 2009 as compared to the prior year due to additional rental income generated from newly developed communities, offset somewhat by decreased rental rates and occupancy for our Established Communities. Rental and other income increased in 2008 as compared to the prior year due to increased rental rates and occupancy for our Established Communities, coupled with additional rental income generated from newly developed communities.

Overall Portfolio — The weighted average number of occupied apartment homes increased to 38,233 apartment homes for 2009 as compared to 37,886 homes for 2008 and 38,436 homes for 2007. The increase in 2009 over 2008 is due to homes available from newly developed communities, offset partially by communities sold during 2009, as well as declining occupancy levels due to the economic slow down.

		The weighted average monthly revenue per occupied apartment home decreased to $1,910 for 2009 as compared to $1,921 in 2008 and $1,767 in 2007.

		Established Communities — Rental revenue decreased $22,370,000, or 3.7%, for 2009 and increased $18,221,000, or 3.1%, for 2008. The decrease in 2009 from 2008 is due primarily to lower rental rates. For 2009, the weighted average monthly revenue per occupied apartment home decreased 3.1% to $1,869 compared to $1,929 in 2008. There was a slight change in year-over-year average economic occupancy for 2009 down 0.6% to 95.6% compared to 96.2% in 2008. The increase in rental revenue in 2008 over the prior year is due entirely to increased average rental rates. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community’s gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents.

We experienced decreases in Established Communities’ rental revenue in all six of our regions for 2009 as compared to the prior year period as discussed in more detail below.

		The Metro New York/New Jersey region, which accounted for approximately 26% of Established Community rental revenue for 2009, experienced a decrease in rental revenue of 4.3% for 2009 as compared to 2008. Average rental rates decreased 4.1% to $2,288, and economic occupancy decreased 0.2% to 95.9% for 2009 as compared to 2008. During 2009, the trend of weakening rental market conditions in both New York City and surrounding suburban markets resulting from the recession is reflected in the declining rental rates in the second half of 2009. The challenges facing the financial services industry drive the region’s current expectation for job growth, which is expected to lag the U.S. average and our other markets.

		The Mid-Atlantic/Midwest region, which represented approximately 21% of Established Community rental revenue during 2009, experienced a decrease in rental revenue of 0.6% as compared to 2008. Average rental rates decreased by 0.7% to $1,729, while economic occupancy increased by 0.1% from 96.4% to 96.5% for 2009 as compared to 2008. This region continues to benefit from the impact of government and government services employment, which has served to stabilize the economy relative to other regions.

		The New England region accounted for approximately 21% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 4.0% over the prior year. Average rental rates decreased 2.9% to $1,984 and economic occupancy decreased 1.1% to 95.2% for 2009, as compared to 2008. Given the significance of the financial services industry in the Boston metro area, as well as the impact of New York trends on Fairfield-New Haven, we expect the job recovery to be slow.

		Northern California accounted for approximately 17% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 4.7% over the prior year. Average rental rates decreased 4.1% to $1,923 and economic occupancy decreased by 0.6% to 96.2% for 2009 as compared to 2008. The region’s employment base, with its above-average exposure to high-technology industries, can result in greater volatility in rental revenue changes relative to other regions.

		Southern California accounted for approximately 11% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 5.0% over the prior year. Average rental rates decreased 3.8% to $1,509, and economic occupancy decreased by 1.2% to 94.1% for 2009 as compared to 2008.

		The Pacific Northwest region accounted for approximately 5% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 5.0% over the prior year. Average rental rates decreased 3.7% to $1,282 and economic occupancy decreased by 1.3% to 94.2% for 2009 as compared to 2008. The Pacific Northwest also has a large presence of technology based employment, a contributing factor to the greater degree of volatility in rental rates. We believe a recovery in apartment fundamentals in the Pacific Northwest is likely to lag other AvalonBay regions given an increased level of housing supply in many submarkets.

In accordance with GAAP, cash concessions are amortized as an offset to rental revenue over the approximate lease term, which is generally one year. As a supplemental measure, we also present rental revenue with concessions stated on a cash basis to help investors evaluate the impact of both current and historical concessions on GAAP based rental revenue and to more readily enable comparisons to revenue as reported by other companies. Rental revenue with concessions stated on a cash basis also allows investors to understand historical trends in cash concessions, as well as current rental market conditions.

The following table reconciles total rental revenue in conformity with GAAP to total rental revenue adjusted to state concessions on a cash basis for our Established Communities for the years 2009 and 2008 (dollars in thousands). Information for the year ended December 31, 2007 is not presented, as Established Community classification is not comparable prior to January 1, 2008. See Note 9, “Segment Reporting,” of our Consolidated Financial Statements.


	For the year ended
	12-31-09			12-31-08
Rental revenue (GAAP basis)	$	587,752		$	610,122
Concessions amortized		8,000			6,771
Concessions granted		(6,361	)		(8,004	)


Rental revenue adjusted to state concessions on a cash basis	$	589,391		$	608,889


Year-over-year % change — GAAP revenue		(3.7	%)		n/a

Year-over-year % change — cash concession based revenue		(3.2	%)		n/a

Management, development and other fees increased $760,000, or 11.6%, in 2009 and increased $426,000, or 6.9% in 2008. The increase in 2009 was due primarily to increased asset and property management fees from Fund II. The increase in 2008 was due primarily to increased redevelopment fees and property management fees as additional communities were acquired by subsidiaries of Fund I.

Direct property operating expenses, excluding property taxes increased $22,817,000, or 11.9% in 2009 and increased $19,722,000, or 11.5% for 2008 as compared to the prior year periods, primarily due to the addition of recently developed apartment homes coupled with increased administrative expense due primarily to increases in bad debt expense due to the recession.

For Established Communities, direct property operating expenses, excluding property taxes, increased $6,411,000, or 4.8% to $139,955,000 for 2009 and $328,000, or 0.2% to $133,544,000 for 2008, due primarily to increased administrative and community maintenance related costs, offset partially by a decrease in insurance and utility related expenses. The increases in administrative expense are primarily due to increased bad debt.

Property taxes increased $9,872,000, or 13.4% and $6,697,000, or 10.0% in 2009 and 2008, respectively, due to the addition of newly developed and redeveloped apartment homes and overall higher assessments. Property tax increases are also impacted by the size and timing of successful tax appeals.

For Established Communities, property taxes increased by $1,242,000, or 2.1% and $3,515,000, or 6.2% for 2009 and 2008, respectively over the prior year, due to both higher assessments throughout all regions and reductions in property taxes realized in 2008 that did not occur in 2009. The impact of the current economic environment has not been reflected in current assessments, as there is typically a time lag between a change in the economy affecting property valuations and updated real estate tax assessments. We expect property taxes in 2010 to increase over 2009 due primarily to higher tax rates, without the benefit of lower assessed values. For communities in California, property tax changes are determined by the change in the California Consumer Price Index, with increases limited by law (Proposition 13). We evaluate property tax increases internally, and also engage third-party consultants to assist in our evaluations. We appeal property tax increases when appropriate.

Corporate-level property management and other indirect operating expenses decreased by $2,315,000, or 5.8% in 2009 and increased $1,247,000, or 3.2% in 2008 over the prior year periods. The decrease in 2009 over 2008 is due primarily to decreases in compensation costs, coupled with a reduction in costs associated with the initial start up of our Customer Care Center, discussed below. The increase in 2008 over the prior year is due primarily to increased compensation and employee separation costs, as well as costs relating to the initial start up of the Customer Care Center and other corporate initiatives focused on increasing efficiency and enhancing controls at our operating communities. The Customer Care Center in Virginia Beach, Virginia opened in 2007 and expanded in 2008 to centralize certain community-related accounting, administrative and customer service functions.

Investments and investment management reflects the costs incurred for investment acquisitions and investment management. Investments and investment management costs decreased in 2009 by $943,000 or 19.7% from the prior year due primarily to lower compensation and travel-related costs.

Expensed development and other pursuit costs primarily reflect the costs incurred for abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of Development Rights and disposition pursuits. Expensed development and other pursuit costs increased in 2008 as compared to 2007 and 2009 due to increases in abandoned development pursuits in response to the economic decline and deteriorating market conditions in 2008. These costs can be volatile, particularly in periods of economic downturn or when there is limited access to capital, and the costs may vary significantly from period to period.

Interest expense, net increased $35,413,000, or 30.8% and $22,735,000, or 24.7% in 2009 and 2008, respectively over the prior years. This category includes interest expense offset by interest capitalized, and interest income. The increase in 2009 is due primarily to a decrease in the amount of interest capitalized in 2009 as compared to the prior year, coupled with increased interest expense in 2009 compared to 2008 from additional secured and unsecured debt issued to fund development activity. The decrease in interest capitalized is due to the reduction in development activity in 2009 as compared to 2008. The increase in 2008 over the prior year is due primarily to a decrease in interest income in 2008 as compared to the prior year period, coupled with increased interest expense in 2008 compared to 2007. The higher level of interest income in 2007 is due to higher invested cash balances from our January 2007 equity offering. The increased interest expense in 2008 is due primarily to increased amounts of debt outstanding in 2008 compared to the prior year.

(Gain) loss on the extinguishment of debt, net reflects the impact of our debt repurchase activity for payments above or below the carrying basis. The net loss in 2009 is due to the $310,100,000 in unsecured notes that we purchased prior to their scheduled maturity at a premium, offset by the gain recognized from our January 2009 tender offer.

Depreciation expens e increased in 2009 and 2008 primarily due to the net increase in assets from the completion of development and redevelopment activities, offset by assets sold during the year.

General and administrative expense (“G&A”) decreased $14,033,000, or 32.8% in 2009 and increased $14,287,000, or 50.1% in 2008 as compared to the prior years. The increase in 2008 as compared to 2007 and 2009 is due primarily to higher severance and related costs in 2008 associated with the decrease in our planned development activity, higher federal excise tax expense in 2008 resulting from gains on disposition activity and organization costs for the formation of Fund II incurred in 2008.

Impairment loss for 2009 is due to the write down of three land parcels which we do not currently plan on developing. Impairment loss in 2008 is due primarily to the write down of eight land parcels which we did not plan on developing at the time. We did not recognize an impairment loss in 2007.

Gain on sale of land for 2009 increased primarily due to the sale of two land parcels in 2009, without comparable activity in the prior year.

Equity in income of unconsolidated entities for 2009 decreased from the prior year period due primarily to the recognition of our proportionate amount of an impairment loss that one of our unconsolidated investments recognized on one of its operating communities in 2009. In addition, gains from both the sale of a community by an

unconsolidated joint venture as well as from an investment in a joint venture formed to develop for sale homes occurred in 2008 that were not present in 2009. These amounts were partially offset by the recognition of our promoted interest in the joint venture that owns Avalon Chrystie Place in 2009. The decrease in 2008 from the prior year is due primarily to the gain on the sale of two partnership interests in 2007 and the related loss of partnership income, partially offset by our portion of the gain from the sale of a community by a joint venture partner, income from joint ventures where the underlying communities have achieved stabilized operations and gains from our investment in a joint venture formed to develop for-sale homes.

Income from discontinued operations represents the net income generated by communities sold or qualifying as discontinued operations during the period from January 1, 2007 through December 31, 2009. This income decreased for 2009 and 2008 due to an increased number of communities sold in each year as compared to the prior year period. See Note 7, “Real Estate Disposition Activities,” of our Consolidated Financial Statements.

Gain on sale of communities decreased in 2009 and increased in 2008 as compared to the prior year periods as a result of changes in the sales volume and associated gains in each respective year. The amount of gain realized upon disposition of a community depends on many factors, including the number of communities sold, the size and carrying value of those communities and the market conditions in the local area.

Net (income) loss attributable to redeemable noncontrolling interests for 2009 resulted in income of $1,373,000 compared to income of $741,000 in 2008 due primarily to recognition of income for our joint venture partners’ portion of expenses incurred by Fund II, as well as the conversion and redemption of limited partnership units in 2008 and 2009, thereby reducing outside ownership interests and the allocation of net income to outside ownership interests.

FFO

FFO is considered by management to be an appropriate supplemental measure of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in our Consolidated Financial Statements included elsewhere in this report. For a more detailed discussion and presentation of FFO, see “Selected Financial Data,” included in Item 6 of this report.

Liquidity and Capital Resources

We believe our principal short-term liquidity needs are to fund:

	•		development and redevelopment activity in which we are currently engaged;

	•		the minimum dividend payments on our common stock required to maintain our REIT qualification under the Internal Revenue Code of 1986;

	•		debt service and principal payments either at maturity or opportunistic payments;

	•		normal recurring operating expenses;

	•		DownREIT partnership unit distributions; and

	•		capital calls for Fund II, as required.

Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Operating cash flow has historically been determined by: (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage, as well as our plans for development, redevelopment, acquisition and disposition activity, are affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital. We regularly review our liquidity needs, the adequacy of cash flows from operations and other expected liquidity sources to meet these needs.

During 2009 we saw access to liquidity improve as credit and equity markets recovered. During 2009, we raised in excess of $1,700,000,000 in the form of secured debt, unsecured debt and public and private equity. In 2010, we expect to meet all of our liquidity needs from a variety of internal and external sources, including cash balances on hand, borrowing capacity under our Credit Facility (as defined below), secured financings and other public or private sources of liquidity as discussed below, as well as our operating activities. To the extent that currently available internal and external resources do not satisfy our needs, we may seek additional external financing. Additional external financing could come from a variety of sources, such as public sales of debt or equity securities or unsecured or secured loans from financial institutions or other private or governmental lenders, among others. Private equity through joint ventures may also be used. Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects. At December 31, 2009, we have unrestricted cash, cash equivalents and cash in escrow of $316,367,000 available for both current liquidity needs as well as development activities, of which $93,440,000 relates to a Development Right for which we have not begun construction.

Unrestricted cash and cash equivalents totaled $105,691,000 at December 31, 2009, an increase of $40,756,000 from $64,935,000 at December 31, 2008. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows included elsewhere in this report.

		Operating Activities — Net cash provided by operating activities decreased to $378,600,000 in 2009 from $386,084,000 in 2008. The decrease was driven primarily by the timing of general corporate payables and the payment of interest amounts in 2009 as compared to 2008.

		Investing Activities — Net cash used in investing activities of $333,559,000 in 2009 related to investments in assets through development and redevelopment. In total, we invested $572,103,000 during 2009 in the following areas:

	•		We invested approximately $560,155,000 in the development of communities.

	•		We had capital expenditures of $11,948,000 for real estate and non-real estate assets.

These amounts are partially offset by the proceeds from the disposition of real estate of $189,417,000.

Financing Activities — Net cash used in financing activities totaled $4,285,000 in 2009. The net cash used is due primarily to the repayment of unsecured notes at maturity and repayment of amounts tendered of $868,564,000, the payment of cash dividends in the amount of $283,710,000, the repayment of amounts outstanding on the Credit Facility, defined below, of $124,000,000, and the repayment of secured notes of $65,229,000. These amounts were partially offset by the pooled secured financing executed in April 2009 for $741,140,000, the issuance of $500,000,000 aggregate principal amount of unsecured notes in September and $108,860,000 received from the issuance of common stock, primarily through the Continuous Equity Program (the “CEP”) we initiated in August 2009.

Variable Rate Unsecured Credit Facility

We currently have a $1,000,000,000 revolving variable rate Credit Facility with a syndicate of commercial banks that expires in November 2011 (assuming our exercise of a one-year renewal option). We pay an annual facility fee of approximately $1,250,000. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), our credit rating and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 0.40% per annum (0.63% on January 31, 2010). The spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on our credit rating. In addition, a competitive bid option is available for borrowings of up to $650,000,000. This option allows banks that are part of the lender consortium to bid to provide us loans at a rate that is lower than the stated pricing provided by the Credit Facility. The competitive bid option may result in lower pricing if market conditions allow. We had no outstanding balance under this competitive bid option at January 31, 2010. At January 31, 2010, there were no amounts outstanding on the Credit Facility,

$45,355,000 was used to provide letters of credit, and $954,645,000 was available for borrowing under the Credit Facility. We expect to refinance the Credit Facility prior to maturity. While credit market conditions continue to improve from the difficult environment seen in 2008 and 2009, we expect facility pricing to be higher, and we may not be able to achieve the same borrowing capacity as exists under the current Credit Facility.

We are subject to financial and other covenants contained in the Credit Facility and the indenture under which our unsecured notes were issued. The financial covenants include the following:

	•		limitations on the amount of total and secured debt in relation to our overall capital structure;

	•		limitation on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and

	•		minimum levels of debt service coverage.

We were in compliance with these covenants at December 31, 2009.

In addition, our secured borrowings may include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period in which our borrowings were secured.

Continuous Equity Offering Program

In August 2009, we commenced the CEP, under which we may sell up to $400,000,000 of our common stock. This program is available until the $400,000,000 is sold or August 2012, whichever occurs first. We may sell the shares in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us, including market conditions, the trading price of our common stock and determinations of the appropriate sources of funding. In conjunction with the CEP, we engaged sales agents who received compensation of 1.5% of the gross sales price for shares sold. During the three months ended December 31, 2009 we sold 37,900 shares under this program at an average sales price of $74.34 per share, for net proceeds of $2,775,000. During the year ended December 31, 2009, we sold 1,504,901 shares under this program at an average sales price of approximately $69.56 per share, resulting in net proceeds of approximately $103,109,000.

Future Financing and Capital Needs — Debt Maturities

One of our principal long-term liquidity needs is the repayment of long-term debt at the time that such debt matures. For unsecured notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our unsecured notes could result in gains or losses on extinguishment similar to those recognized in 2008 and 2009. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance the debt. This refinancing may be accomplished by uncollateralized private or public debt offerings, additional debt financing that is secured by mortgages on individual communities or groups of communities, draws on our Credit Facility or by equity offerings. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.

The following financing activity occurred during 2009:

	•		we obtained secured financing for $741,140,000 pursuant to fourteen separate ten-year mortgage loans, each secured by one of our current communities at an interest rate of 5.86%;

	•		we obtained $93,440,000 in variable rate tax-exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding;

	•		we repaid $4,143,000 in 8.08% fixed rate debt secured by a real estate asset formerly classified as a Development Right in Alexandria, Virginia in April 2009 pursuant to its scheduled maturity;

	•		we redeemed $37,438,000 principal amount of our $150,000,000, 7.5% unsecured notes that mature in August 2009 for par and cancelled the notes upon purchase;

	•		we redeemed $64,423,000 principal amount of our $200,000,000, 7.5% unsecured notes that mature in December 2010 for $63,135,000 with the discount below par recorded as a gain reflected in (gain) loss on extinguishment of debt, net on the Consolidated Statement of Operations and Other Comprehensive Income of the Consolidated Financial Statements in Item 8 of this Form 10-K and cancelled the notes upon purchase;

	•		we repaid $105,600,000 in unsecured debt, representing the first tranche of our $330,000,000 unsecured variable rate term loan pursuant to its scheduled maturity;

	•		we repaid $19,470,000 in variable rate debt secured by Avalon at Flanders Hill, located in Westborough, Massachusetts pursuant to its scheduled maturity;

	•		we repaid $102,562,000 of previously issued 7.5% unsecured notes, along with any unpaid interest, pursuant to their scheduled maturity;

	•		we repaid $112,200,000 in unsecured debt, representing the second tranche of our term loan prior to its scheduled maturity of January 2010;

	•		we issued a total of $500,000,000 of unsecured notes under our existing shelf registration statement. The offering consisted of two separate $250,000,000 tranches with effective interest rates of 5.80% and 6.19%, maturing in March 2017 and March 2020, respectively;

	•		we settled a cash tender offer, purchasing the following unsecured notes:

	•		$46,001,000 principal amount of our $200,000,000 7.5% unsecured notes due December 2010 at a weighted average price of 107.50% of par;

	•		$150,000,000 principal amount of our $300,000,000 6.625% unsecured notes due September 2011 at a weighted average price of 109.00% of par;

	•		$55,600,000 principal amount of our $250,000,000 5.5% unsecured notes due January 2012 at a weighted average price of 106.25% of par; and

	•		$48,399,000 principal amount of our $250,000,000 6.125% unsecured notes due November 2012 at a weighted average price of 108.75% of par;

	•		we repurchased $10,100,000 principal amount of our 6.625% unsecured notes due September 2011 at a weighted average price of 107.0% of par;

	•		we recorded a charge for the purchase premium as well as certain deferred issuance costs related to the $300,000,000 cash tender offer and additional $10,100,000 unsecured notes repurchase activity above of approximately $26,000,000 in (gain) loss on extinguishment of debt, net on the Consolidated Statement of Operations and Other Comprehensive Income of the Consolidated Financial Statements in Item 8 of this form 10-K;

	•		we repaid the final $112,200,000 of our term loan outstanding prior to its scheduled maturity of January 2011;

	•		we repaid $33,615,000 in variable rate debt secured by Avalon at Newton Highlands, located in Newton, Massachusetts pursuant to its scheduled maturity; and

	•		through the execution of interest rate swaps, we effectively converted $300,000,000 principal of our fixed rate unsecured notes, with a weighted average maturity of approximately two years, to floating rate debt at a weighted average interest rate of three month LIBOR plus 5.42%.

The following table details debt maturities for the next five years, excluding our Credit Facility and amounts outstanding related to communities classified as held for sale, for debt outstanding at December 31, 2009 (dollars in thousands).


	All-In			Principal
	interest			maturity	Balance outstanding						Scheduled maturities
Community	rate (1)			date	12-31-08		12-31-09				2010		2011		2012		2013		2014		Thereafter
Tax-exempt bonds
*Fixed rate*
CountryBrook		6.47	%	Mar-2012	$	14,680	$	13,961			$	766	$	816	$	12,379	$	—	$	—	$	—
Avalon at Symphony Glen		5.17	%	Jul-2024		9,780		9,780				—		—		—		—		—		9,780
Avalon at Lexington		6.95	%	Feb-2025		11,665		11,226				466		495		526		559		594		8,586
Avalon Campbell		6.50	%	Jun-2025		30,914		29,881	(2	)		—		—		—		—		—		29,881
Avalon Pacifica		6.51	%	Jun-2025		14,023		13,554	(2	)		—		—		—		—		—		13,554
Avalon Fields		7.79	%	May-2027		9,988		9,714				295		316		339		364		390		8,010
Avalon Oaks		7.49	%	Feb-2041		16,940		16,794				157		168		180		193		207		15,889
Avalon Oaks West		7.54	%	Apr-2043		16,795		16,661				142		152		162		173		185		15,847
Avalon at Chestnut Hill		6.15	%	Oct-2047		41,834		41,501				349		368		388		409		432		39,555

						166,619		163,072				2,175		2,315		13,974		1,698		1,808		141,102

*Variable rate* (3)
Avalon Burbank		1.99	%	Oct-2010		30,142		29,387				29,387		—		—		—		—		—
Waterford		1.09	%	Jul-2014		33,100		33,100	(4	)		—		—		—		—		33,100		—
Avalon at Mountain View		1.14	%	Feb-2017		18,300		18,300	(4	)		—		—		—		—		—		18,300
Avalon at Mission Viejo		1.44	%	Jun-2025		7,635		7,635	(4	)		—		—		—		—		—		7,635
Avalon at Nob Hill		1.31	%	Jun-2025		20,800		20,800	(4	)		—		—		—		—		—		20,800
Avalon Campbell		2.10	%	Jun-2025		7,886		8,919	(2	)		—		—		—		—		—		8,919
Avalon Pacifica		2.12	%	Jun-2025		3,577		4,046	(2	)		—		—		—		—		—		4,046
Avalon Bowery Place I		1.35	%	Nov-2037		93,800		93,800				—		—		—		—		—		93,800
Avalon Bowery Place II		1.57	%	Nov-2039		48,500		48,500	(5	)		—		—		—		—		—		48,500
Avalon Acton		1.67	%	Jul-2040		45,000		45,000	(5	)		—		—		—		—		—		45,000
Avalon Morningside Park		3.00	%	Nov-2040		100,000		100,000	(5	)		—		—		—		—		—		100,000
West Chelsea		0.18	%	May-2012		—		93,440	(5	)		—		—		93,440		—		—		—
Avalon Walnut Creek		2.95	%	Mar-2046		116,000		116,000	(5	)		—		—		—		—		—		116,000
Avalon Walnut Creek		2.89	%	Mar-2046		10,000		10,000	(5	)		—		—		—		—		—		10,000

						534,740		628,927				29,387		—		93,440		—		33,100		473,000

Conventional loans (6)
*Fixed rate*
$150 million unsecured notes		—		Aug-2009		140,000		—				—		—		—		—		—		—
$200 million unsecured notes		7.67	%	Dec-2010		200,000		14,576	(7	) (12)		14,576		—		—		—		—		—
$300 million unsecured notes		6.79	%	Sep-2011		300,000		39,900	(8	) (12)		—		39,900		—		—		—		—
$50 million unsecured notes		6.31	%	Sep-2011		50,000		—	(12	)		—		—		—		—		—		—
$250 million unsecured notes		5.74	%	Jan-2012		235,000		104,400	(9	) (12)		—		—		104,400		—		—		—
$250 million unsecured notes		6.26	%	Nov-2012		250,000		201,601	(10	)		—		—		201,601		—		—		—
$100 million unsecured notes		5.11	%	Mar-2013		100,000		100,000				—		—		—		100,000		—		—
$150 million unsecured notes		5.52	%	Apr-2014		150,000		150,000				—		—		—		—		150,000		—
$250 million unsecured notes		5.89	%	Sep-2016		250,000		250,000				—		—		—		—		—		250,000
$250 million unsecured notes		5.82	%	Mar-2017		—		250,000				—		—		—		—		—		250,000
$250 million unsecured notes		6.19	%	Mar-2020		—		250,000				—		—		—		—		—		250,000
Avalon at Twinbrook		7.25	%	Oct-2011		7,801		7,578				239		7,339		—		—		—		—
Avalon at Tysons West		5.55	%	Jul-2028		6,218		6,045				183		193		204		216		229		5,020
4600 Eisenhower Avenue		—		Apr-2009		4,175		—				—		—		—		—		—		—
Avalon Orchards		7.77	%	Jul-2033		19,322		19,011				333		357		382		409		438		17,092
Avalon at Arlington Square		4.81	%	Apr-2013		170,125		170,125				—		—		—		170,125		—		—
Avalon at Cameron Court		5.07	%	Apr-2013		94,572		94,572				—		—		—		94,572		—		—
Avalon Crescent		5.59	%	May-2015		110,600		110,600				—		—		—		—		—		110,600
Avalon Silicon Valley		5.74	%	Jul-2015		150,000		150,000				—		—		—		—		—		150,000
Avalon Darien		6.22	%	Nov-2015		51,749		51,172				660		702		746		793		843		47,428
Avalon Greyrock Place		6.13	%	Nov-2015		62,400		61,690				811		861		914		971		1,031		57,102
Avalon Commons		6.09	%	Jan-2019		55,100		55,100				—		693		734		779		826		52,068
Avalon Walnut Creek		4.00	%	Jul-2066		2,500		2,500				—		—		—		—		—		2,500
Avalon Shrewsbury		5.92	%	May-2019		—		21,130				—		183		285		301		319		20,042
Avalon Gates		5.93	%	May-2019		—		41,321				—		357		557		589		624		39,194
Avalon at Stamford Harbor		5.92	%	May-2019		—		65,695				—		568		885		937		992		62,313
Avalon Freehold		5.94	%	May-2019		—		36,630				—		317		493		522		553		34,745
Avalon Run East II		5.94	%	May-2019		—		39,250				—		339		529		560		592		37,230
Avalon Gardens		6.06	%	May-2019		—		66,237				—		572		892		945		1,000		62,828
Avalon Edgewater		6.10	%	May-2019		—		78,565				—		679		1,058		1,120		1,186		74,522
Avalon Foxhall		6.05	%	May-2019		—		59,010				—		510		795		841		891		55,973
Avalon Gallery Place I		6.05	%	May-2019		—		45,850				—		396		618		654		692		43,490
Avalon Traville		5.91	%	May-2019		—		77,700				—		672		1,047		1,108		1,173		73,700
Avalon Bellevue		5.91	%	May-2019		—		26,698				—		231		360		381		403		25,323
Avalon on the Alameda		5.91	%	May-2019		—		53,980				—		467		727		770		815		51,201
Avalon Mission Bay North		5.90	%	May-2019		—		73,269				—		633		987		1,045		1,106		69,498
Avalon Woburn		5.91	%	May-2019		—		55,805				—		482		752		796		842		52,933

						2,409,562		2,830,010				16,802		56,451		318,966		378,434		164,555		1,894,802

*Variable rate* (3)
Avalon at Flanders Hill		—		May-2009		19,735		—				—		—		—		—		—		—
Avalon at Newton Highlands		—		Dec-2009		34,945		—				—		—		—		—		—		—
Avalon at Crane Brook		2.11	%	Mar-2011		31,530		30,440	(4	)		1,169		29,271		—		—		—		—
Avalon at Bedford Center		1.74	%	May-2012		16,361		15,871	(4	)		527		560		14,784		—		—		—
Avalon Walnut Creek		3.03	%	Mar-2046		9,000		9,000	(5	)		—		—		—		—		—		9,000
$105.6 million unsecured notes		—		May-2009		105,600		—				—		—		—		—		—		—
$112.2 million unsecured notes		—		Jan-2010		112,200		—	(11	)		—		—		—		—		—		—
$112.2 million unsecured notes		—		Jan-2011		112,200		—	(11	)		—		—		—		—		—		—
$200 Million unsecured notes		7.034	%	Dec-2010		—		75,000	(12	)		75,000		—		—		—		—		—
$300 Million unsecured notes		5.663	%	Sep-2011		—		100,000	(12	)		—		100,000		—		—		—		—
$50 Million unsecured notes		5.663	%	Sep-2011		—		50,000	(12	)		—		50,000		—		—		—		—
$250 Million unsecured notes		4.352	%	Jan-2012		—		75,000	(12	)		—		—		75,000		—		—		—

						441,571		355,311				76,696		179,831		89,784		—		—		9,000

Total indebtedness — excluding unsecured credit facility					$	3,552,492	$	3,977,320			$	125,060	$	238,597	$	516,164	$	380,132	$	199,463	$	2,517,904


(1)		Includes credit enhancement fees, facility fees, trustees’ fees and other fees.


(2)		Financed by variable rate, tax-exempt debt, but the interest rate on a portion of this debt is effectively fixed at December 31, 2009 and December 31, 2008 through an interest rate swap agreement. The portion of the debt fixed through the interest rate swap agreement decreases (and therefore the variable portion of the debt increases) monthly as payments are made to a principal reserve fund.

(3)		Variable rates are given as of December 31, 2009.

(4)		Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.

(5)		Represents full amount of the debt as of December 31, 2009. Actual amounts drawn on the debt as of December 31, 2009 are $46,216 for Bowery Place II, $44,678 for Avalon Acton, $88,823 for Morningside Park, $64,080 for Walnut Creek, and $0 for West Chelsea.

(6)		Balances outstanding represent total amounts due at maturity, and are not net of $2,448 of debt discount and basis adjustments associated with the hedged unsecured notes as of December 31, 2009 and $2,035 of debt discount as of December 31, 2008, as reflected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report.

(7)		In October 2009, we redeemed $46,001 principal amount of our $200,000 7.5% unsecured notes due December 2010.

(8)		In October 2009, we redeemed $160,100 principal amount of our $300,000 6.625% unsecured notes due September 2011.

(9)		In October 2009, we redeemed $55,600 principal amount of our $250,000 5.5% unsecured notes due January 2012.

(10)		In October 2009, we redeemed $48,399 principal amount of our $250,000 6.125% unsecured notes due November 2012.

(11)		In August and October 2009, we repaid $224,400 in unsecured debt, representing the second and third tranches of our term loan, prior to its scheduled maturities in January 2010 and 2011, respectively.

(12)		In October 2009, we executed $300,000 of interest rate swaps allowing us to effectively convert $300,000 principal of our fixed rate unsecured notes to floating rate debt.

Future Financing and Capital Needs — Portfolio and Other Activity

As of December 31, 2009, we had seven new wholly owned communities under construction, for which a total estimated cost of $245,046,000 remained to be invested. We also had seven wholly owned communities under reconstruction, for which a total estimated cost of $49,527,000 remained to be invested. In addition, we may be required to contribute our proportionate share of capital to Fund II, if or to the extent that Fund II makes capital calls in conjunction with additional community acquisitions during 2010. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction, development costs related to pursuing Development Rights, as well as for equity contributions to Fund II, will be funded from:

	•		cash currently on hand, including cash in construction escrows, invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment vehicles;

	•		the remaining capacity under our $1,000,000,000 Credit Facility;

	•		retained operating cash;

	•		the net proceeds from sales of existing communities;

	•		the issuance of debt or equity securities; and/or

	•		private equity funding, including joint venture activity.

Before planned reconstruction activity, including reconstruction activity related to communities acquired by the Funds, or the construction of a Development Right begins, we intend to arrange adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and significant losses could be incurred.

From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities where our partners bring development and operational expertise to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying

degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures.

In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over the past business cycle and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI. However, we believe that the absence of future cash flows from communities sold will have a minimal impact on our ability to fund future liquidity and capital resource needs.

Off-Balance Sheet Arrangements

In addition to our investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet arrangements with the entities in which we invest. Additional discussion of these entities can be found in Note 6, “Investments in Real Estate Entities,” of our Consolidated Financial Statements located elsewhere in this report.

	•		CVP I, LLC has outstanding tax-exempt, variable rate bonds maturing in November 2036 in the amount of $117,000,000, which have permanent credit enhancement. We have agreed to guarantee, under limited circumstances, the repayment to the credit enhancer of any advances it may make in fulfillment of CVP I, LLC’s repayment obligations under the bonds . We have also guaranteed to the credit enhancer that CVP I, LLC will obtain a final certificate of occupancy for the project (Chrystie Place in New York City), which is expected in 2010. Our 80% partner in this venture has agreed that it will reimburse us its pro rata share of any amounts paid relative to these guaranteed obligations. The estimated fair value of and our obligation under these guarantees, both at inception and as of December 31, 2009, were not significant. As a result we have not recorded any obligation associated with these guarantees at December 31, 2009.

	•		Subsidiaries of Fund I have 21 loans secured by individual assets with amounts outstanding in the aggregate of $436,410,000, with varying maturity dates (or dates after which the loans can be prepaid), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate. The mortgage loans are payable by the subsidiaries of Fund I with operating cash flow or disposition proceeds from the underlying real estate. We have not guaranteed the debt of Fund I, nor do we have any obligation to fund this debt should Fund I be unable to do so.

			In addition, as part of the formation of Fund I, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund I, the total amount of all distributions to that partner during the life of Fund I (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $7,500,000 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund I is considered adequate to cover such potential payment to that partner under the expected Fund I liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2009.

	•		A subsidiary of Fund II has one loan secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable by the subsidiary of Fund II. As of December 31, 2009, Fund II also has $30,200,000 outstanding under a credit facility that matures in December 2010. The mortgage loan is payable by the subsidiary of Fund II with operating cash flow or disposition proceeds from the underlying real estate, and the credit facility is payable by Fund II and is secured by capital commitments. We have not guaranteed, beyond our proportionate share of capital commitments supporting the credit facility of Fund II, the debt of Fund II, nor do we have any obligation to fund this debt should Fund II be unable to do so.

			In addition, as part of the formation of Fund II, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $1,470,000 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payment to that partner under the expected Fund II liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2009.

	•		MVP I, LLC, the entity that owns Avalon at Mission Bay North II, has a loan secured by the underlying real estate assets of the community for $105,000,000. The loan is a fixed rate, interest-only note bearing interest at 6.02%, maturing in December 2015. We have not guaranteed the debt of MVP I, LLC, nor do we have any obligation to fund this debt should MVP I, LLC be unable to do so.

	•		Avalon Del Rey Apartments, LLC has a loan secured by the underlying real estate assets of the community for $45,943,000 maturing in April 2016. The variable rate loan had an interest rate of 3.69% at December 31, 2009. We have not guaranteed the debt of Avalon Del Rey Apartments, LLC, nor do we have any obligation to fund this debt should Avalon Del Rey Apartments, LLC be unable to do so.

	•		Aria at Hathorne Hill, LLC is a joint venture in which we have a non-managing member interest. The LLC is developing for-sale town homes in Danvers, Massachusetts. The LLC has three separate variable rate loans with aggregate borrowings of $2,432,000 and a weighted average interest rate of 4.19% at December 31, 2009. We have not guaranteed the debt of Aria at Hathorne, nor do we have any obligation to fund this debt should Aria at Hathorne be unable to do so.

	•		PHVP I, LLC, a consolidated joint venture in which we hold a 99.0% controlling interest, constructed a public garage adjacent to our Walnut Creek development. As part of the construction management services we provided to PHVP I, LLC for the construction of the public garage, we provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing, which occurred in the third quarter of 2009. Our obligations under this guarantee therefore, have terminated and we have no further obligation under this agreement.

	•		In 2007 we entered into a non-cancelable commitment (the “Commitment”) to acquire parcels of land in Brooklyn, New York for an aggregate purchase price of approximately $111,000,000. Under the terms of the Commitment, we are closing on the various parcels over a period determined by the seller’s ability to execute unrelated purchase transactions and achieve deferral of gains for the land sold under this Commitment. However, under no circumstances will the Commitment extend beyond 2011, at which time either we or the seller can compel execution of the remaining transactions. At December 31, 2009, we have an outstanding commitment to purchase the remaining land for approximately $51,500,000.

There are no other lines of credit, side agreements, financial guarantees or any other derivative financial instruments related to or between our unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage, management takes into consideration our proportionate share of this unconsolidated debt.

Contractual Obligations

In 2009, we entered into a lease agreement for office space in Arlington, Virginia. The office space will serve as our corporate headquarters, with relocation scheduled to occur in the first half of 2010. The lease has a ten year lease term, with extension rights, with rent of approximately $1,900,000 annually. We are marketing for lease or sale the building that serves as our current headquarters in Alexandria, Virginia. Aside from this lease, there have not been any other material changes outside of the ordinary course of business to our contractual obligations during 2009.

Scheduled contractual obligations required for the next five years and thereafter are as follows as of December 31, 2009 (dollars in thousands):


	Payments due by period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Debt Obligations	$	3,977,320	$	125,060	$	754,761	$	579,595	$	2,517,904

Operating Lease Obligations (1)		3,412,947		20,732		50,815		53,850		3,287,550

Total	$	7,390,267	$	145,792	$	805,576	$	633,445	$	5,805,454


(1)		Includes land leases expiring between October 2026 and March 2142. Amounts do not include any adjustment for purchase options available under the land leases.

Inflation and Deflation

Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore expose us to the effect of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases.

Forward-Looking Statements

This Form 10-K contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,” “plan,” “may,” “shall,” “will” and other similar expressions in this Form 10-K, that predict or indicate future events and trends and that do not report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:

	•		our potential development, redevelopment, acquisition or disposition of communities;

	•		the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment;

	•		the timing of lease-up, occupancy and stabilization of apartment communities;

	•		the pursuit of land on which we are considering future development;

	•		the anticipated operating performance of our communities;

	•		cost, yield, revenue, NOI and earnings estimates;

	•		our declaration or payment of distributions;

	•		our joint venture and discretionary fund activities;

	•		our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;

	•		our qualification as a REIT under the Internal Revenue Code;

	•		the real estate markets in Northern and Southern California and markets in selected states in the Mid-Atlantic, Midwest, New England, Metro New York/New Jersey and Pacific Northwest regions of the United States and in general;

	•		the availability of debt and equity financing;

	•		interest rates;

	•		general economic conditions including the recent economic downturn; and

	•		trends affecting our financial condition or results of operations.

We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. In addition, these

forward-looking statements represent our estimates and assumptions only as of the date of this report. We do not undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. In addition to the factors referred to below, you should carefully review the discussion under Item 1a., “Risk Factors,” in this document for a discussion of additional risks associated with our business and these forward-looking statements.

Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following:

	•		we may fail to secure development opportunities due to an inability to reach agreements with third parties to obtain land at attractive prices or to obtain desired zoning and other local approvals;

	•		we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses;

	•		construction costs of a community may exceed our original estimates;

	•		we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest costs and construction costs and a decrease in our expected rental revenues;

	•		occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are beyond our control;

	•		financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline which could limit our pursuit of opportunities;

	•		our cash flows may be insufficient to meet required payments of principal and interest, and we may be unable to refinance existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness;

	•		we may be unsuccessful in our management of Fund I, Fund II or the REIT vehicles that are used with each respective Fund; and

	•		we may be unsuccessful in managing changes in our portfolio composition.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 1, “Organization and Basis of Presentation” of our Consolidated Financial Statements.

Principles of Consolidation

We may enter into various joint venture agreements with unrelated third parties to hold or develop real estate assets. We must determine for each of these ventures whether to consolidate the entity or account for our investment under the equity or cost basis of accounting.

We determine whether to consolidate certain entities based on our rights and obligations under the joint venture agreements, applying the applicable accounting guidance. For investment interests that we do not consolidate, we

evaluate the guidance to determine the accounting framework to apply. The application of the rules in evaluating the accounting treatment for each joint venture is complex and requires substantial management judgment. Therefore, we believe the decision to choose an appropriate accounting framework is a critical accounting estimate.

If we were to consolidate the joint ventures that we accounted for using the equity method at December 31, 2009, our assets would have increased by $1,030,260,000 and our liabilities would have increased by $778,156,000. We would be required to consolidate those joint ventures currently not consolidated for financial reporting purposes if the facts and circumstances changed, including but not limited to the following reasons, none of which are currently expected to occur:

	•		For entities not considered to be variable interest entities, the nature of the entity changed such that it would be considered a variable interest entity and if we were considered the primary beneficiary.

	•		For entities in which we do not hold a controlling voting and/or variable interest, the contractual arrangement changed resulting in our investment interest being either a controlling voting and/or variable interest.

We evaluate our accounting for investments on a quarterly basis or when a significant change in the design of an entity occurs.

Cost Capitalization

We capitalize costs during the development of assets beginning when we determine that development of a future asset is probable until the asset, or a portion of the asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs either (i) in advance of taking homes out of service when significant renovation of the common area has begun until the redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating expenses incurred during the initial lease-up or post-redevelopment lease-up period are fully recognized as they accrue.

During the development and redevelopment efforts we capitalize all direct costs and indirect costs which have been incurred as a result of the development and redevelopment activities. These costs include interest and related loan fees, property taxes as well as other direct and indirect costs. Interest is capitalized for any project specific financing, as well as for general corporate financing to the extent of our aggregate investment in the projects. Indirect project costs, which include personnel and office and administrative costs that are clearly associated with our development and redevelopment efforts, are also capitalized. The estimation of the direct and indirect costs to capitalize as part of our development and redevelopment activities requires judgment and, as such, we believe cost capitalization to be a critical accounting estimate.

There may be a change in our operating expenses in the event that there are changes in accounting guidance governing capitalization or changes to our levels of development or redevelopment activity. If changes in the accounting guidance limit our ability to capitalize costs or if we reduce our development and redevelopment activities without a corresponding decrease in indirect project costs, there may be an increase in our operating expenses. For example, if in 2009 our development activities decreased by 10%, and there were no corresponding decrease in our indirect project costs, our operating expenses would have increased by $2,493,200.

We capitalize pre-development costs incurred in pursuit of Development Rights. These costs include legal fees, design fees and related overhead costs. Future development of these pursuits is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development costs are written off with a charge to expense.

Due to the subjectivity in determining whether a pursuit will result in the development of an apartment community, and therefore should be capitalized, the accounting for pursuit costs is a critical accounting estimate. If we had

determined that 10% of our capitalized pursuit costs were associated with Development Rights that were no longer probable of occurring, net income for the year ended December 31, 2009 would have decreased by $8,776,300.

Abandoned Pursuit Costs & Asset Impairment

We capitalize pre-development costs incurred in pursuit of new development opportunities for which we currently believe future development is probable. Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by us no longer probable, any capitalized pre-development costs are written off with a charge to expense. We expensed costs related to abandoned pursuits, which includes the abandonment of Development Rights and disposition pursuits, in the amounts of $5,842,000 in 2009 and $12,511,000 in 2008. These costs are included in operating expenses, excluding property taxes on the accompanying Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.

During 2009, we concluded that the continued economic downturn and the related decline in employment levels did not support the development and construction of certain new apartment communities that were previously in planning. This resulted in the recognition of an impairment charge of $20,302,000 related to the impairment of two land parcels which we currently do not intend to develop. We looked to third-party pricing estimates to determine the fair values of the land parcels considered to be impaired. Given the heterogeneous nature of multifamily real estate, the third party values incorporated significant other unobservable inputs and are therefore considered to be Level 3 prices in the fair value hierarchy. In addition, in 2009 we recognized a further impairment charge of $850,000 on a land parcel for which an earlier impairment had been recognized in the fourth quarter of 2008. The additional impairment charge reduces our carrying basis to its current estimated selling price less costs to dispose.

Our focus on value creation through real estate development presents an impairment risk in the event of a future deterioration of the real estate and/or capital markets or a decision by us to reduce or cease development. We cannot predict the occurrence of future events that may cause an impairment assessment to be performed, or the likelihood of any future impairment charges, if any. You should also review Item 1a., “Risk Factors” of this Form 10-K.

REIT Status

We are a Maryland corporation that has elected to be treated, for federal income tax purposes, as a REIT. We elected to be taxed as a REIT under the Code for the year ended December 31, 1994 and have not revoked such election. A corporate REIT is a legal entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on taxable income if we distribute 100% of taxable income to our stockholders over time periods allowed under the Code. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at regular corporate rates (subject to any applicable alternative minimum tax) and may not be able to elect to qualify as a REIT for four subsequent taxable years. For example, if we failed to qualify as a REIT in 2009, our net income would have decreased by approximately $62,000,000.

Our qualification as a REIT requires management to exercise significant judgment and consideration with respect to operational matters and accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risk. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seek to reduce the

potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily, in short-term LIBOR and the SIFMA index as a result of borrowings under our Credit Facility and outstanding bonds with variable interest rates. In addition the fair value of our fixed rate unsecured and secured notes are impacted by changes in market interest rates. The effect of interest rate fluctuations on our results of operations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy.

We currently use interest rate protection agreements (consisting of interest rate swap and interest rate cap agreements) for our risk management objectives, as well as for compliance with the requirements of certain lenders, and not for trading or speculative purposes. In the fourth quarter of 2009, we entered into interest rate swap agreements to convert fixed rate borrowings to effective floating rate notes. In addition, we have interest rate caps and interest rate swaps that serve to either convert floating rate borrowings to fixed rate borrowings, or effectively limit the amount of interest rate expense we would incur on a floating rate borrowing. Further discussion of the financial instruments impacted and our exposure is presented below.

We had $1,271,273,000 and $1,088,848,000 in variable rate debt outstanding (excluding variable rate debt effectively fixed through swap agreements and including fixed rate debt effectively swapped to variable rates through swap agreements) as of December 31, 2009 and 2008, respectively. If interest rates on the variable rate debt had been 100 basis points higher throughout 2009 and 2008, our annual interest costs would have increased by approximately $9,079,000 and $11,490,000, respectively, based on balances outstanding during the applicable years.

As of December 31, 2009, we had executed interest rate swap agreements to hedge cash flow variability for approximately $43,435,000 of our variable rate, tax-exempt debt and executed interest rate swap agreements to hedge fair value exposure for approximately $300,000,000 of our fixed rate unsecured notes. Had these interest rate swap agreements not been in place during 2009 and 2008, our annual interest costs would have been approximately $1,492,000 higher and $1,451,000 lower, respectively, based on balances outstanding and reported interest rates during the applicable years. Additionally, if the variable interest rates on hedged floating rate debt had been 100 basis points higher throughout 2009 and 2008 and these swap agreements had not been in place, our annual interest costs would have been approximately $2,054,000 higher and $887,000 lower, respectively.

Because the counterparties providing the interest rate cap and swap agreements are major financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group and the current valuation of the position is a net liability for us, we do not believe there is exposure at this time to a default by a counterparty provider.

In addition, changes in interest rates affect the fair value of our fixed rate debt, computed using a discounted cash flow model considering our current market yields, which impacts the fair value of our aggregate indebtedness. Debt securities and notes payable (excluding amounts outstanding under our Credit Facility) with an aggregate carrying value of $3,977,320,000 at December 31, 2009 had an estimated aggregate fair value of $4,052,817,000 at December 31, 2009. Contractual fixed rate debt represented $3,249,647,000 of the carrying value and $3,352,312,000 of the fair value at December 31, 2009. If interest rates had been 100 basis points higher as of December 31, 2009, the fair value of this fixed rate debt would have decreased by $159,030,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item 8 is included as a separate section of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9a. CONTROLS AND PROCEDURES

	(a)		Evaluation of Disclosure Controls and Procedures . As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

	(b)		Management’s Report on Internal Control Over Financial Reporting . Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

Our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

(c)

Changes in Internal Control Over Financial Reporting . There was no change in our internal control over financial reporting that occurred during the fourth quarter of the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9b. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 pertaining to directors and executive officers of the Company and the Company’s Code of Conduct is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 19, 2010.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 pertaining to executive compensation is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 19, 2010.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 pertaining to security ownership of management and certain beneficial owners of the Company’s common stock is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 19, 2010, to the extent not set forth below.

The Company maintains the 2009 Stock Option and Incentive Plan (the “2009 Plan”) and the 1996 Non-Qualified Employee Stock Purchase Plan (the “ESPP”), pursuant to which common stock or other equity awards may be issued or granted to eligible persons.

The following table gives information about equity awards under the 2009 Plan, the Company’s prior 1994 Stock Incentive Plan (the “1994 Plan”) under which awards were previously made, and the ESPP as of December 31, 2009:

(b)

(c)

Weighted-

Number of securities

(a)

average

remaining available for

Number of securities

exercise price

future issuance under

to be issued upon

of outstanding

equity compensation

exercise of

options,

plans (excluding

outstanding options,

warrants and

securities reflected in

Plan category

warrants and rights

rights

column (a))

Equity compensation plans approved by security holders ⁽¹⁾

2,964,394

⁽²⁾

80.76

⁽³⁾

4,164,064

Equity compensation plans not approved by security holders ⁽⁴⁾

—

n/a

755,484

Total

2,964,394

80.76

⁽³⁾

4,919,548


(1)		Consists of the 2009 Plan and the 1994 Plan.

(2)		Includes 128,141 deferred units granted under the 2009 Plan and the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis, but does not include 244,640 shares of restricted stock that are outstanding and that are already reflected in the Company’s outstanding shares.


(3)		Excludes deferred units granted under the 2009 Plan and the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis.

(4)		Consists of the ESPP.

The ESPP, which was adopted by the Board of Directors on October 29, 1996, has not been approved by our shareholders. A further description of the ESPP appears in Note 10, “Stock-Based Compensation Plans,” of our Consolidated Financial Statements included in this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 pertaining to certain relationships and related transactions is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 19, 2010.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 pertaining to the fees paid to and services provided by the Company’s principal accountant is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 19, 2010.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE

15(a)(1) Financial Statements

Index to Financial Statements

Consolidated Financial Statements and Financial Statement Schedule:


Reports of Independent Registered Public Accounting Firm		F-1

Consolidated Balance Sheets as of December 31, 2009 and 2008		F-3

Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2009, 2008 and 2007		F-4

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007		F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007		F-6

Notes to Consolidated Financial Statements		F-8

15(a)(2) Financial Statement Schedule


Schedule III — Real Estate and Accumulated Depreciation		F-37

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

15(a)(3) Exhibits

The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.

INDEX TO EXHIBITS


3(i).1	—	Articles of Amendment and Restatement of Articles of Incorporation of the Company, dated as of June 4, 1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-K of the Company filed March 1, 2007.)

3(i).2	—	Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3(i).2 to Form 10-K of the Company filed March 1, 2007.)

3(ii).1	—	Amended and Restated Bylaws of the Company, as adopted by the Board of Directors on May 21, 2009. (Filed herewith.)

3(ii).2	—	Amendment to Amended and Restated Bylaws of AvalonBay Communities, Inc., dated February 10, 2010. (Incorporated by reference to Exhibit 3.2 to Form 8-K of the Company filed February 12, 2010.)

4.1	—	Indenture for Senior Debt Securities, dated as of January 16, 1998, between the Company and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.2	—	First Supplemental Indenture, dated as of January 20, 1998, between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.3	—	Second Supplemental Indenture, dated as of July 7, 1998, between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.4	—	Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.5	—	Fourth Supplemental Indenture, dated as of September 18, 2006, between the Company and U.S. Bank National Association as Trustee. (Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)

4.6	—	Dividend Reinvestment and Stock Purchase Plan of the Company. (Incorporated by reference to Exhibit 8.1 to Registration Statement on Form S-3 of the Company (File No. 333-87063), filed September 14, 1999.)

4.7	—	Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on December 17, 1999. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(2) of the Securities Act of 1933 on December 17, 1999.)

4.8	—	Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on March 26, 2004. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on March 26, 2004.)


4.9	—	Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on May 15, 2006. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on May 15, 2006.)

10.1	—	Amended and Restated Distribution Agreement, dated August 6, 2003, among the Company and the Agents, including Administrative Procedures, relating to the MTNs. (Incorporated by reference to Exhibit 10.1 to Form 10-K of the Company filed March 2, 2009.)

10.2	—	Amended and Restated Limited Partnership Agreement of AvalonBay Value Added Fund, L.P., dated as of March 16, 2005. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed May 6, 2005.)

10.3	—	Term Loan Agreement, dated May 15, 2008, among the Company, as Borrower, JPMorgan Chase Bank, N.A., as Syndication Agent, Sumitomo Mitsui Banking Corporation, Wells Fargo Bank, N.A., and Deutsche Bank Trust Company Americas, each as a Documentation Agent, the other banks signatory thereto, each as a Bank, J.P. Morgan Securities, Inc., as Sole Bookrunner and Lead Arranger, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed May 19, 2008.)

10.4	—	Master Cross-Collateralization Agreement, dated as of April 24, 2009, between Deutsche Bank Berkshire Mortgage, Inc., parties identified on Exhibit A-Schedule 1 attached thereto, and Shady Grove Financing, LLC. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed August 10, 2009.)

10.5	—	Master Substitution Agreement, dated April 23, 2009, between Deutsche Bank Berkshire Mortgage, Inc., AvalonBay Traville, LLC and the entities identified on Schedule B attached thereto. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company filed August 10, 2009.)

10.6	—	Form of Multifamily Note, dated April 24, 2009. (Used in connection with the properties identified on Exhibit B to the Master Cross-Collateralization Agreement dated April 24, 2009.) (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company filed August 10, 2009.)

10.7	—	Form of Guaranty, dated April 24, 2009. (Used in connection with the properties identified on Exhibit B to the Master Cross-Collateralization Agreement dated April 24, 2009.) (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company filed August 10, 2009.)

10.8+	—	Endorsement Split Dollar Agreements and Amendments thereto with Messrs. Blair, Naughton, Fuller, Sargeant, Horey and Meyer (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed May 6, 2005.)

10.9+	—	Form of Amendment to Endorsement Split Dollar Agreement with Messrs. Blair, Naughton, Sargeant, and Horey. (Incorporated by reference to Exhibit 10.4 to Form 10-K of the Company filed March 2, 2009.)

10.10+	—	Employment Agreement, dated as of July 1, 2003, between the Company and Thomas J. Sargeant. (Incorporated by reference to Exhibit 10.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-3 (File No. 333-103755), filed July 7, 2003.)


10.11+	—	First Amendment to Employment Agreement between the Company and Thomas J. Sargeant, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company filed May 6, 2005.)

10.12+	—	Form of Second Amendment to Employment Agreements between the Company and Certain Executive Officers. (Incorporated by reference to Exhibit 10.2 to form 8-K of the Company filed May 22, 2008.)

10.13+	—	Third Amendment to Employment Agreement between the Company and Thomas J. Sargeant, dated as of December 14, 2008. (Incorporated by reference to Exhibit 10.9 to Form 10-K of the Company filed March 2, 2009.)

10.14+	—	Employment Agreement, dated as of January 10, 2003, between the Company and Bryce Blair. (Incorporated by reference to Exhibit 10.10 to Form 10-K of the Company filed March 2, 2009.)

10.15+	—	First Amendment to Employment Agreement between the Company and Bryce Blair, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company filed May 6, 2005.)

10.16+	—	Third Amendment to Employment Agreement between the Company and Bryce Blair, dated as of December 14, 2008. (Incorporated by reference to exhibit 10.12 to Form 10-K of the Company filed March 2, 2009.)

10.17+	—	Employment Agreement, dated as of February 26, 2001, between the Company and Timothy J. Naughton. (Incorporated by reference to Exhibit 10.8 to Form 10-K of the Company filed March 1, 2007.)

10.18+	—	First Amendment to Employment Agreement between the Company and Timothy J. Naughton, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company filed May 6, 2005.)

10.19+	—	Third Amendment to Employment Agreement between the Company and Timothy J. Naughton, dated as of December 14, 2008. (Incorporated by reference to Exhibit 10.15 to Form 10-K of the Company filed March 2, 2009.)

10.20+	—	Employment Agreement, dated as of September 10, 2001, between the Company and Leo S. Horey. (Incorporated by reference to Exhibit 10.10 to Form 10-K of the Company filed March 1, 2007.)

10.21+	—	First Amendment to Employment Agreement between the Company and Leo S. Horey, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.6 to Form 10-Q of the Company filed May 6, 2005.)

10.22+	—	Third Amendment to Employment Agreement between the Company and Leo S. Horey, dated as of December 14, 2008.) (Incorporated by reference to Exhibit 10.18 to Form 10-K of the Company filed March 2, 2009.)

10.23+	—	Retirement Agreement, dated as of March 24, 2000, between the Company and Gilbert M. Meyer. (Incorporated by reference to Exhibit 10.15 to Form 10-K of the Company filed March 1, 2007.)

10.24+	—	First Amendment to Retirement Agreement between the Company and Gilbert M. Meyer, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.8 to Form 10-Q of the Company filed May 6, 2005.)


10.25+	—	AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed May 28, 2009.)

10.26+	—	Form of Incentive Stock Option Agreement (2009 Stock Option and Incentive Plan). (Incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-8 of the Company filed May 22, 2009.)

10.27+	—	Form of Non-Qualified Stock Option Agreement (2009 Stock Option and Incentive Plan). (Incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-8 of the Company filed May 22, 2009.)

10.28+	—	Form of Stock Grant and Restricted Stock Agreement (2009 Stock Option and Incentive Plan). (Incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-8 of the Company filed May 22, 2009.)

10.29+	—	Form of Director Restricted Stock Agreement (2009 Stock Option and Incentive Plan). (Incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-8 of the Company filed May 22, 2009.)

10.30+	—	Form of Director Restricted Unit Agreement (2009 Stock Option and Incentive Plan). (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-8 of the Company filed May 22, 2009.)

10.31+	—	1996 Non-Qualified Employee Stock Purchase Plan, dated June 26, 1997, as amended and restated. (Incorporated by reference to Exhibit 99.1 to Post-effective Amendment No. 1 to Registration Statement on Form S-8 of the Company (File No. 333-16837), filed June 26, 1997.)

10.32+	—	1996 Non-Qualified Employee Stock Purchase Plan — Plan Information Statement dated June 26, 1997. (Incorporated by reference to Exhibit 99.2 to Registration Statement on Form S-8 of the Company (File No. 333-16837), filed November 26, 1996.)

10.33+	—	Form of Addendum to AvalonBay Communities, Inc. Non-Qualified Stock Option Agreement for Certain Officers. (Incorporated by reference to Exhibit 10.30 to Form 10-K of the Company filed March 2, 2009.)

10.34+	—	Form of Indemnity Agreement between the Company and its Directors. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed November 9, 2005.)

10.35+	—	The Company’s Officer Severance Plan, as amended and restated on November 18, 2008. (Incorporated by reference to Exhibit 10.28 to Registration Statement on Form 10-K of the Company filed March 2, 2009.)

10.36+	—	AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated in full on December 8, 2004 (Incorporated by reference to Exhibit 10.21 to Form 10-K of the Company filed March 2, 2009.)

10.37+	—	Amendment dated February 9, 2006, to the AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on December 8, 2004. (Incorporated by reference to Exhibit 10.32 to Form 10-K of the Company filed March 14, 2006.)


10.38+	—	Amendment, dated December 6, 2006, to the AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on December 8, 2004. (Incorporated by reference to Exhibit 10.22 to Form 10-K of the Company filed March 1, 2007.)

10.39+	—	Amendment, dated September 20, 2007, to the AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on December 8, 2004. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed November 9, 2007.)

10.40+	—	Form of AvalonBay Communities, Inc. Non-Qualified Stock Option Agreement (1994 Stock Incentive Plan, as Amended and Restated). (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 12, 2008.)

10.41+	—	Form of AvalonBay Communities, Inc. Incentive Stock Option Agreement (1994 Stock Incentive Plan, as Amended and Restated.) (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed February 12, 2008.)

10.42+	—	Form of AvalonBay Communities, Inc. Employee Stock Grant and Restricted Stock Agreement (1994 Stock Incentive Plan, as Amended and Restated.) (Incorporated by reference to Exhibit 10.33 of Form 10-K of the Company filed March 2, 2009.)

10.43+	—	Form of AvalonBay Communities, Inc. Director Restricted Unit Agreement (1994 Stock Incentive Plan, as Amended and Restated). (Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q filed November 9, 2007.)

10.44+	—	Form of AvalonBay Communities, Inc. Director Restricted Stock Agreement (1994 Stock Incentive Plan, as Amended and Restated). (Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed November 9, 2007.)

10.45	—	Second Amended and Restated Revolving Loan Agreement, dated as of November 14, 2006, among the Company, as Borrower, JPMorgan Chase Bank, N.A., and Wachovia Bank, National Association, each as a Bank and Syndication Agent, Bank of America, N.A., as a Bank, Swing Lender and Issuing Bank, Morgan Stanley Bank, Wells Fargo Bank, National Association, and Deutsche Bank Trust Company Americas, each as a Bank and Documentation Agent, the other banks signatory thereto, each as a Bank, J.P. Morgan Securities, Inc., as Sole Bookrunner and Lead Arranger, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed November 17, 2006.)

10.46	—	First Amendment to the Second Amended and Restated Revolving Loan Agreement, dated as of November 13, 2007, among the Company, as Borrower, the banks signatory thereto, each as a Bank, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed November 16, 2007.)

10.47+	—	Rules and Procedures for Non-Employee Directors’ Deferred Compensation Program. (Incorporated by reference to Exhibit 10.33 to Form 10-K of the Company filed March 1, 2007.)

10.48+	—	Amendment to Rules and Procedures for Non-Employee Directors’ Deferred Compensation Program adopted December 11, 2008. (Incorporated by reference to Exhibit 10.38 to Form 10-K of the Company field March 2, 2009.)


10.49+	—	Amendment, effective September 30, 2007, to the Company’s quarterly compensation of Non-Employee Directors. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed November 9, 2007.)

10.50+	—	Form of AvalonBay Communities, Inc. 2008 Performance Plan Deferred Stock Award Agreement. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed May 22, 2008).

10.51+	—	Amended and Restated AvalonBay Communities, Inc. Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.42 to Form 10-K of the Company filed March 2, 2009.)

12.1	—	Statements re: Computation of Ratios. (Filed herewith.)

21.1	—	Schedule of Subsidiaries of the Company. (Filed herewith.)

23.1	—	Consent of Ernst & Young LLP. (Filed herewith.)

31.1	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (Filed herewith.)

31.2	—	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (Filed herewith.)

32	—	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer). (Furnished herewith.)

101	—	XBRL (Extensible Business Reporting Language). The following materials from AvalonBay Communities, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009, formatted in XBRL: (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows, (iv) consolidated changes in stockholders’ equity, and (v) notes to consolidated financial statements. ^*


+		Management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 15(a)(3) of Form 10-K.

*		As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	AvalonBay Communities, Inc.
Date: February 26, 2010	By:	/s/ Bryce Blair
		Bryce Blair, Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Date: February 26, 2010	By:	/s/ Bryce Blair
		Bryce Blair, Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer)



Date: February 26, 2010	By:	/s/ Thomas J. Sargeant
		Thomas J. Sargeant, Chief Financial Officer (Principal Financial Officer)



Date: February 26, 2010	By:	/s/ Keri A. Shea
		Keri A. Shea, Vice President --Finance & Treasurer (Principal Accounting Officer)



Date: February 26, 2010	By:	/s/ Bruce A. Choate
		Bruce A. Choate, Director



Date: February 26, 2010	By:	/s/ John J. Healy, Jr.
		John J. Healy, Jr., Director



Date: February 26, 2010	By:	/s/ Gilbert M. Meyer
		Gilbert M. Meyer, Director



Date: February 26, 2010	By:	/s/ Timothy J. Naughton
		Timothy J. Naughton, Director



Date: February 26, 2010	By:	/s/ Lance R. Primis
		Lance R. Primis, Director



Date: February 26, 2010	By:	/s/ Peter S. Rummell
		Peter S. Rummell, Director



Date: February 26, 2010	By:	/s/ H. Jay Sarles
		H. Jay Sarles, Director



Date: February 26, 2010	By:	/s/ W. Edward Walter
		W. Edward Walter, Director

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
AvalonBay Communities, Inc.:

We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AvalonBay Communities, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AvalonBay Communities, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.



		/s/ Ernst & Young LLP

McLean, Virginia
March 1, 2010

F - 1

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Stockholders of
AvalonBay Communities, Inc.:

We have audited AvalonBay Communities, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AvalonBay Communities, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9a. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, AvalonBay Communities, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AvalonBay Communities, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of AvalonBay Communities, Inc. and our report dated March 1, 2010 expressed an unqualified opinion thereon.



		/s/ Ernst & Young LLP

McLean, Virginia
March 1, 2010

F - 2

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)


	12-31-09			12-31-08
ASSETS
Real estate:
Land	$	1,250,679		$	1,119,221
Buildings and improvements		5,988,330			5,281,134
Furniture, fixtures and equipment		186,301			170,466

		7,425,310			6,570,821
Less accumulated depreciation		(1,477,772	)		(1,268,557	)

Net operating real estate		5,947,538			5,302,264
Construction in progress, including land		531,299			867,040
Land held for development		237,095			239,456
Operating real estate assets held for sale, net		117,555			240,983

Total real estate, net		6,833,487			6,649,743

Cash and cash equivalents		105,691			64,935
Cash in escrow		210,676			192,681
Resident security deposits		23,646			29,708
Investments in unconsolidated real estate entities		74,570			55,025
Deferred financing costs, net		34,531			31,350
Deferred development costs		87,763			57,365
Prepaid expenses and other assets		87,241			93,546

Total assets	$	7,457,605		$	7,174,353


LIABILITIES AND STOCKHOLDERS’ EQUITY
Unsecured notes, net	$	1,658,029		$	2,002,965
Variable rate unsecured credit facility		—			124,000
Mortgage notes payable		2,316,843			1,527,757
Dividends payable		72,773			208,209
Payables for construction		49,623			64,363
Accrued expenses and other liabilities		229,299			218,280
Accrued interest payable		35,069			32,651
Resident security deposits		33,646			38,643
Liabilities related to real estate assets held for sale		6,399			31,136

Total liabilities		4,401,681			4,248,004


Redeemable noncontrolling interests		5,797			10,234

Stockholders’ equity:
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both December 31, 2009 and December 31, 2008; zero shares issued and outstanding at December 31, 2009 and December 31, 2008		—			—
Common stock, $0.01 par value; 140,000,000 shares authorized at both December 31, 2009 and December 31, 2008; 81,528,957 and 77,119,963 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively		815			771
Additional paid-in capital		3,200,367			2,940,499
Accumulated earnings less dividends		(149,988	)		(22,223	)
Accumulated other comprehensive loss		(1,067	)		(2,932	)

Total stockholders’ equity		3,050,127			2,916,115



Total liabilities and stockholders’ equity	$	7,457,605		$	7,174,353

See accompanying notes to Consolidated Financial Statements.

F - 3

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)


	For the year ended
	12-31-09		12-31-08			12-31-07
Revenue:
Rental and other income	$	844,254	$	807,656		$	721,644
Management, development and other fees		7,328		6,568			6,142

Total revenue		851,582		814,224			727,786

Expenses:
Operating expenses, excluding property taxes		261,752		248,862			222,332
Property taxes		83,809		73,937			67,240
Interest expense, net		150,323		114,910			92,175
(Gain) loss on extinguishment of debt, net		25,910		(1,839	)		—
Depreciation expense		209,746		183,748			157,895
General and administrative expense		28,748		42,781			28,494
Impairment loss — land holdings		21,152		57,899			—

Total expenses		781,440		720,298			568,136

Equity in income of unconsolidated entities		1,441		4,566			59,169
Gain on sale of land		4,830		—			545


Income from continuing operations		76,413		98,492			219,364

Discontinued operations:
Income from discontinued operations		13,974		27,353			33,894
Gain on sale of communities		63,887		284,901			106,487

Total discontinued operations		77,861		312,254			140,381


Net income		154,274		410,746			359,745
Net (income) loss attributable to redeemable noncontrolling interests		1,373		741			(1,585	)

Net income attributable to the Company		155,647		411,487			358,160
Dividends attributable to preferred stock		—		(10,454	)		(8,700	)


Net income attributable to common stockholders	$	155,647	$	401,033		$	349,460

Other comprehensive income:
Unrealized gain on cash flow hedges		1,865		434			213

Comprehensive income	$	157,512	$	401,467		$	349,673


Earnings per common share — basic:
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)	$	0.97	$	1.15		$	2.65
Discontinued operations attributable to common stockholders		0.97		4.06			1.78

Net income attributable to common stockholders	$	1.94	$	5.21		$	4.43


Earnings per common share — diluted:
Income from continuing operations attributable to common stockholders, net of preferred stock dividends	$	0.96	$	1.15		$	2.62
Discontinued operations attributable to common stockholders		0.97		4.02			1.76

Net income attributable to common stockholders	$	1.93	$	5.17		$	4.38

Dividends per common share:	$	3.5700	$	5.3775		$	3.4000

See accompanying notes to Consolidated Financial Statements.

F-4

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)


																Accumulated			Accumulated
	Shares issued												Additional			earnings			other			Total
	Preferred			Common			Preferred			Common			paid-in			less			comprehensive			stockholders’
	stock			stock			stock			stock			capital			dividends			loss			equity
Balance at December 31, 2006		4,000,000			74,668,372		$	40		$	747		$	2,482,516		$	90,199		$	(3,579	)	$	2,569,923

Net income attributable to the Company		—			—			—			—			—			358,160			—			358,160
Unrealized gain on cash flow hedges		—			—			—			—			—			—			213			213
Change in redemption value of redeemable noncontrolling interest		—			—			—			—			—			(3,826	)		—			(3,826	)
Dividends declared to common and preferred stockholders		—			—			—			—			—			(276,823	)		—			(276,823	)
Issuance of common stock		—			5,130,855			—			51			619,359			(1,741	)		—			617,669
Purchase of common stock		—			(2,480,616	)		—			(25	)		(93,501	)		(164,403	)		—			(257,929	)
Amortization of deferred compensation		—			—			—			—			18,334			—			—			18,334


Balance at December 31, 2007		4,000,000			77,318,611			40			773			3,026,708			1,566			(3,366	)		3,025,721

Net income attributable to the Company		—			—			—			—			—			411,487			—			411,487
Unrealized gain on cash flow hedges		—			—			—			—			—			—			434			434
Change in redemption value of redeemable noncontrolling interest		—			—			—			—			—			12,095			—			12,095
Dividends declared to common and preferred stockholders		—			—			—			—			—			(423,118	)		—			(423,118	)
Issuance of common stock		—			323,085			—			3			5,838			(185	)		—			5,656
Purchase of common stock		—			(521,733	)		—			(5	)		(18,086	)		(24,068	)		—			(42,159	)
Redemption of preferred stock		(4,000,000	)		—			(40	)		—			(96,425	)		—			—			(96,465	)
Amortization of deferred compensation		—			—			—			—			22,464			—			—			22,464


Balance at December 31, 2008		—			77,119,963			—			771			2,940,499			(22,223	)		(2,932	)		2,916,115

Net income attributable to the Company		—			—			—			—			—			155,647			—			155,647
Unrealized gain on cash flow hedges		—			—			—			—			—			—			1,865			1,865
Change in redemption value of redeemable noncontrolling interest		—			—			—			—			—			3,373			—			3,373
Dividends declared to common stockholders		—			—			—			—			—			(287,983	)		—			(287,983	)
Issuance of common stock		—			4,442,180			—			44			245,676			1,198			—			246,918
Purchase of common stock		—			(33,186	)		—			—			—			—			—			—
Amortization of deferred compensation		—			—			—			—			14,192			—			—			14,192


Balance at December 31, 2009		—			81,528,957		$	—		$	815		$	3,200,367		$	(149,988	)	$	(1,067	)	$	3,050,127

See accompanying notes to Consolidated Financial Statements.

F-5

AVALONBAY COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


	For the year ended
	12-31-09			12-31-08			12-31-07
Cash flows from operating activities:
Net income	$	154,274		$	410,746		$	359,745
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense		209,746			183,748			157,895
Depreciation expense from discontinued operations		8,540			15,704			23,830
Amortization of deferred financing costs and debt premium/discount		8,139			5,892			4,934
Amortization of stock-based compensation		6,098			11,888			14,353
Return on investment of unconsolidated entities		—			—			130
Equity in income of unconsolidated entities, net of eliminations		(810	)		(3,436	)		(58,122	)
Impairment loss — land holdings		21,152			57,899			—
Abandonment of development pursuits		2,461			9,428			3,429
(Gain) loss on extinguishment of debt, net		25,910			(1,839	)		—
Gain on sale of real estate assets		(68,717	)		(284,901	)		(107,032	)
(Increase) decrease in cash in operating escrows		(2,434	)		3,054			(7,403	)
(Increase) decrease in resident security deposits, prepaid expenses and other assets		2,391			(5,673	)		8,747
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable		11,850			(16,426	)		54,368

Net cash provided by operating activities		378,600			386,084			454,874


Cash flows from investing activities:
Development/redevelopment of real estate assets including land acquisitions and deferred development costs		(560,155	)		(881,503	)		(1,112,590	)
Acquisition of real estate assets, including partner equity interest		—			—			(13,841	)
Capital expenditures — existing real estate assets		(11,114	)		(15,534	)		(13,851	)
Capital expenditures — non-real estate assets		(834	)		(5,290	)		(1,424	)
Proceeds from sale of real estate, net of selling costs		189,417			529,777			261,089
Increase (decrease) in payables for construction		(14,740	)		(27,018	)		32,348
Decrease in cash in construction escrows		77,754			126,611			54,149
(Increase) decrease in investments in unconsolidated real estate entities		(13,887	)		6,648			(15,127	)

Net cash used in investing activities		(333,559	)		(266,309	)		(809,247	)


Cash flows from financing activities:
Issuance of common stock		108,860			7,433			621,029
Repurchase of common stock		—			(42,159	)		(257,929	)
Redemption of preferred stock		—			(100,000	)		—
Dividends paid		(283,710	)		(278,795	)		(268,966	)
Net borrowings (repayments) under unsecured credit facility		(124,000	)		(390,500	)		514,500
Issuance of mortgage notes payable and draws on construction loans		741,140			697,046			59,126
Repayments of mortgage notes payable		(65,229	)		(67,442	)		(27,256	)
Issuance of unsecured notes		500,000			330,000			—
Repayment of unsecured notes		(868,564	)		(219,050	)		(260,000	)
Payment of deferred financing costs		(12,523	)		(9,491	)		(6,550	)
Redemption of units for cash by minority partners		(202	)		(1,756	)		(6,851	)
Contributions from minority and profit-sharing partners		—			—			1,333
Distributions to DownREIT partnership unitholders		(57	)		(216	)		(280	)
Distributions to joint venture and profit-sharing partners		—			(181	)		(1,796	)

Net cash provided by (used in) financing activities		(4,285	)		(75,111	)		366,360

Net increase in cash and cash equivalents		40,756			44,664			11,987

Cash and cash equivalents, beginning of year		64,935			20,271			8,284

Cash and cash equivalents, end of year	$	105,691		$	64,935		$	20,271

Cash paid during the year for interest, net of amount capitalized	$	168,651		$	110,290		$	98,594

See accompanying notes to Consolidated Financial Statements.

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Supplemental disclosures of non-cash investing and financing activities (dollars in thousands):

During the year ended December 31, 2009:

	•		2,624,641 shares of common stock valued at $139,058 were issued as part of the special dividend declared in the fourth quarter of 2008, 169,851 shares of common stock valued at $8,360 were issued in connection with stock grants, 11,172 shares valued at $651 were issued through the Company’s dividend reinvestment plan, 33,186 shares valued at $1,517 were withheld to satisfy employees’ tax withholding and other liabilities and 1,031 shares valued at $147 were forfeited, for a net value of $146,405. In addition, the Company granted 344,801 options for common stock at a value of $2,252.

	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $1,865 to record the impact of the Company’s hedge accounting activity (as described in Note 5, “Derivative Instruments and Hedging Activities”).

	•		Common dividends declared but not paid totaled $72,773.

	•		The Company recorded a decrease of $3,373 in redeemable noncontrolling interests with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, “Fair Value.”

	•		The Company obtained $93,440 in variable rate tax-exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding. This loan provides an option for the Company to request an additional construction loan of up to $83,560 subject to the lender’s discretion.

During the year ended December 31, 2008:

	•		130,325 shares of common stock valued at $11,646 were issued in connection with stock grants, 5,703 shares valued at $458 were issued through the Company’s dividend reinvestment plan, 24,407 shares valued at $1,357 were issued to members of the Board of Directors in fulfillment of deferred stock awards, 39,633 shares valued at $3,483 were withheld to satisfy employees’ tax withholding and other liabilities and 1,101 shares valued at $109 were forfeited, for a net value of $9,869. In addition, the Company granted 401,212 options for common stock at a value of $3,976.

	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $434 to record the impact of the Company’s hedge accounting activity.


	•		The Company issued $135,000 of variable rate debt relating to Avalon Walnut Creek. The proceeds were placed in an escrow account until requisitioned for construction funding and no amounts have been drawn for use in the development of the community.

	•		Common and preferred dividends declared but not paid totaled $208,209.

	•		The Company recorded a decrease of $12,095 in redeemable noncontrolling interests with a corresponding increase to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

During the year ended December 31, 2007:

	•		75,231 shares of common stock valued at $10,971 were issued in connection with stock grants, 2,929 shares valued at $365 were issued through the Company’s dividend reinvestment plan, 41,000 shares valued at $4,381 were withheld to satisfy employees’ tax withholding and other liabilities and 8,609 shares valued at $231 were forfeited, for a net value of $6,724. In addition, the Company granted 331,356 options for common stock, net of forfeitures, at a value of $7,518.

	•		19,231 units of limited partnership, valued at $887, were presented for redemption to the DownREIT partnerships that issued such units and were acquired by the Company in exchange for an equal number of shares of the Company’s common stock.

	•		The Company recorded a decrease to other liabilities and a corresponding gain to other comprehensive income of $213 to record the impact of the Company’s hedge accounting activity.

	•		The Company issued $100,000 of variable rate tax-exempt debt relating to Avalon Morningside Park. The proceeds were placed in an escrow account until requisitioned for construction funding, none of which was drawn for use in the development of the community.

	•		Common and preferred dividends declared but not paid totaled $67,909.

	•		The Company recorded an increase of $3,826 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners and DownREIT partnership units.

F-7

AVALONBAY COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

1. Organization and Basis of Presentation

Organization

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its consolidated subsidiaries), is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Code. The Company focuses on the development, acquisition, ownership and operation of apartment communities in high barrier to entry markets of the United States. These markets are located in the New England, Metro New York/New Jersey, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the country.

At December 31, 2009, the Company owned or held a direct or indirect ownership interest in 165 operating apartment communities containing 47,926 apartment homes in ten states and the District of Columbia, of which seven communities containing 2,615 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in seven communities under construction that are expected to contain an aggregate of 2,438 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in rights to develop an additional 28 communities that, if developed as expected, will contain an estimated 7,180 apartment homes.

All capitalized terms have the meaning as provided in this Form 10-K.

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, certain joint venture partnerships, subsidiary partnerships structured as DownREITs and any variable interest entities that qualified for consolidation. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company accounts for joint venture entities and subsidiary partnerships, including those structured as DownREITs, that are not variable interest entities in accordance with the guidance applicable to limited partnerships or similar entities. The Company evaluates the partnership of each joint venture entity and determines whether control over the partnership lies with the general partner or, when the limited partners have certain rights, with the limited partners. The Company consolidates an investment when both (i) the Company is the general partner, and (ii) the limited partner interests do not overcome the Company’s presumption of control by having either substantive participating rights, the ability to remove the Company as the general partner or the ability to dissolve the partnership.

The Company generally uses the equity method under all other potential scenarios, including (i) where the Company holds a general partner interest but the presumption of control by the Company is overcome by the limited partner interests as described in the preceding paragraph, and (ii) where the Company holds a limited partner interest in a joint venture. Investments in which the Company has little or no influence are accounted for using the cost method.

In each of the partnerships structured as DownREITs, either the Company or one of the Company’s wholly owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive an initial distribution of current cash flow before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated the Company’s current common stock dividend per share. The holders of units of limited partnership interests have the right to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement and based on the fair value of the Company’s common stock. In lieu of cash redemption, the Company may elect to exchange such units for an

F-8

equal number of shares of the Company’s common stock. In 2009, the Company redeemed 4,077 operating units for cash.

In conjunction with the acquisition and development of investments in unconsolidated entities, the Company may incur costs in excess of its equity in the underlying assets. These costs are capitalized and depreciated over the life of the underlying assets to the extent that the Company expects to recover the costs.

In 2009, an unconsolidated joint venture in which the Company holds an interest determined that the recent economic downturn impacted the recoverability of the carrying value of a long lived asset held as an investment. Accordingly, the joint venture recognized an impairment loss. The Company recognized its proportionate share of the impairment loss of approximately $2,600 as a component of equity in income of unconsolidated entities on the accompanying Consolidated Statements of Operations and Other Comprehensive Income. There were no impairment losses recognized by any of the Company’s investments in unconsolidated entities during the years ended December 31, 2008 or 2007.

Revenue and Gain Recognition

Rental income related to leases is recognized on an accrual basis when due from residents as required by the accounting guidance applicable to leases, which provides guidance on classification and recognition. In accordance with the Company’s standard lease terms, rental payments are generally due on a monthly basis. Any cash concessions given at the inception of the lease are amortized over the approximate life of the lease, which is generally one year.

The Company accounts for sales of real estate assets and the related gain recognition in accordance with the accounting guidance applicable to sales of real estate, which establishes standards for recognition of profit on all real estate sales transactions, other than retail land sales. The Company recognizes the sale, and associated gain or loss from the disposition, provided that the earnings process is complete and the Company is not obligated to perform significant activities after the sale.

Real Estate

Operating real estate assets are stated at cost and consist of land, buildings and improvements, furniture, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Significant expenditures which improve or extend the life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

The Company’s policy with respect to capital expenditures is generally to capitalize only non-recurring expenditures. Improvements and upgrades are capitalized only if the item exceeds $15, extends the useful life of the asset and is not related to making an apartment home ready for the next resident. Purchases of personal property, such as computers and furniture, are capitalized only if the item is a new addition and exceeds $2.5. The Company generally expenses purchases of personal property made for replacement purposes.

Project costs related to the development, construction and redevelopment of real estate projects (including interest and related loan fees, property taxes and other direct costs) are capitalized as a cost of the project. Indirect project costs that relate to several projects are capitalized and allocated to the projects to which they relate. Indirect costs not clearly related to development, construction and redevelopment activity are expensed as incurred. For development, capitalization (i) begins when the Company has determined that development of the future asset is probable, (ii) can be suspended if there is no current development activity underway, but future development is probable and (iii) ends when the asset, or a portion of an asset, is delivered and is ready for its intended use, or the Company’s intended use changes such that capitalization is no longer appropriate. For redevelopment efforts, the Company capitalizes costs either (i) in advance of taking homes out of service when significant renovation of the common area has begun until the redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating costs incurred during the initial lease-up or post-redevelopment lease-up period are recognized as they accrue.

F-9

The Company acquired as Development Rights eleven land parcels improved with office buildings, industrial space and other commercial and residential ventures occupied by unrelated third parties. As of December 31, 2009, the Company is pursuing development of four of these parcels. For the seven parcels of land for which the Company does not intend to pursue development, rental revenue from the incidental operations are recognized as a component of rental and other income. For those land parcels for which the Company intends to pursue development, the Company will manage the current improvements until such time as all tenant obligations have been satisfied or eliminated through negotiation, and construction of new apartment communities is ready to begin. Revenue from incidental operations received from the current improvements on the land parcels in excess of any incremental costs are being recorded as a reduction of total capitalized costs of the Development Right and not as part of net income.

In connection with the acquisition of an operating community, the Company performs a valuation, allocating to each asset and liability acquired in such transaction its estimated fair value at the date of acquisition. The purchase price allocations to tangible assets, such as land, buildings and improvements, and furniture, fixtures and equipment, are reflected in real estate assets and depreciated over their estimated useful lives. Any purchase price allocation to intangible assets, such as in-place leases, is included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets and amortized over the average remaining lease term of the acquired leases. The fair value of acquired in-place leases is determined based on the estimated cost to replace such leases, including foregone rents during an assumed re-lease period, as well as the impact on projected cash flow of acquired leases with leased rents above or below current market rents. For acquisitions subsequent to December 31, 2008, all costs incurred with these acquisitions will be expensed. Prior to January 1, 2009, third party costs directly associated with the acquisition were capitalized as part of the purchase price.

Depreciation is calculated on buildings and improvements using the straight-line method over their estimated useful lives, which range from seven to thirty years. Furniture, fixtures and equipment are generally depreciated using the straight-line method over their estimated useful lives, which range from three years (primarily computer-related equipment) to seven years.

Income Taxes

As of December 31, 2009, the Company did not have any unrecognized tax benefits. The Company does not believe that there will be any material changes in its unrecognized tax positions over the next 12 months. The Company is subject to examination by the respective taxing authorities for the tax years 2006 through 2008.

The Company elected to be taxed as a REIT under the Code, as amended, for the year ended December 31, 1994 and has not revoked such election. A corporate REIT is a legal entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income if it distributes 100% of the taxable income over the time period allowed under the Code to its stockholders. Management believes that all such conditions for the avoidance of income taxes have been or will be met for the periods presented. Accordingly, no provision for federal and state income taxes has been made. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. The Company incurred net charges of $515 and $3,200 for federal excise taxes as a component of general and administrative expense in the Consolidated Statement of Operations and Other Comprehensive Income as a result of the excess income attributable to gains on asset sales from the Company’s disposition activities during 2009 and 2008, respectively. The Company did not incur any related charges in 2007. For further discussion of the real estate disposition activities, see Note 7, “Real Estate Disposition Activities.” In addition, taxable income from non-REIT activities performed through taxable REIT subsidiaries is subject to federal, state and local income taxes.

The following reconciles net income attributable to common stockholders to taxable net income for the years ended December 31, 2009, 2008 and 2007 (unaudited):

F-10


	2009		2008			2007
	Estimate		Actual			Actual
Net income attributable to common stockholders	$	155,647	$	401,033		$	349,460
Dividends attributable to preferred stock, not deductible for tax		—		7,226			8,700
GAAP gain on sale of communities less than tax gain		20,410		62,540			12,245
Depreciation/Amortization timing differences on real estate		10,757		(18,997	)		(88,328	)
Tax compensation expense less than (in excess of) GAAP		13,512		10,131			(24,239	)
Impairment loss		19,037		50,100			—
Other adjustments		10,488		1,943			17,915

Taxable net income	$	229,851	$	513,976		$	275,753

The following summarizes the tax components of the Company’s common and preferred dividends declared for the years ended December 31, 2009, 2008 and 2007 (unaudited):


	2009			2008			2007
Ordinary income		69	%		16	%		35	%
15% capital gain		21	%		60	%		54	%
Unrecaptured §1250 gain		10	%		24	%		11	%

Deferred Financing Costs

Deferred financing costs include fees and other expenditures necessary to obtain debt financing and are amortized on a straight-line basis, which approximates the effective interest method, over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Unamortized financing costs are charged to earnings when debt is retired before the maturity date. The Company recognized a charge of approximately $1,000 as a component of (gain) loss on extinguishment of debt, net in 2009. Amounts recognized in earnings in 2008 and 2007 were not significant. Accumulated amortization of deferred financing costs was $19,880 at December 31, 2009 and $24,264 at December 31, 2008.

Cash, Cash Equivalents and Cash in Escrow

Cash and cash equivalents include all cash and liquid investments with an original maturity of three months or less from the date acquired. Cash in escrow consists primarily of construction financing proceeds that are restricted for use in the construction of a specific community. The majority of the Company’s cash, cash equivalents and cash in escrows are held at major commercial banks.

Interest Rate Contracts

The Company utilizes derivative financial instruments to manage interest rate risk. As of December 31, 2009, the Company had approximately $59,306 in variable rate debt subject to cash flow hedges and $300,000 of fixed rate debt subject to fair value hedges; and $61,298 as of December 31, 2008 subject to cash flow hedges. Excluding debt on communities classified as held for sale, the Company did not apply hedge accounting for an additional $110,275 in variable rate debt which is subject to interest rate caps as of December 31, 2009. See Note 5, “Derivative Instruments and Hedging Activities,” for further discussion of derivative financial instruments.

F-11

Comprehensive Income

Comprehensive income, as reflected on the Consolidated Statements of Operations and Other Comprehensive Income, is defined as all changes in equity during each period except for those resulting from investments by or distributions to shareholders. Accumulated other comprehensive loss, as reflected on the Consolidated Statements of Stockholders’ Equity, reflects the effective portion of the cumulative changes in the fair value of derivatives in qualifying cash flow hedge relationships.

Earnings per Common Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic EPS. All historical periods presented have been restated to reflect the impact of including participating securities in the basic earnings per share calculation. Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company’s earnings per common share are determined as follows:


	For the year ended
	12-31-09			12-31-08			12-31-07
Basic and diluted shares outstanding
Weighted average common shares — basic		79,951,348			76,783,515			78,680,043
Weighted average DownREIT units outstanding		16,490			59,886			105,859
Effect of dilutive securities		631,819			735,451			1,071,025

Weighted average common shares — diluted		80,599,657			77,578,852			79,856,927

Calculation of Earnings per Share — basic
Net income attributable to common stockholders	$	155,647		$	401,033		$	349,460
Net income allocated to unvested restricted shares	$	(486	)	$	(1,313	)	$	(1,144	)

Net income attributable to common stockholders, adjusted	$	155,161		$	399,720		$	348,316

Weighted average common shares — basic		79,951,348			76,783,515			78,680,043

Earnings per common share — basic	$	1.94		$	5.21		$	4.43

Calculation of Earnings per Share — diluted
Net income attributable to common stockholders	$	155,647		$	401,033		$	349,460
Add: noncontrolling interests of DownREIT unitholders in
consolidated partnerships, including discontinued operations		66			216			280

Adjusted net income available to common stockholders	$	155,713		$	401,249		$	349,740

Weighted average common shares — diluted		80,599,657			77,578,852			79,856,927

Earnings per common share — diluted	$	1.93		$	5.17		$	4.38

Certain options to purchase shares of common stock in the amounts of 1,990,064 and 1,534,784 were outstanding at December 31, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because such options are anti-dilutive.

Stock-Based Compensation

The Company estimates the forfeiture of stock options and recognizes compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period. The forfeiture rate at December 31, 2009 was 1.7%. The application of estimated forfeitures did not materially impact compensation expense for the years ended December 31, 2009, 2008 or 2007.

Abandoned Pursuit Costs and Impairment of Long-Lived Assets

F-12

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a property may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the property to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. Based on periodic tests of recoverability of long-lived assets, for the years ended December 31, 2009, 2008 and 2007, the Company did not record any impairment losses for wholly owned operating real estate assets.

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable. Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense. The Company expensed costs related to abandoned pursuits, which includes the abandonment of Development Rights and disposition pursuits, in the amounts of $5,842 in 2009, $12,511 in 2008 and $6,974 in 2007. These costs are included in operating expenses, excluding property taxes on the accompanying Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.

During 2009 the Company concluded that the economic downturn and the related decline in employment levels did not support the development and construction of certain new apartment communities that were previously in planning. This resulted in the recognition of impairment charges of $20,302 related to the impairment of two land parcels which the Company does not currently intend to develop. The Company looked to third-party pricing estimates to determine the fair values of the land parcels considered to be impaired. Given the heterogeneous nature of multifamily real estate, the third party values incorporated significant other unobservable inputs and are therefore considered to be Level 3 prices in the fair value hierarchy. In addition, in 2009 the Company recognized a further impairment charge of $850 on a land parcel that was previously impaired in the fourth quarter of 2008. The additional charge is to reduce the land basis to the Company’s estimated selling price less costs to dispose. In 2008, the Company incurred charges of $57,899 for the impairment of land parcels for which the Company does not currently intend to develop. The Company looked to a combination of internal models and third-party pricing estimates to determine the fair values for these land parcels at December 31, 2008. Considering the Company’s knowledge of multifamily residential development, the fair values of the land parcels that are zoned for multifamily residential development were generated using an internal model, and the land parcels zoned for other purposes were valued using third-party estimates of fair value. For the internally generated fair values, the Company used a discounted cash flow analysis on the expected cash flows for a multifamily residential rental community.

Assets Held for Sale & Discontinued Operations

The Company presents the assets and liabilities of any communities which have been sold, or otherwise qualify as held for sale, separately in the Consolidated Balance Sheets. In addition, the results of operations for those assets that meet the definition of discontinued operations are presented as such in the Company’s Consolidated Statements of Operations and Other Comprehensive Income. Held for sale and discontinued operations classifications are provided in both the current and prior periods presented. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less the cost to sell. Both the real estate assets and corresponding liabilities are presented separately in the accompanying Consolidated Balance Sheets. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. For those assets qualifying for classification as discontinued operations, specific components of net income presented as discontinued operations include net operating income, minority interest expense, depreciation expense and interest expense, net. For periods prior to the asset qualifying for discontinued operations, the Company reclassifies the results of operations to discontinued operations. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of assets held for sale will be presented as discontinued operations when recognized. A change in presentation for held for sale or discontinued operations will not have any impact on the Company’s financial condition or results of operations. The Company combines the operating, investing and financing portions of cash flows attributable to discontinued operations with the respective cash flows from continuing operations on the accompanying Consolidated Statements of Cash Flows. The Company had three assets

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that qualified for held for sale presentation at December 31, 2009.

Redeemable Noncontrolling Interests

Redeemable noncontrolling interests are comprised of potential future obligations of the Company, which allow the investors holding the noncontrolling interest to require the Company to purchase their interest. The Company classifies obligations under the redeemable noncontrolling interests at fair value, with a corresponding offset for changes in the fair value recorded in accumulated earnings less dividends. Reductions in fair value are recorded only to the extent that the Company has previously recorded increases in fair value above the redeemable noncontrolling interest’s initial basis. The redeemable noncontrolling interests are presented outside of permanent equity as settlement in the Company’s common shares, where permitted, may not be within the Company’s control. In accordance with the accounting guidance, the Company has applied the presentation and disclosure requirements for noncontrolling interests to all periods presented on a retrospective basis. The nature and valuation of the Company’s redeemable noncontrolling interests are discussed further in Note 11, “Fair Value.”

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to amounts in prior years’ financial statements to conform to current year presentations.

Recently Adopted Accounting Standards

In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and for identifying transactions that are not orderly for purposes of determining fair value. This guidance clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. It also reaffirms the objective of fair value measurement, as previously stated by the FASB, which is to reflect how much an asset would be sold for in an orderly transaction. This pronouncement also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The Company adopted this on a prospective basis. The adoption did not have a material impact on the Company’s financial position or results of operations.

In May 2009, the FASB issued guidance on subsequent events. This guidance defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. The requirements for disclosing subsequent events remain unchanged from the previous requirements. However, the guidance contains an additional requirement that companies must disclose the date through which subsequent events have been evaluated and the rationale for selecting that date. The adoption of this guidance did not impact the Company’s financial position or results of operations. See Note 14, “Subsequent Events.”

In June 2009, the FASB issued FASB Accounting Standards Codification (the “Codification”) which established the Codification as the sole source of authoritative GAAP. The adoption of the Codification did not impact the Company’s financial position or results of operations. Based on the Company’s adoption of the Codification, all references to U.S. GAAP have been removed and replaced with plain English explanations.

Recently Issued Accounting Standards

In June 2009, the FASB issued guidance to significantly amend the consolidation guidance applicable to variable interest entities (“VIEs”). The consolidation model was modified to one based on control and economics, and replaces the current quantitative primary beneficiary analysis with a qualitative analysis. The primary beneficiary of a VIE will be the entity that has (i) the power to direct the activities of the VIE that most significantly impact the

F-14

VIE’s economic performance and (ii) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. If multiple unrelated parties share such power, as defined, no party will be required to consolidate the VIE. Further, the guidance requires continual reconsideration of the primary beneficiary of a VIE and adds an additional reconsideration event for determination of whether an entity is a VIE. The amendments also require expanded disclosures related to VIEs which are largely consistent with the disclosure framework currently applied by the Company. The new guidance is effective January 1, 2010 for the Company. The Company is evaluating the impact of the new guidance on the Company’s financial position and results of operations.

In August 2009, the FASB issued guidance on Measuring Liabilities at Fair Value to clarify the measurement of liabilities at fair value. When a quoted price in an active market for the identical liability is not available, the fair value of a liability is required to be measured using one or more of the listed valuation techniques that should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. In addition, the guidance clarifies that when estimating the fair value of a liability an entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability, and clarifies how the price of a traded debt security should be considered in estimating the fair value of a liability. The adoption of this did not impact the Company’s financial position or results of operations.

2. Interest Capitalized

The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Company’s development or redevelopment activities totaled $48,226 for 2009, $74,621 for 2008 and $73,118 for 2007.

3. Notes Payable, Unsecured Notes and Credit Facility

The Company’s mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of December 31, 2009 and December 31, 2008 are summarized below. The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of December 31, 2009 and 2008, as shown in the Consolidated Balance Sheets (see Note 7, “Real Estate Disposition Activities”).


	12-31-09		12-31-08
Fixed rate unsecured notes (1)	$	1,358,257	$	1,672,965
Variable rate unsecured notes (2)		299,772		330,000
Fixed rate mortgage notes payable — conventional and tax-exempt		1,632,605		901,181
Variable rate mortgage notes payable — conventional and tax-exempt		684,238		646,311

Total notes payable and unsecured notes		3,974,872		3,550,457
Variable rate unsecured credit facility		—		124,000

Total mortgage notes payable, unsecured notes and Credit Facility	$	3,974,872	$	3,674,457


(1)		Balances at December 31, 2009 and December 31, 2008 include $2,220 and $2,035 of debt discount.

(2)		Balance at December 31, 2009 includes $228 basis adjustments resulting from qualifying fair value hedging relationships.

The following debt activity occurred during the year ended December 31, 2009:

	•		In January 2009, the Company made a cash tender offer for any and all of its 7.5% unsecured notes due August 2009 and December 2010. The Company purchased $37,438 principal amount of its $150,000, 7.5% unsecured notes due August 2009 at par. In addition, the Company purchased $64,423 principal amount of its $200,000, 7.5% unsecured notes due December 2010 at 98% of par, for approximately $63,135, representing a yield to maturity of 8.66%. The Company recorded a gain of approximately $1,062, net of the write-off of related deferred financing costs during the first quarter of 2009 in conjunction with the purchase of the unsecured notes due December 2010 as a gain on extinguishment of debt, net. All of the notes purchased in the tender offer were cancelled.

	•		In April 2009, the Company completed a 5.86% fixed rate, pooled secured financing transaction for aggregate borrowing of $741,140. The financing consists of fourteen separate mortgage loans each with a 10-year term. Each loan provides for payment of interest only during the first and second years of the loan

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			term, with payment of principal and interest (based on a 30 year amortization schedule) thereafter and the remaining principal amount and any unpaid interest due at maturity on the tenth anniversary.

	•		In April 2009, the Company repaid the $4,143 principal, 8.08% fixed rate loan secured by a real estate asset formerly classified as a Development Right pursuant to its scheduled maturity.

	•		In May 2009, the Company repaid $105,600 in unsecured debt, representing the first tranche of its $330,000 unsecured variable rate term loan (the “Term Loan”), pursuant to its schedule maturity.

	•		In May 2009, the Company repaid $19,470 in variable rate secured debt pursuant to its scheduled maturity.

	•		In May 2009, the Company obtained $93,440 in variable rate tax-exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding. This loan provides an option for the Company to request an additional construction loan of up to $83,560 subject to the lender’s discretion.

	•		In August 2009, the Company repaid $102,562 in previously issued 7.5% unsecured notes, along with any unpaid interest, pursuant to their scheduled maturity.

	•		In August 2009, the Company repaid $112,200 in unsecured debt, representing the second tranche of its Term Loan, prior to its scheduled maturity in January 2010.

	•		In September 2009, the Company issued a total of $500,000 unsecured notes in a public offering under its existing shelf registration statement. The offering consisted of two separate $250,000 tranches with effective interest rates of 5.82% and 6.19%, maturing in March 2017 and March 2020, respectively.

	•		In October 2009, the Company settled a cash tender offer, purchasing the following unsecured notes:

	•		$46,001 principal amount of the Company’s $200,000 7.5% unsecured notes due December 2010 at a weighted average price of 107.50% of par;

	•		$150,000 principal amount of the Company’s $300,000 6.625% unsecured notes due September 2011 at a weighted average price of 109.00% of par;

	•		$55,600 principal amount of the Company’s $250,000 5.5% unsecured notes due January 2012 at a weighted average price of 106.25% of par; and

	•		$48,399 principal amount of the Company’s $250,000 6.125% unsecured notes due November 2012 at a weighted average price of 108.75% of par.

	•		In October 2009, the Company repurchased $10,100 principal amount of the Company’s 6.625% unsecured notes due September 2011 at a weighted average price of 107.0% of par.

	•		The Company recorded a charge for the purchase premium as well as certain deferred issuance costs related to the $300,000 cash tender offer and additional $10,100 unsecured notes repurchase activity above of approximately $26,000 in (gain) loss on extinguishment of debt, net.

	•		In October 2009, the Company repaid the final $112,200 tranche of its Term Loan, in advance of its scheduled maturity of January 2011.

	•		In December 2009 the Company repaid $33,615 in variable rate secured debt pursuant to its scheduled maturity.

In the aggregate, secured notes payable mature at various dates from October 2010 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $2,335,284 as of December 31, 2009). As of December 31, 2009, the Company has guaranteed approximately $519,762 of mortgage notes payable held by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Company’s fixed rate mortgage notes payable (conventional and tax-exempt) was 5.0% and 5.7% at December 31, 2009 and December 31, 2008, respectively. The weighted average interest rate of the Company’s variable rate mortgage notes payable, including the effect of certain financing related fees, was 3.0% at December 31, 2009. The weighted average interest rate of the Company’s variable rate mortgage notes payable, Term Loan, and Credit Facility including the effect of certain financing fees was 2.9% at December 31, 2008.

Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at December 31, 2009 are as follows:

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							Stated
					Unsecured		interest rate
	Secured notes		Secured notes		notes		of unsecured
Year	payments ⁽¹⁾		maturities		maturities		notes
2010		6,097		29,387		14,576		7.500	%
						75,000		7.034	%	(2	)

2011		12,087		36,610		39,900		6.625	%
						150,000		5.663	%	(2	)

2012		14,560		120,603		201,601		6.125	%
						104,400		5.500	%
						75,000		4.352	%	(2	)

2013		15,435		264,697		100,000		4.950	%

2014		16,363		33,100		150,000		5.375	%

2015		15,356		365,130		—		—

2016		16,270		—		250,000		5.750	%

2017		17,244		18,300		250,000		5.700	%

2018		18,278		—		—		—

2019		3,391		699,529		—		—

Thereafter		115,722		498,684		250,000		6.100	%


	$	250,803	$	2,066,040	$	1,660,477


(1)		Secured note payments are comprised of the principal pay downs for amortizing mortgage notes.

(2)		The weighted average interest rate for the swapped unsecured notes as of December 31, 2009.

The Company’s unsecured notes are redeemable at our option, in whole or in part, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present value of the remaining scheduled payments of principal and interest discounted at a rate equal to the yield on U.S. Treasury securities with a comparable maturity plus a spread between 25 and 45 basis points depending on the specific unsecured note, plus accrued and unpaid interest to the redemption date. The indenture under which the Company’s unsecured notes were issued contains restrictions on incurring debt and using our assets as security in other financing transactions and other customary financial and other covenants, with which the Company was in compliance at December 31, 2009.

The Company has a variable rate Credit Facility in the amount of $1,000,000 with a syndicate of commercial banks, to whom the Company pays an annual facility fee of approximately $1,250. The Company did not have any amounts outstanding under the Credit Facility and $44,105 outstanding in letters of credit as of December 31, 2009. At December 31, 2008, there was $124,000 outstanding under the Credit Facility and $45,976 outstanding in letters of credit. The Credit Facility bears interest at varying levels based on LIBOR, rating levels achieved on the Company’s unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 0.40% per annum (0.63% at December 31, 2009). The stated spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on the Company’s credit ratings. In addition, the Credit Facility includes a competitive bid option, which allows banks that are part of the lender consortium to bid to make loans to the Company at a rate that is lower than the stated rate provided by the Credit Facility for up to $650,000. The competitive bid option may result in lower pricing than the stated rate if market conditions allow. The Company did not have any amounts outstanding under this competitive bid option as of December 31, 2009. The Credit Facility matures in November 2011, assuming exercise of a one-year renewal option by the Company.

The Company was in compliance at December 31, 2009 with certain customary financial and other covenants under the Credit Facility and the Company’s unsecured notes.

F-17

4. Stockholders’ Equity

As of December 31, 2009 and 2008, the Company had authorized for issuance 140,000,000 shares of common stock and 50,000,000 shares of preferred stock. In October 2008, the Company redeemed all 4,000,000 outstanding shares of Series H Cumulative Redeemable Preferred Stock, including accrued but unpaid dividends, for $100,701. The average dividend for all non-redeemed preferred shares was $1.81 per share in 2008 and $2.18 per share in 2007.

During the year ended December 31, 2009, the Company:

	(i)		issued 1,504,901 shares of common stock through public offerings;

	(ii)		issued 115,675 shares of common stock in connection with stock options exercised;

	(iii)		issued 2,624,641 shares in connection with the dividend declared in December 2008;

	(iv)		issued 11,172 common shares through the Company’s dividend reinvestment plan;

	(v)		issued 169,851 common shares in connection with stock grants;

	(vi)		issued 16,971 common shares through the Company’s employee stock purchase plan;

	(vii)		withheld 33,186 common shares to satisfy employees’ tax withholding and other liabilities; and

	(viii)		had 1,031 shares of restricted common stock forfeited.

In addition, the Company granted 344,801 options for common stock to employees. Any deferred compensation related to the Company’s stock option and restricted stock grants during 2009 is not reflected on the Company’s Consolidated Balance Sheet as of December 31, 2009, and will not be reflected until earned as compensation cost.

Dividends per common share were $3.57 for the year ended December 31, 2009, and $5.3775 for the year ended December 31, 2008. Dividends per common share for December 31, 2008 included a special dividend declared in December 2008, of $1.8075 per share (the “Special Dividend”) in conjunction with the fourth quarter 2008 regular dividend of $0.8925 per share. The Special Dividend was declared to distribute a portion of the excess income attributable to gains on asset sales from the Company’s disposition activities during 2008. The Special Dividend was declared to qualify for the dividends paid deduction for tax purposes and to minimize corporate level income taxes for 2008 and reduce federal excise taxes.

In August 2009, the Company commenced the CEP, under which the Company may sell up to $400,000 of its common stock until August 2012. The Company may sell common stock in amounts and at times to be determined by the Company. Actual sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company’s common stock and determinations by the Company of the appropriate sources of funding for the Company. In conjunction with the CEP, the Company engaged sales agents who received compensation of 1.5% of the gross sales price per share for the common stock sold. During the three months ended December 31, 2009, the Company sold 37,900 shares under this program at an average sales price of $74.34 per share, for net proceeds of $2,775. For the year ended December 31, 2009, the Company sold 1,504,901 shares under this program at an average sales price of $69.56 per share, resulting in net proceeds of $103,109.

F-18

5. Derivative Instruments and Hedging Activities

The Company enters into interest rate swap and interest rate cap agreements (collectively, the “Hedging Derivatives”) for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into derivative transactions for trading or other speculative purposes. The following table summarizes the consolidated Hedging Derivatives at December 31, 2009, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):


	Non-designated									Fair Value
	Hedges			Cash Flow Hedges						Hedges
	Interest			Interest			Interest			Interest
	Rate Caps			Rate Caps			Rate Swaps			Rate Swaps

Notional balance	$	109,847		$	15,743		$	43,435		$	300,000
Weighted average interest rate (1)		1.5	%		1.7	%		6.5	%		5.4	%
Weighted average capped interest rate		6.9	%		6.0	%		n/a			n/a
Earliest maturity date	Apr-11			Jun-12			Jun-10			Dec-10
Latest maturity date	Mar-14			Jun-12			Jun-10			Jan-12
Estimated fair value, asset/(liability)	$	126		$	24		$	(900	)	$	(228	)


(1)		For interest rate caps, this represents the weighted average interest rate on the debt.

In October 2009, the Company executed $300,000 notional amount of interest rate swaps to convert $300,000 principal amount of the Company’s fixed rate unsecured notes with a weighted average maturity of approximately two years to effective floating rate instruments at a weighted average rate of three month LIBOR plus 5.42%. The Company designated the interest rate swaps as fair value hedges of the unsecured notes.

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had three derivatives designated as cash flow hedges, five derivatives designated as fair value hedges and five derivatives not designated as hedges at December 31, 2009. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of general and administrative expenses on the accompanying Consolidated Statements of Operations and Other Comprehensive Income. Fair value changes for derivatives not in qualifying hedge relationships for the full year ended December 31, 2009, were not material. For the derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive income of $1,865, $434 and $213 during the years ended December 31, 2009, 2008 and 2007, respectively. The amount reclassified into earnings in 2009, as well as the estimated amount included in accumulated other comprehensive income as of December 31, 2009, expected to be reclassified into earnings within the next twelve months to offset the variability of cash flows of the hedged items during this period are not material. For the derivative positions that the Company has determined qualify as effective fair value hedges, the Company has recorded the derivatives at fair value as a component of accrued expenses and other liabilities, with the associated gain or loss as an adjustment to the carrying amount of the corresponding debt being hedged on the accompanying Consolidated Balance Sheets.

The Company assesses, both at inception and on an on-going basis, the effectiveness of qualifying cash flow and fair value hedges. Hedge ineffectiveness, reported as a component of general and administrative expenses, did not have a material impact on earnings of the Company for any prior period, and the Company does not anticipate that it will have a material effect in the future. The fair values of the Hedging Derivatives and non-designated derivatives are included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by the counterparties under the terms of the Hedging Derivatives. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit

F-19

ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. Because of our counterparties’ credit rating and that our derivative transactions are a net liability as of December 31, 2009, the Company believes the likelihood of realizing losses from counterparty non-performance is remote. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivative financial instruments. Refer to Note 11, “Fair Value Measurements,” for further discussion.

6. Investments in Real Estate Entities

The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting, except as otherwise noted below, as discussed in Note 1, “Organization and Basis of Presentation,” under Principles of Consolidation .

As of December 31, 2009, the Company had investments in the following real estate entities:

•

CVP I, LLC — In February 2004, the Company entered into a joint venture agreement with an unrelated third-party for the development of Avalon Chrystie Place, a 361 apartment-home community located in New York, New York, for which construction was completed in late 2005. The Company has contributed $6,270 to this joint venture and holds a 20% equity interest (with a right to 50% of distributions after achievement of a threshold return, which was achieved in 2009). The Company is the managing member of CVP I, LLC, however, property management services at the community are performed by an unrelated third party.

As of December 31, 2009, CVP I, LLC has outstanding tax-exempt, variable rate bonds maturing in November 2036 in the amount of $117,000, which have permanent credit enhancement. The Company has agreed to guarantee, under limited circumstances, the repayment to the credit enhancer of any advances it may make in fulfillment of CVP I, LLC’s repayment obligations under the bonds . The Company has also guaranteed to the credit enhancer that CVP I, LLC will obtain a final certificate of occupancy for the project (Chrystie Place in New York City), which is expected in 2010. Our 80% partner in this venture has agreed that it will reimburse us its pro rata share of any amounts paid relative to these guaranteed obligations. The estimated fair value of and our obligation under these guarantees, both at inception and as of December 31, 2009, were not significant. As a result the Company has not recorded any obligation associated with these guarantees at December 31, 2009.

•

MVP I, LLC — In December 2004, the Company entered into a joint venture agreement with an unrelated third-party for the development of Avalon at Mission Bay North II. Construction for Avalon at Mission Bay North II, a 313 apartment-home community located in San Francisco, California, was completed in December 2006. The Company has contributed $6,433 to this venture and holds a 25% equity interest. The Company is responsible for the day-to-day operations of the community and is the management agent subject to the terms of a management agreement. In December 2007, MVP I, LLC executed a seven-year, fixed rate conventional loan, which is secured by the underlying real estate assets of the community for $105,000. The loan is a fixed rate, interest-only note bearing interest at 6.02%, maturing in December 2015. The Company has not guaranteed the debt of MVP I, LLC, nor does the Company have any obligation to fund this debt should MVP I, LLC be unable to do so.

•

Avalon Del Rey Apartments, LLC — In March 2004, the Company entered into an agreement with an unrelated third party which provided that, upon construction completion, Avalon Del Rey would be owned and operated by a joint venture between the Company and the third party. Avalon Del Rey is a 309 apartment-home community located in Los Angeles, California that was developed by the Company, with construction completed during the third quarter of 2006. During the fourth quarter of 2006, the third-party venture partner invested $49,000 and was granted a 70% ownership interest in the venture, with the Company retaining a 30% equity interest. The Company continues to be responsible for the day-to-day operations of the community and is the management agent subject to the terms of a management agreement.

Avalon Del Rey Apartments, LLC has a loan secured by the underlying real estate assets of the community for $45,943 maturing in April 2016. The variable rate loan had an interest rate of 3.69% at December 31,

F-20

2009.

The Company has not guaranteed the debt of Avalon Del Rey Apartments, LLC, nor does the Company have any obligation to fund this debt should Avalon Del Rey Apartments, LLC be unable to do so.

	•		Aria at Hathorne Hill, LLC — In the second quarter of 2007, a wholly owned taxable REIT subsidiary of the Company entered into an LLC agreement with a joint venture partner to develop 64 for-sale town homes with a total capital cost of $23,621 in Danvers, Massachusetts on an out parcel adjacent to our Avalon Danvers rental apartment community. Approximately 20% of the homes have been built and sold, with the remaining homes to be developed during 2010 and 2011. The out parcel was zoned for for-sale activity, and was contributed to the LLC by a subsidiary of the Company in exchange for a 50% ownership interest. The LLC has three separate variable rate loans with aggregate borrowings of $2,432 and a weighted average interest rate of 4.19% at December 31, 2009. The Company has not guaranteed the debt of Aria at Hathorne, nor does the Company have any obligation to fund this debt should Aria at Hathorne be unable to do so.

	•		Arna Valley View LP — In connection with the municipal approval process for the development of a consolidated community, the Company agreed to participate in the formation of a limited partnership in February 1999 to develop, finance, own and operate Arna Valley View, a 101 apartment-home community located in Arlington, Virginia. This community has affordable rents for 100% of apartment homes related to the tax-exempt bond financing and tax credits used to finance construction of the community. A subsidiary of the Company is the general partner of the partnership with a 0.01% ownership interest. The Company is responsible for the day-to-day operations of the community and is the management agent subject to the terms of a management agreement. As of December 31, 2009, Arna Valley View has $5,520 of variable rate, tax-exempt bonds outstanding, which mature in June 2032. In addition, Arna Valley View has $5,121 of 4% fixed rate county bonds outstanding that mature in December 2030. Arna Valley View’s debt is neither guaranteed by, nor recourse, to the Company. Due to the Company’s limited ownership in this venture and the terms of the management agreement regarding the rights of the limited partners, it is accounted for using the cost method.

	•		Juanita Construction, Inc. — In April 2004, a taxable REIT subsidiary of the Company entered into an agreement to develop Avalon at Juanita Village, a 211 apartment-home community located in Kirkland, Washington, for which construction was completed in late 2005. Avalon at Juanita Village was developed through Juanita Construction, Inc., a wholly owned taxable REIT subsidiary and was sold to a joint venture in the first quarter of 2006, at which point, the subsidiary was reimbursed for all the costs of construction and retained a promoted interest in the residual profits of the joint venture. The third-party joint venture partner received a 100% equity interest in the joint venture and will control the joint venture. The Company was engaged to manage the community for a property management fee. This community is unconsolidated for financial reporting purposes effective with the sale to the joint venture.

	•		Fund I — In March 2005, the Company admitted outside investors into Fund I, a private, discretionary investment vehicle, which acquired and operates communities in the Company’s markets. Fund I served as the principal vehicle through which the Company acquired investments in apartment communities, subject to certain exceptions until March 2008. Fund I has nine institutional investors, including the Company, and a combined equity capital investment of $330,000. A significant portion of the investments made in Fund I by its investors were made through AvalonBay Value Added Fund, Inc., a Maryland corporation that qualifies as a REIT under the Internal Revenue Code (the “Fund I REIT”). A wholly owned subsidiary of the Company is the general partner of Fund I and has contributed $50,000 to Fund I and the Fund I REIT, representing a 15.2% combined general partner and limited partner equity interest. At December 31, 2009, Fund I was fully invested. The Company receives asset management fees, property management fees and redevelopment fees, as well as a promoted interest if certain thresholds are met.

			Subsidiaries of Fund I have 21 loans secured by individual assets with amounts outstanding in the aggregate of $436,410, with varying maturity dates (or dates after which the loans can be prepaid), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate. The mortgage loans are payable by subsidiaries of Fund I with operating cash flow or disposition proceeds from the underlying real estate. The Company has not guaranteed the debt of Fund I, nor does the

F-21

		Company have any obligation to fund this debt should Fund I be unable to do so. Fund I had a credit facility that matured in December 2009.

		In addition, as part of the formation of Fund I, the Company has provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund I, the total amount of all distributions to that partner during the life of Fund I (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then the Company will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $7,500 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund I is considered adequate to cover such potential payment to that partner under the expected Fund I liquidation scenario. The estimated fair value of, and the Company’s obligation under this guarantee, both at inception and as of December 31, 2009, was not significant and therefore the Company has not recorded any obligation for this guarantee as of December 31, 2009.

		As of December 31, 2009, subsidiaries of Fund I owned the following 19 communities, subject to certain mortgage debt. The Company has not guaranteed any of Fund I debt, nor does it have any obligation to fund this debt should Fund I subsidiaries be unable to do so.


			Outstanding Debt
		# of apt				Interest	Maturity
Community Name	Location	homes	Amount		Type	Rate	Date
Avalon at Redondo Beach	Los Angeles, CA	105	$	21,033	Fixed	4.87%	Oct 2011
Avalon Lakeside	Chicago, IL	204		12,056	Fixed	5.74%	Mar 2012
Avalon Columbia	Baltimore, MD	170		22,275	Fixed	5.48%	Apr 2012
Avalon Sunset	Los Angeles, CA	82		12,750	Fixed	5.41%	Feb 2014
Avalon at Poplar Creek	Chicago, IL	196		16,500	Fixed	4.83%	Oct 2012
Avalon at Civic Center	Norwalk, CA	192		27,001	Fixed	5.38%	Aug 2013
Avalon Paseo Place	Fremont, CA	134		11,800	Fixed	5.74%	Nov 2013
Avalon at Yerba Buena	San Francisco, CA	160		41,500	Fixed	5.88%	Mar 2014
Avalon at Aberdeen Station	Aberdeen, NJ	290		39,842	Fixed	5.64%	Sep 2013
The Springs	Corona, CA	320		26,000	Fixed	6.06%	Oct 2014
Avalon Lombard	Lombard, IL	256		17,243	Fixed	5.43%	Jan 2014
Avalon Cedar Place	Columbia, MD	156		12,000	Fixed	5.68%	Feb 2014
Avalon Centerpoint (1)	Baltimore, MD	392		45,000	Fixed	5.74%	Dec 2013
Middlesex Crossing	Billerica, MA	252		24,100	Fixed	5.49%	Dec 2013
Avalon Crystal Hill	Ponoma, NY	168		24,500	Fixed	5.43%	Dec 2013
Skyway Terrace	San Jose, CA	348		37,500	Fixed	6.11%	Mar 2014
Avalon Rutherford Station	East Rutherford, NJ	108		20,094	Fixed	6.13%	Sep 2016
South Hills Apartments	West Covina, CA	85		11,761	Fixed	5.92%	Dec 2013
Weymouth Place	Weymouth, MA	211		13,455	Fixed	5.12%	Mar 2015


(1)		Borrowing on this community is comprised of three mortgage loans.

•

Fund II — On September 2, 2008, the Company announced the formation of Fund II, a private, discretionary investment vehicle with commitments from five institutional investors including the Company. In the second quarter of 2009, the Company announced the second and final closing of Fund II, admitting an additional joint venture partner, and additional equity commitments, both from existing as well as the new joint venture partner. The additional joint venture partner capital commitments raised as part of the second closing, reduced the Company’s equity ownership interest to 31% from 45%. A subsidiary of Fund II has one loan secured by an asset in the amount of $21,515 with a maturity of June 2019. This loan is payable by a subsidiary of Fund II. As of December 31, 2009, Fund II also has $30,200 outstanding under a credit facility that matures in December 2010.

In addition, as part of the formation of Fund II, the Company has provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all

F-22

		distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then the Company will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $1,470 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payment to that partner under the expected Fund II liquidation scenario. The estimated fair value of, and the Company’s obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore the Company has not recorded any obligation for this guarantee as of December 31, 2009.

		As of December 31, 2009, subsidiaries of Fund II owns the following two communities, subject to certain mortgage debt. The Company has not guaranteed any of Fund II’s debt, nor does it have any obligation to fund this debt should the subsidiaries of Fund II be unable to do so.

Outstanding Debt

# of apt

Interest

Maturity

Community Name

Location

homes

Amount

Type

Rate

Date

Avalon Bellevue Park

Bellevue, WA

220

21,515

Fixed

5.52

Jun-19

The Hermitage

Fairfax, VA

491

—

n/a

F-23

The following is a combined summary of the financial position of the entities accounted for using the equity method, as of the dates presented:


	12-31-09		12-31-08
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	1,065,328	$	995,680
Other assets		39,502		38,027

Total assets	$	1,104,830	$	1,033,707


Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	758,487	$	705,332
Other liabilities		19,669		17,578
Partners’ capital		326,674		310,797

Total liabilities and partners’ capital	$	1,104,830	$	1,033,707

The following is a combined summary of the operating results of the entities accounted for using the equity method, for the years presented:


	For the year ended
	12-31-09			12-31-08			12-31-07
	(unaudited)			(unaudited)			(unaudited)

Rental and other income	$	101,748		$	105,421		$	92,078
Operating and other expenses		(49,730	)		(43,992	)		(39,952	)
Impairment loss		(17,162	)		—			—
Gain on sale of communities		—			25,417			—
Interest expense, net		(37,156	)		(38,478	)		(40,791	)
Depreciation expense		(32,909	)		(31,152	)		(26,622	)

Net loss	$	(35,209	)	$	17,216		$	(15,287	)

In conjunction with the acquisition and development of investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $11,047 at December 31, 2009 and $4,817 at December 31, 2008 of the respective investment balances.

The following is a summary of the Company’s equity in income (loss) of unconsolidated entities for the years presented: (unaudited)

F-24


	For the year ended
	12-31-09			12-31-08			12-31-07
Town Grove, LLC ⁽¹⁾	$	—		$	31		$	57,821
Avalon Del Rey, LLC ⁽²⁾		79			241			3,616
CVP I, LLC ⁽³⁾		7,330			1,109			567
MVP I, LLC		(684	)		(474	)		(1,261	)
AvalonBay Value Added Fund, L.P. ⁽⁴⁾⁽⁵⁾		(4,109	)		2,532			(1,775	)
AvalonBay Value Added Fund II, L.P.		(48	)		—			—
Other		—			—			201
Aria at Hathorne, LLC		(1,127	)		1,127			—


Total	$	1,441		$	4,566		$	59,169


⁽¹⁾		Equity in income from this entity for 2007 includes a gain of $56,320 for the Company from the fourth quarter disposition of its partnership interest in Avalon Grove, an asset held by Town Grove, LLC.

⁽²⁾		Equity in income from this entity for 2007 includes a gain of $3,607 for the Company from the fourth quarter disposition of its ownership interest in Avalon Del Rey, the sole asset held by Avalon Del Rey, LLC.

⁽³⁾		Equity in income from this entity for 2009 includes $6,192 relating to the Company’s recognition of its promoted interest.

⁽⁴⁾		Equity in income from this entity for 2008 includes a gain of $3,483 for the Company’s 15.2% share of the gain from the second quarter disposition of Avalon Redmond, an asset held by the Fund.

⁽⁵⁾		Equity in income for 2009 includes an impairment loss of $2,600 for the Company’s proportionate share of the impairment charge on an operating community.

7. Real Estate Disposition Activities

During the year ended December 31, 2009, the Company sold five wholly owned communities for an aggregate gross sales price of $179,675. These dispositions resulted in a gain in accordance with GAAP of approximately $61,117. In conjunction with the settlement of previously disclosed litigation with the Equal Rights Center involving accessibility of our communities, the Company recognized an additional gain of approximately $2,770 associated with communities sold in prior years, which was previously deferred.

Details regarding the community asset sales are summarized in the following table:


		Period	Apartment				Gross sales		Net
Community Name	Location	of sale	homes		Debt		price		proceeds
Avalon at River Oaks	San Jose, CA	Q309		226	$	—	$	42,250	$	41,626
Avalon at Faxon Park	Quincy, MA	Q309		171		—		27,250		26,633
Avalon at Parkside	Sunnyvale, CA	Q409		192		—		43,800		43,283
Avalon Orange	Orange, CT	Q409		168		—		25,500		24,858
Avalon at Flanders Hill	Westborough, MA	Q409		280		—		40,875		40,081

Total of all 2009 asset sales				1,037	$	—	$	179,675	$	176,481

Total of all 2008 asset sales				3,059	$	43,715	$	564,950	$	503,377

Total of all 2007 asset sales				1,384	$	8,116	$	268,096	$	257,396

The operations for any real estate assets sold from January 1, 2007 through December 31, 2009 and the real estate assets that qualified as discontinued operations and held for sale as of December 31, 2009 have been presented as such in the accompanying Consolidated Financial Statements. Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation.

The following is a summary of income from discontinued operations for the periods presented:

F-25


	For the year ended
	12-31-09			12-31-08			12-31-07
Rental income	$	35,086		$	68,481		$	95,866
Operating and other expenses		(11,891	)		(22,127	)		(32,085	)
Interest expense, net		(681	)		(3,297	)		(6,057	)
Depreciation expense		(8,540	)		(15,704	)		(23,830	)

Income from discontinued operations	$	13,974		$	27,353		$	33,894

The Company’s Consolidated Balance Sheets include other assets (excluding net real estate) of $2,185 and $2,965 as of December 31, 2009 and 2008, respectively, $0 and $19,735 of mortgage notes as of December 31, 2009 and 2008, respectively and other liabilities of $6,399 and $11,401 as of December 31, 2009 and 2008, respectively relating to real estate assets sold or classified as held for sale.

During the year ended December 31, 2009, the Company sold two land parcels, one of which was previously impaired by the Company . The Company had gains on the sale of land parcels of $4,830, $0 and $545 in 2009, 2008 and 2007, respectively.

8. Commitments and Contingencies

Employment Agreements and Arrangements

As of December 31, 2009, the Company had employment agreements with four executive officers. The employment agreements provide for severance payments and generally provide for accelerated vesting of stock options and restricted stock in the event of a termination of employment (except for a termination by the Company with cause or a voluntary termination by the employee). The current terms of these agreements end on dates that vary between November 2010 and June 2011. The employment agreements provide for one-year automatic renewals (two years in the case of the Chief Executive Officer (“CEO”)) after the initial term unless an advance notice of non-renewal is provided by either party. Upon a notice of non-renewal by the Company, each of the officers may terminate his employment and receive a severance payment. Upon a change in control, the agreements provide for an automatic extension of up to three years from the date of the change in control. The employment agreements provide for base salary and incentive compensation in the form of cash awards, stock options and stock grants subject to the discretion of, and attainment of performance goals established by, the Compensation Committee of the Board of Directors.

The Company’s stock incentive plan, as described in Note 10, “Stock-Based Compensation Plans,” provides that upon an employee’s Retirement (as defined in the plan documents) from the Company, all outstanding stock options and restricted shares of stock held by the employee will vest, and the employee will have up to 12 months to exercise any options held upon retirement. Under the plan, Retirement means a termination of employment, other than for cause, after attainment of age 50, provided that (i) the employee has worked for the Company for at least 10 years, (ii) the employee’s age at Retirement plus years of employment with the Company equals at least 70, (iii) the employee provides at least six months written notice of his intent to retire, and (iv) the employee enters into a one year non-compete and employee non-solicitation agreement.

The Company also has an Officer Severance Program (the “Program”) for the benefit of those officers of the Company who do not have employment agreements. Under the Program, in the event an officer who is not otherwise covered by a severance arrangement is terminated (other than for cause) within two years following a change in control (as defined) of the Company, such officer will generally receive a cash lump sum payment equal to the sum of such officer’s base salary and cash bonus, as well as accelerated vesting of stock options and restricted stock. Costs related to the Company’s employment agreements and the Program are deferred and recognized over the requisite service period when considered by management to be probable and estimable.

Construction and Development Contingencies

The Company holds a 99% controlling interest in PHVP I, LLC, a consolidated joint venture. In conjunction with the development of an operating community, Avalon Walnut Creek, PHVP I, LLC constructed a public garage adjacent to the community. As part of providing construction management services to PHVP I, LLC for the

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construction of the public garage, the Company provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing. The Company’s obligations under this guarantee terminated following construction completion of the garage in the third quarter of 2009.

In 2007 the Company entered into a commitment to acquire parcels of land in Brooklyn, New York for an aggregate purchase price of approximately $111,000. Under the terms of the commitment, the Company is closing on the various parcels over a period determined by the seller’s ability to execute unrelated purchase transactions and achieve deferral of gains for the land sold under this commitment. However, under no circumstances will the commitment extend beyond 2011, at which time either the Company or the seller can compel execution of the remaining transactions. At December 31, 2009, the Company has an outstanding commitment to purchase the remaining land for approximately $51,500.

Legal Contingencies

As previously reported, the Company has been involved in litigation alleging that communities constructed by the Company violate the accessibility requirements of the FHA and the Americans with Disabilities Act. The ERC filed a complaint against the Company on September 23, 2005 in the U.S. District Court, District of Maryland with respect to 100 properties. In November 2009, the Company settled this litigation by entering into a court approved consent decree. Under the consent decree the Company will inspect and, if necessary, remediate up to 8,250 apartment units and related public and common areas at the Company’s communities. The Company expects that the remediation resulting from the inspections, which should occur over approximately a four year period, will enhance and/or extend the useful life of the applicable communities and will therefore be capitalized. Although the Company will not be able to determine the exact remediation or associated costs until inspections are completed, the Company does not believe that the remediation costs will be material to the Company’s Consolidated Financial Statements.

In a separate matter related to FHA accessibility matters, on August 13, 2008 the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the Company and the joint venture in which it has an interest that owns Avalon Chrystie Place. The lawsuit alleges that Avalon Chrystie Place was not designed and constructed in accordance with the accessibility requirements of the FHA. The Company designed and constructed the community to address compliance with New York City’s Local Law 58, which for more than 20 years has been New York City’s code regulating the accessible design and construction of apartments. After the filing of its answer and affirmative defenses, during the fourth quarter of 2009 the plaintiff served the Company with discovery requests relating to communities owned by the Company nationwide. The Company objected to these discovery requests as being overly broad, as the plaintiff’s complaint made factual allegations with regard to Avalon Chrystie Place only. A magistrate judge agreed with the Company and limited discovery to Avalon Chrystie Place. The plaintiff is appealing the magistrate judge’s ruling. As there are uncertainties relating to this lawsuit, (such as the legal requirements to meet and demonstrate accessibility under the applicable statutes, the cost to remediate, if necessary and whether the scope of this lawsuit will be extended to other properties by an amended complaint or otherwise) the Company cannot predict or determine the outcome of this lawsuit, nor is it reasonably possible at this time to estimate the cost of remediation or any other costs, if any, that would be associated with an adverse decision or settlement.

In addition, the Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements. While the resolution of these other matters cannot be predicted with certainty, management currently believes the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company. In instances where the Company has a gain contingency associated with legal proceedings, the Company records a gain in the financial statements, to the extent of a loss recovery, when it is deemed probable to occur, can be reasonably estimated and is considered to be collectible.

Lease Obligations

The Company owns 14 apartment communities and Development Rights and two commercial properties which are located on land subject to land leases expiring between October 2026 and March 2142. In addition, the Company

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leases certain office space. These leases are accounted for as operating leases recognizing rental expense on a straight-line basis over the lease term. These leases have varying escalation terms, and nine of these leases have purchase options exercisable through 2142. The Company incurred costs of $19,442, $16,937 and $15,516 in the years ended December 31, 2009, 2008 and 2007, respectively, related to these leases.

The following table details the future minimum lease payments under the Company’s current leases:


Payments due by period
2010	2011		2012		2013		2014		Thereafter
$20,732	$	24,101	$	26,714	$	26,884	$	26,966	$	3,287,550

9. Segment Reporting

The Company’s reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities. Annually as of January 1 ^st , the Company determines which of its communities fall into each of these categories and maintains that classification, unless disposition plans regarding a community change, throughout the year for the purpose of reporting segment operations.

	•		Established Communities (also known as Same Store Communities) are communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the year 2009, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2008, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

	•		Other Stabilized Communities includes all other completed communities that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.

	•		Development/Redevelopment Communities consists of communities that are under construction and have not received a final certificate of occupancy, communities where the Company owns a majority interest and where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up that had not reached stabilized occupancy, as defined above, as of January 1, 2009.

In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.

The Company’s segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing such segments’ performance. The Company’s chief operating decision maker is comprised of several members of its executive management team who use NOI as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a community’s or communities’ operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.

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A reconciliation of NOI to net income for years ended December 31, 2009, 2008 and 2007 is as follows:


	For the year ended
	12-31-09			12-31-08			12-31-07
Net income	$	154,274		$	410,746		$	359,745
Indirect operating expenses, net of corporate income		30,315			33,010			31,285
Investments and investment management expense		3,844			4,787			4,763
Expensed development and other pursuit costs		5,842			12,511			6,974
Interest expense, net		150,323			114,910			92,175
(Gain) loss on extinguishment of debt, net		25,910			(1,839	)		—
General and administrative expense		28,748			42,781			28,494
Equity in income of unconsolidated entities		(1,441	)		(4,566	)		(59,169	)
Depreciation expense		209,746			183,748			157,895
Impairment loss — land holdings		21,152			57,899			—
Gain on sale of real estate assets		(68,717	)		(284,901	)		(107,032	)
Income from discontinued operations		(13,974	)		(27,353	)		(33,894	)

Net operating income	$	546,022		$	541,733		$	481,236

The primary performance measure for communities under development or redevelopment depends on the stage of completion. While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.

The following table provides details of the Company’s segment information as of the dates specified. The segments are classified based on the individual community’s status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the years ended December 31, 2009, 2008 and 2007 have been adjusted for the communities that were sold from January 1, 2007 through December 31, 2009, or otherwise qualify as discontinued operations as of December 31, 2009, as described in Note 7, “Real Estate Disposition Activities.”

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	Total				% NOI change			Gross
	revenue		NOI		from prior year			real estate (1)
For the period ended December 31, 2009

Established
New England	$	121,455	$	75,766		(7.5	%)	$	858,858
Metro NY/NJ		155,468		103,558		(7.4	%)		1,048,636
Mid-Atlantic/Midwest		122,001		74,983		(3.5	%)		775,979
Pacific Northwest		28,184		19,101		(9.3	%)		239,215
Northern California		98,529		70,819		(7.9	%)		857,321
Southern California		62,751		42,900		(9.7	%)		428,241

Total Established (2)		588,388		387,127		(7.1	%)		4,208,250

Other Stabilized		126,166		81,517		n/a			1,421,651
Development / Redevelopment		129,700		77,378		n/a			2,264,590
Land Held for Future Development		n/a		n/a		n/a			237,095
Non-allocated (3)		7,328		n/a		n/a			62,118

Total	$	851,582	$	546,022		0.8	%	$	8,193,704


For the period ended December 31, 2008

Established
New England	$	115,834	$	75,180		2.3	%	$	748,824
Metro NY/NJ		133,501		91,376		2.1	%		814,523
Mid-Atlantic/Midwest		119,194		75,256		1.9	%		725,471
Pacific Northwest		21,525		15,493		7.5	%		175,504
Northern California		123,204		91,547		7.9	%		1,000,952
Southern California		61,449		44,048		1.1	%		377,841

Total Established (2)		574,707		392,900		3.5	%		3,843,115

Other Stabilized		103,212		68,709		n/a			959,224
Development / Redevelopment		129,737		80,124		n/a			2,502,820
Land Held for Future Development		n/a		n/a		n/a			239,456
Non-allocated (3)		6,568		n/a		n/a			132,702

Total	$	814,224	$	541,733		12.6	%	$	7,677,317


For the year ended December 31, 2007

Established
New England	$	116,930	$	75,317		3.0	%	$	776,255
Metro NY/NJ		130,511		90,253		4.5	%		786,115
Mid-Atlantic/Midwest		110,929		69,685		6.8	%		692,989
Pacific Northwest		28,294		19,671		16.1	%		237,464
Northern California		135,642		98,453		12.4	%		1,156,162
Southern California		56,091		40,219		5.9	%		349,719

Total Established (2)		578,397		393,598		7.2	%		3,998,704

Other Stabilized		47,822		30,324		n/a			356,038
Development / Redevelopment		95,425		57,314		n/a			2,171,207
Land Held for Future Development		n/a		n/a		n/a			288,423
Non-allocated (3)		6,142		n/a		n/a			47,793

Total	$	727,786	$	481,236		14.6	%	$	6,862,165


(1)		Does not include gross real estate assets held for sale of $166,387, $325,170 and $694,574 as of December 31, 2009, 2008 and 2007, respectively.

(2)		Gross real estate for the Company’s established communities includes capitalized additions of approximately $10,783, $15,534 and $13,851 in 2009, 2008 and 2007 respectively.

(3)		Revenue represents third-party management, accounting and developer fees and miscellaneous income which are not allocated to a reportable segment.

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10. Stock-Based Compensation Plans

On May 21, 2009, the stockholders of the Company, upon the recommendation of the Board of Directors, approved the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan (the “2009 Plan”). The 2009 Plan includes an authorization to issue up to 4,199,822 shares of the Company’s common stock, par value $0.01 per share, (2,930,000 newly authorized shares plus 1,269,822 shares that were available for grant as of May 21, 2009 under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”)), pursuant to awards under the 2009 Plan. The 2009 Plan provides for various types of equity awards to employees, officers, non-employee directors and other key personnel of the Company and its subsidiaries. The types of awards that may be granted under the 2009 Plan include restricted and deferred stock, stock options that qualify as incentive stock options (“ISOs”) under Section 422 of the Code, non-qualified stock options, and stock appreciation rights. The 2009 Plan will expire on May 21, 2019.

Effective as of the close of business on May 21, 2009, and as part of the proposal to approve the 2009 Plan described above, the Board of Directors terminated the 1994 Plan with respect to new awards. The 1994 Plan provided for the same types of equity awards as the 2009 Plan, and would have expired by its terms on May 8, 2011. Outstanding awards previously granted under the 1994 Plan will not be affected by termination of the 1994 Plan, the terms of which shall continue to govern such previously granted awards. In addition to the 4,199,822 shares authorized for issue under the 2009 Plan as described above, any awards that were outstanding under the 1994 Plan on May 21, 2009 that are subsequently forfeited, canceled, surrendered or terminated (other than by exercise) will become available for awards under the 2009 Plan.

Information with respect to stock options granted under the 1994 Plan is as follows:


				Weighted		Avalon 1995			Weighted
				average		and Avalon			average
	1994 Plan			exercise price		1993 Plan			exercise price
	shares			per share		shares			per share
Options Outstanding, December 31, 2006		2,487,239		$	69.65		4,240		$	36.81
Exercised		(471,024	)		56.57		(3,472	)		36.86
Granted		344,429			147.39		—			—
Forfeited		(38,929	)		110.28		—			—

Options Outstanding, December 31, 2007		2,321,715		$	83.15		768		$	36.61

Exercised		(154,523	)		46.15		(768	)		36.61
Granted		401,212			89.06		—			—
Forfeited		(23,413	)		112.51		—			—
Special Dividend Option Adjustment (1)		78,144			n/a		—			—

Options Outstanding, December 31, 2008		2,623,135		$	83.49		0			n/a

Exercised		(115,675	)		44.20		—			—
Granted		344,801			48.60		—			—
Forfeited		(16,007	)		98.83		—			—

Options Outstanding, December 31, 2009		2,836,254		$	80.76		0			n/a


Options Exercisable:
December 31, 2007		1,230,428		$	60.84		768		$	36.61

December 31, 2008 (1)		1,711,508		$	72.97		—			n/a

December 31, 2009		2,127,829		$	81.90		—			n/a


(1)		In accordance with the applicable equity award plan documents, the number and exercise price of outstanding awards have been adjusted as a result of the special dividend declared in the fourth quarter of 2008, to maintain their value.

The following summarizes the exercise prices and contractual lives of options outstanding as of December 31, 2009:

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		Weighted Average
		Remaining Contractual Term
Number of Options	Range - Exercise Price	(in years)
88,255	30.00 — 39.99		1.4
757,935	40.00 — 49.99		3.2
463,096	60.00 — 69.99		5.2
1,030	70.00 — 79.99		5.5
414,016	80.00 — 89.99		7.0
773,857	90.00 — 99.99		6.1
6,698	100.00 — 109.99		6.4
5,152	110.00 — 119.99		7.5
326,215	140.00 — 149.99		7.1

2,836,254

Options outstanding under the 1994 Plan at December 31, 2009 had an intrinsic value of $3,815. Options exercisable at December 31, 2009 under the 1994 plan had a weighted average contractual life of 4.8 years and $438 intrinsic value. The intrinsic value of options exercised during 2009, 2008 and 2007 was $2,199, $8,565 and $17,895, respectively.

The cost related to stock-based employee compensation for employee stock options included in the determination of net income is based on estimated forfeitures for the given year. Estimated forfeitures are adjusted to reflect actual forfeitures at the end of the vesting period. The following table summarizes the weighted average fair value of employee stock options for the periods shown and the associated assumptions used to calculate the value:


	2009			2008			2007
Weighted average fair value per share	$	6.53		$	9.91		$	21.83

Life of options (in years)		7.0			7.0			7.0

Dividend yield		8.5	%		5.5	%		4.0	%

Volatility		36.57	%		22.17	%		17.32	%

Risk-free interest rate		2.17	%		3.09	%		4.73	%

At December 31, 2009 and 2008, the Company had 244,640 and 207,070 outstanding unvested shares granted under restricted stock awards. The Company issued 169,851 shares of restricted stock valued at $8,360 as part of its stock-based compensation plan during the year ended December 31, 2009. Restricted stock vesting during the year ended December 31, 2009 totaled 130,981 shares and had fair values at the grant date ranging from $48.60 to $147.75 per share. The total fair value of shares vested was $10,731, $10,668 and $8,590 for the years ended December 31, 2009, 2008 and 2007, respectively.

Total employee stock-based compensation cost recognized in income was $11,446, $17,268, and $13,502 for the years ended December 31, 2009, 2008 and 2007, respectively, and total capitalized stock-based compensation cost was $6,000, $6,499, and $5,106 for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, there was a total of $1,595 and $5,953 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 1.52 years and 2.26 years, respectively.

Deferred Stock Performance Plan

The Company’s Board of Directors and its Compensation Committee approved a multiyear performance plan (“the 2008 Performance Plan”). On June 1, 2008, awards in connection with this plan with an estimated compensation cost of $8,958 were granted to senior management and other selected officers (“2008 Performance Plan Awards”). The 2008 Performance Plan awards are initially in the form of deferred stock awards, with no dividend rights, granted under the Company’s 1994 Plan. These deferred stock awards will be forfeited in their entirety unless the Company’s total return to shareholders, consisting of stock price appreciation plus cumulative dividends without reinvestment or compounding (the “Actual TRS”), over the measurement period exceeds both (i) an Absolute TRS

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Target and (ii) a Relative TRS Target. The measurement period of the 2008 Performance Plan began on June 1, 2008 with a starting common stock price equal to the average closing price of the Company’s common stock on the twenty trading days prior to June 1, 2008. The measurement period will end on May 31, 2011, again using a twenty-day average closing price. The measurement period will end earlier upon a change in control of the Company.

The “Absolute TRS Target” that must be exceeded during the measurement period is a 32% total return performance (or a pro rated amount in the event the measurement period is less than three years due to a change in control). The “Relative TRS Target” that must be exceeded is the total return performance (stock price appreciation plus cumulative dividends without reinvestment or compounding) during the measurement period of the Financial Times and the London Stock Exchange (FTSE) NAREIT Apartment Index. If the Actual TRS exceeds both the Absolute TRS Target and the Relative TRS Target, the total funding pool will equal 10% of the simple average of (i) the excess shareholder value created by the Actual TRS exceeding the Absolute TRS Target and (ii) the excess shareholder value created by the Actual TRS exceeding the Relative TRS Target, provided that in no event will the total funding pool exceed $60 million.

Each participating officer’s 2008 Performance Plan award is designated as a specified “Participation Percentage” in the 2008 Performance Plan. If both TRS targets are exceeded at the end of the measurement period, then each participating officer will earn deferred stock awards having a total value (based on the closing price of the Company’s common stock on the last day of the measurement period) equal to that officer’s participation percentage multiplied by the total funding pool. The total funding pool will under no circumstance exceed $60 million. Any unearned deferred stock awards (i.e., deferred stock awards in excess of the number of awards having a value equal to that officer’s participation percentage in the total funding pool) will be forfeited. Earned deferred stock awards will convert into vested unrestricted common stock (50%), and unvested restricted common stock with a one-year vesting period (50%), subject to earlier forfeiture or acceleration under certain circumstances. Dividends will be paid on both the unrestricted common stock and the restricted common stock.

The Company will recognize compensation expense for the 2008 Performance Plan over the three year measurement period for the 50% of each award which vests at the end of the measurement period. For the remaining 50% of each award, the Company will recognize compensation expense over the four year period which includes the measurement period as well as the one-year vesting period subsequent to the end of the measurement period. The recognition of compensation cost will take into account actual forfeitures as well as retirement eligibility. The Company used a Monte Carlo model to assess the compensation cost associated with the 2008 Performance Plan. The estimated compensation cost was derived using the following assumptions: baseline share value of $102.16, dividend yield of 3.53%, estimated volatility figures over the life of the plan using 50% historical volatility and 50% implied volatility and risk free rates over the life of the plan ranging from 2.13% to 2.97%, resulting in an estimated fair value per share of $14.15. During the years ended December 31, 2009 and 2008, the Company recognized expense of $1,673 and $1,013, respectively in earnings and capitalized stock-based compensation costs of $895 and $582, respectively for the 2008 Performance Plan.

Employee Stock Purchase Plan

In October 1996, the Company adopted the 1996 Non-Qualified Employee Stock Purchase Plan (as amended, the “ESPP”). Initially 1,000,000 shares of common stock were reserved for issuance under this plan. There are currently 755,484 shares remaining available for issuance under the plan. Full-time employees of the Company generally are eligible to participate in the ESPP if, as of the last day of the applicable election period, they have been employed by the Company for at least one month. All other employees of the Company are eligible to participate provided that, as of the applicable election period, they have been employed by the Company for 12 months. Under the ESPP, eligible employees are permitted to acquire shares of the Company’s common stock through payroll deductions, subject to maximum purchase limitations. The purchase period is a period of seven months beginning each April 1 and ending each October 30. The purchase price for common stock purchased under the plan is 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable purchase period or the last day of the applicable purchase period. The offering dates, purchase dates and duration of purchase periods may be changed, if the change is announced prior to the beginning of the affected date or purchase period. The Company issued 16,971, 8,460 and 8,577 shares and recognized compensation expense of $118, $90 and $158 under the ESPP for the years ended December 31, 2009, 2008 and 2007, respectively. The Company accounts for transactions under the ESPP using the fair value method prescribed by accounting guidance

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applicable to entities that use employee share purchase plans, as further discussed in Note 1, “Organization and Basis of Presentation.”

11. Fair Value

Fair Value Methodology

As a basis for applying a market-based approach in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The valuation of financial instruments can be determined using widely accepted valuation techniques.

The Company applies valuation models such as discounted cash flow analysis on the expected cash flows of each instrument which considers the contractual terms of the instruments, including the period to maturity, and uses observable market-based inputs, including interest rate curves and market prices, as available and applicable. In addition, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements as discussed below. When market-based inputs are not available in valuing the Company’s financial instruments, such as for valuing redeemable noncontrolling interests, the Company uses unobservable inputs considering the assumptions that market participants would make in deriving the fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the Company’s estimates of fair value.

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Company’s financial statements. See Note 5, “Derivative Instruments and Hedging Activities,” for derivative values at December 31, 2009 and a description of where these amounts are recorded in the financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of December 31, 2009, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Redeemable Noncontrolling Interests

Redeemable noncontrolling interests are reported at fair value, with reductions in fair value recorded only to the extent that the Company has previously recorded increases in fair value above the redeemable noncontrolling interests’ initial basis.

•

Puts — The Company provided redemption options (the “Puts”) that allow two of the Company’s joint venture partners to require the Company to purchase their interests in the investments at the future fair market value. One Put is payable in cash or, at the Company’s option, common stock of the Company, and the second is payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations, including applying discount factors to the estimated future cash flows of the asset underlying the associated joint venture, which in the case of the Puts is the NOI from an apartment community, as well as potential disposition proceeds utilizing market capitalization rates, to derive the fair value of the position. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

F-34

			At December 31, 2008, the Puts’ aggregate fair value was $9,057. At December 31, 2009, the aggregate fair value of the Puts was $4,101.

	•		DownREIT units — The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s common stock on or about the date of redemption. In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares in the Company’s common stock. The limited partnership units in DownREITs are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy. At December 31, 2008, the fair value of the DownREIT units was $1,177. At December 31, 2009, the fair value of the DownREIT units was $1,260.

Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

Cash and cash equivalent balances are held with various financial institutions within principal protected accounts. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote. Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values.

Other Financial Instruments

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.

The Company values its bond indebtedness, notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its bond indebtedness and notes payable are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy. Bond indebtedness, notes payable and outstanding amounts under the Company’s Credit Facility (as applicable) with an aggregate outstanding par amount of approximately $3,977,320 and $3,676,000 had an estimated aggregate fair value of $4,052,817 and $3,612,130 at December 31, 2009 and December 31, 2008, respectively.

12. Related Party Arrangements

Unconsolidated Entities

The Company manages unconsolidated real estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $7,328, $6,568 and $6,142 in the years ended December 31, 2009, 2008 and 2007, respectively. These fees are included in management, development and other fees on the accompanying Consolidated Statements of Operations and Other Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $2,344 and $5,043 as of December 31, 2009 and 2008, respectively.

Director Compensation

Directors of the Company who are also employees receive no additional compensation for their services as a director. Following each annual meeting of stockholders starting with the 2006 annual meeting, non-employee directors receive (i) a number of shares of restricted stock (or deferred stock awards) having a value of $100 and (ii) a cash payment of $40, payable in quarterly installments of $10. After September 20, 2007, the cash payment increased to $50, payable in quarterly installments of $12.5. The value of the restricted stock or deferred stock award increased to $125 following

F-35

the 2008 annual meeting. The number of shares of restricted stock (or deferred stock awards) is calculated based on the closing price on the day of the award. Non-employee directors may elect to receive all or a portion of cash payments in the form of a deferred stock award. In addition, the Lead Independent Director receives an annual fee of $30 payable in equal monthly installments of $2.5.

The Company recorded non-employee director compensation expense relating to the restricted stock grants and deferred stock awards in the amount of $856, $2,170 and $855 for the years ended December 31, 2009, 2008 and 2007, respectively as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards was $365 and $137 on December 31, 2009 and December 31, 2008, respectively. Compensation expense during 2008 includes additional expense associated primarily with the accelerated award vesting for directors.

13. Quarterly Financial Information

The following summary represents the quarterly results of operations for the years ended December 31, 2009 and 2008: (unaudited)


	For the three months ended (4)
	3-31-09		6-30-09		9-30-09		12-31-09
Total revenue ⁽¹⁾	$	209,733	$	212,259	$	215,160	$	214,429
Income (loss) from continuing operations ^{(1) (2) (3)}	$	43,153	$	13,076	$	27,623	$	(7,437	)
Income from discontinued operations ⁽¹⁾	$	3,948	$	3,647	$	30,478	$	39,787
Net income attributable to common stockholders	$	47,425	$	17,674	$	58,154	$	32,394
Net income per common share — basic	$	0.60	$	0.22	$	0.72	$	0.40
Net income per common share — diluted	$	0.59	$	0.22	$	0.72	$	0.40


	For the three months ended (4)
	3-31-08		6-30-08		9-30-08		12-31-08
Total revenue ⁽¹⁾	$	194,314	$	201,165	$	208,378	$	210,366
Income (loss) from continuing operations ^{(1) (5)}	$	40,145	$	44,636	$	43,460	$	(29,749	)
Income from discontinued operations ⁽¹⁾	$	8,411	$	82,803	$	189,426	$	31,615
Net income (loss) attributable to common stockholders	$	46,275	$	125,159	$	231,406	$	(1,806	)
Net income (loss) per common share — basic	$	0.60	$	1.63	$	3.00	$	(0.02	)
Net income (loss) per common share — diluted	$	0.60	$	1.61	$	2.98	$	(0.02	)


⁽¹⁾		Amounts may not equal previously reported results due to reclassification between income from continuing operations and income from discontinued operations.

⁽²⁾		Income from continuing operations for the second quarter of 2009 includes an impairment charge of approximately $20,302 associated with the Company’s planned reduction in development activity.

⁽³⁾		Income from continuing operations for the fourth quarter of 2009 includes an impairment charge of approximately $850 associated with the Company’s planned reduction in development activity and a charge of approximately $26,000 related to the October 2009 tender offer.

⁽⁴⁾		Amounts may not equal full year results due to rounding.

⁽⁵⁾		Income from continuing operations for the fourth quarter of 2008 includes an impairment charge of approximately $57,899 associated with the Company’s planned reduction in development activity.

14. Subsequent Events

The Company has evaluated subsequent events through the date on which this Form 10-K was filed, the date on which these financial statements were issued, and identified the items below for discussion.

In January 2010, the Company sold one community, Avalon at Danada Farms, located in Wheaton, Illinois. Avalon at Danada Farms contains 295 apartment homes and was sold for $45,450. The Company estimates that it will record at gain of approximately $18,000 related to this disposition.

In February 2010, Fund II purchased its third community, located in Gaithersburg, Maryland. The community, renamed Avalon Rothbury, contains 203 homes and was acquired for a purchase price of $31,250.

In February 2010, the Company sold one community, Avalon Knoll, located in Germantown, Maryland. Avalon Knoll

F-36

contains 300 apartment homes and was sold for $37,500. The Company estimates that it will record a gain of approximately $32,000 related to this disposition.

Also in February 2010, the Company repaid a 6.47% fixed rate secured mortgage note in the amount of $13,961 in advance of its March 2012 schedule maturity date.

F-37

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2009
(Dollars in thousands)


		Initial Cost						Total Cost
				Building /		Costs				Building /
				Construction in		Subsequent to				Construction in						Total Cost, Net of				Year of
				Progress &		Acquisition /				Progress &				Accumulated		Accumulated				Completion /
Current Communities	City and state	Land		Improvements		Construction		Land		Improvements		Total		Depreciation		Depreciation		Encumbrances		Acquisition
Avalon at Lexington	Lexington, MA	$	2,124	$	12,599	$	1,737	$	2,124	$	14,336	$	16,460	$	7,665	$	8,795	$	11,226	1994
Avalon Oaks	Wilmington, MA		2,129		18,656		505		2,129		19,161		21,290		7,377		13,913		16,794	1999
Avalon Summit	Quincy, MA		1,743		14,670		1,281		1,743		15,951		17,694		7,650		10,044		—	1986/1996
Avalon Essex	Peabody, MA		5,184		16,303		536		5,184		16,839		22,023		5,879		16,144		—	2000
Avalon at Prudential Center	Boston, MA		25,811		104,399		27,123		25,811		131,522		157,333		48,332		109,001		—	1968/1998
Avalon Oaks West	Wilmington, MA		3,318		13,467		199		3,318		13,666		16,984		3,887		13,097		16,661	2002
Avalon Orchards	Marlborough, MA		2,983		18,037		397		2,983		18,434		21,417		5,157		16,260		19,011	2002
Avalon at Newton Highlands	Newton, MA		11,039		45,527		692		11,039		46,219		57,258		10,424		46,834		—	2003
Avalon at The Pinehills I	Plymouth, MA		3,623		16,292		93		3,623		16,385		20,008		3,157		16,851		—	2004
Avalon at Crane Brook	Peabody, MA		12,381		42,298		282		12,381		42,580		54,961		8,233		46,728		30,440	2004
Essex Place	Peabody, MA		4,645		19,007		11,759		4,645		30,766		35,411		4,203		31,208		—	2004
Avalon at Bedford Center	Bedford, MA		4,257		20,547		—		4,257		20,547		24,804		2,974		21,830		15,871	2005
Avalon Chestnut Hill	Chestnut Hill, MA		14,572		45,911		—		14,572		45,911		60,483		5,190		55,293		41,501	2007
Avalon Shrewsbury	Shrewsbury, MA		5,152		30,608		—		5,152		30,608		35,760		3,501		32,259		21,130	2007
Avalon Danvers	Danvers, MA		7,009		75,947		—		7,009		75,947		82,956		5,981		76,975		—	2006
Avalon Woburn	Woburn, MA		20,649		62,678		—		20,649		62,678		83,327		6,028		77,299		55,805	2007
Avalon at Lexington Hills	Lexington, MA		8,544		78,440		—		8,544		78,440		86,984		5,278		81,706		—	2007
Avalon Acton	Acton, MA		13,125		49,758		—		13,125		49,758		62,883		3,041		59,842		45,000	2007
Avalon Sharon	Sharon, MA		4,719		25,502		—		4,719		25,502		30,221		1,379		28,842		—	2007
Avalon at Center Place	Providence, RI		—		26,816		2,721		—		29,537		29,537		13,094		16,443		—	1991/1997
Avalon at Hingham Shipyard	Hingham, MA		12,208		42,013		—		12,208		42,013		54,221		1,551		52,670		—	2009
Avalon Northborough I	Northborough, MA		3,304		21,726		—		3,304		21,726		25,030		326		24,704		—	2009
Avalon Blue Hills	Randolph, MA		11,051		34,265		—		11,051		34,265		45,316		545		44,771		—	2009
Avalon Gates	Trumbull, CT		4,414		31,268		2,030		4,414		33,298		37,712		14,481		23,231		41,321	1997
Avalon Glen	Stamford, CT		5,956		23,993		2,617		5,956		26,610		32,566		14,513		18,053		—	1991
Avalon Springs	Wilton, CT		2,116		14,664		519		2,116		15,183		17,299		6,711		10,588		—	1996
Avalon Valley	Danbury, CT		2,277		23,781		385		2,277		24,166		26,443		8,970		17,473		—	1999
Avalon on Stamford Harbor	Stamford, CT		10,836		51,989		144		10,836		52,133		62,969		13,974		48,995		65,695	2003
Avalon New Canaan	New Canaan, CT		4,834		19,485		150		4,834		19,635		24,469		5,296		19,173		—	2002
Avalon at Greyrock Place	Stamford, CT		13,819		56,499		526		13,819		57,025		70,844		14,761		56,083		61,690	2002
Avalon Danbury	Danbury, CT		4,933		30,581		107		4,933		30,688		35,621		4,841		30,780		—	2005
Avalon Darien	Darien, CT		6,926		34,594		78		6,926		34,672		41,598		7,571		34,027		51,172	2004
Avalon Milford I	Milford, CT		8,746		22,699		56		8,746		22,755		31,501		4,444		27,057		—	2004
Avalon Huntington	Shelton, CT		5,048		20,166		—		5,048		20,166		25,214		770		24,444		—	2008
Avalon Commons	Smithtown, NY		4,679		28,509		917		4,679		29,426		34,105		12,484		21,621		55,100	1997
Avalon Towers	Long Beach, NY		3,118		12,709		5,767		3,118		18,476		21,594		8,200		13,394		—	1990/1995
Avalon Court	Melville, NY		9,228		50,021		1,162		9,228		51,183		60,411		19,362		41,049		—	1997/2000
Avalon at Glen Cove South	Glen Cove, NY		7,871		59,969		312		7,871		60,281		68,152		11,516		56,636		—	2004
Avalon Pines I & II	Coram, NY		8,700		62,931		81		8,700		63,012		71,712		9,957		61,755		—	2005
Avalon at Glen Cove North	Glen Cove, NY		2,577		37,336		31		2,577		37,367		39,944		3,447		36,497		—	2007
Avalon Cove	Jersey City, NJ		8,760		82,453		2,368		8,760		84,821		93,581		37,233		56,348		—	1997
Avalon at Edgewater	Edgewater, NJ		14,528		60,240		670		14,528		60,910		75,438		17,650		57,788		78,565	2002
Avalon at Florham Park	Florham Park, NJ		6,647		34,906		562		6,647		35,468		42,115		11,522		30,593		—	2001
Avalon Lyndhurst	Lyndhurst, NJ		18,621		62,363		—		18,621		62,363		80,984		5,989		74,995		—	2006
Avalon Run & Run East	Lawrenceville, NJ		14,650		60,486		1,589		14,650		62,075		76,725		12,208		64,517		—	1996
Avalon Watch	West Windsor, NJ		5,585		22,394		8,132		5,585		30,526		36,111		14,120		21,991		—	1988
Avalon at Freehold	Freehold, NJ		4,119		30,514		193		4,119		30,707		34,826		8,788		26,038		36,630	2002

F-38

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2009
(Dollars in thousands)


		Initial Cost						Total Cost
				Building /		Costs				Building /
				Construction in		Subsequent to				Construction in						Total Cost, Net of				Year of
				Progress &		Acquisition /				Progress &				Accumulated		Accumulated				Completion /
Current Communities	City and state	Land		Improvements		Construction		Land		Improvements		Total		Depreciation		Depreciation		Encumbrances		Acquisition
Avalon Run East II	Lawrenceville, NJ		6,766		45,377		95		6,766		45,472		52,238		8,300		43,938		39,250	2003
Avalon at Tinton Falls	Tinton Falls, NJ		7,939		33,106		—		7,939		33,106		41,045		1,745		39,300		—	2007
Avalon Gardens	Nanuet, NY		8,428		45,660		1,491		8,428		47,151		55,579		19,573		36,006		66,237	1998
Avalon Green	Elmsford, NY		1,820		10,525		1,606		1,820		12,131		13,951		5,859		8,092		—	1995
Avalon Willow	Mamaroneck, NY		6,207		40,791		605		6,207		41,396		47,603		14,622		32,981		—	2000
The Avalon	Bronxville, NY		2,889		28,324		366		2,889		28,690		31,579		10,346		21,233		—	1999
Avalon on the Sound	New Rochelle, NY		—		116,239		1,115		—		117,354		117,354		30,833		86,521		—	2001
Avalon Riverview I	Long Island City, NY		—		94,166		1,068		—		95,234		95,234		24,868		70,366		—	2002
Avalon Bowery Place I	New York, NY		18,575		73,555		680		18,575		74,235		92,810		8,354		84,456		93,800	2006
Avalon Riverview North	Long Island City, NY		—		169,057		272		—		169,329		169,329		12,779		156,550		—	2007
Avalon on the Sound East	New Rochelle, NY		—		179,427		227		—		179,654		179,654		13,750		165,904		—	2007
Avalon Bowery Place II	New York, NY		9,104		46,628		34		9,104		46,662		55,766		3,384		52,382		48,500	2007
Avalon White Plains	White Plains, NY		15,328		135,103		—		15,328		135,103		150,431		3,336		147,095		—	2009
Avalon Morningside Park	New York, NY		—		109,654		—		—		109,654		109,654		4,356		105,298		100,000	2009
Avalon Charles Pond	Coram, NY		14,719		33,359		—		14,719		33,359		48,078		758		47,320		—	2009
Avalon at Fairway Hills I, II, & III	Columbia, MD		8,603		34,432		9,913		8,603		44,345		52,948		20,007		32,941		—	1987/1996
Avalon Symphony Woods (SGlen)	Columbia, MD		1,594		6,384		5,850		1,594		12,234		13,828		4,880		8,948		9,780	1986
Avalon Symphony Woods (SGate)	Columbia, MD		7,207		29,151		5,394		7,207		34,545		41,752		3,207		38,545		—	1986/2006
Avalon at Foxhall	Washington, DC		6,848		27,614		10,624		6,848		38,238		45,086		18,068		27,018		59,010	1982
Avalon at Gallery Place I	Washington, DC		8,800		39,731		514		8,800		40,245		49,045		9,641		39,404		45,850	2003
Avalon at Decoverly	Rockville, MD		11,865		49,686		1,973		11,865		51,659		63,524		15,969		47,555		—	1991/1995
Avalon Fields I	Gaithersburg, MD		2,608		11,707		226		2,608		11,933		14,541		5,773		8,768		9,714	1996
Avalon Fields II	Gaithersburg, MD		1,439		6,846		48		1,439		6,894		8,333		2,811		5,522		—	1998
Avalon at Rock Spring	North Bethesda, MD		—		81,796		790		—		82,586		82,586		19,880		62,706		—	2003
Avalon at Grosvenor Station	North Bethesda, MD		29,159		53,001		292		29,159		53,293		82,452		11,571		70,881		—	2004
Avalon at Traville	North Potomac, MD		14,365		55,398		339		14,365		55,737		70,102		11,754		58,348		77,700	2004
Avalon Fair Lakes	Fairfax, VA		6,096		24,400		7,390		6,096		31,790		37,886		12,046		25,840		—	1989/1996
Avalon at Ballston — Washington Towers	Arlington, VA		7,291		29,177		2,747		7,291		31,924		39,215		16,970		22,245		—	1990
Avalon at Cameron Court	Alexandria, VA		10,292		32,930		1,360		10,292		34,290		44,582		13,844		30,738		94,572	1998
Avalon at Providence Park	Fairfax, VA		2,152		8,907		883		2,152		9,790		11,942		4,320		7,622		—	1988/1997
Avalon Crescent	McLean, VA		13,851		43,397		673		13,851		44,070		57,921		19,071		38,850		110,600	1996
Avalon at Arlington Square	Arlington, VA		22,041		90,296		1,342		22,041		91,638		113,679		26,837		86,842		170,125	2001
Avalon Knoll	Germantown, MD		1,412		5,673		1,918		1,412		7,591		9,003		4,849		4,154		—	1985
Avalon at Danada Farms	Wheaton, IL		7,535		31,299		1,196		7,535		32,495		40,030		13,150		26,880		—	1997
Avalon at Stratford Green	Bloomingdale, IL		4,326		17,569		358		4,326		17,927		22,253		7,381		14,872		—	1997
Avalon Arlington Heights	Arlington Heights, IL		9,750		39,661		7,575		9,750		47,236		56,986		14,041		42,945		—	1987/2000
Avalon Redmond Place	Redmond, WA		4,558		18,368		8,996		4,558		27,364		31,922		9,630		22,292		—	1991/1997
Avalon at Bear Creek	Redmond, WA		6,786		27,641		1,856		6,786		29,497		36,283		11,304		24,979		—	1998
Avalon Bellevue	Bellevue, WA		6,664		24,119		310		6,664		24,429		31,093		7,790		23,303		26,698	2001
Avalon RockMeadow	Bothell, WA		4,777		19,742		513		4,777		20,255		25,032		6,776		18,256		—	2000
Avalon WildReed	Everett, WA		4,253		18,676		203		4,253		18,879		23,132		6,266		16,866		—	2000
Avalon HighGrove	Everett, WA		7,569		32,041		332		7,569		32,373		39,942		10,327		29,615		—	2000
Avalon ParcSquare	Redmond, WA		3,789		15,146		607		3,789		15,753		19,542		5,267		14,275		—	2000
Avalon Brandemoor	Lynwood, WA		8,608		36,679		404		8,608		37,083		45,691		11,437		34,254		—	2001
Avalon Belltown	Seattle, WA		5,644		12,733		122		5,644		12,855		18,499		3,947		14,552		—	2001
Avalon Meydenbauer	Bellevue, WA		12,654		76,711		—		12,654		76,711		89,365		4,347		85,018		—	2008
Avalon Fremont	Fremont, CA		10,746		43,399		3,166		10,746		46,565		57,311		18,921		38,390		—	1994
Avalon Dublin	Dublin, CA		5,276		19,642		3,776		5,276		23,418		28,694		9,316		19,378		—	1989/1997
Avalon Pleasanton	Pleasanton, CA		11,610		46,552		7,864		11,610		54,416		66,026		21,581		44,445		—	1988/1994

F-39

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2009
(Dollars in thousands)


		Initial Cost						Total Cost
				Building /		Costs				Building /
				Construction in		Subsequent to				Construction in						Total Cost, Net of				Year of
				Progress &		Acquisition /				Progress &				Accumulated		Accumulated				Completion /
Current Communities	City and state	Land		Improvements		Construction		Land		Improvements		Total		Depreciation		Depreciation		Encumbrances		Acquisition
Avalon at Union Square	Union City, CA		4,249		16,820		1,855		4,249		18,675		22,924		7,781		15,143		—	1973/1996
Waterford	Hayward, CA		11,324		45,717		5,149		11,324		50,866		62,190		21,665		40,525		33,100	1985/1986
Avalon at Willow Creek	Fremont, CA		6,581		26,583		3,329		6,581		29,912		36,493		12,690		23,803		—	1985/1994
Avalon at Dublin Station	Dublin, CA		10,058		74,298		24		10,058		74,322		84,380		4,782		79,598		—	2006
Avalon Union City	Union City, CA		14,731		104,009		—		14,731		104,009		118,740		1,419		117,321		—	2009
Avalon at Cedar Ridge	Daly City, CA		4,230		9,659		15,252		4,230		24,911		29,141		9,494		19,647		—	1972/1997
Avalon at Nob Hill	San Francisco, CA		5,403		21,567		1,222		5,403		22,789		28,192		9,230		18,962		20,800	1990/1995
Crowne Ridge	San Rafael, CA		5,982		16,885		10,233		5,982		27,118		33,100		11,722		21,378		—	1973/1996
Avalon Foster City	Foster City, CA		7,852		31,445		4,894		7,852		36,339		44,191		14,202		29,989		—	1973/1994
Avalon Towers by the Bay	San Francisco, CA		9,155		57,631		269		9,155		57,900		67,055		20,408		46,647		—	1999
Avalon Pacifica	Pacifica, CA		6,125		24,796		1,560		6,125		26,356		32,481		10,728		21,753		17,600	1971/1995
Avalon Sunset Towers	San Francisco, CA		3,561		21,321		4,008		3,561		25,329		28,890		10,779		18,111		—	1961/1996
Avalon at Diamond Heights	San Francisco, CA		4,726		19,130		5,077		4,726		24,207		28,933		8,727		20,206		—	1972/1994
Avalon at Mission Bay North	San Francisco, CA		14,029		78,452		667		14,029		79,119		93,148		19,006		74,142		73,269	2003
Avalon at Mission Bay III	San Francisco, CA		28,686		118,227		—		28,686		118,227		146,913		1,575		145,338		—	2009
Avalon Campbell	Campbell, CA		11,830		47,828		1,014		11,830		48,842		60,672		19,295		41,377		38,800	1995
CountryBrook	San Jose, CA		9,384		38,791		4,699		9,384		43,490		52,874		16,369		36,505		13,961	1985/1996
Avalon on the Alameda	San Jose, CA		6,119		50,230		590		6,119		50,820		56,939		18,997		37,942		53,980	1999
Avalon Rosewalk	San Jose, CA		15,814		62,028		2,130		15,814		64,158		79,972		25,022		54,950		—	1997/1999
Avalon Silicon Valley	Sunnyvale, CA		20,713		99,573		3,241		20,713		102,814		123,527		40,874		82,653		150,000	1997
Avalon Mountain View	Mountain View, CA		9,755		39,393		9,735		9,755		49,128		58,883		17,196		41,687		18,300	1986
Avalon at Creekside	Mountain View, CA		6,546		26,301		10,810		6,546		37,111		43,657		14,259		29,398		—	1962/1997
Avalon at Cahill Park	San Jose, CA		4,765		47,600		382		4,765		47,982		52,747		12,627		40,120		—	2002
Avalon Towers on the Peninsula	Mountain View, CA		9,560		56,136		115		9,560		56,251		65,811		15,440		50,371		—	2002
Countrybrook II	San Jose, CA		3,536		14,256		213		3,536		14,469		18,005		1,232		16,773		—	2007
Avalon Newport	Costa Mesa, CA		1,975		3,814		4,652		1,975		8,466		10,441		3,450		6,991		—	1956/1996
Avalon Mission Viejo	Mission Viejo, CA		2,517		9,257		2,346		2,517		11,603		14,120		5,014		9,106		7,635	1984/1996
Avalon at South Coast	Costa Mesa, CA		4,709		16,063		5,255		4,709		21,318		26,027		9,051		16,976		—	1973/1996
	Rancho Santa
Avalon Santa Margarita	Margarita, CA		4,607		16,911		3,009		4,607		19,920		24,527		8,276		16,251		—	1990/1997
Avalon at Pacific Bay	Huntington Beach, CA		4,871		19,745		8,617		4,871		28,362		33,233		11,177		22,056		—	1971/1997
Avalon Warner Place	Canoga Park, CA		7,920		44,822		—		7,920		44,822		52,742		2,468		50,274		—	2007
Avalon Anaheim Stadium	Anaheim, CA		27,853		69,188		772		27,853		69,960		97,813		1,880		95,933		—	2009
Avalon at Mission Bay	San Diego, CA		9,922		40,633		16,331		9,922		56,964		66,886		21,989		44,897		—	1969/1997
Avalon at Mission Ridge	San Diego, CA		2,710		10,924		9,032		2,710		19,956		22,666		8,278		14,388		—	1960/1997
Avalon at Cortez Hill	San Diego, CA		2,768		20,134		11,843		2,768		31,977		34,745		12,525		22,220		—	1973/1998
Avalon Fashion Valley	San Diego, CA		19,627		44,913		—		19,627		44,913		64,540		1,823		62,717		—	2008
Avalon at Media Center	Burbank, CA		22,483		28,104		27,138		22,483		55,242		77,725		20,885		56,840		—	1961/1997
Avalon Woodland Hills	Woodland Hills, CA		23,828		40,372		43,701		23,828		84,073		107,901		21,299		86,602		—	1989/1997
Avalon at Warner Center	Woodland Hills, CA		7,045		12,986		7,533		7,045		20,519		27,564		9,012		18,552		—	1979/1998
Avalon Glendale	Burbank, CA		—		41,434		133		—		41,567		41,567		9,350		32,217		—	2003
Avalon Burbank	Burbank, CA		14,053		56,827		20,773		14,053		77,600		91,653		15,264		76,389		29,387	1988/2002
Avalon Camarillo	Camarillo, CA		8,447		40,291		—		8,447		40,291		48,738		5,205		43,533		—	2006
Avalon Wilshire	Los Angeles, CA		5,459		41,182		235		5,459		41,417		46,876		3,708		43,168		—	2007
Avalon Encino	Los Angeles, CA		12,788		48,866		161		12,788		49,027		61,815		1,955		59,860		—	2008

			1,138,797		5,796,633		420,833		1,138,797		6,217,466		7,356,263		1,493,630		5,862,633		2,072,280


Development Communities
Avalon Irvine	Irvine, CA		6,750		46,416		22,938		6,750		69,354		76,104		566		75,538		—	N/A
Avalon Walnut Creek	Walnut Creek, CA		—		370		98,450		—		98,820		98,820		—		98,820		137,500	N/A

F-40

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2009
(Dollars in thousands)


		Initial Cost						Total Cost
				Building /		Costs				Building /
				Construction in		Subsequent to				Construction in						Total Cost, Net of				Year of
				Progress &		Acquisition /				Progress &				Accumulated		Accumulated				Completion /
Current Communities	City and state	Land		Improvements		Construction		Land		Improvements		Total		Depreciation		Depreciation		Encumbrances		Acquisition
Avalon Norwalk	Norwalk, CT		—		159		50,612		—		50,771		50,771		—		50,771		—	N/A
Avalon Fort Greene	Brooklyn, NY		10,423		29,562		219,687		10,423		249,249		259,672		83		259,589		—	N/A
Avalon Towers Bellevue	Bellevue, WA		—		350		73,449		—		73,799		73,799		—		73,799		—	N/A
Avalon Northborough II	Northborough, MA		—		184		18,717		—		18,901		18,901		—		18,901		—	N/A
Avalon at West Long Branch	West Long Branch, NJ		—		—		2,219		—		2,219		2,219		—		2,219		—	N/A

			17,173		77,041		486,072		17,173		563,113		580,286		649		579,637		137,500

Land held for development			237,095		—		—		237,095		—		237,095		—		237,095		107,063
Corporate Overhead			103,656		39,633		43,158		103,656		82,791		186,447		32,325		154,122		1,658,029

		$	1,496,721	$	5,913,307	$	950,063	$	1,496,721	$	6,863,370	$	8,360,091	$	1,526,604	$	6,833,487	$	3,974,872

F-41

AVALONBAY COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2009
(Dollars in thousands)

Amounts include real estate assets held for sale.

Depreciation of AvalonBay Communities, Inc. building, improvements, upgrades and furniture, fixtures and equipment (FF&E) is calculated over the following useful lives, on a straight line basis:

Building — 30 years

Improvements, upgrades and FF&E — not to exceed 7 years

The aggregate cost of total real estate for federal income tax purposes was approximately $8,179,000 at December 31, 2009.

The changes in total real estate assets for the years ended December 31, 2009, 2008 and 2007 are as follows:


	Years ended December 31,
	2009			2008			2007
Balance, beginning of period	$	8,002,487		$	7,556,740		$	6,615,593
Acquisitions, construction costs and improvements		493,196			757,835			1,097,959
Dispositions, including impairment loss on planned dispositions		(135,592	)		(312,088	)		(156,812	)

Balance, end of period	$	8,360,091		$	8,002,487		$	7,556,740

The changes in accumulated depreciation for the years ended December 31, 2009, 2008 and 2007, are as follows:


	Years ended December 31,
	2009			2008			2007
Balance, beginning of period	$	1,352,744		$	1,259,558		$	1,105,231
Depreciation, including discontinued operations		218,286			199,452			180,697
Dispositions		(44,426	)		(106,266	)		(26,370	)

Balance, end of period	$	1,526,604		$	1,352,744		$	1,259,558

F - 42

TABLE OF CONTENTS

Part I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Communities Item 3. Legal Proceedings Item 4. [reserved]Part II Item 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities Item 6. Selected Financial Data Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Part IV Item 15. Exhibits, Financial Statement Schedule

AVB 10-K Fiscal year ended Dec. 31, 2009