Edgar Filing: AVALONBAY COMMUNITIES INC

e10vk

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, 2007

Commission file number 1-12672

AVALONBAY COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)


Maryland		77-0404318
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 8.70% Series H Cumulative Redeemable Preferred Stock, par value $.01 per share (Title of each class)		New York Stock Exchange New York Stock Exchange (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 ý 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 ý

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 ý 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 ý	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 ý

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, 2007 was $9,281,643,046.

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of January 31, 2008 was 76,845,045.

Documents Incorporated by Reference

Portions of AvalonBay Communities, Inc.’s Proxy Statement for the 2008 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


		PAGE

	PART I

ITEM 1.	BUSINESS		1

ITEM 1a.	RISK FACTORS		8

ITEM 1b.	UNRESOLVED STAFF COMMENTS		15

ITEM 2.	COMMUNITIES		16

ITEM 3.	LEGAL PROCEEDINGS		34

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		34

	PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		35

ITEM 6.	SELECTED FINANCIAL DATA		37

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		40

ITEM 7a.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		59

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		61

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		61

ITEM 9a.	CONTROLS AND PROCEDURES		61

ITEM 9b.	OTHER INFORMATION		61

	PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		62

ITEM 11.	EXECUTIVE COMPENSATION		62

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		62

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		63

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES		63

	PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULE		64

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” on page 55 of 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, or 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 the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and 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 larger increases in cash flows relative to other markets. In addition to increasing the rental revenues of our operating assets, we believe these market attributes will increase the value of our operating assets and enable us to create additional value through the development and selective acquisition of multifamily housing.

At January 31, 2008, we owned or held a direct or indirect ownership interest in:

	•		163 operating apartment communities containing 45,932 apartment homes in ten states and the District of Columbia, of which (i) 12 communities containing 4,006 apartment homes were redevelopment communities, discussed below and (ii) 20 communities containing 4,229 apartment homes were held by the Fund (as defined below) which we manage and in which we own a 15.2% equity interest;

	•		21 communities under construction that are expected to contain an aggregate of 6,816 apartment homes when completed; and

	•		rights to develop an additional 48 communities that, if developed in the manner expected, will contain an estimated 13,656 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 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 are consolidated for financial reporting purposes and that were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. 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. 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 by successfully and cost-effectively developing, redeveloping, acquiring, owning and operating high-quality communities in our selected markets that contain features and amenities desired by residents, as well as by providing our residents with efficient and effective service. To help fulfill this goal, we regularly (i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire 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 such that we maintain continuous access to cost-effective capital. Our long-term strategy is to more deeply penetrate the high barrier-to-entry markets in our chosen regions with a broad range of products and services and an intense focus on our customer. 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, 2007, excluding acquisition for the Fund, we acquired two apartment communities and executed the buyout of our partner’s 75% interest in a joint venture that owns an apartment community. All three communities’ financial results are consolidated for financial reporting purposes. During the same three-year period, we disposed of 15 apartment communities, disposed of one investment in a real estate joint venture and completed the development of 21 apartment communities and the redevelopment of 10 apartment communities, including communities we redeveloped for the Fund (as defined below). In anticipation of favorable apartment fundamentals and to help position us for future growth, we increased our construction volume during 2007 (as measured by total projected capitalized cost at completion) and continued to secure new development opportunities, including the acquisition of land for future development. We also increased our investments in apartment communities through an institutional discretionary investment fund, AvalonBay Value Added Fund, L.P. (the “Fund”), which we manage and in which we own a 15% interest. To create value, the Fund acquired communities with the objective of either redeveloping or repositioning them, or taking advantage of market cycle timing and improved operating performance. Since its inception in March 2005, the Fund has acquired 20 communities. A more detailed description of the Fund and its 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. As a result of strong capital flows to the industry, we also continued to dispose of assets at prices that provided significant realized gains.

In 2008, we expect additional new development starts to be in the range of $900,000,000 to $1,100,000,000, measured at total projected cost of completion, and anticipate an increase in our redevelopment activity for both wholly-owned assets and assets of the Fund. We also anticipate asset sales in the range of $700,000,000 to $1,000,000,000, dependent on strategic and value realization opportunities. The level of development, acquisition and disposition activity, however, is heavily influenced by capital market conditions, including prevailing interest rates. 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 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 and administrative or specialty offices in or near the following cities:

	•		Boston, Massachusetts;
	•		Chicago, Illinois;
	•		Long Island, New York;
	•		Los Angeles, California;
	•		New York, New York;
	•		Newport Beach, California;
	•		San Francisco, California;
	•		San Jose, California;
	•		Seattle, Washington;
	•		Shelton, Connecticut;
	•		Virginia Beach, Virginia; and
	•		Woodbridge, New Jersey.

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 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 the recent competitive market conditions for land suitable for development, we recently have 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. We currently own land that is held for development with an aggregate carrying basis under U.S. generally accepted accounting principles (“GAAP”) of $288,423,000 on which we have not yet commenced construction.

Except for certain mid-rise and high-rise apartment communities where we may elect to use third-party general contractors or construction managers, when we start construction we act as our own general contractor and construction manager. 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 high-quality workmanship and a smooth and timely transition into the leasing and operating phase.

When there is increased competition for desirable development opportunities, we will in some cases be engaged in more complicated development pursuits. For example, at times we have acquired and may in the future acquire existing commercial buildings with the intent to pursue rezoning, tenant terminations or expirations and demolition of the existing structures. 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 procedures to reduce 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 high-quality design and workmanship and a smooth and timely transition into the lease-up and restabilization phase.

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 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 by issuing debt or equity securities. 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 2005 we formed the Fund, which since then has served as the exclusive vehicle through which we acquired additional investments in apartment communities, subject to limited exceptions. At December 31, 2007, the Fund had invested $777,568,000. We expect that the Fund will invest approximately $46,000,000 of additional funds to redevelop the assets acquired, at which time the Fund will become fully invested. We are exploring various potential sources and vehicles for funding future acquisitions after the Fund is fully invested.

Property Management Strategy. We expect 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;

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

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

	•		managing community occupancy for optimal rental revenue levels.

Constraining growth in operating expenses is another way in which we expect 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 control operating expenses in a variety of ways, which include the following, among others:

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

	•		we purchase supplies in bulk where possible;

	•		we bid third-party contracts on a volume basis;

	•		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;

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

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

	•		we aggressively pursue real estate tax appeals.

On-site property management teams receive bonuses based largely upon the net operating income 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 have consistently maintained, and intend to continue to maintain, a capital structure that provides us with flexibility in meeting the financial obligations and opportunities presented by our real estate development and ownership business. At December 31, 2007, our debt-to-total market capitalization was 30.3%, and our long-term floating rate debt, which includes amounts outstanding on our variable rate unsecured credit facility, was 10.2% of total market capitalization. Total market capitalization reflects the aggregate of the market value of our common stock, the market value of our operating partnership units outstanding (based on the market value of our common stock), the liquidation preference of our preferred stock and the outstanding principal amount of our debt. We believe that debt-to-total market capitalization can be one useful measure of a real estate operating company’s long-term liquidity and balance sheet strength, because it shows an approximate relationship between a company’s total debt and the current total market value of its assets based on the current price at which the company’s common stock trades. However, because debt-to-total market capitalization changes with fluctuations in our stock price, which occur regularly, our debt-to-total market capitalization may change even when our earnings and debt levels remain stable.

We estimate that a portion of our short-term liquidity needs will be met from retained operating cash, borrowings under our variable rate unsecured credit facility and sales of current operating communities. If required to meet the balance of our current or anticipated liquidity needs, we will borrow funds under our existing unsecured credit facility, sell existing communities or land and/or issue 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 venture or partnership. Our decision whether to hold an apartment community in fee simple or to have an indirect interest in the community through a joint venture or partnership 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, who may prefer that (or who may require less payment if) the land or community is contributed to a joint venture or partnership; (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 or partnership vehicle is used. Investments in joint ventures or partnerships are not limited to a specified percentage of our assets. Each joint venture or partnership 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 or partnership agreement.

Since its inception in 2005, the Fund has served as the principal vehicle through which we have invested in the acquisition of apartment communities, subject to certain exceptions. These exceptions included significant individual asset and portfolio acquisitions, properties acquired in tax-deferred transactions and acquisitions that are inadvisable or inappropriate for the Fund. The Fund does not restrict our development activities, and will terminate after a term of eight years, subject to two one-year extensions. The Fund has nine institutional investors, including us, with a combined equity capital commitment of $330,000,000. A significant portion of the investments made in the Fund by its investors are being made through AvalonBay Value Added Fund, Inc., a Maryland corporation that qualifies as a REIT under the Internal Revenue Code (the “Fund REIT”). A wholly-owned subsidiary of the Company is the general partner of the Fund and has committed $50,000,000 to the Fund and the Fund REIT (of which approximately $43,399,000 has been invested as of January 31, 2008) representing a 15.2% combined general partner and limited partner equity interest. As of January 31, 2008, the Fund had invested $779,318,000, with an additional expected net investment of $39,000,000 to redevelop the assets acquired. We are exploring various potential sources and vehicles for funding future acquisitions after the Fund is fully invested.

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. On occasion, 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, 2007, we had a total of 405,122 square feet of rentable retail space that produced gross rental revenue in 2007 of $7,790,000 (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 64 for-sale townhomes at a total projected capital cost of $23,636,000 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), the Board of Directors determines that it is no longer in our best interest to qualify as a REIT.

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.

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, 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 net income to the extent 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 proposition 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”.

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. 20002. You may call the SEC at 1-800-SEC-0330 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 20 Board Street, New York, New York 10005. Our SEC filings are available at the NYSE because our common stock and an outstanding series of preferred stock are 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 New York Stock Exchange (“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 December 31, 2007, we had 1,898 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 on page 55.

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 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 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;

	•		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 a lawsuit alleging noncompliance with these statutes. See “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 have been increasing, particularly for materials such as steel, concrete and lumber, and, for some of our Development Communities and Development Rights, the total construction costs may be higher than the original budget. Total capitalized cost includes all capitalized costs projected to be incurred to develop or redevelop a community, determined in accordance with United States Generally Accepted Accounting Principles (“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 or operating expenses.

Local conditions in our markets significantly affect occupancy or rental rates at 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 may adversely affect the operating performance of our communities.

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

We must operate our communities in compliance with numerous federal, state and local laws and regulations, including landlord tenant laws and other laws generally applicable to business operations. Noncompliance with laws could expose us to liability.

Compliance with changes in (i) laws increasing 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 (iii) other governmental rules and regulations or enforcement policies affecting the use and operation of our communities, including changes to building codes and fire and life-safety codes, may result in lower revenue growth or significant unanticipated expenditures.

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.

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 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, in order for us to continue to qualify as a REIT, and 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, variable interest rate debt. 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 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, 2007, approximately 4.7% 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 aggressively and, in consequence, can also limit increases in 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.

Risks related to indebtedness.

We have a $1,000,000,000 revolving variable rate unsecured 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 unsecured credit facility and the indentures 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.

Failure to generate sufficient revenue could limit cash flow available for distributions to stockholders.

A decrease in rental revenue 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.

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 hard to sell. 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 the Fund, 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 in the business description above, we also own and lease 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 in the business description above, through a taxable REIT subsidiary that is a joint venture partner, we have a 50% economic interest in a 64 townhome for-sale development with a total estimated capital cost at completion of $23,636,000, 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 evaluate accurately 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.

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. Partnership or joint venture investments 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 a discretionary investment fund.

We have formed the Fund which, through a wholly-owned subsidiary, we manage as the general partner and to which we have committed $50,000,000, representing an equity interest of approximately 15%. This presents risks, including the following:

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

	•		our subsidiary that is the general partner of the Fund is generally liable, under partnership law, for the debts and obligations of the Fund, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the Fund;

	•		investors in the Fund 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 Fund;

	•		while we have broad discretion to manage the Fund and make investment decisions on behalf of the Fund, 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 Fund 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 the Fund, which is our exclusive investment vehicle until March 2008 or when 80% of the Fund’s capital is invested, subject to certain exceptions; and

	•		we may be liable if either the Fund, or the REIT through which a number of investors have invested in the Fund and which we manage, fails to comply with various tax or other regulatory matters.

If we were to employ a similar vehicle to fund acquisitions in the future, such vehicle could present similar risks to us, or similar requirements that our acquisition activity be conducted primarily through the vehicle.

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.

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 the Northeast and 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 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 several 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 or redeveloping, 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 operation. 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.

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 could relate to 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 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 to otherwise address concerns about concentrations of ownership of our stock, our charter generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Internal Revenue 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. 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, 2007, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2006, 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.

Development Communities are communities that are under construction and for which a certificate of occupancy has not been received. 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.

As of December 31, 2007, 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:
Northeast		42		11,226
Mid-Atlantic		17		5,757
Midwest		3		887
Pacific Northwest		9		2,278
Northern California		27		8,109
Southern California		10		3,172

Total Established		108		31,429


Other Stabilized Communities:
Northeast		18		5,359
Mid-Atlantic		6		1,485
Midwest		3		869
Pacific Northwest		2		611
Northern California		5		1,149
Southern California		10		2,123

Total Other Stabilized		44		11,596


Lease-Up Communities		3		676

Redevelopment Communities		8		2,231


Total Current Communities		163		45,932


Development Communities		21		6,816


Development Rights		48		13,656

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. The Current Communities, as of January 31, 2008, include 123 garden-style (of which 14 are mixed communities and include townhomes), 21 high-rise and 19 mid-rise apartment communities. The Current Communities offer many attractive amenities including some or all of the following:

	•		vaulted ceilings;

	•		lofts;

	•		fireplaces;

	•		patios/decks; and

	•		modern appliances.

Other features at various communities may include:

	•		swimming pools;

	•		fitness centers;

	•		tennis courts; and

	•		business centers.

We also have an extensive and ongoing maintenance program to keep all communities and apartment homes substantially free of deferred maintenance and, where vacant, available for immediate occupancy. We believe that 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 this will ultimately 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
	1-31-07		1-31-08		1-31-07		1-31-08		1-31-07			1-31-08

Northeast		56		64		15,732		17,547		36.1	%		38.2	%
Boston, MA		18		22		4,490		5,788		10.3	%		12.6	%
Fairfield County, CT		14		14		3,812		3,812		8.8	%		8.3	%
Long Island, NY		6		7		1,621		1,732		3.7	%		3.8	%
Northern New Jersey		3		5		1,182		1,618		2.7	%		3.5	%
Central New Jersey		6		6		2,042		2,042		4.7	%		4.4	%
New York, NY		9		10		2,585		2,555		5.9	%		5.6	%

Mid-Atlantic		24		25		7,622		7,818		17.5	%		17.0	%
Baltimore, MD		9		9		1,987		1,987		4.6	%		4.3	%
Washington, DC		15		16		5,635		5,831		12.9	%		12.7	%

Midwest		7		7		1,952		1,952		4.5	%		4.2	%
Chicago, IL		7		7		1,952		1,952		4.5	%		4.2	%

Pacific Northwest		12		12		3,111		3,111		7.2	%		6.8	%
Seattle, WA		12		12		3,111		3,111		7.2	%		6.8	%

Northern California		33		34		9,366		9,546		21.5	%		20.8	%
Oakland-East Bay, CA		7		7		2,089		2,089		4.8	%		4.5	%
San Francisco, CA		11		11		2,489		2,489		5.7	%		5.4	%
San Jose, CA		15		16		4,788		4,968		11.0	%		10.8	%

Southern California		19		21		5,750		5,958		13.2	%		13.0	%
Los Angeles, CA		9		11		3,006		3,214		6.9	%		7.0	%
Orange County, CA		7		7		1,686		1,686		3.9	%		3.7	%
San Diego, CA		3		3		1,058		1,058		2.4	%		2.3	%

		151		163		43,533		45,932		100.0	%		100.0	%

We manage and operate substantially all of our Current Communities. During the year ended December 31, 2007, we completed construction of 1,749 apartment homes in eight communities, acquired one wholly-owned community containing 80 apartment homes and sold 982 apartment homes in four communities. In addition, the Fund acquired 1,491 apartment homes in seven communities. The average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 15.3 years. When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the average age of our Current Communities is 9.7 years.

Of the Current Communities, as of January 31, 2008, we own:

	•		a full fee simple, or absolute, ownership interest in 120 operating communities, 5 of which are on land subject to land leases expiring in November 2028, December 2061, April 2095, September 2105, and March 2142;

	•		a general partnership interest in 3 partnerships that each own a fee simple interest in an operating community;

	•		a general partnership interest and an indirect limited partnership interest in the Fund, which owns a fee simple interest in 20 operating communities;

	•		a general partnership interest in two partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of 12 communities;

	•		a membership interest in 7 limited liability companies that each hold a fee simple interest in an operating community, three of which are on land subject to land leases expiring in February 2093, August 2100, and December 2103; 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.

We also hold, directly or through wholly owned subsidiaries, the full fee simple ownership interest in 21 of the Development Communities, all of which are currently consolidated for financial reporting purposes.

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, 2008, there were 64,019 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 economic						Average
				Approx.				Year of	Average		Physical			occupancy						rental rate					Financial
		Number of		rentable area				completion/	size		occupancy at									$ per		$ per			reporting cost
	City and state	homes		(Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		12/31/07			2007			2006			Apt (4)		Sq. Ft.			(5)
CURRENT COMMUNITIES

*NORTHEAST*
Boston, MA
Avalon at Lexington	Lexington, MA		198		230,280		16.1	1994		1,163		98.5	%		96.5	%		95.9	%		1,784		1.48			16,271
Avalon Summit	Quincy, MA		245		216,509		8.0	1986/1996		884		96.7	%		96.0	%		95.5	%		1,279		1.39			17,582
Avalon at Faxon Park	Quincy, MA		171		175,649		8.3	1998		1,027		95.9	%		95.9	%		96.3	%		1,604		1.50			15,675
Avalon at Prudential Center	Boston, MA		780		725,409		1.0	1968/1998		930		97.2	%		97.0	%		97.5	%		2,858		2.98			156,839
Avalon Ledges	Weymouth, MA		304		330,606		57.6	2002		1,088		96.7	%		95.0	%		95.3	%		1,452		1.27			36,408
Avalon Orchards	Marlborough, MA		156		176,477		23.0	2002		1,131		98.1	%		96.0	%		96.4	%		1,449		1.23			21,197
Avalon at Flanders Hill	Westborough, MA		280		299,425		62.0	2003		1,069		96.4	%		96.0	%		95.4	%		1,438		1.29			37,447
Avalon at Newton Highlands (8)	Newton, MA		294		339,537		7.0	2003		1,155		96.6	%		95.5	%		95.2	%		2,231		1.84			56,685
Avalon at The Pinehills I	Plymouth, MA		101		150,991		6.0	2004		1,495		91.1	%		95.8	%		93.4	%		1,786		1.14			19,984
Avalon at Crane Brook	Danvers & Peabody, MA		387		410,076		20.0	2004		1,060		97.9	%		95.7	%		95.5	%		1,347		1.22			54,807
Avalon at Center Place (11)	Providence, RI		225		222,834		1.2	1991/1997		990		91.6	%		92.8	%		93.8	%		2,245		2.10			29,182
Avalon Shrewsbury	Shrewsbury, MA		251		274,780		25.5	2007		1,095		97.2	%		84.3	%		N/A			1,312		1.01	(3)		35,705
Avalon Woburn	Woburn, MA		446		486,091		56.0	2007		1,090		98.0	%		61.4	%		N/A			1,471		0.83			81,410
Avalon Oaks	Wilmington, MA		204		229,452		22.5	1999		1,125		96.1	%		95.4	%		95.1	%		1,477		1.25			21,272
Avalon Essex	Peabody, MA		154		198,478		11.1	2000		1,289		97.4	%		96.5	%		97.3	%		1,577		1.18			21,864
Avalon Oaks West	Wilmington, MA		120		133,376		27.0	2002		1,111		94.2	%		95.0	%		93.7	%		1,374		1.18			16,844
Avalon at Bedford Center	Bedford, MA		139		159,704		38.0	2005		1,149		96.4	%		95.6	%		85.4	%(3)		1,756		1.46			24,805
Avalon Chestnut Hill	Chestnut Hill, MA		204		270,031		4.7	2007		1,324		97.1	%		78.8	%		7.9	%		2,045		1.22	(3)		60,274
Essex Place	Peabody, MA		286		250,322		18.0	2004		875		90.9	%		96.3	%(2)		97.8	%		1,089		1.20	(2)		27,155

Fairfield-New Haven, CT
Avalon Gates	Trumbull, CT		340		379,282		37.0	1997		1,116		97.4	%		94.9	%		98.1	%		1,627		1.38			37,170
Avalon Glen	Stamford, CT		238		221,843		4.1	1991		932		97.5	%		97.2	%		97.2	%		2,015		2.10			32,243
Avalon Springs	Wilton, CT		102		158,259		12.0	1996		1,552		99.0	%		96.5	%		92.7	%		2,983		1.85			17,213
Avalon Valley	Danbury, CT		268		295,303		17.1	1999		1,102		98.1	%		96.8	%		98.1	%		1,664		1.46			26,397
Avalon Haven	North Haven, CT		128		139,972		10.6	2000		1,094		94.5	%		96.8	%		97.4	%		1,594		1.41			14,014
Avalon Orange	Orange, CT		168		161,795		9.6	2005		963		94.6	%		95.1	%		97.9	%		1,499		1.48			22,096
Avalon on Stamford Harbor	Stamford, CT		323		323,587		12.1	2003		1,002		94.7	%		97.5	%		97.6	%		2,502		2.44			62,891
Avalon New Canaan	New Canaan, CT		104		131,468		9.1	2002		1,264		95.2	%		94.3	%		95.7	%		2,935		2.19			24,379
Avalon at Greyrock Place	Stamford, CT		306		314,600		3.0	2002		1,028		95.8	%		97.5	%		97.9	%		2,272		2.15			70,454
Avalon Darien	Darien, CT		189		242,533		32.0	2004		1,283		97.9	%		96.2	%		93.7	%		2,564		1.92			41,519
Avalon Milford I	Milford, CT		246		216,746		22.0	2004		881		97.2	%		96.1	%		98.1	%		1,443		1.57			31,460
Avalon Walk I & II	Hamden, CT		764		435,426		38.4	1992/1994		1,003		91.9	%		88.3	%(2)		91.7	%		1,308		2.03	(2)		69,537
Avalon Danbury	Danbury, CT		234		235,320		36.0	2005		1,006		95.3	%		95.5	%		94.5	%		1,666		1.58			35,515

Long Island, NY
Avalon Commons	Smithtown, NY		312		377,240		20.6	1997		1,209		95.5	%		95.4	%		97.1	%		2,087		1.65			33,786
Avalon Towers	Long Beach, NY		109		124,611		1.3	1990/1995		1,143		94.5	%		96.8	%		97.7	%		3,491		2.96			21,326
Avalon Court	Melville, NY		494		596,942		35.4	1997/2000		1,208		92.5	%		95.3	%		96.3	%		2,470		1.95			59,922
Avalon at Glen Cove South	Glen Cove, NY		256		261,462		4.0	2004		1,021		97.3	%		94.5	%		95.5	%		2,343		2.17			67,965
Avalon Pines I	Coram, NY		298		362,132		32.0	2005		1,215		96.0	%		95.7	%		95.9	%		1,912		1.51			46,877
Avalon at Glen Cove North (11)	Glen Cove, NY		111		100,851		1.3	2007		909		97.3	%		50.2	%(3)		N/A			2,530		1.40	(3)		39,710
Avalon Pines II	Coram, NY		152		183,857		42.0	2006		1,210		99.3	%		96.3	%		71.0	%		1,887		1.50			24,765


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

														Average economic						Average
				Approx.				Year of	Average		Physical			occupancy						rental rate					Financial
		Number of		rentable area				completion/	size		occupancy at									$ per		$ per			reporting cost
	City and state	homes		(Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		12/31/07			2007			2006			Apt (4)		Sq. Ft.			(5)
Northern New Jersey
Avalon Cove	Jersey City, NJ		504		575,334		11.0	1997		1,142		95.4	%		97.5	%		97.7	%		2,905		2.48			93,181
Avalon at Edgewater	Edgewater, NJ		408		422,269		7.6	2002		1,035		94.6	%		95.2	%		95.8	%		2,362		2.17			75,205
Avalon at Florham Park	Florham Park, NJ		270		330,410		41.9	2001		1,224		94.8	%		96.1	%		97.6	%		2,616		2.06			41,878
Avalon Lyndhurst	Lyndhurst, NJ		328		329,526		5.8	2006		1,005		95.4	%		57.0	%(3)		N/A			2,136		1.21	(3)		80,350

Central New Jersey
Avalon Run East (8)	Lawrenceville, NJ		206		265,733		27.1	1996		1,290		96.6	%		96.2	%		95.8	%		1,588		1.18			16,358
Avalon at Freehold	Freehold, NJ		296		317,416		40.3	2002		1,072		97.6	%		97.5	%		96.3	%		1,697		1.54			34,765
Avalon Run East II	Lawrenceville, NJ		312		341,292		70.5	2003		1,094		93.6	%		96.2	%		96.2	%		1,775		1.56			52,144
Avalon Watch	West Windsor, NJ		512		493,866		64.4	1988		965		97.1	%		95.6	%		96.4	%		1,384		1.37			30,197
Avalon Run (7)	Lawrenceville, NJ		426		443,168		9.0	1994		1,040		95.1	%		96.2	%		96.0	%		1,423		1.32			60,056

New York, NY
Avalon Gardens	Nanuet, NY		504		608,842		62.5	1998		1,208		96.2	%		96.9	%		97.0	%		2,108		1.69			55,425
Avalon Green	Elmsford, NY		105		113,538		16.9	1995		1,081		97.1	%		97.3	%		96.5	%		2,308		2.08			13,709
Avalon Willow	Mamaroneck, NY		227		199,834		4.0	2000		880		97.8	%		96.5	%		98.9	%		2,220		2.43			47,530
The Avalon	Bronxville, NY		110		119,410		1.5	1999		1,086		98.2	%		97.4	%		97.0	%		3,506		3.14			31,485
Avalon on the Sound (11)	New Rochelle, NY		412		367,969		2.4	2001		893		94.4	%		95.2	%		96.2	%		2,320		2.47			117,232
Avalon Riverview I (11)	Long Island City, NY		372		332,947		1.0	2002		895		98.1	%		97.6	%		96.7	%		3,087		3.37			94,561
Avalon Bowery Place I	New York, NY		206		162,000		1.1	2006		786		93.7	%		89.8	%		32.2	%(3)		3,780		4.31			93,008
Avalon Bowery Place II	New York, NY		90		73,624		1.1	2007		818		90.0	%		42.4	%(3)		N/A			3,669		1.90	(3)		52,356

*MID-ATLANTIC*
Baltimore, MD
Avalon at Fairway Hills	Columbia, MD		192		193,784		15.0	1987/1996		1,009		92.7	%		95.8	%		96.7	%		1,281		1.22			10,439
Avalon at Fairway Hills II (7)	Columbia, MD		192		192,560		29.0	1987/1996		1,003		93.8	%		95.9	%		97.2	%		1,294		1.24			12,486
Avalon Landing	Annapolis, MD		158		116,923		13.8	1984/1995		740		98.1	%		95.9	%		97.8	%		1,219		1.58			10,268
Avalon at Fairway Hills III (7)	Columbia, MD		336		337,683		15.0	1987/1996		1,005		90.5	%		95.5	%		95.1	%(2)		1,430		1.36			29,395
Avalon at Symphony Glen	Columbia, MD		176		179,880		10.0	1986		1,022		93.1	%		93.2	%		96.6	%		1,343		1.22			9,355
Southgate Crossing	Columbia, MD		215		214,670		12.7	1986/2006		998		90.7	%		93.5	%		93.8	%		1,222		1.14			36,359

Washington, DC
Avalon at Foxhall	Washington, DC		308		297,875		2.7	1982		967		95.8	%		96.2	%		96.6	%		2,215		2.20			44,671
Avalon at Gallery Place I	Washington, DC		203		184,157		0.5	2003		907		96.6	%		95.4	%		95.7	%		2,413		2.54			48,975
Avalon at Decoverly	Rockville, MD		368		368,732		24.0	1991/1995		1,002		96.7	%		96.2	%		97.0	%		1,455		1.40			32,537
Avalon Fields I	Gaithersburg, MD		192		191,280		5.0	1996		996		96.4	%		97.3	%		97.2	%		1,370		1.34			14,445
Avalon Fields II	Gaithersburg, MD		96		100,268		5.0	1998		1,044		96.9	%		95.9	%		96.8	%		1,549		1.42			8,333
Avalon Knoll	Germantown, MD		300		290,544		26.7	1985		968		95.3	%		96.0	%		97.2	%		1,188		1.18			9,518
Avalon at Rock Spring (9) (11)	North Bethesda, MD		386		387,884		10.2	2003		1,005		96.4	%		95.0	%		96.6	%		1,771		1.67			82,166
Avalon at Grosvenor Station	North Bethesda, MD		497		471,221		10.0	2004		948		98.6	%		95.8	%		97.3	%		1,769		1.79			82,181
Avalon at Traville (8)	North Potomac, MD		520		573,773		47.9	2004		1,103		98.8	%		96.2	%		97.7	%		1,720		1.50			69,963
Avalon at Ballston — Washington Towers	Arlington, VA		344		294,954		4.1	1990		857		97.4	%		96.2	%		97.8	%		1,728		1.94			38,587
Avalon at Cameron Court	Alexandria, VA		460		467,292		16.0	1998		1,016		94.3	%		95.6	%		97.3	%		1,862		1.75			43,609
Avalon at Providence Park	Fairfax, VA		141		148,282		9.3	1988/1997		1,052		96.5	%		97.0	%		96.9	%		1,500		1.38			11,854
Avalon Crescent	McLean, VA		558		613,426		19.1	1996		1,099		97.3	%		95.6	%		96.0	%		1,894		1.65			57,711
Avalon at Arlington Square	Arlington, VA		842		577,293		20.1	2001		686		96.4	%		96.6	%		96.5	%		1,865		2.63			112,827
Avalon at Decoverly II	Rockville, MD		196		182,560		10.8	2007		931		96.4	%		85.3	%(3)		N/A			1,494		1.37	(3)		30,433
AutumnWoods	Fairfax, VA		420		354,945		24.3	1989/1996		845		89.1	%		90.0	%(2)		94.6	%		1,318		1.40	(2)		36,808


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

														Average economic						Average
				Approx.				Year of	Average		Physical			occupancy						rental rate					Financial
		Number of		rentable area				completion/	size		occupancy at									$ per		$ per			reporting cost
	City and state	homes		(Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		12/31/07			2007			2006			Apt (4)		Sq. Ft.			(5)

*MIDWEST*
Chicago, IL
Avalon at West Grove (8)	Westmont, IL		400		388,500		17.4	1967		971		96.0	%		95.4	%		95.0	%		912		0.90			31,492
Avalon at Danada Farms (8)	Wheaton, IL		295		351,326		19.2	1997		1,191		95.4	%		95.5	%		95.3	%		1,414		1.13			39,185
Avalon at Stratford Green (8)	Bloomingdale, IL		192		237,124		12.7	1997		1,235		96.9	%		96.1	%		95.9	%		1,404		1.09			22,202
Avalon Arlington Heights	Arlington Heights, IL		409		346,416		2.8	1987/2000		847		97.1	%		94.3	%(2)		92.9	%		1,456		1.62	(2)		56,680

*PACIFIC NORTHWEST*
Seattle, WA
Avalon at Bear Creek	Redmond, WA		264		288,250		22.2	1998		1,092		96.2	%		95.5	%		96.3	%		1,340		1.17			35,444
Avalon Bellevue	Bellevue, WA		202		167,070		1.7	2001		827		93.6	%		96.6	%		96.5	%		1,513		1.77			30,894
Avalon RockMeadow (8)	Bothell, WA		206		243,958		11.2	2000		1,184		95.6	%		96.6	%		96.1	%		1,264		1.03			24,807
Avalon WildReed (8)	Everett, WA		234		259,080		23.0	2000		1,107		97.0	%		96.7	%		96.7	%		1,077		0.94			23,096
Avalon HighGrove (8)	Everett, WA		391		422,482		19.0	2000		1,081		96.4	%		96.6	%		96.5	%		1,079		0.96			39,879
Avalon ParcSquare (8)	Redmond, WA		124		127,231		2.0	2000		1,026		92.7	%		96.5	%		96.4	%		1,507		1.42			19,256
Avalon Wynhaven (8)	Issaquah, WA		333		424,803		11.6	2001		1,276		94.0	%		96.4	%		95.4	%		1,376		1.04			52,844
Avalon Brandemoor (8)	Lynwood, WA		424		453,602		27.0	2001		1,070		96.0	%		96.1	%		96.8	%		1,164		1.05			45,645
Avalon Belltown	Seattle, WA		100		82,418		0.7	2001		824		95.0	%		97.2	%		96.4	%		1,724		2.03			18,443
Avalon Redmond Place	Redmond, WA		222		211,450		8.4	1991/1997		952		84.0	%		90.1	%(2)		96.7	%		1,238		1.17	(2)		28,400

*NORTHERN CALIFORNIA*
Oakland-East Bay, CA
Avalon Fremont I	Fremont, CA		308		311,121		14.3	1994		1,010		98.7	%		97.4	%		96.9	%		1,698		1.64			56,711
Avalon Dublin	Dublin, CA		204		179,004		13.0	1989/1997		877		97.1	%		97.3	%		97.2	%		1,507		1.67			28,206
Avalon Pleasanton	Pleasanton, CA		456		366,062		14.7	1988/1994		803		97.1	%		95.8	%		96.8	%		1,386		1.65			63,032
Avalon at Union Square	Union City, CA		208		150,320		8.5	1973/1996		723		98.6	%		97.6	%		96.7	%		1,211		1.64			22,622
Waterford	Hayward, CA		544		452,043		11.1	1985/1986		831		96.1	%		96.5	%		95.6	%		1,218		1.42			61,630
Avalon at Willow Creek	Fremont, CA		235		191,935		13.5	1985/1994		817		98.3	%		98.1	%		97.7	%		1,462		1.76			36,493

San Francisco, CA
Avalon at Cedar Ridge	Daly City, CA		195		141,411		7.0	1972/1997		725		97.9	%		98.1	%		96.8	%		1,506		2.04			27,007
Avalon at Nob Hill	San Francisco, CA		185		108,712		1.4	1990/1995		588		97.8	%		96.9	%		96.4	%		1,797		2.96			28,119
Avalon Foster City	Foster City, CA		288		222,364		11.0	1973/1994		772		97.9	%		97.1	%		97.1	%		1,505		1.89			43,952
Avalon Towers by the Bay	San Francisco, CA		227		245,033		1.0	1999		1,079		98.2	%		97.6	%		96.8	%		3,046		2.75			67,006
Avalon Pacifica	Pacifica, CA		220		186,800		21.9	1971/1995		849		97.7	%		96.9	%		96.7	%		1,592		1.82			32,259
Avalon Sunset Towers	San Francisco, CA		243		171,854		16.0	1961/1996		707		98.4	%		96.9	%		96.7	%		1,808		2.48			28,797
Avalon at Mission Bay North	San Francisco, CA		250		240,368		1.4	2003		961		96.0	%		94.5	%		95.2	%		3,213		3.16			92,881
Crowne Ridge	San Rafael, CA		254		221,635		21.9	1973/1996		873		94.5	%		97.8	%		96.3	%		1,430		1.60			33,100
Avalon at Diamond Heights	San Francisco, CA		154		123,047		3.0	1972/1994		799		96.6	%		97.7	%		97.4	%		1,733		2.12			25,327


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

														Average economic						Average
				Approx.				Year of	Average		Physical			occupancy						rental rate					Financial
		Number of		rentable area				completion/	size		occupancy at									$ per		$ per			reporting cost
	City and state	homes		(Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		12/31/07			2007			2006			Apt (4)		Sq. Ft.			(5)
San Jose, CA
Avalon Campbell	Campbell, CA		348		326,796		10.8	1995		939		97.7	%		97.7	%		96.9	%		1,636		1.70			60,359
Avalon at Blossom Hill	San Jose, CA		324		323,496		7.5	1995		998		97.5	%		96.7	%		96.7	%		1,608		1.56			62,263
CountryBrook	San Jose, CA		360		322,992		14.0	1985/1996		897		97.2	%		97.0	%		97.8	%		1,491		1.61			52,622
Avalon at River Oaks	San Jose, CA		226		210,050		4.0	1990/1996		929		98.7	%		98.3	%		97.6	%		1,607		1.70			45,008
Avalon at Foxchase I	San Jose, CA		252		213,072		7.0	1988/1987		846		99.2	%		97.1	%		96.7	%		1,367		1.57			39,230
Avalon at Foxchase II	San Jose, CA		144		120,723		5.0	1988/1987		838		97.2	%		97.1	%		97.2	%		1,349		1.56			21,805
Avalon at Parkside	Sunnyvale, CA		192		204,060		8.0	1991/1996		1,063		99.0	%		97.5	%		98.0	%		1,837		1.69			38,236
Avalon on the Alameda	San Jose, CA		305		299,762		8.9	1999		983		97.4	%		97.7	%		96.9	%		1,992		1.98			56,815
Avalon Rosewalk	San Jose, CA		456		448,512		16.6	1997/1999		984		97.8	%		97.2	%		96.4	%		1,634		1.61			79,549
Avalon at Pruneyard	Campbell, CA		252		197,000		8.5	1968/1997		782		98.8	%		97.3	%		97.4	%		1,381		1.72			32,316
Avalon Silicon Valley	Sunnyvale, CA		710		653,929		13.6	1997		921		95.4	%		96.2	%		96.5	%		1,917		2.00			123,254
Avalon at Creekside	Mountain View, CA		294		215,680		13.0	1962/1997		734		98.6	%		98.0	%		97.7	%		1,405		1.88			43,400
Avalon at Cahill Park	San Jose, CA		218		218,248		3.8	2002		1,001		96.8	%		97.7	%		97.0	%		1,991		1.94			52,599
Avalon Towers on the Peninsula	Mountain View, CA		211		218,392		1.9	2002		1,035		97.2	%		97.0	%		96.5	%		2,685		2.52			65,752
Countrybrook II	San Jose, CA		80		64,554		3.6	2007		807		98.8	%		95.9	%(3)		N/A			1,405		1.67	(3)		17,790
Avalon Mountain View	Mountain View, CA		248		211,552		10.5	1986		853		99.6	%		96.6	%		95.9	%		1,756		1.99			51,630

*SOUTHERN CALIFORNIA*
Orange County, CA
Avalon Newport	Costa Mesa, CA		145		122,415		6.6	1956/1996		844		97.2	%		97.7	%		98.2	%		1,671		1.93			10,353
Avalon Mission Viejo	Mission Viejo, CA		166		124,450		7.8	1984/1996		750		96.4	%		96.1	%		95.5	%		1,321		1.69			14,038
Avalon Santa Margarita	Rancho Santa Margarita, CA		301		229,593		20.0	1990/1997		763		97.7	%		95.0	%		96.9	%		1,372		1.71			24,382
Avalon at Pacific Bay	Huntington Beach, CA		304		268,000		9.7	1971/1997		882		97.7	%		96.1	%		96.0	%		1,527		1.67			32,384
Avalon at South Coast	Costa Mesa, CA		258		207,672		8.0	1973/1996		805		96.1	%		96.4	%		98.3	%		1,453		1.74			25,725

San Diego, CA
Avalon at Mission Bay	San Diego, CA		564		402,285		12.9	1969/1997		713		93.4	%		94.8	%		95.7	%		1,421		1.89			66,492
Avalon at Mission Ridge	San Diego, CA		200		208,125		4.0	1960/1997		1,041		96.5	%		96.2	%		96.3	%		1,584		1.46			22,579
Avalon at Cortez Hill	San Diego, CA		294		226,140		1.4	1973/1998		769		96.9	%		94.9	%		95.1	%		1,461		1.80			34,568


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

														Average economic						Average
				Approx.				Year of	Average		Physical			occupancy						rental rate					Financial
		Number of		rentable area				completion/	size		occupancy at									$ per		$ per			reporting cost
	City and state	homes		(Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		12/31/07			2007			2006			Apt (4)		Sq. Ft.			(5)

Los Angeles, CA
Avalon at Warner Center	Woodland Hills, CA		227		191,224		7.0	1979/1998		842		98.7	%		96.9	%		96.8	%		1,705		1.96			26,946
Avalon Glendale (11)	Burbank, CA		223		241,714		5.1	2003		1,084		95.5	%		95.0	%		95.4	%		2,315		2.03			41,433
Avalon at Media Center	Burbank, CA		748		530,084		14.1	1961/1997		709		96.1	%		95.9	%		95.7	%		1,463		1.98			76,545
Avalon Wilshire	Los Angeles, CA		123		125,093		1.6	2007		1,017		95.9	%		55.8	%(3)		N/A			2,715		1.82	(3)		46,229
The Promenade	Burbank, CA		400		360,587		6.9	1988/2002		901		99.0	%		97.8	%		97.4	%		1,896		2.06			71,003
Avalon Camarillo	Camarillo, CA		249		233,267		10.0	2006		937		97.2	%		94.9	%		54.4	%(3)		1,619		1.64			47,616
Avalon Woodland Hills	Woodland Hills, CA		663		594,396		18.2	1989/1997		897		89.6	%		94.8	%		95.5	%		1,553		1.64			75,192

DEVELOPMENT COMMUNITIES

Avalon at Lexington Hills	Lexington, MA		387		487,483		23.0	N/A		1,260		N/A			N/A			N/A			N/A		N/A			73,630
Avalon Danvers	Danvers, MA		433		492,119		75.0	N/A		1,137		N/A			N/A			N/A			N/A		N/A			81,561
Avalon at Hingham Shipyard	Hingham, MA		235		267,165		12.9	N/A		1,137		N/A			N/A			N/A			N/A		N/A			17,197
Avalon Sharon	Sharon, MA		156		175,512		27.2	N/A		1,125		N/A			N/A			N/A			N/A		N/A			17,429
Avalon Acton	Acton, MA		380		299,228		50.3	N/A		787		N/A			N/A			N/A			N/A		N/A			54,622
Avalon Huntington	Shelton, CT		99		132,339		7.1	N/A		1,337		N/A			N/A			N/A			N/A		N/A			6,449
Avalon at Tinton Falls	Tinton Falls, NJ		216		239,208		35.0	N/A		1,107		N/A			N/A			N/A			N/A		N/A			20,334
Avalon Riverview North (11)	Long Island City, NY		602		477,232		1.8	N/A		793		N/A			N/A			N/A			N/A		N/A			167,105
Avalon on the Sound II (11)	New Rochelle, NY		588		562,499		1.7	N/A		957		N/A			N/A			N/A			N/A		N/A			174,083
Avalon Morningside Park (11)	New York, NY		296		243,157		0.8	N/A		821		N/A			N/A			N/A			N/A		N/A			48,883
Avalon White Plains	White Plains, NY		393		364,345		0.1	N/A		927		N/A			N/A			N/A			N/A		N/A			74,472
Avalon Fort Greene	Brooklyn, NY		628		498,632		1.0	N/A		794		N/A			N/A			N/A			N/A		N/A			92,294
Avalon Meydenbauer	Bellevue, WA		368		331,945		3.6	N/A		902		N/A			N/A			N/A			N/A		N/A			76,435
Avalon at Dublin Station I	Dublin, CA		305		299,233		4.7	N/A		981		N/A			N/A			N/A			N/A		N/A			80,969
Avalon Union City	Union City, CA		438		428,730		6.0	N/A		979		N/A			N/A			N/A			N/A		N/A			48,059
Avalon at Mission Bay III	San Francisco, CA		260		261,361		1.5	N/A		1,005		N/A			N/A			N/A			N/A		N/A			41,740
Avalon Anaheim	Anaheim, CA		251		302,646		3.5	N/A		1,206		N/A			N/A			N/A			N/A		N/A			48,706
Avalon Jamboree Village	Irvine, CA		279		243,157		4.5	N/A		872		N/A			N/A			N/A			N/A		N/A			19,236
Avalon Fashion Valley	San Diego, CA		161		184,080		10.0	N/A		1,143		N/A			N/A			N/A			N/A		N/A			34,496
Avalon Encino	Los Angeles, CA		131		131,252		2.0	N/A		1,002		N/A			N/A			N/A			N/A		N/A			38,565
Avalon Warner Place	Canoga Park, CA		210		186,402		3.3	N/A		888		N/A			N/A			N/A			N/A		N/A			40,627

UNCONSOLIDATED COMMUNITIES

Avalon at Mission Bay North II (9)(12)	San Francisco, CA		313		291,556		1.5	2006		931		98.4	%		83.3	%		27.8	%		3,096		2.77			N/A
Avalon Del Rey (9)	Los Angeles, CA		309		283,151		5.0	2006		916		95.8	%		96.5	%		94.3	%		1,979		2.08			N/A
Avalon Chrystie Place I (9)(11)	New York, NY		361		266,940		1.5	2005		739		97.5	%		96.1	%		98.4	%(3)		3,803		4.94			N/A
Avalon Juanita Village (10)	Kirkland, WA		211		207,916		2.9	2005		985		95.7	%		95.2	%		94.1	%(3)		1,586		1.53			N/A
Avalon at Redondo Beach (6)	Redondo Beach, CA		105		85,380		1.2	1971/2004		813		97.1	%		94.0	%		94.4	%		2,017		2.33			N/A
Avalon Sunset (6)	Los Angeles, CA		82		71,037		0.8	1987/2005		866		100.0	%		88.3	%(2)		96.1	%(3)		1,873		1.91	(2)		N/A
Civic Center (6)	Norwalk, CA		192		173,568		8.7	1987/2005		904		92.7	%		85.5	%(2)		94.8	%(3)		1,620		1.53	(2)		N/A
Avalon Paseo Place (6)	Fremont, CA		134		106,249		7.0	1987/2005		793		100.0	%		87.3	%(2)		96.9	%(3)		1,256		1.38	(2)		N/A
Avalon Yerba Buena (6)	San Francisco, CA		160		159,498		0.9	2000/2006		997		97.5	%		97.1	%		95.4	%		2,641		2.57			N/A
The Springs (6)	Corona, CA		320		241,440		13.3	1987/2006		755		94.7	%		94.2	%		94.7	%		1,105		1.38			N/A
Skyway Terrace (6)	San Jose,CA		348		283,618		18.4	1994/2007		815		95.1	%		96.2	%(3)		N/A			1,306		1.54	(3)		N/A
South Hills Apartments (6)	West Covina, CA		85		104,600		5.3	1966/2007		1,231		94.1	%		97.5	%(3)		N/A			1,603		1.27	(3)		N/A
Avalon Lakeside (6)	Wheaton, IL		204		162,821		12.4	2004		798		98.0	%		95.1	%		95.5	%		945		1.13			N/A
Avalon at Poplar Creek (6)	Schaumburg, IL		196		178,490		12.8	1986/2005		911		82.7	%		88.6	%(2)		95.9	%		1,124		1.09	(2)		N/A


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

														Average economic						Average
				Approx.				Year of	Average		Physical			occupancy						rental rate					Financial
		Number of		rentable area				completion/	size		occupancy at									$ per		$ per			reporting cost
	City and state	homes		(Sq. Ft.)		Acres		acquisition	(Sq. Ft.)		12/31/07			2007			2006			Apt (4)		Sq. Ft.			(5)
The Covington (6)	Schaumburg, IL		256		201,924		13.2	1988/2006		789		94.9	%		93.1	%		83.8	%		1,015		1.20			N/A
Middlesex Crossing (6)	Billerica, MA		252		188,915		13.0	2007		750		94.0	%		93.6	%(3)		N/A			1,224		1.53	(3)		N/A
Colonial Towers/South Shore
Manor (6)	Weymouth, MA		211		154,957		7.7	1971/2007		734		90.5	%		87.9	%(3)		N/A			1,005		1.20	(3)		N/A
Avalon Columbia (6)	Columbia, MD		170		177,284		11.3	1989/2004		1,043		92.9	%		96.0	%(2)		96.1	%		1,453		1.34	(2)		N/A
Cedar Place (6)	Columbia, MD		156		150,219		11.4	1972/2006		963		95.2	%		95.3	%		96.6	%		1,079		1.07			N/A
Avalon Centerpoint (6)	Baltimore,MD		392		312,356		6.9	2005/2007		797		91.0	%		92.9	%(3)		N/A			912		1.06	(3)		N/A
Avalon at Aberdeen Station (6)	Aberdeen, NJ		290		289,710		16.8	2002/2006		999		96.2	%		96.1	%		95.0	%		1,750		1.68			N/A
Avalon at Rutherford Station (6)	East Rutherford, NJ		108		112,537		1.5	2005/2007		1,042		93.5	%		89.2	%(3)		N/A			2,172		1.86	(3)		N/A
Avalon Crystal Hill (6)	Pomona, NY		168		215,203		12.1	2001/2007		1,281		94.7	%		94.9	%(3)		N/A			2,011		1.49	(3)		N/A
Avalon Redmond (6)	Redmond, WA		400		340,568		24.0	1983/2004		851		94.8	%		85.6	%(2)		88.4	%		1,180		1.19	(2)		N/A

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


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

(2)		Represents community which was under redevelopment during the year, resulting 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 generally accepted accounting principles. For current Development Communities, cost represents total costs incurred through December 31, 2007. 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)		This community completed development and was financed under a joint venture structure with third-party financing, in which the community is owned by a limited liability company managed by one of our wholly-owned subsidiaries.

Development Communities

As of December 31, 2007, we had 21 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 6,816 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $2,162,500,000. You should carefully review Item 1a., “Risk Factors,” for a discussion of the risks associated with 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)

Avalon Riverview North
New York, NY

602

175.6

Q3 2005

Q3 2007

Q2 2008

Q4 2008

Avalon Danvers
Danvers, MA

433

84.8

Q4 2005

Q1 2007

Q3 2008

Q1 2009

Avalon on the Sound II
New Rochelle, NY

588

181.8

Q1 2006

Q2 2007

Q2 2008

Q4 2008

Avalon Meydenbauer
Bellevue, WA

368

84.3

Q1 2006

Q1 2008

Q3 2008

Q1 2009

Avalon at Dublin Station I
Dublin, CA

305

85.8

Q2 2006

Q4 2007

Q2 2008

Q4 2008

Avalon at Lexington Hills
Lexington, MA

387

86.2

Q2 2006

Q2 2007

Q3 2008

Q1 2009

Avalon Encino
Los Angeles, CA

131

61.5

Q3 2006

Q3 2008

Q4 2008

Q1 2009

Avalon Warner Place
Canoga Park, CA

210

53.9

Q4 2006

Q2 2008

Q3 2008

Q1 2009

Avalon Acton (4)
Acton, MA

380

68.8

Q4 2006

Q4 2007

Q4 2008

Q2 2009

10.

Avalon Morningside Park (4)
New York, NY

296

125.5

Q1 2007

Q2 2008

Q1 2009

Q3 2009

11.

Avalon White Plains
White Plains, NY

393

154.5

Q2 2007

Q4 2008

Q4 2009

Q2 2010

12.

Avalon at Tinton Falls
Tinton Falls, NJ

216

41.2

Q2 2007

Q2 2008

Q4 2008

Q2 2009

13.

Avalon Fashion Valley
San Diego, CA

161

64.7

Q2 2007

Q4 2008

Q1 2009

Q2 2009

14.

Avalon Anaheim
Anaheim, CA

251

102.7

Q2 2007

Q2 2009

Q3 2009

Q1 2010

15.

Avalon Union City
Union City, CA

438

125.2

Q3 2007

Q2 2009

Q3 2009

Q1 2010

16.

Avalon at the Hingham Shipyard
Hingham, MA

235

52.7

Q3 2007

Q3 2008

Q1 2009

Q2 2009

17.

Avalon Sharon
Sharon, MA

156

30.7

Q3 2007

Q2 2008

Q4 2008

Q1 2009

18.

Avalon Huntington
Shelton, CT

26.1

Q4 2007

Q4 2008

Q2 2009

Q3 2009

19.

Avalon at Mission Bay North III
San Francisco, CA

260

157.8

Q4 2007

Q3 2009

Q4 2009

Q2 2010

20.

Avalon Jamboree Village
Irvine, CA

279

78.3

Q4 2007

Q2 2009

Q4 2009

Q2 2010

21.

Avalon Fort Greene
New York, NY

628

320.4

Q4 2007

Q2 2009

Q2 2010

Q4 2010

Total

6,816

2,162.5

(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, 2007, we had five consolidated communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $65,000,000, excluding costs prior to redevelopment. In addition, the Fund has three communities under 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 Fund-owned communities, 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		Estimated
	apartment		Pre-redevelopment		Total capitalized		Reconstruction		reconstruction		restabilized
	homes		cost		cost (1)		start		completion		operations (2)
Consolidated Communities
1. Avalon at AutumnWoods Fairfax, VA		420	$	31.2	$	38.3		Q3 2006		Q2 2008		Q4 2008
2. Essex Place Peabody, MA		286		23.7		34.5		Q3 2007		Q2 2009		Q4 2009
3. Avalon Redmond Place Redmond, WA		222		26.3		31.3		Q3 2007		Q4 2008		Q2 2009
4. Avalon Woodland Hills Woodland Hills, CA		663		72.1		109.3		Q4 2007		Q1 2010		Q3 2010
5. Avalon at Diamond Heights San Francisco, CA		154		25.3		30.2		Q4 2007		Q4 2010		Q2 2011


Subtotal		1,745	$	178.6	$	243.6


Fund Communities
1. Avalon at Poplar Creek Schaumburg, IL		196	$	25.2	$	28.6		Q4 2006		Q1 2008		Q3 2008
2. Avalon Paseo Place Fremont, CA		134		19.8		25.5		Q2 2007		Q2 2008		Q4 2008
3. Avalon Cedar Place Columbia, MD		156		21.0		25.0		Q3 2007		Q1 2009		Q3 2009


Subtotal		486	$	66.0	$	79.1


Total		2,231	$	244.6	$	322.7

(1)		Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop 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, 2007, we are evaluating the future development of 48 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 hold Development Rights through options to acquire land, although for 21 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 13,656 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, 2007, there were cumulative capitalized costs (including legal fees, design fees and related overhead costs, but excluding land costs) of $60,996,000 relating to Development Rights that we consider probable for future development. In addition, land costs related to the pursuit of Development Rights (consisting of original land and additional carrying costs) of $288,423,000 are reflected as land held for development as of December 31, 2007 on the Consolidated Balance Sheet of the Consolidated Financial Statements set forth in Item 8 of this report.

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. Pre-development costs incurred in the pursuit of Development Rights 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. During 2007, we incurred a charge of approximately $7,000,000 for pursuits for which we determined it was not probable that we would proceed with development.

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.	Coram, NY			200	$	46
2.	Randolph, MA			276		49
3.	Northborough, MA			350		61
4.	Pleasant Hill, CA			422		153
5.	Kirkland, WA Phase II			189		60
6.	Los Angeles, CA			174		78
7.	Canoga Park, CA			299		85
8.	Bellevue, WA			408		126
9.	Norwalk, CT			311		84
10.	North Bergen, NJ	(2)		164		48
11.	Rockville Centre, NY			349		129
12.	Chicago, IL Phase I			492		173
13.	New York, NY			678		307
14.	Wilton, CT			100		24
15.	Camarillo, CA			376		55
16.	Irvine, CA Phase III			170		73
17.	San Francisco, CA			157		50
18.	Brooklyn, NY			825		443
19.	Seattle, WA			201		65
20.	Cohasset, MA			200		38
21.	Dublin, CA Phase II			405		105
22.	Greenburgh, NY Phase II			444		112
23.	Plymouth, MA Phase II			69		17
24.	Irvine, CA Phase II			179		57
25.	Seattle, WA II			234		76
26.	Wheaton, MD			320		107
27.	West Long Branch, NJ	(2)		180		34
28.	Andover, MA			115		21
29.	Milford, CT			284		45
30.	Highland Park, NJ			178		42
31.	Stratford, CT			146		23
32.	Oyster Bay, NY			150		42
33.	Shelton, CT			250		66
34.	Yonkers, NY			400		88
35.	Concord, MA			150		38
36.	Bloomingdale, NJ			173		38
37.	North Andover, MA			526		98
38.	Tysons Corner, VA			439		121
39.	Roselle Park, NJ	(2)		300		70
40.	Gaithersburg, MD			254		41
41.	Chicago, IL Phase II			492		141
42.	Alexandria, VA			283		73
43.	Garden City, NY			160		58
44.	Hackensack, NJ			230		56
45.	Plainview, NY			160		38
46.	Wanaque, NJ			210		45
47.	Yaphank, NY			343		57
48.	Rockville, MD			241		62


	Total			13,656	$	3,918


(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 development right is subject to a joint venture arrangement.

Recent Developments

We seek to increase the value of our interests and increase our presence in selected high barrier-to-entry markets where we believe we can:

	•		apply sufficient market and management presence to enhance revenue growth;
	•		reduce operating expenses; and
	•		leverage management talent.

To achieve this increased value creation and presence, 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 variable rate unsecured 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, 2007 to January 31, 2008, we disposed of our interest in five communities including one partnership interest to our joint venture partner in a community previously held by a joint venture entity, containing an aggregate of 1,384 apartment homes. The aggregate gross sales price from the dispositions of these assets was $268,096,000.

Land Acquisitions. We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 2007, we acquired 17 land parcels for an aggregate purchase price of $311,691,000. The land parcels purchased, which are currently being developed or are held for future development, are as follows:


				Estimated		Total
				number		capitalized
		Gross		of apartment		cost (1)		Date	Construction
		acres		homes		($ millions)		acquired	start (2)
1.	Avalon Fort Greene New York, NY		1.0		628		320	January 2007	2007
2.	Avalon Fashion Valley San Diego, CA		10.0		161		65	March 2007	2007
3.	Avalon Warner Park Canoga Park, CA		4.2		299		85	March 2007	2008
4.	Avalon Tinton Falls Tinton Falls, NJ		35.0		216		41	April 2007	2007
5.	Avalon at Mission Bay North III San Francisco, CA		1.5		260		158	May 2007	2007
6.	Avalon Anaheim Anaheim, CA		3.5		251		103	June 2007	2007
7.	Avalon Matsu Los Angeles, CA		1.7		174		78	June 2007	2008
8.	Avalon Sharon Sharon, MA		27.2		156		31	July 2007	2007
9.	Avalon South Clark I Chicago, IL		2.0		492		173	August 2007	2008
10.	Avalon South Clark II Chicago, IL		1.5		492		141	August 2007	2010
11.	Avalon Jamboree Village II Irvine, CA		2.8		179		57	September 2007	2009
12.	Avalon Blue Hills Randolph, MA		23.1		276		49	September 2007	2008
13.	Avalon Northborough Northborough, MA		33.7		350		61	October 2007	2008
14.	Avalon at Mission Bay North II (3) San Francisco, CA		1.5		313		N/A	November 2007	Ground Lease Buyout
15.	Avalon Huntington Shelton, CT		7.1		99		26	November 2007	2007
16.	Avalon Rockville Centre Rockville Centre, NY		7.1		349		129	November 2007	2008
17.	Avalon at Garden City (4) Garden City, NY		8.7		N/A		N/A	December 2007	N/A


	Total		171.6		4,695	$	1,517


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


(3)		This asset, which is owned by MVP I, LLC, a joint venture entity in which the Company has a 25% ownership interest, was completed in December 2006. The joint venture exercised its option to purchase the land under the Ground Lease Agreement in November 2007.

(4)		A portion of this land will be redeveloped and operated by the Company. The multifamily portion of the land for the Company’s development has not yet been purchased.

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,” 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. A large concentration of our communities lies near, and thus is 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, for any single occurrence and in the aggregate, $75,000,000 of coverage with a deductible per building equal to five percent of the insured value of that building. The five percent deductible is subject to a minimum of $100,000 per occurrence. Earthquake coverage outside of California is subject to a $100,000,000 limit, except with respect to the state of Washington, for which the limit is $65,000,000. Our earthquake insurance outside of California provides for a $100,000 deductible per occurrence. In addition, up to a policy aggregate of $2,000,000, the next $400,000 of loss per occurrence outside California will be treated as an additional deductible.

On May 1, 2007, we renewed our property insurance policy for a 12 month term. On December 1, 2007, we elected to cancel and rewrite this policy for a 17 month term in order to take advantage of declining insurance premium rates. As a result, our property insurance premium decreased by approximately 15% with no material changes in coverage. The policy now expires on May 1, 2009.

Our annual general liability policy and workman’s compensation coverage renewed on August 1, 2007. This policy is in effect until July 31, 2008.

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 $200,000,000. 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 results 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 on environmental contamination. 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.

ITEM 3. LEGAL PROCEEDINGS

We are currently involved in litigation alleging that communities constructed by us violate the accessibility requirements of the Fair Housing Act and the Americans with Disabilities Act. The lawsuit, Equal Rights Center v. AvalonBay Communities, Inc., was filed on September 23, 2005 in the federal district court in Maryland. The plaintiff seeks compensatory and punitive damages in unspecified amounts as well as injunctive relief (such as modification of existing communities), an award of attorneys’ fees, expenses and costs of suit. The Company has filed a motion to dismiss all or parts of the suit, which has not been ruled on yet by the court. Due to the preliminary nature of the litigation, we cannot predict or determine the outcome of this lawsuit, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision or settlement.

We are seeking compensatory damages, as well as punitive and treble damages, in a complaint we filed in October 2007 in the U.S. District Court, Eastern District of Virginia (Alexandria) against a former vice president of the Company who had authority over repair and capital improvements at existing communities (AvalonBay Communities, Inc. v. James R. Willden). The complaint alleges, among other things, that the former employee colluded to receive payments from a vendor in exchange for approving invoices. We previously filed a complaint in the same court against this vendor and its president (AvalonBay Communities, Inc. v. San Jose Water Conservation Corp. and Michael P. Schroll). We are investigating these and other payments approved by or under the supervision of this former employee and may amend these complaints or file additional complaints. We do not expect that the loss related to this matter will be material to our results of operations or financial condition.

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 outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on our operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of 2007.

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 2007 and 2006, as reported by the NYSE. On January 31, 2008 there were 813 holders of record of an aggregate of 76,845,045 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.


	2007						2006
	Sales Price				Dividends		Sales Price				Dividends
	High		Low		declared		High		Low		declared
Quarter ended March 31	$	149.94	$	125.30	$	0.85	$	110.45	$	88.95	$	0.78

Quarter ended June 30	$	134.62	$	115.38	$	0.85	$	112.00	$	100.50	$	0.78

Quarter ended September 30	$	128.46	$	105.91	$	0.85	$	125.21	$	110.27	$	0.78

Quarter ended December 31	$	125.48	$	88.97	$	0.85	$	134.60	$	119.31	$	0.78

We expect to continue our policy of paying regular quarterly cash dividends. However, 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. In February 2008, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of 2008 of $0.8925 per share, a 5.0% increase over the previous quarterly dividend of $0.85 per share. The increased dividend will be payable on April 15, 2008 to all common stockholders of record as of April 1, 2008.

Issuer Purchases of Equity Securities


					(c)		(d)
			(b)		Total Number of		Maximum Dollar Amount
	(a)		Average Price		Shares Purchased		that May Yet be Purchased
	Total Number of		Paid per		as Part of Publicly		Under the Plans or
	Shares Purchased		Share		Announced Plans		Programs
Period	(1)		(1)		or Programs (2)		(in thousands) (2)
Month Ended October 31, 2007		—	$	—		—	$	385,197
Month Ended November 30, 2007		1,120,900	$	100.42		1,120,900	$	272,639
Month Ended December 31, 2007		328,574	$	92.88		328,316	$	242,145
Month Ended January 31, 2008		483,036	$	87.32		482,100	$	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)		On August 8, 2007, we announced that our the Board of Directors voted to increase the aggregate limit of our common stock repurchase program to $300,000,000. On February 6, 2008, we disclosed that our Board of Directors voted to further increase the authorized limit to $500,000,000. All amounts presented in the table above include this further increase. In determining whether to repurchase shares, we consider a variety of factors, including our liquidity needs, the then current market price of our shares and the effect of the share repurchases on our per share earnings and FFO. 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 AvalonBay Communities, Inc. 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
	12-31-07			12-31-06			12-31-05			12-31-04			12-31-03

Revenue:
Rental and other income	$	806,599		$	715,170		$	650,907		$	598,656		$	545,794
Management, development and other fees		6,142			6,259			4,304			604			896

Total revenue		812,741			721,429			655,211			599,260			546,690


Expenses:
Operating expenses, excluding property taxes		242,702			217,134			197,990			187,804			169,039
Property taxes		74,912			66,786			63,975			57,907			52,215
Interest expense, net		97,545			109,184			125,171			129,106			128,183
Depreciation expense		179,549			160,442			156,455			149,721			137,311
General and administrative expense		28,494			24,767			25,761			18,074			14,830

Total expenses		623,202			578,313			569,352			542,612			501,578


Equity in income of unconsolidated entities		59,169			7,455			7,198			1,100			25,535
Venture partner interest in profit-sharing		—			—			—			(1,178	)		(1,688	)
Minority interest in consolidated partnerships		(1,585	)		(573	)		(1,481	)		(150	)		(950	)
Gain on sale of communities		545			13,519			4,479			1,138			1,234


Income from continuing operations before cumulative effect of change in accounting principle		247,668			163,517			96,055			57,558			69,243

Discontinued operations:
Income from discontinued operations		4,005			5,618			19,126			24,387			33,504
Gain on sale of communities		106,487			97,411			195,287			121,287			159,756

Total discontinued operations		110,492			103,029			214,413			145,674			193,260


Income before cumulative effect of change in accounting principle		358,160			266,546			310,468			203,232			262,503
Cumulative effect of change in accounting principle		—			—			—			4,547			—


Net income		358,160			266,546			310,468			207,779			262,503
Dividends attributable to preferred stock		(8,700	)		(8,700	)		(8,700	)		(8,700	)		(10,744	)

Net income available to common stockholders	$	349,460		$	257,846		$	301,768		$	199,079		$	251,759


Per Common Share and Share Information:

Earnings per common share — basic:
Income from continuing operations (net of dividends attributable to preferred stock)	$	3.04		$	2.09		$	1.20		$	0.75		$	0.85
Discontinued operations		1.40			1.39			2.94			2.03			2.82

Net income available to common stockholders	$	4.44		$	3.48		$	4.14		$	2.78		$	3.67


Weighted average common shares outstanding — basic		78,680,043			74,125,795			72,952,492			71,564,202			68,559,657
Earnings per common share — diluted:
Income from continuing operations (net of dividends attributable to preferred stock)	$	3.00		$	2.06		$	1.18		$	0.75		$	0.84
Discontinued operations		1.38			1.36			2.87			2.00			2.76

Net income available to common stockholders	$	4.38		$	3.42		$	4.05		$	2.75		$	3.60

Weighted average common shares outstanding — diluted		79,856,927			75,586,898			74,759,318			73,354,956			70,203,467

Cash dividends declared	$	3.40		$	3.12		$	2.84		$	2.80		$	2.80


	For the year ended
	12-31-07			12-31-06			12-31-05			12-31-04			12-31-03

Other Information:
Net income	$	358,160		$	266,546		$	310,468		$	207,779		$	262,503
Depreciation — continuing operations		179,549			160,442			156,455			149,721			137,311
Depreciation — discontinued operations		2,176			3,687			6,842			14,179			17,414
Interest expense, net — continuing operations		97,545			109,184			125,171			129,106			128,183
Interest expense, net — discontinued operations		687			1,862			1,927			2,522			4,394

EBITDA (1)	$	638,117		$	541,721		$	600,863		$	503,307		$	549,805


Funds from Operations (2)	$	368,057		$	320,199		$	271,096		$	235,514		$	222,473
Number of Current Communities (3)		163			150			143			138			131
Number of apartment homes		45,932			43,141			41,412			40,142			38,504

Balance Sheet Information:
Real estate, before accumulated depreciation	$	7,556,740		$	6,615,593		$	5,940,146		$	5,734,122		$	5,468,735
Total assets	$	6,736,484		$	5,848,507		$	5,198,598		$	5,116,019		$	4,945,585
Notes payable and unsecured credit facilities	$	3,208,202		$	2,866,433		$	2,334,017		$	2,451,354		$	2,337,817

Cash Flow Information:
Net cash flows provided by operating activities	$	455,825		$	351,660		$	306,248		$	275,617		$	239,677
Net cash flows provided by (used in) investing activities	$	(809,247	)	$	(511,371	)	$	(19,761	)	$	(251,683	)	$	33,935
Net cash flows provided by (used in) financing activities	$	366,360		$	162,280		$	(282,293	)	$	(29,471	)	$	(279,465	)


Notes to Selected Financial Data

(1)		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 generally accepted accounting principles, or “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.

(2)		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.

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

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
	12-31-07			12-31-06			12-31-05			12-31-04			12-31-03
Net income	$	358,160		$	266,546		$	310,468		$	207,779		$	262,503
Dividends attributable to preferred stock		(8,700	)		(8,700	)		(8,700	)		(8,700	)		(10,744	)
Depreciation — real estate assets, including discontinued operations and joint venture adjustments		184,731			165,982			163,252			159,221			129,207
Minority interest expense, including discontinued operations		280			391			1,363			3,048			1,263
Gain on sale of unconsolidated entities holding previously depreciated real estate assets		(59,927	)		(6,609	)		—			—			—
Cumulative effect of change in accounting principle		—			—			—			(4,547	)		—
Gain on sale of previously depreciated real estate assets		(106,487	)		(97,411	)		(195,287	)		(121,287	)		(159,756	)

Funds from Operations attributable to common stockholders	$	368,057		$	320,199		$	271,096		$	235,514		$	222,473


Weighted average common shares outstanding - diluted		79,856,927			75,586,898			74,759,318			73,354,956			70,203,467
FFO per common share — diluted	$	4.61		$	4.24		$	3.63		$	3.21		$	3.17


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 as described more fully under “Forward-Looking Statements” on page 55 of this report. Actual results or developments could differ materially from those projected in such statements as a result of 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 the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern and Southern California regions of the United States. Our strategy is to more deeply penetrate these markets with a broad range of products and services and an intense focus on our customer. 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

Net income available to common stockholders for the quarter ended December 31, 2007 was $129,644,000, as compared to $44,138,000 for the quarter ended December 31, 2006, an increase of 193.7%. For the year ended December 31, 2007, net income available to common stockholders was $349,460,000 compared to $257,846,000 for 2006, an increase of 35.5%. These increases are primarily attributable to an increase in gains from the sale of communities and joint venture real estate investments in 2007 as compared to 2006 and growth in income from existing and newly developed communities in 2007.

Apartment fundamentals remained positive in 2007 as evidenced by full year-over-year rental revenue growth of 5.5% achieved within our Established Community portfolio (as defined later in this report), comprised of an increase in rental rates of 5.8% and a decrease in occupancy of 0.3%. This revenue growth combined with constrained expense growth contributed to our Established Community portfolio achieving year-over-year growth in net operating income (“NOI”) of 7.2% in 2007. For the fourth quarter of 2007, our Established Communities experienced an increase in rental revenue of 4.4% and a corresponding increase in NOI of 4.9% over the prior year period, evidencing the moderating, but continued growth in operations.

Projected growth in earnings per share — diluted (“EPS”) in our current financial outlook is expected to be between 48.4% and 94.1% driven primarily by gains on the sale of communities that may occur under our expanded disposition program. In addition, we expect that our Established Communities will continue to show revenue and net operating income growth in 2008, but at a lesser rate relative to growth levels in 2007. Despite third party forecasts of a weaker economic environment, we anticipate positive renter demand resulting from a continued reduction in homeownership rates and a general increase in the propensity to rent. Declining home ownership rates are the result of a number of factors, including concerns regarding home prices and economic growth, demographic growth in those age groups that have historically demonstrated a higher propensity to rent as well as tighter underwriting standards for mortgages. Management expects the level of new rental completions in the Company’s markets will decline modestly during 2008 from 2007 levels and competition from unsold housing inventory made available for rent will remain modest relative to more oversupplied residential markets in the U.S. Overall we expect apartment market fundamentals will be balanced in our markets, supporting moderate growth in earnings. Our current financial outlook provides for 2008 rental growth of 2.5% to 4.0% in our established community portfolio and projected NOI growth of 3.0% to 4.5%

We expect that our development activity will continue to create long-term value. We currently have approximately $2,162,500,000 under construction (measured by total projected capitalized cost of the communities at completion, including the portions in which joint venture partners hold an equity or economic interest). For 2008, we expect new development starts in the range of $900,000,000 to $1,100,000,000 measured at projected cost of completion, including projects that may be developed through joint ventures. This is a decrease in new activity from 2007 reflecting the current economic and capital market conditions. We continue to be selective in pursuing new development opportunities. Land prices generally have not re-set in most of our markets, but we are seeing construction cost increases stabilizing. Construction costs for certain materials have begun to decline while prices for other materials remain high given strong global demand. There is also greater availability of experienced subcontractors and trade professionals as a result of slowing construction in both the condominium and single-family housing markets. We continue to selectively secure new Development Rights, including the acquisition of land for future development. We currently have Development Rights for construction of new apartment communities that would, if developed as expected, total approximately $3,918,000,000 based on total projected capitalized costs at December 31, 2007. We also expect to increase our redevelopment activities in 2008, for both wholly owned and Fund (as defined below) related assets. While current market conditions with respect to liquidity may impact the types of funding sources used, 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) on our assets provide us with the financial position and financial flexibility to access the capital necessary to fund our development and redevelopment activities. We expect to meet these needs from both secured and unsecured debt, as well as asset sales and retained cash.

AvalonBay Value Added Fund, L.P. (the “Fund”) is a discretionary investment fund in which we hold a 15% interest. The Fund has been our principal vehicle for acquiring apartment communities, subject to certain exceptions, since its formation in March 2005. The Fund acquired seven communities for an aggregate purchase price of $305,450,000 during 2007. As of January 31, 2008, the total amount invested by the Fund is $779,318,000. Management of the Fund expects to invest approximately $39,000,000 of additional funds to redevelop the assets acquired, at which time, the Fund will become fully invested. We are exploring various potential sources and vehicles for funding future acquisitions after the Fund is fully invested.

We continue to see real estate capital flows from income investors. In 2007, we completed the disposition of four communities and one partnership interest for an aggregate gross sales price of $268,096,000. Given the current levels of demand from investors for high quality multifamily real estate assets, we anticipate increasing our level of disposition activity to a range of $700,000,000 to $1,000,000,000 in 2008. Actual disposition activity will depend on various factors including market and economic conditions.

Communities Overview

Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights (i.e., land or options to purchase land held for development), as further described in Item 2 of this report. 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, and discussions related to these segments of our business can be found in “Liquidity and Capital Resources.”

The net operating income of our current operating communities, as defined later in this report, is one of the financial measures that we use to evaluate community performance. Net operating income 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, 2007, we owned or held a direct or indirect ownership interest in 184 apartment communities containing 52,748 apartment homes in ten states and the District of Columbia, of which 21 communities were under construction and eight communities were under reconstruction. Of these communities, 23 were owned by entities that were not consolidated for financial reporting purposes, including 20 owned by the Fund. In addition, we owned a direct or indirect ownership interest in Development Rights to develop an additional 48 communities that, if developed in the manner expected, will contain an estimated 13,656 apartment homes.

Results of Operations

Our year-over-year operating performance is primarily affected by individual geographic market conditions and apartment fundamentals as measured by changes in net operating income of our Established Communities; net operating income derived from acquisitions and development completions; the loss of net operating income related to disposed communities; and capital market, disposition and financing activity. A comparison of our operating results for the years 2007, 2006 and 2005 follows (dollars in thousands):


	2007			2006			$ Change			% Change			2006			2005			$ Change			% Change
Revenue:
Rental and other income	$	806,599		$	715,170		$	91,429			12.8	%	$	715,170		$	650,907		$	64,263			9.9	%
Management, development and other fees		6,142			6,259			(117	)		(1.9	%)		6,259			4,304			1,955			45.4	%

Total revenue		812,741			721,429			91,312			12.7	%		721,429			655,211			66,218			10.1	%


Expenses:
Direct property operating expenses, excluding property taxes		192,338			175,927			16,411			9.3	%		175,927			161,913			14,014			8.7	%
Property taxes		74,912			66,786			8,126			12.2	%		66,786			63,975			2,811			4.4	%

Total community operating expenses		267,250			242,713			24,537			10.1	%		242,713			225,888			16,825			7.4	%


Corporate-level property management and other indirect operating expenses		38,627			34,177			4,450			13.0	%		34,177			31,243			2,934			9.4	%
Investments and investment management		11,737			7,030			4,707			67.0	%		7,030			4,834			2,196			45.4	%
Interest expense, net		97,545			109,184			(11,639	)		(10.7	%)		109,184			125,171			(15,987	)		(12.8	%)
Depreciation expense		179,549			160,442			19,107			11.9	%		160,442			156,455			3,987			2.5	%
General and administrative expense		28,494			24,767			3,727			15.0	%		24,767			25,761			(994	)		(3.9	%)

Total other expenses		355,952			335,600			20,352			6.1	%		335,600			343,464			(7,864	)		(2.3	%)


Equity in income of unconsolidated entities		59,169			7,455			51,714			693.7	%		7,455			7,198			257			3.6%
Minority interest in consolidated partnerships		(1,585	)		(573	)		(1,012	)		176.6	%		(573	)		(1,481	)		908			(61.3	%)
Gain on sale of land		545			13,519			(12,974	)		(96.0	%)		13,519			4,479			9,040			201.8	%


Income from continuing operations		247,668			163,517			84,151			51.5	%		163,517			96,055			67,462			70.2	%

Discontinued operations:

Income from discontinued operations		4,005			5,618			(1,613	)		(28.7	%)		5,618			19,126			(13,508	)		(70.6	%)
Gain on sale of communities		106,487			97,411			9,076			9.3	%		97,411			195,287			(97,876	)		(50.1	%)

Total discontinued operations		110,492			103,029			7,463			7.2	%		103,029			214,413			(111,384	)		(51.9	%)


Net income		358,160			266,546			91,614			34.4	%		266,546			310,468			(43,922	)		(14.1	%)
Dividends attributable to preferred stock		(8,700	)		(8,700	)		—			—			(8,700	)		(8,700	)		—			—

Net income available to common stockholders	$	349,460		$	257,846		$	91,614			35.5	%	$	257,846		$	301,768		$	(43,922	)		(14.6	%)

Net income available to common stockholders increased $91,614,000 or 35.5%, to $349,460,000 in 2007 due primarily to sales of consolidated operating communities and investments in unconsolidated entities and related gains occurring in 2007 combined with growth in net operating income from Established Communities and contributions to net operating income from newly developed communities in 2007. Net income available to common stockholders decreased $43,922,000, or 14.6%, to $257,846,000 in 2006, primarily attributable to reduced asset sales and the related gains, partially offset by growth in net operating income from Established Communities and contributions to net operating income from newly developed communities.

Net operating income (“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 U.S. generally accepted accounting principles (“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. A calculation of NOI for the years ended December 31, 2007, 2006 and 2005, along with reconciliation to net income for each year, is as follows (dollars in thousands):


	For the year ended
	12-31-07			12-31-06			12-31-05

Net income	$	358,160		$	266,546		$	310,468
Indirect operating expenses, net of corporate income		31,285			28,811			26,675
Investments and investment management		11,737			7,030			4,834
Interest expense, net		97,545			109,184			125,171
General and administrative expense		28,494			24,767			25,761
Equity in income of unconsolidated entities		(59,169	)		(7,455	)		(7,198	)
Minority interest in consolidated partnerships		1,585			573			1,481
Depreciation expense		179,549			160,442			156,455
Gain on sale of real estate assets		(107,032	)		(110,930	)		(199,766	)
Income from discontinued operations		(4,005	)		(5,618	)		(19,126	)

Net operating income	$	538,149		$	473,350		$	424,755

The NOI increases in both 2007 and 2006, as compared to the prior year period, consist of changes in the following categories (dollars in thousands):


	2007		2006
	Increase		Increase
Established Communities	$	29,866	$	32,083

Other Stabilized Communities		10,185		5,379

Development and Redevelopment Communities		24,748		11,133


Total	$	64,799	$	48,595

The NOI increases in Established Communities in 2007 were largely due to continued favorable apartment market fundamentals. During 2007, we continued to focus on rental rate growth, while maintaining occupancy of at least 95% in all regions. We anticipate that increases in rental rates and overall rental revenue growth will moderate in 2008 as compared to 2007, as we expect a slower rate of job growth (demand) and a decline in new rental completions in our markets (supply). We expect revenue growth from our Established Communities of 2.5% to 4.0% in 2008 as compared to 2007. In addition, we continue to monitor and manage operating expenses to constrain expense growth. We expect operating expenses at our Established Communities to increase by 2.0% to 3.0% in 2008 as compared to 2007 from increasing property tax, labor and utility expenses. Overall, we anticipate growth in NOI from our Established Communities of 3.0% to 4.5% in 2008 as compared to 2007.

The Company has given projected NOI growth in 2008 only for Established Communities and not on a company-wide basis. The Company believes that NOI growth of the Established Communities assists investors in understanding management’s estimate of the likely contribution to operations from Established Communities. However, the Company has not provided a projection of NOI growth on a company-wide basis due to the difficulty in projecting the timing of new development starts, dispositions and acquisitions, as well as the complexities involved in projecting the allocation of corporate-level property management overhead, general and administrative costs and interest expense to communities not yet developed, disposed or acquired. NOI growth expected from Established Communities is not a projection of the Company’s projected consolidated financial performance or projected cash flow.

Rental and other income increased in 2007 as compared to the prior year due to increased rental rates 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 38,436 apartment homes for 2007 as compared to 37,716 apartment homes for 2006 and 36,520 apartment homes for 2005. This change is primarily the result of increased homes available from newly developed and acquired communities, partially offset by communities sold in 2007 and 2006. The weighted average monthly revenue per occupied apartment home increased to $1,767 in 2007 as compared to $1,610 in 2006 and $1,516 in 2005.

Established Communities - Rental revenue increased $34,257,000, or 5.5%, for 2007 and increased $35,871,000, or 6.8% in 2006. These increases are due to increased average rental rates, partially offset by decreased economic occupancy. For 2007, the weighted average monthly revenue per occupied apartment home increased 5.8% to $1,795 compared to $1,697 in 2006, primarily due to increased market rents and the decrease in the amortization of concessions. The higher amortization recognized in 2006 was due to the higher levels of concessions granted in periods prior to 2006. The average economic occupancy decreased 0.3% to 96.3% in 2007. 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 increases in Established Communities’ rental revenue in all six of our regions in 2007 as compared to 2006. The largest increases in rental revenue were in the Pacific Northwest, Northern California and the Mid-Atlantic, with increases of 11.1%, 8.6% and 5.9%, respectively, between years. The Northeast and Northern California regions comprise the majority of our Established Community revenue, and therefore are discussed in more detail below.

Northern California, which represented approximately 24.6% of Established Community rental revenue during 2007, experienced an increase in rental revenue of 8.6% in 2007 as compared to 2006. Average rental rates increased by 8.3% to $1,699, and economic occupancy increased 0.3% to 97.0% in 2007. Apartment fundamentals remain strong in Northern California. We expect Northern California to see continued but moderating revenue growth during 2008 at growth levels in excess of those expected in other markets.

The Northeast region, which accounted for approximately 42.3% of Established Community rental revenue during 2007, experienced an increase in rental revenue of 3.2% in 2007 as compared to 2006. Average rental rates increased 3.5% to $2,129, and economic occupancy decreased 0.3% to 96.2% in 2007. We expect overall apartment fundamentals in the Northeast region will be balanced during 2008, with slower job growth and except in the Boston area, minimal net new rental supply. Supply-demand fundamentals for New York City and surrounding areas should remain healthy, although changes in employment levels in the financial services industry could cause economic growth to decelerate. Boston will continue to lag the region in revenue growth, as we expect the net new supply from apartment deliveries will outpace improvement in the region’s economy. These factors support our expectation for moderate rental rate growth in 2008.

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 ended December 31, 2007 and 2006 (dollars in thousands). Information for the year ended December 31, 2005 is not presented, as Established Community classification is not comparable prior to January 1, 2006. See Note 9, “Segment Reporting,” of our Consolidated Financial Statements.


	For the year ended
	12-31-07			12-31-06

Rental revenue (GAAP basis)	$	652,129		$	617,872
Concessions amortized		6,119			12,336
Concessions granted		(6,234	)		(6,236	)


Rental revenue adjusted to state concessions on a cash basis	$	652,014		$	623,972


Year-over-year % change — GAAP revenue		5.5	%		n/a

Year-over-year % change — cash concession based revenue		4.5	%		n/a

Management, development and other fees decreased $117,000, or 1.9% in 2007 and increased $1,955,000 or 45.4% in 2006. The decrease in 2007 was due to lower development and redevelopment management fees, coupled with the loss of fees due to the disposition of our interest in a joint venture, partially offset by increased property management fees from the Fund, as additional communities are acquired. The increase in 2006 over 2005 was due to a full year of management fees from the Fund, which was formed in March 2005.

Direct property operating expenses, excluding property taxes increased $16,411,000 or 9.3% and $14,014,000 or 8.7% in 2007 and 2006, respectively, primarily due to the addition of recently developed and acquired apartment homes coupled with expense growth in our Established Communities.

For Established Communities, direct property operating expenses, excluding property taxes, increased $1,661,000, or 1.1%, and $3,030,000, or 2.4%, to $148,628,000 and $131,106,000 in 2007 and 2006, respectively, due primarily to increases in other maintenance, marketing and landscaping expenses offset by lower utility and redecorating costs.

Property taxes increased $8,126,000 or 12.2% and $2,811,000 or 4.4% in 2007 and 2006, respectively, due to overall higher assessments and the addition of newly developed and redeveloped apartment homes. Property taxes are impacted by the size and timing of successful tax appeals in both years.

For Established Communities, property taxes increased by $2,618,000, or 4.5%, and $721,000, or 1.4% in 2007 and 2006, respectively, due to higher assessments throughout all regions. Year over year changes are impacted by the size and timing of successful tax appeals. Overall, we expect property taxes in 2008 to increase from 2007 levels due to increased valuations and the addition of newly developed communities. Despite the potential decreases in real estate property values for tax purposes, there is generally a lag to the ultimate recognition of any savings in the real estate tax assessments. In addition, property tax increases are limited by law (Proposition 13) for communities in California. We evaluate property tax increases internally, as well as engage third-party consultants, and appeal increases when appropriate.

Corporate-level property management and other indirect operating expenses increased by $4,450,000, or 13.0% and $2,934,000, or 9.4%, in 2007 and 2006, respectively, over the prior year periods due primarily to increased costs relating to corporate initiatives focused on increasing efficiency and enhancing controls at our operating communities, coupled with increased compensation and relocation costs. The 2007 expense includes the set up costs related to the office in Virginia Beach, Virginia that we opened in 2007. This office will be used to centralize certain community-related accounting, administrative and customer service functions. The transition began during the third quarter of 2007, when certain community-related accounting functions were relocated to our Virginia Beach office and is expected to continue through the end of 2008. Expenses in this category increased in 2006, primarily due to the addition of recently developed and acquired apartment homes coupled with expense growth in our Established Communities.

Investments and investment management reflects the costs incurred for investment acquisitions, investment management and abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment or impairment of development pursuits, acquisition pursuits and disposition pursuits. Investments and investment management costs increased in 2007 as compared to 2006 due primarily to increased abandoned pursuit costs. Abandoned pursuit costs were $6,974,000 in 2007, $2,115,000 in 2006 and $816,000 in 2005. Abandoned pursuit costs can be volatile, and the costs incurred in any given period may vary significantly in future periods.

Interest expense, net decreased $11,639,000 or 10.7% in 2007 and $15,987,000 or 12.8% in 2006 due primarily to higher levels of capitalized interest in connection with our increased development activity and increased interest income, partially offset by an increase in the average outstanding balance on our unsecured credit facility. Interest income increased in 2007 due to higher invested cash balances from our January 2007 equity offering as well as increases in the interest rate earned on cash deposits, offset partially by interest income in 2006 from an escrow funded from a disposition in 2005 that was used in a tax-deferred exchange.

Depreciation expense increased $19,107,000 or 11.9% in 2007 and $3,987,000 or 2.5% in 2006 primarily due to the completion of development and redevelopment activities, partially offset by the loss of depreciation from assets sold.

General and administrative expense (“G&A”) increased $3,727,000 or 15.0% in 2007 primarily due to increased compensation costs. G&A expenses decreased $994,000 or 3.9% in 2006 primarily due to the incurrence in 2005 of the following: (i) separation costs of approximately $2,100,000 due to the departure of a senior executive; (ii) the accrual of costs related to various litigation matters of approximately $1,500,000; and (iii) increased board of director fees due to the acceleration of equity awards with the resignation of a director due to disability in 2005, partially offset by higher compensation costs in 2006.

Gain on sale of land in 2007 decreased from 2006 due to the volume and size of land parcels sold in each year. The increase in 2006 from 2005 is due to larger gains on sales in 2006.

Equity in income of unconsolidated entities in 2007 increased from 2006 due primarily to the recognition in 2007 of approximately $60,000,000 in gains from the disposition of two investments, partially offset by losses (after depreciation) associated with two unconsolidated investments and the consolidation in 2007 of a community that was not consolidated as of December 31, 2006.

Minority interest in consolidated partnerships increased in 2007 as compared to 2006 due to the recognition of the sale of a 70% joint venture partner interest in one of our consolidated communities (See Note 6, “Investment in Real Estate Entities”). This increase was partially offset by the conversion and redemption of limited partnership units, thereby reducing outside ownership interests and the allocation of net income to outside ownership interests. The year-over-year decrease in 2006 was due to the conversion of limited partnership units, reducing the outside ownership interests.

Income from discontinued operations represents the net income generated by communities sold or qualifying as discontinued operations during the period from January 1, 2006 through December 31, 2007. It decreased in 2007 and 2006 due to fewer communities sold or classified as discontinued operations. See Note 7, “Real Estate Disposition Activities,” of our Consolidated Financial Statements.

Gain on sale of communities increased in 2007 due to the higher volume of dispositions in 2007. The decrease in 2006 as compared to 2005 is due to the volume and size of dispositions in the respective years relative to our basis in the assets. The amount of gain realized in any given reporting period depends on many factors, including the number of communities sold, the size and carrying value of those communities and the sales prices, which are driven by local and national market conditions.

Funds from Operations Attributable to Common Stockholders (“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 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

Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities, 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, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, particularly to changes in interest rates. 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. We believe our principal short-term liquidity needs are to fund:

	•		normal recurring operating expenses;
	•		debt service and maturity payments;
	•		preferred stock dividends and DownREIT partnership unit distributions;
	•		the minimum dividend payments on our common stock required to maintain our REIT qualification under the Internal Revenue Code of 1986;
	•		development and redevelopment activity in which we are currently engaged; and
	•		capital calls for the Fund, as required.

Increased capital market volatility in 2007 and constrained liquidity suggest that our liquidity needs may be met in 2008 from sources that differ from historical sources. Increased use of secured debt and increased asset sales relative to our recent activity are expected for 2008. Although general market liquidity is constrained, we anticipate that we can satisfy these needs from a combination of cash flow provided by operating activities, proceeds from asset dispositions and borrowing capacity under our variable rate unsecured credit facility, as well as secured financings and other public or private sources of liquidity.

Cash and cash equivalents totaled $21,222,000 at December 31, 2007, an increase of $12,938,000 from $8,284,000 at December 31, 2006. 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 increased to $455,825,000 in 2007 from $351,660,000 in 2006. The increase was driven primarily by the additional NOI from our Established Communities’ operations, as well as NOI from recently developed communities.

Investing Activities – Net cash used in investing activities of $809,247,000 in 2007 related to investments in assets through the development and redevelopment of apartment communities, the acquisition of a community, and the acquisition of 17 land parcels, partially offset by proceeds from the disposition of a land parcel, four communities and a partnership interest in an unconsolidated real estate investment. During 2007, we invested $1,141,706,000 in the purchase and development of the following real estate and capital expenditures:

	•		We completed the development of eight communities containing a total of 1,749 apartment homes for a total capitalized cost, including land acquisition cost, of $440,700,000.
	•		We acquired 17 parcels of land in connection with Development Rights, for an aggregate purchase price of $311,691,000.
	•		We had capital expenditures relating to current communities’ real estate assets of $13,851,000 and non-real estate capital expenditures of $1,424,000.

•

We commenced the development of 12 communities which are expected to contain a total of 3,412 apartment homes for an expected aggregate total capital cost of $1,279,800,000.

Financing Activities – Net cash provided by financing activities totaled $366,360,000 in 2007. The net cash inflow is due primarily to the proceeds from the issuance of 4,600,000 shares of the Company’s common stock at $129.30 per share, borrowings of $514,500,000 under our unsecured credit facility and the issuance of two mortgage notes for approximately $59,126,000, offset by the repurchase of 2,480,616 shares of our common stock at an average price of $103.95 per share, the repayment of mortgage notes of approximately $27,256,000, the repayment of unsecured notes at maturity of approximately $260,000,000 and dividend payments of $268,966,000.

Variable Rate Unsecured Credit Facility

In November 2007, we increased our borrowing capacity under our existing revolving variable rate unsecured credit facility from $650,000,000 to $1,000,000,000. The facility is with a syndicate of commercial banks, to whom we pay, in the aggregate, an annual facility fee of approximately $1,250,000. The unsecured 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 (3.54% on January 31, 2008). 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 $422,500,000. 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 unsecured 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, 2008. We are subject to and currently in compliance with certain customary covenants under the unsecured credit facility, including, but not limited to, maintaining certain maximum leverage ratios, a minimum fixed charges coverage ratio and minimum unencumbered assets and equity levels. The credit facility matures in November 2011, assuming our exercise of a one-year renewal option. At January 31, 2008, $733,500,000 was outstanding on the credit facility, $57,000,000 was used to provide letters of credit and $209,361,000 was available for borrowing under the unsecured credit facility.

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, we anticipate that no significant portion of the principal of these notes will be repaid prior to maturity. 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 collateralized by mortgages on individual communities or groups of communities, draws on our unsecured credit facility or by equity offerings. Although we believe we will have the capacity to meet our long-term 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 the year ended December 31, 2007:

	•		we issued $16,926,000 of variable rate mortgage debt for an operating community in June, maturing in May 2012;
	•		we repaid $15,980,000 of mortgage debt, secured by the assets of an operating community in July;
	•		we assumed $3,941,000 of fixed rate mortgage debt in conjunction with the acquisition of an operating community in July 2007 and subsequently defeased the note in December 2007;
	•		we issued $100,000,000 of variable rate, tax-exempt debt for a development community in June, maturing in November 2040;
	•		we repaid $150,000,000 in previously issued unsecured notes in August 2007, along with any unpaid interest, pursuant to their scheduled maturity;
	•		we issued $42,200,000 of fixed rate, tax-exempt mortgage debt for an operating community in September 2007, maturing in June 2047;
	•		we were relieved of our obligations associated with $8,116,000 in mortgage debt in conjunction with the disposition of the associated operating community in September 2007;
	•		we repaid $110,000,000 in previously issued unsecured notes in December 2007, along with any unpaid interest, pursuant to their scheduled maturity;
	•		we borrowed $514,500,000 under our unsecured credit facility;
	•		we increased our borrowing capacity under our unsecured credit facility by $350,000,000, to $1,000,000,000;
	•		we issued 4,600,000 shares of common stock at $129.30 per share for net proceeds of approximately $594,000,000 in conjunction with the inclusion of our common stock in the S&P 500 index in January 2007; and
	•		we repurchased 2,480,616 shares of our common stock at an average price of $103.95 per share, for a total approximate purchase price of $257,854,000.

In February 2008, the Board of Directors authorized a further increase of $200,000,000 in the common stock repurchase program, increasing the total amount the Company can acquire to $500,000,000, of which approximately $300,000,000 has been used to repurchase our common stock as of January 31, 2008. The decision to use the additional share repurchase authorization will depend on current capital market conditions and liquidity, our share price relative to the net asset value per share and other uses of capital, including development.

The table below details debt maturities for the next five years, excluding our unsecured credit facility, and amounts outstanding related to communities classified as held for sale, for debt outstanding at December 31, 2007 (dollars in thousands, except footnotes).


	All-In			Principal
	interest			maturity	Balance outstanding					Scheduled maturities
Community	rate (1)			date	12-31-06		12-31-07			2008		2009		2010		2011		2012		Thereafter
Tax-exempt bonds
*Fixed rate*
CountryBrook		6.30	%	Mar-2012	$	15,990	$	15,356		$	676	$	719	$	766	$	816	$	12,379	$	—
Avalon at Symphony Glen		4.90	%	Jul-2024		9,780		9,780			—		—		—		—		—		9,780
Avalon at Lexington		6.55	%	Feb-2025		12,467		12,078			413		439		466		495		526		9,739
Avalon at Nob Hill		5.80	%	Jun-2025		18,116		—	(2)		—		—		—		—		—		—
Avalon Campbell		6.48	%	Jun-2025		32,776		31,877	(2)		—		—		—		—		—		31,877
Avalon Pacifica		6.48	%	Jun-2025		14,867		14,460	(2)		—		—		—		—		—		14,460
Avalon Knoll		6.95	%	Jun-2026		11,957		11,654			324		347		371		398		426		9,788
Avalon Landing		6.85	%	Jun-2026		5,903		5,751			162		173		185		198		212		4,821
Avalon Fields		7.55	%	May-2027		10,483		10,224			256		275		295		316		339		8,743
Avalon Oaks		7.45	%	Jul-2041		17,205		17,077			137		147		157		168		180		16,288
Avalon Oaks West		7.48	%	Apr-2043		17,036		16,919			125		133		142		152		162		16,205
Avalon at Chestnut Hill		5.82	%	Oct-2047		—		42,149			314		331		349		368		388		40,399

						166,580		187,325			2,407		2,564		2,731		2,911		14,612		162,100

*Variable rate* (3)
The Promenade		4.88	%	Oct-2010		31,495		30,844			701		755		29,388		—		—		—
Waterford		3.50	%	Jul-2014		33,100		33,100	(4)		—		—		—		—		—		33,100
Avalon at Mountain View		3.50	%	Feb-2017		18,300		18,300	(4)		—		—		—		—		—		18,300
Avalon at Foxchase I		3.50	%	Nov-2017		16,800		16,800	(4)		—		—		—		—		—		16,800
Avalon at Foxchase II		3.50	%	Nov-2017		9,600		9,600	(4)		—		—		—		—		—		9,600
Avalon at Mission Viejo		3.98	%	Jun-2025		7,635		7,635	(4)		—		—		—		—		—		7,635
Avalon at Nob Hill		3.46	%	Jun-2025		2,684		20,800	(4)		—		—		—		—		—		20,800
Avalon Campbell		3.46	%	Jun-2025		6,024		6,923	(2)		—		—		—		—		—		6,923
Avalon Pacifica		3.46	%	Jun-2025		2,733		3,140	(2)		—		—		—		—		—		3,140
Avalon at Fairway Hills I		4.33	%	Jun-2026		11,500		11,500			—		—		—		—		—		11,500
Bowery Place I		3.31	%	Nov-2037		93,800		93,800	(5)		521		576		636		703		777		90,587
Bowery Place II		3.34	%	Nov-2039		48,500		48,500	(5)		—		—		270		298		329		47,603
Avalon Acton		4.14	%	Jul-2040		45,000		45,000	(5)		—		—		—		—		—		45,000
Morningside Park		6.63	%	Nov-2040		—		100,000			—		—		138		302		340		99,220

						327,171		445,942			1,222		1,331		30,432		1,303		1,446		410,208
Conventional loans (6)
*Fixed rate*
$150 million unsecured notes		5.18	%	Aug-2007	$	150,000	$	—		$	—	$	—	$	—	$	—	$	—	$	—
$110 million unsecured notes		7.13	%	Dec-2007		110,000		—			—		—		—		—		—		—
$50 million unsecured notes		6.63	%	Jan-2008		50,000		50,000	(7)		50,000		—		—		—		—		—
$150 million unsecured notes		8.38	%	Jul-2008		146,000		146,000			146,000		—		—		—		—		—
$150 million unsecured notes		7.63	%	Aug-2009		150,000		150,000			—		150,000		—		—		—		—
$200 million unsecured notes		7.66	%	Dec-2010		200,000		200,000			—		—		200,000		—		—		—
$300 million unsecured notes		6.79	%	Sep-2011		300,000		300,000			—		—		—		300,000		—		—
$50 million unsecured notes		6.31	%	Sep-2011		50,000		50,000			—		—		—		50,000		—		—
$250 million unsecured notes		5.73	%	Jan-2012		250,000		250,000			—		—		—		—		250,000		—
$250 million unsecured notes		6.26	%	Nov-2012		250,000		250,000			—		—		—		—		250,000		—
$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
Wheaton Development Right		6.99	%	Oct-2008		4,514		4,432			4,432		—		—		—		—		—
4600 Eisenhower Avenue		8.08	%	Apr-2009		4,402		4,293			118		4,175		—		—		—		—
Twinbrook Development Right		7.25	%	Oct-2011		8,200		8,007			207		222		239		7,339		—		—
Tysons West Development Right		5.55	%	Jul-2028		6,535		6,381			162		173		183		193		204		5,466
Avalon Orchards		7.65	%	Jul-2033		19,883		19,612			290		311		333		357		382		17,939

						2,199,534		1,938,725			201,209		154,881		200,755		357,889		500,586		523,405

*Variable rate* (3)
Avalon Ledges		5.68	%	May-2009		18,635		17,990			688		17,302		—		—		—		—
Avalon at Flanders Hill		5.68	%	May-2009		21,245		20,510			784		19,726		—		—		—		—
Avalon at Newton Highlands		5.62	%	Dec-2009		37,650		36,335			1,397		34,938		—		—		—		—
Avalon at Crane Brook		5.59	%	Mar-2011		33,535		32,560			1,045		1,106		1,169		29,240		—		—
Avalon at Bedford Center		5.62	%	May-2012		—		16,816	(4)		468		497		527		560		14,764		—

						111,065		124,211			4,382		73,569		1,696		29,800		14,764		—

Total indebtedness — excluding unsecured credit facility					$	2,804,350	$	2,696,203		$	209,220	$	232,345	$	235,614	$	391,903	$	531,408	$	1,095,713


(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, 2007 and December 31, 2006 through a swap agreement. The portion of the debt fixed through a 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, 2007.

(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, 2007. Actual amounts drawn on the debt as of December 31, 2007 are $87,519,000 for Bowery Place I, $34,323,000 for Bowery Place II, $12,156,000 for Avalon Acton and $0 for Morningside Park.

(6)		Balances outstanding represent total amounts due at maturity, and are not net of $2,501 of debt discount as of December 31, 2007 and $2,922 of debt discount as of December 31, 2006, as reflected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report.

(7)		These notes were repaid at their scheduled maturity in January 2008.

Future Financing and Capital Needs – Portfolio and Other Activity

As of December 31, 2007, we had 21 new communities under construction, for which a total estimated cost of $943,679,000 remained to be invested. In addition, we had eight communities which we own, or in which we have a direct or indirect interest, under reconstruction, for which a total estimated cost of $53,836,000 remained to be invested. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction, as well as development costs related to pursuing Development Rights, will be funded from:

	•		cash currently on hand invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment vehicles;
	•		the remaining capacity under our current $1,000,000,000 unsecured credit facility;
	•		the net proceeds from sales of existing communities;
	•		retained operating cash;
	•		the issuance of debt or equity securities; and/or
	•		private equity funding.

Before planned reconstruction activity, including reconstruction activity related to communities acquired by the Fund as discussed below, 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.

We have invested in the Fund, a private, discretionary investment vehicle that acquires and operates apartment communities in our markets. The Fund has invested $777,568,000 as of December 31, 2007. Management of the Fund expects to invest approximately $46,000,000 of additional funds to redevelop the assets acquired, at which time the Fund will become fully invested. The Fund has nine institutional investors, including us, with a combined capital equity commitment of $330,000,000. A significant portion of the investments made in the Fund by its investors have been made through AvalonBay Value Added Fund, Inc., a Maryland corporation that qualifies as a REIT under the Internal Revenue Code (the “Fund REIT”). A wholly-owned subsidiary of the Company is the general partner of the Fund and has committed $50,000,000 to the Fund and the Fund REIT (of which approximately $32,035,000 has been invested as of January 31, 2008) representing a 15.2% combined general partner and limited partner equity interest. As of January 31, 2008, the Fund has committed to invest approximately $818,367,000. We are exploring various potential sources for funding future acquisitions after the Fund is fully invested.

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 or 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 and will continue to be 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. In response to real estate and capital markets conditions, we sold four communities and one partnership interest in an unconsolidated entitiy for an aggregate sales price of $268,096,000 from January 1, 2007 through January 31, 2008. 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. During 2008, we intend to dispose of between $700,000,000 and $1,000,000,000 in assets. However, actual disposition volume will depend on market conditions and other variables, which are subject to change in 2008.

Off Balance Sheet Arrangements

In addition to the 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,” and Note 8, “Commitments and Contingencies,” 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) overall once tenant improvements related to a retail tenant are complete, which is expected in the first half of 2008. 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, 2007 were not significant. As a result we have not recorded any obligation associated with these guarantees at December 31, 2007.

	•		MVP I, LLC executed a construction loan in the amount of $94,000,000 to finance the development of Avalon at Mission Bay North II. In conjunction with the construction management services that the Company provided to MVP I, LLC, the Company provided a construction completion guarantee to the construction loan lender in order to fulfill their standard financing requirements related to construction financing. In the fourth quarter of 2007, all of the lender’s standard completion requirements were satisfied and the obligation of the Company under this guarantee terminated. In December 2007, MVP I, LLC repaid the construction loan, concurrently executing a seven-year, fixed rate conventional loan.

	•		The Fund has 20 loans secured by individual assets with amounts outstanding in the aggregate of $447,166,000. These mortgage loans have 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. In addition, the Fund had amounts outstanding of $47,400,000 as of December 31, 2007 under its credit facilities, all of which is under an unsecured facility maturing in December 2008. The Fund did not have any amounts outstanding at December 31, 2007 under the Fund’s credit facility secured by uncalled capital commitments that matured in January 2008. The mortgage loans and the credit facility are payable by the Fund with operating cash flow from the underlying real estate, and the credit facility is secured by capital commitments. We have not guaranteed the debt of the Fund, nor do we have any obligation to fund this debt should the Fund be unable to do so.

			In addition, as part of the formation of the Fund, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (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 $6,510,000 as of December 31, 2007). As of December 31, 2007, the fair value of the real estate assets owned by the Fund is considered adequate to cover such potential payment to that partner under a liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2007 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2007.

	•		In connection with the pursuit of a Development Right in Pleasant Hill, California, $125,000,000 in bond financing was issued by the Contra Costa County Redevelopment Agency (the “Agency”) in connection with the possible future construction of a multifamily rental community by PHVP I, LLC. The bond proceeds were immediately invested in their entirety in a guaranteed investment contract (“GIC”) administered by a trustee. This Development Right is planned as a mixed-use development, with residential, for-sale, retail and office components. The bond proceeds will remain in the GIC until August 2008, at which time a loan will be made to PHVP I, LLC to fund construction of the multifamily portion of the development, or the bonds will be redeemed by the Agency. We are currently in discussions to extend both the term until the bond financing proceeds must be used for development of the multifamily portion of the project, and the GIC until August 2008, when construction of the multifamily portion of the development is now expected to begin. Although we do not have any equity or economic interest in PHVP I, LLC at this time, we do have an option to make a capital contribution to PHVP I, LLC in exchange for a 99% general partner interest in the entity. Should we decide not to exercise this option, bond proceeds will be released from escrow, the bonds will be redeemed without penalty and a loan will not be made to PHVP I, LLC. The bonds are payable from the proceeds of the GIC and are non-recourse to both PHVP I, LLC and to us. There is no loan payable outstanding by PHVP I, LLC as of December 31, 2007.

			In addition, as part of providing construction management services to PHVP I, LLC for the construction of a public garage, we have provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing. Our obligations under this guarantee will terminate following construction completion of the garage once all of the lender’s standard completion requirements have been satisfied, which we currently expect to occur in the first half of 2008. In the third quarter of 2006, significant modifications were requested by the local transit authority to change the garage structure design. We do not believe that the requested design changes impact the construction schedule. However, it is expected that these changes will increase the original budget by an amount up to $5,000,000. We believe that substantially all potential additional amounts are reimbursable from unrelated third parties. At this time we do not believe that it is probable that we will incur any additional costs. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2007 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2007.

	•		In the fourth quarter of 2006, we admitted a 70% venture partner to the Avalon Del Rey Apartments, LLC for an investment of $49,000,000, including the assumption of debt. In conjunction with this investment, we provided an operating guarantee to the joint venture partner which stated that if the initial year return earned by the joint venture partner was less than a threshold return of 7% on its initial equity investment, we would pay the joint venture partner an amount equal to the shortfall, up to the 7% threshold return required. In the fourth quarter of 2007, the initial year return earned by the joint venture partner was determined to be in excess of the guarantee threshold thereby satisfying all provisions of the Company under this guarantee.

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

We currently have contractual obligations consisting primarily of long-term debt obligations and lease obligations for certain land parcels and regional and administrative office space. During the second quarter of 2007, we entered into an operating lease for 20,000 square feet of office space in Virginia Beach, Virginia. We began to utilize this space for certain of our community-related accounting and customer service functions in the third quarter of 2007. There have not been any other material changes outside the ordinary course of business to our contractual obligations during 2007. Scheduled contractual obligations required for the next five years and thereafter are as follows as of December 31, 2007 (dollars in thousands):


	Payments due by period
			Less than						More than 5
	Total		1 Year		1-3 Years		3-5 Years		Years

Debt Obligations (1)	$	3,210,703	$	723,720	$	467,959	$	923,311	$	1,095,713

Operating Lease Obligations (2)		2,142,739		14,412		29,108		29,268		2,069,951


Total	$	5,353,442	$	738,132	$	497,067	$	952,579	$	3,165,664


(1)		Includes $514,500 outstanding under our variable rate unsecured credit facility as of December 31, 2007. The table of contractual obligations assumes repayment of this amount in 2008 — See “Liquidity and Capital Resources.” Amounts exclude interest payable as of December 31, 2007.

(2)		Includes land leases expiring between November 2028 and March 2142. Amounts do not include any adjustment for purchase options available under the land leases.

Inflation and Deflation

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 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, Northeast, Midwest and Pacific Northwest regions of the United States and in general;
	•		the availability of debt and equity financing;
	•		interest rates;
	•		general economic conditions; 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. 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. You should carefully review the discussion under Item 1a, “Risk Factors,” elsewhere in this report for a discussion of risks associated with forward-looking statements.

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.

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 and increases in the cost of capital, 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 the Fund and the Fund REIT; 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 Significant Accounting Policies” 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 guidance of FIN 46(R), “Consolidation of Variable Interest Entities” (as revised) and Emerging Issues Task Force Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” For investment interests that we do not consolidate, we look to the guidance in AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures”, Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, and Emerging Issues Task Force Topic D-46, “Accounting for Limited Partnership Investments”, to determine the accounting framework to apply. The application of these 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, 2007, our assets would have increased by $1,029,093,000 and our liabilities would have increased by $739,806,000. 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 under FIN 46(R), the nature of the entity changed such that it would be considered a variable interest entity.
	•		For entities in which we do not hold a controlling voting and/or variable interest, the contractual arrangement changes 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 beginning 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 and those 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 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 2007 our development activities decreased by 10%, and there were no corresponding decrease in our indirect project costs, our operating expenses would have increased by $2,748,000.