** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

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**(MARK ONE)**

 

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

 

**For thefiscal year ended December 31, 2004**

 

**OR**

 

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

 

**FOR THETRANSITION PERIOD FROM                 TO                 **

 

**Commissionfile number   333-44467-01**

 

**Essex Portfolio, L.P.**

(Exact name ofRegistrant as Specified in its Charter)

 
| **Maryland**                                                    | ** ** | **77-0369575**                          |
|-----------------------------------------------------------------|------------|-----------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer Identification Number) |

 

 

**925 EastMeadow Drive Palo Alto, California    94303**

(Address ofPrincipal Executive Offices including Zip Code)

 

**(650) 494-3700**

(Registrant’sTelephone Number, Including Area Code)

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K, or any amendment to this Form10-K.  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934). Yes ý   No o

 

LOCATION OF EXHIBITINDEX: The index exhibit is contained in Part III, Item 15, on page number 54.

 

DOCUMENTS INCORPORATED BYREFERENCE:

 

The following document isincorporated by reference in Part III of the Annual Report on Form 10-K: Proxystatement for the annual meeting of stockholders of Essex Property Trust, Inc.to be held May 10, 2005.

 

 

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** **

**EssexPortfolio, L.P. 2004 ANNUAL REPORT ON FORM 10-K**

 

**TABLE OFCONTENTS**

 
| **Part I.**    |                                                                                             |       |
|----------------|--------------------------------------------------------------------------------------------------|------------|
| ** **     |                                                                                             |       |
| Item 1.        | Description  of Business                                                                         |       |
|           |                                                                                             |       |
| Item 2.        | Properties                                                                                       |       |
|           |                                                                                             |       |
| Item 3.        | Legal Proceedings                                                                                |       |
|           |                                                                                             |       |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                             |       |
|           |                                                                                             |       |
| **Part II.**   | ** **                                                                                       | ** ** |
| ** **     | ** **                                                                                       | ** ** |
| Item  5.       | Market  for Registrant’s Common Stock and Related Stockholder Matters                       |       |
|           |                                                                                             |       |
| Item 6.        | Selected Financial Data                                                                          |       |
|           |                                                                                             |       |
| Item  7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |       |
|           |                                                                                             |       |
| Item  7A.      | Quantitative  and Qualitative Disclosures About Market Risks                                     |       |
|           |                                                                                             |       |
| Item  8.       | Financial  Statements and Supplementary Data                                                     |       |
|           |                                                                                             |       |
| Item  9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure            |       |
|           |                                                                                             |       |
| Item 9A.       | Controls and  Procedures                                                                         |       |
|           |                                                                                             |       |
| Item 9B.       | Other  Information                                                                               |       |
|           |                                                                                             |       |
| **Part  III.** | ** **                                                                                       | ** ** |
| ** **     | ** **                                                                                       | ** ** |
| Item  10.      | Directors  and Executive Officers of the Registrant                                              |       |
|           |                                                                                             |       |
| Item 11.       | Executive Compensation                                                                           |       |
|           |                                                                                             |       |
| Item  12.      | Security  Ownership of certain Beneficial Owners and Management and Related Stockholder  Matters |       |
|           |                                                                                             |       |
| Item  13.      | Certain  Relationships and Related Transactions                                                  |       |
|           |                                                                                             |       |
| Item  14.      | Principal  Accounting Fees and Services                                                          |       |
|           |                                                                                             |       |
| Item  15.      | Exhibits  and Financial Statement Schedules                                                      |       |
|           |                                                                                             |       |
| **Signatures** |                                                                                             |       |

 

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**PART I**

 

Asused herein, the terms “Company” and “Essex” mean Essex Property Trust, Inc., aMaryland real estate investment trust, those entities controlled by EssexProperty Trust, Inc. and Predecessors of Essex Property Trust, Inc., unless thecontext indicates otherwise and the term “Operating Partnership” refers toEssex Portfolio, L.P., a California limited partnership, formed on March 15,1994 as to which the Company owns an approximate 90.3% general partnershipinterest, as of December 31, 2004 (except with regard to the section entitled“Risk Factors,” below, wherein all reference to the “Company” shall be deemedto be references to the Company and the Operating Partnership, unless the contextindicates otherwise).

 

**Forward Looking Statements**

 

ThisForm 10-K contains forward-looking statement within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Our actual results could differ materially from those set forth ineach forward-looking statement. Certain factors that might cause such adifference are discussed in this report, included in the section entitled “Forward-LookingStatements” on page 36 of this Form 10-K.

 

**Item 1. Business**

 

***Descriptionof Business***

 

Essex Portfolio, L.P.(the “Operating Partnership”) is engaged in the ownership, acquisition,development and management of multifamily apartment communities. The OperatingPartnership’s multifamily portfolio as of December 31, 2004 consists ofownership interests in 120 properties (comprising 25,518 apartment units), ofwhich 13,755 units are located in Southern California (Los Angeles, Ventura,Orange, San Diego and Riverside counties), 5,810 units are located in NorthernCalifornia (the San Francisco Bay Area), 5,651 are located in the PacificNorthwest (4,776 units in the Seattle metropolitan area and 875 units in thePortland, Oregon metropolitan area), and 302 units are located in Houston,Texas. In addition, at December 31, 2004, the Operating Partnership has anownership interest in other real estate assets consisting of four recreationalvehicle parks (comprising 698 spaces), five office buildings (totalingapproximately 173,540 square feet) and two manufactured housing communities(containing 607 sites), (collectively, together with the Operating Partnership’smultifamily residential properties, the “Properties”).  One of the office buildings located inNorthern California (Palo Alto) has approximately 17,400 square feet and housesthe Operating Partnership’s headquarters and another office building located inSouthern California (Woodland Hills) has approximately 38,940 square feet, ofwhich the Operating Partnership occupies approximately 11,200 square feet. TheWoodland Hills office building has eight third-party tenants occupyingapproximately 26,600 feet. The Operating Partnership along with its affiliatedentities and joint ventures also has entered into commitments for thedevelopment of 645 units in four multifamily communities; of which two are inNorthern California and two are in Southern California.

 

The Company wasincorporated in the state of Maryland in March 1994. On June 13,1994, the Company commenced operations with the completion of an initial publicoffering (“the Offering”) in which it issued 6,275,000 shares of common stockat $19.50 per share.

 

The Company conductssubstantially all of its activities through Essex Portfolio, L.P. (the “OperatingPartnership”). The Company currently owns an approximate 90.3% generalpartnership interest and members of the Company’s Board of Directors, seniormanagement and certain third-party investors own limited partnership interestsof approximately 9.7% in the Operating Partnership. As the sole general partnerof the Operating Partnership, the Company has control over the management ofthe Operating Partnership. The Operating Partnership either controls or hassignificant influence over the Properties.

 

The Company’s and the Operating Partnership’s websiteaddress is http://www.essexpropertytrust.com. TheOperating Partnership’s annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K and all amendments to those reports, and theProxy Statement for its Annual Meeting of Stockholders are all available, freeof charge, on our

 

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website as soon as practicable after we file thereports with the Securities and Exchange Commission (“SEC”).

 

References in this Form 10-K to “us,” “we,” or “our”refer to Essex unless indicated otherwise.

 

***BusinessObjectives***

 

The Operating Partnership’sprimary business objective is to maximize funds from operations and totalreturns to stockholders through active property and portfolio management. TheOperating Partnership’s primary business objectives include:

 

•                  ActiveProperty Marketing and Management. Maximize, on a per share basis, cashavailable for distribution and the capital appreciation of its propertyportfolio through active property marketing and management and, if applicable,redevelopment.

 

•                  SelectedExpansion of Property Portfolio. Increase, on a per share basis, cash availablefor distribution through the acquisition and development of multifamilyresidential properties in selected major metropolitan areas located primarilyin the west coast region of the United States.

 

•                  OptimalPortfolio Asset Allocations. Enhance financial performance through a portfolioasset allocation program that seeks to increase or decrease the investments ineach market based on projected changes in regional economic and local marketconditions.

 

•                  Managementof Capital and Financial Risk. Optimize the Operating Partnership’s capital andfinancial risk positions by maintaining a conservative leverage ratio andseeking a lower cost of capital.

 

***BusinessPrinciples***

 

The Operating Partnershipwas founded on, has followed, and intends to continue to follow the businessprinciples set forth below:

 

*PropertyManagement*.  Throughits long-standing philosophy of active property management and a customersatisfaction approach, coupled with a discipline of internal cost control, theOperating Partnership seeks to retain tenants, maximize cash flow, enhanceproperty values and compete effectively for new tenants in the marketplace. TheOperating Partnership’s Chief Operating Officer, its Senior Vice President ofOperations, its Division Managers, its area and regional portfolio managers,and their staff are accountable for the performance and maintenance of theProperties. They supervise on-site managers, provide training for the on-sitestaff, monitor fiscal performance against budgeted expectations, monitorproperty performance against competing properties in the area, prepareoperating and capital budgets for executive approval, and implement newstrategies focused on enhancing tenant satisfaction, increasing revenue,controlling expenses, and creating a more efficient operating environment.

 

*BusinessPlanning and Control.* Real estate investment decisions are accompanied by a multiple yearplan, to which executives and other managers responsible for obtaining futurefinancial performance must agree. Performance versus plan serves as asignificant factor in determining compensation.

 

*PropertyType Focus.*  TheOperating Partnership focuses on acquisition and development of multifamilyresidential communities, containing between 75 and 750 units.

 

*GeographicFocus.*  The OperatingPartnership focuses its property investments in markets that meet the followingcriteria:

 

•                  *Major Metropolitan Areas.*  The Operating Partnership focuses onmetropolitan areas having a regional population in excess of one millionpeople. Real estate markets in these areas are typically characterized by agreater number of buyers and sellers and are, therefore, more liquid. Liquidityis an important element for implementing the Operating Partnership’s strategyof varying its portfolio in response to changing market conditions.

 

•                  *Supply Constraints.*  The Operating Partnership believes thatproperties located in real estate markets

 

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with limited housingdevelopment opportunities may produce increased rental income. When evaluatingsupply constraints, the Operating Partnership reviews: (i)availability of developable land sites on which competing properties could bereadily constructed; (ii) political barriers to growth resulting from arestrictive local political environment regarding development (such anenvironment, in addition to the restrictions on development itself, is oftenassociated with a lengthy and expensive development process); and (iii)physical barriers to growth, resulting from natural limitations to development,such as mountains or waterways.

 

•                  *Rental Demand Created by High Cost of Housing*.  The Operating Partnership concentrates onmarkets in which the cost of renting compares favorably to the cost of owning ahome. In such markets, rent levels tend to be higher and operating expenses andcapital expenditures, as a percentage of rent, are often lower in comparisonwith markets that have a lower cost of owning a home.

 

•                  *Job Proximity*.  The Operating Partnership believes that mostrenters select housing based on its proximity to their jobs and relatedcommuting factors. The Operating Partnership obtains local area informationrelating to its residential properties and uses this information when makingmultifamily property acquisition decisions. The Operating Partnership alsoreviews the location of major employers relative to its portfolio and potentialacquisition properties.

 

Following the abovecriteria, the Operating Partnership is currently pursuing investmentopportunities in selected markets of Northern and Southern California and thePacific Northwest.

 

*ActivePortfolio Management Through Regional Economic Research and Local MarketKnowledge.* TheOperating Partnership was founded on the belief that the key elements ofsuccessful real estate investment and portfolio growth include extensiveregional economic research and local market knowledge. The OperatingPartnership utilizes its economic research and local market knowledge to makeappropriate portfolio allocation decisions that it believes will result inbetter overall operating performance and lower portfolio risk. The OperatingPartnership maintains and evaluates:

 

•                  *Regional Economic Data.*  The Operating Partnership evaluates andreviews regional economic factors for the markets in which it owns propertiesand where it considers expanding its operations. The Operating Partnership’sresearch focuses on regional and sub-market supply and demand for all types ofhousing, economic diversity, job growth, market depth and the comparison ofrents to down payments and occupancy costs associated with for-sale housing.

 

•                  *Local Market Conditions.*  Local market knowledge includes (i) local factors that influence whether a sub-market isdesirable to tenants; (ii) the extent to which the area surrounding a propertyis improving or deteriorating; and (iii) local investment market dynamics,including the relationship between the value of a property and its yield, theprospects for capital appreciation and market depth.

 

Recognizing that all realestate markets are cyclical, the Operating Partnership regularly evaluates theresults of regional economic and local market research and adjusts itsportfolio allocations accordingly. The Operating Partnership actively managesthe allocation of assets within its portfolio. The Operating Partnership seeksto increase its portfolio allocation in markets projected to have the strongestlocal economies and to decrease such allocations in markets projected to havedeclining economic conditions. Likewise, the Operating Partnership also seeksto increase its portfolio allocation in markets that have attractive property valuationsand to decrease such allocations in markets that have inflated valuations andlow relative yields.

 

***CurrentBusiness Activities***

 

Essex Portfolio, L.P.(the “Operating Partnership”) was formed in March 1994 and commencedoperations on June 13, 1994, when the Company, the general partner of theOperating Partnership, completed its initial public offering (the “Offering”)in which it issued 6,275,000 shares of common stock at $19.50 per share. TheCompany has elected to be treated as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (“The Code”)as amended.

 

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The Company conductssubstantially all of its activities through the Operating Partnership, of whichit owns an approximate 90.3% general partnership interest. The approximate 9.7%limited partnership interests in the Operating Partnership are owned bydirectors, officers and employees of the Company and certain third-partyinvestors. As the sole general partner of the Operating Partnership, theCompany has operating control over the management of the Operating Partnership.The Operating Partnership either controls or has significant influence over theProperties. From time to time, the Company may invest in properties through theacquisition of an interest in another entity. The Company does not plan toinvest in the securities of other entities not engaged in real estate relatedactivities.

 

The Company has electedto be treated as a real estate investment trust (“REIT”)for federal income tax purposes, commencing with the year ended December 31,1994. In order to maintain the Company’s compliance with REITtax rules, the Operating Partnership utilizes taxable REITsubsidiaries (“TRS”) for various revenue generatingor investment activities. The TRS’s are consolidatedby the Operating Partnership.

 

***Acquisitions***

 

On January 21, 2004,the Operating Partnership purchased the improvements comprising Marina CityClub, located in Marina del Rey, California, whichinclude a 101-unit apartment community, an adjacent marina with approximately340 boat slips and assorted retail space. The total contract price was approximately $27.7 million.  The improvements are subject to a long-termground lease with the County of Los Angeles that expires in 2067.  The property is unencumbered.

 

On January 28, 2004,the Operating Partnership purchased Mountain View Apartments, a 106-unitmultifamily community located in Camarillo, California for a contract price ofapproximately $14.3 million.  Theproperty is unencumbered.

 

On February 27,2004, the Operating Partnership purchased Fountain Park Apartments, a 705-unitmultifamily community located in Playa Vista, California, for a contract priceof approximately $124.5 million.  Inconnection with the transactions, the Operating Partnership assumed tax-exemptvariable rate bond obligations totaling $83.2 million that mature in 2033.  Financing and other agreements require 53% ofthe apartment homes in Fountain Park to be subject to various rent restrictionsbased on resident income criteria.

 

During the second quarterof 2004, the Operating Partnership acquired its partner’s 80% interests inTierra Vista Apartments, a 404-unit apartment community located in Oxnard,California and The Pointe at Cupertino, a 116-unit apartment community locatedin Cupertino, California.  The combinedcontract price for the interests was approximately $74.6 million.  In conjunction with the transaction, theOperating Partnership assumed a $37.3 million loan with an interest rate of5.93% that matures on July 1, 2007 for Tierra Vista, and a $14.1 millionloan with an interest rate of 4.86%, which matures on November 1, 2012 forThe Pointe at Cupertino.  As a result ofthese transactions, the Operating Partnership now consolidates theseproperties.

 

On August 6, 2004,the Operating Partnership acquired Vista Belvedere, a 76-unit apartmentcommunity located in the Marin County town of Tiburon, California.  Essex acquired the multifamily community in aUPREIT structured transaction for an agreed uponvalue of approximately $17.1 million. The Operating Partnership issued 73,088 operating partnership units tothe prior owner.  The property isencumbered by a mortgage loan in the principal amount of $11.8 million, with a5.375% fixed interest rate, an August 2013 maturity date and an option toextend the maturity for one year thereafter at a floating rate of 2.5% overFreddie Mac’s Reference Bill.

 

On September 29,2004, the Operating Partnership acquired its partner’s 55% interest in ParkHill, a 245-unit apartment community located in Issaquah, Washington forapproximately $1.3 million.  Inconjunction with the transaction, the Operating Partnership assumedapproximately a $21.2 million loan with an interest rate of 6.9%, which maturesin July 2009.  The OperatingPartnership now consolidates this property.

 

In November 2004,the Operating Partnership acquired Fairwood PondApartments, a 194-unit apartment community located in Renton, Washington forapproximately $21.1 million and The Esplanade Apartments, a 278-unit apartmentcommunity located in San Jose, California for approximately $60.5 million.These properties are unencumbered.

 

In December 2004,the Operating Partnership acquired two apartment communities – Woodside Villageand Pinehurst Apartments – aggregating 173 apartment units, located in Ventura,California, for approximately $28.3 million. These properties are unencumbered.

 

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***SubsequentEvents – Acquisition***

 

On February 2, 2005,the Operating Partnership acquired Cedar Terrace Apartments, a 180-unitapartment community, located in Bellevue, Washington, for approximately $22.3million. The property is unencumbered.

 

***Dispositions***

 

On August 3, 2004,the Operating Partnership sold The Essex at Lake Merritt, a 270-unitmultifamily community located in Oakland, California for an approximatecontract price of $88.0 million.  Inconjunction with this transaction, a company owned TRSoriginated a participating loan to the buyer in the amount of $5.0 million,which allows the Operating Partnership to participate in approximatelyone-third of the potential profits related to the condominium conversion of theproperty.  The Operating Partnership’sgain on the sale of The Essex at Lake Merritt is approximately $12.9 million,of which $5.0 million is deferred under the provisions of FAS66.  The deferred gain will be recognizedas a realized gain on sale as payments on the participating loan arereceived.  The Operating Partnership continuesto provide property management services for the portion of the property not yetconverted to condominiums.  Recognitionof interest income on the loan and the Operating Partnership’s share of theprofits, if any, associated with the condominium conversions has been deferreduntil realized.

 

At June 30, 2004,Golden Village Recreational Vehicle Park, a property located in Hemet,California and acquired as part of the John M. Sachs merger in December 2002,met the “held for sale” criteria under SFAS 144.  In accordance with SFAS144, assets and liabilities and the results of operations of the property werepresented as discontinued operations in the consolidated financial statementsfor all periods presented.  Uponreclassification as held for sale at June 30, 2004, the OperatingPartnership presented Golden Village at its estimated fair value less disposalcosts which resulted in an impairment charge of approximately $756,000.  Such fair value was determined using thecontractual sales price pursuant to the contract with the buyer of theproperty.  On July 18, 2004, theOperating Partnership sold Golden Village for $6.7 million.  No gain or loss was recognized on the sale.

 

In the fourth quarter of 2004, the OperatingPartnership sold its approximate 49.9% ownership interest in Coronado atNewport – North in connection with the sale of the Fund I assets to anunrelated entity. Please refer to Fund I discussion on page 8.

 

***SubsequentEvents – Dispositions***

 

In January 2005, theOperating Partnership sold four non-core assets that were acquired inconjunction with the merger with John M. Sachs, Inc. in 2002.  The four non-core assets were: The RivieraRecreational Vehicle Park and The Riviera Manufactured Home Park, both locatedin Las Vegas, Nevada, and for which the Operating Partnership had previouslyentered into master lease and option agreements with an unrelated entity; andtwo small office buildings, located in San Diego California, aggregating 7,200square feet.

 

***Development***

 

Development communities aredefined by the Operating Partnership as new apartment properties that are beingconstructed or are newly constructed and in a phase of lease-up and have notyet reached stabilized operations (defined as 95% physical occupancy). As of December 31,2004, the Operating Partnership had direct ownership interests in twodevelopment communities with an aggregate of 395 multifamily units. During2004, the Operating Partnership achieved stabilized operations at onedevelopment community— Hidden Valley at Parker Ranch, a 324-unit apartmentcommunity located in Simi Valley, California, which achieved stabilizedoperations during the fourth quarter of 2004.

 

In the fourth quarter of2004, the Operating Partnership entered into a joint venture to develop a5-story apartment building aggregating 275 apartment homes in Los Angeles,California. It is anticipated that, upon completion, the community will offer220 market-rate units and 55 affordable-rate units. The cost to develop thisproject is estimated at approximately $62.6 million.  The joint venture has obtained $47.0 millionof tax-exempt

 

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bond financing on theproject, which will be drawn to fund future construction costs.  Essex has originated a $7.4 million mezzanineloan to the joint venture, which bears an interest rate of 14.0%, is subject tovarious conditions, and matures in December 2009. The OperatingPartnership’s limited partnership equity investment is approximately $3.2million and will, subject to the provisions of the agreements, generally allowthe Operating Partnership to receive 75% of the cash flow up to a 22.67%priority return, and 50% of cash flow thereafter.  Essex has also provided a construction completionguarantee in the amount of $4.8 million. Pursuant to FIN46R, the Operating Partnership has consolidated thisjoint venture and eliminated all intercompanyaccounts.

 

In connection with theproperties currently under development, the Operating Partnership has directly,or in some cases through affiliated joint venture entities, entered intocontractual construction-related commitments with unrelated third parties. Asof December 31, 2004, the Operating Partnership and its partners arecommitted to approximately $51.3 million in estimated development expendituresto complete these projects.

 

The following table sets forth information regardingthe Operating Partnership’s development communities at December 31, 2004.

 
| **Development  Communities**   | ** ** | **Location**    | ** ** | **Units**  | ** ** | **Estimated Project   Cost as of   12/31/04(1)** | ** ** | **Incurred Project   Cost as of   12/31/04(1)** | ** ** | **Projected   Stabilization** | ** ** |
|--------------------------------|------------|-----------------|------------|------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | ** **      | ** ** | ** ** | ** ** | **($in millions)**                               | ** ** | **($in millions)**                              | ** ** | ** **                    | ** ** |
| The  San Marcos Phase II(2)    |       | Richmond, CA    |       | 120        |       | 23.9                                             |       | 21.9                                            |       | Jan. 2005                     |       |
| Northwest  Gateway             |       | Los Angeles, CA |       | 275        |       | 62.6                                             |       | 13.3                                            |       | Jan. 2008                     |       |
| Pre-development  costs         |       |            |       |       |       | 3.1                                              |       | 3.1                                             |       | —                        |       |
| Total  Development Communities |       |            |       | 395        |       | $                                                | 89.6       |                                            | $          | 38.3                          |       |   |   |
|                                |            |                 |            |            |            |                                                  |            |                                                 |            |                               |            |  |  |

 

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(1)          Estimated project costas of December 31, 2004 includes incurred costs and estimated costs tocomplete the development projects.

(2)          The OperatingPartnership is the sole owner of this development project.

 

# ***Redevelopment***

# *** ***

Redevelopment communitiesare defined by the Operating Partnership as existing properties owned orrecently acquired which have been targeted for additional investment by theOperating Partnership with the expectation of increased financial returns.Redevelopment communities are typically affected by significant constructionactivity and, as a result, may have less than stabilized operations. As of December 31,2004, the Operating Partnership has direct ownership interests in sixredevelopment communities, which contain 2,512 units.

 

The following table setsforth information regarding the Operating Partnership’s development communitiesat December 31, 2004.

 
| **Redevelopment  Communities**   | ** ** | **Location**       | ** ** | **Units**  | ** ** | **Estimated  Renovation  Cost as of  12/31/04(1)** | ** ** | **Incurred   Total Cost as  12/31/04(1)** | ** ** |
|----------------------------------|------------|--------------------|------------|------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | ** **         | ** ** | ** ** | ** ** | **($in millions)**                                 | ** ** | **($in millions)**                        | ** ** |
| Hillcrest  Park - Phase II       |       | Newbury Park, CA   |       | 608        |       | $                                                  | 3.6        |                                      | $          | 2.9 |   |
| Kings  Road                      |       | Los Angeles, CA    |       | 196        |       | 6.0                                                |       | 2.2                                       |       |
| Coronado  at Newport - South (2) |       | Newport Beach, CA  |       | 715        |       | 13.3                                               |       | 4.4                                       |       |
| Mira  Woods                      |       | San Diego, CA      |       | 355        |       | 4.9                                                |       | 0.1                                       |       |
| Palisades                        |       | Bellevue, WA       |       | 192        |       | 1.6                                                |       | 0.2                                       |       |
| Avondale                         |       | Woodland Hills, CA |       | 446        |       | 5.5                                                |       | 0.3                                       |       |
| Total  Redevelopment Communities |       |               |       | 2,512      |       | $                                                  | 34.9       |                                      | $          | 10.1 |   |

 

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(1)          Estimated project costas of December 31, 2004 includes incurred costs and estimated costs tocomplete the development projects.

(2)          The Operating Partnershipand Fund I each own an approximate 49.9% interest in this property. Thisproperty is in contract to sell in 2005.

 

***DebtTransactions***

 

On February 20, 2004the Operating Partnership prepaid an $8.7 million non-recourse mortgage with aninterest rate of 7.8% that was to mature in January 2007.  In conjunction with this transaction, theOperating Partnership paid a $175,000 prepayment fee.

 

On April 30, 2004the Operating Partnership renewed its $185.0 million unsecured line of creditfacility for a three-year term, with an option to extend it for one yearthereafter. The underlying interest rate on this line is based on a tiered ratestructure tied to the Operating Partnership’s corporate ratings and iscurrently LIBOR plus 1.0%.

 

On May 13, 2004, the OperatingPartnership obtained a non-recourse mortgage on a previously unencumberedproperty in the amount of $30.7 million, with a 5.19% fixed interest rate for a9-year term, maturing in May 2013, with an option to extend the maturity forone year thereafter at a floating rate of 2.5% over Freddie Mac’s ReferenceBill.  During the extension period, theloan may be paid in full with no prepayment penalty.

 

On November 15,2004, the Operating Partnership repaid a non-recourse mortgage that matured inthe amount of $25.6 million.  Theinterest rate on the loan was 7.1%.

 

***SubsequentEvent – Debt***

 

On February 1, 2005,the Operating Partnership obtained a non-recourse mortgage on a previouslyunencumbered property in the amount of $21.8 million with a 4.94% fixed interestrate for a 9-year term, maturing in March 2014, with an option to extendthe maturity for one year thereafter at a floating rate of 2.4% over one monthLIBOR. During the extension period, the loan may be paid in full with noprepayment penalty.

 

On February 16,2005, the Operating Partnership entered into a $50 million notional forwardstarting interest rate swap with PNC Bank at a fixed rate of 4.927% and asettlement date on or around October 1, 2007. The Operating Partnershipexpects to refinance up to $113 million of mortgages that mature in 2007. Thesemortgages have an effective interest rate of approximately 6.3% as of December 31,2004. This notional forward starting interest rate swap will be designated as acash flow hedge under FAS 133 and changes to its fairvalue prior to settlement will be reflected in Other Comprehensive Income onthe Operating Partnership’s consolidated financial statements.

 

***EquityTransactions***

 

On June 14, 2000 theOperating Partnership purchased Waterford Place, a 238-unit apartment communitylocated in San Jose, California for a contract price of $35.0 million and anadditional contingent payment.  The amount of the contingent payment wasdisputed and submitted to binding arbitration.  As a result of the arbitration, the OperatingPartnership was directed to issue an additional 109,874 units of limitedpartnership interest (“Units”) in the Operating Partnership to the sellers ofWaterford Place.  On March 31, 2004, the Operating Partnershipcompleted the issuance of these Units to the sellers and redeemed for cash55,564 Units from these sellers.

 

In January 2004, theOperating Partnership restructured its previously issued $50.0 million, 9.30%Series D Cumulative Redeemable Preferred Units (“Series D Units”), and its previouslyissued $80.0 million, 7.875% Series B Cumulative Redeemable Preferred Units (“SeriesB Units”).  The existing distributionrate of 9.30% of the Series D Units continued until July 27, 2004 – theend of the non-call period.  On July 28,2004, the distribution rate on the Series D Units was reduced to 7.875%.  The date that the Series D Units can first beredeemed at the Operating Partnership’s option was extended by six years to July 28,2010.  The date that the Series B Unitscan first be redeemed at the Operating Partnership’s option was extended from February 6,2003 to December 31, 2009.

 

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On September 3,2004, the Operating Partnership redeemed all of its outstanding, $55 million,9.25% Series E Cumulative Redeemable Preferred Units of the OperatingPartnership, which resulted in a non-cash charge of $1.6 million related to thewrite-off of the issuance costs.

 

***EssexApartment Value Fund I (“Fund I”)***

 

Essex Apartment ValueFund, L.P. (“Fund I”), is an investment fund organized by the OperatingPartnership in 2001 to add value through rental growth and asset appreciation,utilizing the Operating Partnership’s acquisition, development, redevelopmentand asset management capabilities. Fund I was considered fully invested in2003. An affiliate of the Operating Partnership, Essex VFGP,L.P. (“VFGP”), is a 1% general partner and is a 20.4%limited partner. The Operating Partnership owns a 99% limited partnershipinterest in VFGP.

 

Since its formation, FundI has acquired or developed ownership interests in 19 multifamily residentialproperties, representing 5,406 apartment units with an aggregate cost ofapproximately $618.0 million.  Fund Ialso owns the Kelvin Ave. land parcel in Irvine, California, which is plannedfor development into a 132-unit apartment community.

 

Prior to 2004, Fund Idisposed of two multifamily residential properties, consisting of 530apartments units for a aggregate contract sales price of approximately $73.2million.

 

On August 26, 2004,Fund I sold Palermo Apartments, 230-unit multifamily community located in SanDiego, California for a net sales price of $58.2 million.  Fund I completed the development of thisproperty at an approximate cost of $44.9 million in 2004.

 

In the third quarter of2004, Fund I entered into a purchase and sale agreement with United DominionRealty, L.P. (“UDR”) for a sale of sixteen apartmentcommunities, totaling 4,646 units owned by Fund I and, with respect to Coronadoat Newport North and South, both Fund I’s and theOperating Partnership’s separate ownership interests, for a contract price of$756.0 million.  In connection with thetransaction, UDR remitted a $10 million earnest moneydeposit directly to Fund I, which is refundable only in limitedcircumstances.  On September 30,2004, pursuant to the UDR purchase and saleagreement, Fund I sold seven of the multifamily communities, aggregating 1,777apartment units at a contract price of approximately $264.0 million. On October 27,2004, an additional seven of the remaining nine properties, including theOperating Partnership’s approximate 49.9% ownership interest in Coronado atNewport – North, were sold to UDR for a contractprice of $322.0 million, of which $267.6 million represents Fund I’s allocated portion of the contract price based on itsownership interest.  The remaining twomultifamily properties under the UDR agreement thatare anticipated to close in 2005 are Coronado at Newport - South, a 715-unitapartment community in Newport Beach, California currently undergoingredevelopment and River Terrace, a newly developed 250-unit apartment communityin Santa Clara which is currently in lease up.

 

The Fund I dispositionsin 2004, combined with the sale of its 49.9% direct ownership interest inCoronado at Newport North, resulted in the Operating Partnership recognizingequity income from investments of $38.8 million. The Operating Partnership’sshare of the gain on the sale of real estate of $39.3 million was reduced by a$505,000 non-cash loss on the early extinguishment of debt related to thewrite-off of unamortized loan fees.  TheOperating Partnership’s general partnership interest provides for “promotedistributions” upon attainment of certain financial return benchmarks.  During 2004, the Operating Partnershiprecognized $18.3 million of additional equity income associated with itspromote distribution.  The OperatingPartnership accrued $4.0 million of employee incentive compensation expenserelated to the Fund I sale, which is included in general and administrativeexpense in the accompanying consolidated statement of operations.

 

## Development Communities

 

At December 31, 2004Fund I owned two development communities with an aggregate of 250 multifamilyunits and an estimated total cost of $64.1 million, of which $3.6 millionremains to be expended and approximately $770,000 is expected to be funded bythe Operating Partnership through its capital commitments.

 

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The following table sets forth information regardingFund I’s development communities at December 31,2004.

 
| **Development  Communities**          | ** ** | **Location**    | ** ** | **Units**  | ** ** | **Estimated Project  Cost as of  12/31/04(1)** | ** ** | **Incurred Project  Cost as of  12/31/04(1)** | ** ** | **Projected  Stabilization** | ** ** |
|---------------------------------------|------------|-----------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | ** **      | ** ** | ** ** | ** ** | **($in millions)**                             | ** ** | **($in millions)**                            | ** ** | ** **                   | ** ** |
| Fund  I                               |       |            |       |       |       |                                           |       |                                          |       |                         |       |
| River  Terrace                        |       | Santa Clara, CA |       | 250        |       | $                                              | 57.9       |                                          | $          | 54.3                         |       | Jun. 2005 |   |
| Pre-development  - Kelvin Avenue      |       | Irvine, CA      |       | —     |       | 6.2                                            |       | 6.2                                           |       | —                       |       |
| Total  Fund I Development Communities |       |            |       | 250        |       | $                                              | 64.1       |                                          | $          | 60.5                         |       |   |   |

 

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(1)          Estimated project costas of December 31, 2004 includes incurred costs and estimated costs tocomplete the development projects. Estimated project costs for Kelvin Avenuehave not been determined.

 

***EssexApartment Value Fund II (“Fund II”)***

 

On September 27, 2004the Operating Partnership announced the final closing of the Essex ApartmentValue Fund II (“Fund II”). Fund II has eight institutional investors includingEssex with combined equity commitments of $265.9 million. Essex has committed$75.0 million to Fund II, which represents a 28.2% interest as general partnerand limited partner. Fund II expects to utilize leverage of approximately 65%of the estimated value of the underlying real estate. Fund II will invest inmultifamily properties in the Operating Partnership’s targeted West Coastmarkets with an emphasis on investment opportunities in the Seattlemetropolitan area and the San Francisco Bay Area. Subject to certainexceptions, Fund II will be Essex’s exclusive investment vehicle until October 31,2006, or when Fund II’s committed capital has beeninvested, whichever occurs first. Consistent with Fund I, Essex will becompensated for its asset management, property management, development andredevelopment services and may receive promote distributions if Fund II exceedscertain financial return benchmarks.

 

Acquisition Activities

 

During 2004, Fund IIacquired ownership interests in three multifamily properties consisting of 907units with an aggregate purchase price of approximately $130.0 million. Theseinvestments were primarily funded by mortgage loans in the aggregate amount of$76.6 million and the contribution of equity from joint venture partners.

 

Multifamily propertiesacquired in 2004 are as follows:

 
| **Property  Name** | ** ** | **Location**    | ** ** | **Units**  | ** ** | **Contract   Purchase   Price** | ** ** | **Loan   Amount**  | ** ** | **Fixed   Interest   Rate** | ** ** | **Loan   Maturity   Date** | ** ** |
|--------------------|------------|-----------------|------------|------------|------------|---------------------------------|------------|--------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **         | ** ** | ** **      | ** ** | ** ** | ** ** | **($in millions)**              | ** ** | **($in millions)** | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Carlmont Woods     |       | Belmont, CA     |       | 195        |       | $                               | 23.8       |               | $          | 13.5                        |       | 4.89                       | %          | Dec-13 |   |
| Parcwood           |       | Corona, CA      |       | 312        |       | 40.0                            |       | 26.6               |       | 4.89                        | %          | Dec-13                     |       |
| Harbor  Cove       |       | Foster City, CA |       | 400        |       | 66.2                            |       | 36.5               |       | 4.89                        | %          | Dec-13                     |       |
|               |       |            |       |       |       |                            |       |               |       |                        |       |                       |       |
| Total              |       |            |       | 907        |       | $                               | 130.0      |               | $          | 76.6                        |       |                       |       |   |   |

 

***SubsequentEvents – Acquisition***

 

On March 2, 2005,the Fund II acquired Regency Tower Apartment Homes, a 178-unit apartmentcommunity, located in Oakland, California, for approximately $21.2 million. Inconjunction with the transaction, Fund II originated a new mortgage loantotaling approximately $11.5 million with a fixed interest rate of 5.16%, whichmatures in February 2014 and has a 1-year variable rate extension period.

 

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***Officesand Employees***

 

The Operating Partnershipis headquartered in Palo Alto, California, and has regional offices in WoodlandHills, California; Irvine, California; San Diego, California; Bellevue,Washington; and Portland, Oregon. As of December 31, 2004, the OperatingPartnership had approximately 800 employees.

 

***EnvironmentalMatters***

 

Under various federal,state and local laws, ordinances and regulations, an owner or operator of realestate is liable for the costs of removal or remediation of certain hazardousor toxic substances on, in, to or migrating from such property. Such laws oftenimpose liability without regard as to whether the owner or operator knew of, orwas responsible for, the presence of such hazardous or toxic substances. Thepresence of such substances, or the failure to properly remediate suchsubstances, may adversely affect the owner’s or operator’s ability to sell orrent such property or to borrow using such property as collateral. In addition,persons exposed to such substances, either through soil vapor or ingestion ofthe substance, may claim personal injury damages. Persons who arrange for thedisposal or treatment of hazardous or toxic substances or wastes also may beliable for the costs of removal or remediation of such substances at thedisposal or treatment facility to which such substances or wastes were sent,whether or not such facility is owned or operated by such person. In addition,certain environmental laws impose liability for release of asbestos-containingmaterials (“ACMs”) into the air, and third partiesmay seek recovery from owners or operators of real properties for personalinjury associated with ACMs. In connection with theownership (direct or indirect), operation, management and development of realproperties, the Operating Partnership could be considered an owner or operatorof such properties or as having arranged for the disposal or treatment ofhazardous or toxic substances and, therefore, may be potentially liable forremoval or remediation costs, as well as certain other costs, includinggovernmental fines and costs related to injuries of persons and property.

 

California has enactedlegislation commonly referred to as “Proposition 65” requiring that “clear andreasonable” warnings be given to consumers who are exposed to chemicals knownto the State of California to cause cancer or reproductive toxicity, includingtobacco smoke. Although we have sought to comply with Proposition 65requirements, we cannot assure you that we will not be adversely affected bylitigation relating to Proposition 65.

 

Methane gas is anaturally-occurring gas that is commonly found below the surface in severalareas of California, particularly in the Southern California coastalareas.  Methane is a non-toxic gas, but can be ignitable in confinedspaces.  Although naturally-occurring, methane gas is not regulated at thestate or federal level, some local governments, such as the County of LosAngeles, have imposed requirements that new buildings install detection systemsin areas where methane gas is known to be located.  Methane gas is alsoassociated with certain industrial activities, such as former municipal wastelandfills.

 

Recently there has beenan increasing number of lawsuits against owners and managers of multifamilyproperties alleging personal injury and property damage caused by the presenceof mold in residential real estate. Some of these lawsuits have resulted insubstantial monetary judgments or settlements. Essex has been sued for moldrelated matters and has settled some, but not all, of such matters. Insurancecarriers have reacted to mold related liability awards by excluding moldrelated claims from standard policies and pricing mold endorsements atprohibitively high rates. We have adopted programs designed to manage theexistence of mold in our properties as well as guidelines for promptlyaddressing and resolving reports of mold to minimize any impact mold might haveon residents or the property.

 

All of the Propertieshave been subjected to preliminary environmental assessments, including areview of historical and public data (“Phase I assessments”), by independentenvironmental consultants. Phase I assessments generally consist of aninvestigation of environmental conditions at the Property, including apreliminary investigation of the site, an identification of publicly knownconditions occurring at properties in the vicinity of the site, aninvestigation as to the presence of polychlorinated biphenyl’s (“PCBs”), ACMs and above-ground and underground storage tankspresently or formerly at the sites, and preparation and issuance of writtenreports. As a result of information collected in the Phase I assessments, certainof the Properties were subjected to additional environmental investigations,including, in a some cases, soil sampling or ground water analysis to furtherevaluate the environmental conditions of those Properties.

 

The environmental studiesrevealed the presence of soil and groundwater contamination and the presence ofmethane and associated gases at certain of the Properties.  Based on itscurrent knowledge, the Operating

 

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Partnership does not believethe future liabilities associated with the contamination or with the methanegas is material and is not in receipt of any cleanup order from a regulatoryagency.  Environmental studies alsoindicate that one of the Properties is located on a former municipal landfill,which has been closed for approximately eighty years.  To the OperatingPartnership’s knowledge, the property has not been subject to any regulatoryrequirements since it was initially closed; however, state regulatory agencieshave discretion to impose various requirements on closed landfills, includingmonitoring for methane gas.  Limited sampling has indicated there isno methane gas above explosive limits at the property.  Based on itscurrent knowledge, the Operating Partnership does not believe that anyregulatory requirements or other liabilities associated with this property arematerial.  The environmental studies have also indicated that many of theProperties contain ACM, a common building material prior to the 1980s. The ACM is found primarily in the ceiling textures, floor tiles, andadhesives.  To the Operating Partnership’s knowledge, the ACM is in goodcondition.  The Operating Partnership has implemented an operations andmaintenance plan to inspect and monitor the ACM to ensure that the ACM remainsin good condition and is properly managed.  Based on the informationcontained in the environmental studies, the Operating Partnership believes thatthere is only a remote risk that the environmental contamination or otherconditions at these Properties would lead to a material adverse effect on theOperating Partnership’s financial condition, result of operations, orliquidity.* *CertainProperties that have been sold by the Operating Partnership were identified ashaving potential groundwater contamination. While the Operating Partnershipdoes not anticipate any losses or costs related to groundwater contamination onProperties that have been sold, it is possible that such losses or costs maymaterialize in the future.

 

Except with respect tothree Properties, the Operating Partnership has no indemnification agreementsfrom third parties for potential environmental clean-up costs at itsProperties. The Operating Partnership has no way of determining at this timethe magnitude of any potential liability to which it may be subject arising outof unknown environmental conditions or violations with respect to theproperties formerly owned by the Operating Partnership. No assurance can begiven that existing environmental studies with respect to any of the Propertiesreveal all environmental liabilities, that any prior owner or operator of aProperty did not create any material environmental condition not known to theOperating Partnership, or that a material environmental condition does nototherwise exist as to any one or more of the Properties. The OperatingPartnership has limited insurance coverage for the types of environmentalliabilities described above.

 

***Insurance***

 

The Operating Partnershipcarries comprehensive liability, fire, extended coverage and rental lossinsurance for each of the Properties. There are, however, certain types ofextraordinary losses, such as, for example, losses for terrorism or earthquake,for which the Operating Partnership may not have sufficient insurance coverage.Substantially all of the Properties are located in areas that are subject toearthquake activity. The Operating Partnership has obtained earthquakeinsurance for most the Properties. Most of the Properties are included in anearthquake insurance program that is subject to an aggregate limit of $80.0million payable upon a covered loss in excess of a $15.0 million self-insuredretention amount and a 5% deductible. In the future, the Operating Partnershipmay selectively exclude properties from being covered by earthquake insurancebased on management’s evaluation of the following factors: (i)the availability of coverage on terms acceptable to the Operating Partnership,(ii) the location of the property and the amount of seismic activity affectingthat region, and, (iii) the age of the property and building codes in effect atthe time of construction. Despite earthquake coverage on most of the OperatingPartnership’s Properties, should a property sustain damage as a result of anearthquake, the Operating Partnership may incur losses due to deductibles,co-payments and losses in excess of applicable insurance, if any.

 

Although the OperatingPartnership may carry insurance for potential losses associated with itsproperties, employees, residents, and compliance with applicable laws, it maystill incur losses due to uninsured risks, deductibles, co-payments or lossesin excess of applicable insurance coverage.

 

***Competition***

 

The Operating Partnership’sProperties compete for tenants with similar properties primarily on the basisof location, rent charged, services provided, and the design and condition ofthe improvements. Competition for tenants from competing properties affects theamount of rent charged as well as rental growth rates, vacancy rates, rentalconcessions, deposit amounts, and the services and features provided at eachproperty. While economic conditions

 

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are generally stable inthe Operating Partnership’s target markets, a prolonged economic downturn couldhave a material adverse effect on the Operating Partnership’s financialposition, results of operations or liquidity.

 

The Operating Partnershipalso experiences competition when attempting to acquire properties that meetits investment criteria. Such competing buyers include domestic and foreignfinancial institutions, other REITs, life insurancecompanies, pension funds, trust funds, partnerships and individual investors.

 

***WorkingCapital***

 

The Operating Partnershipexpects to meet its short-term liquidity requirements by using its workingcapital, cash generated from operations, and its amounts available on lines ofcredit. The Operating Partnership believes that its future net cash flows andborrowing capacity will be adequate to meet operating requirements and toprovide for payment of dividends by the Operating Partnership in accordancewith REIT qualification requirements. The OperatingPartnership has line of credit facilities in the committed amount ofapproximately $285.0 million. At December 31, 2004 the OperatingPartnership had an outstanding balance of $249.5 million under these line ofcredit facilities.

 

**Risk Factors**

 

Our operations involvevarious risks that could have adverse consequences including, withoutlimitation, reductions in funds from operations, impairing our ability to makedistributions to shareholders, and failure to qualify as a REIT.These risks include, among others, the following:

 

***We depend on our key personnel***

 

Our success depends onour ability to attract and retain the services of executive officers, seniorofficers and Operating Partnership managers. There is substantial competitionfor qualified personnel in the real estate industry and the loss of several ofour key personnel could have an adverse effect on us.

 

***DebtFinancing***

 

At December 31,2004, we had approximately $1.317 billion of indebtedness (including $438.3million of variable rate indebtedness, of which $152.7 million is subject tointerest rate protection agreements).

 

We are subject to therisks normally associated with debt financing, including the following:

 

•                  cashflow may not be sufficient to meet required payments of principal and interest;

 

•                  inabilityto refinance existing indebtedness on encumbered properties;

 

•                  theterms of any refinancing may not be as favorable as the terms of existingindebtedness;

 

•                  inabilityto comply with debt covenants which could cause an acceleration of the maturitydate; and

 

•                  repayingdebt before the scheduled maturity date could result in prepayment penalties.

 

***Uncertaintyof Ability to Refinance Balloon Payments***

 

At December 31,2004, we had an aggregate of approximately $1.317 billion of mortgage debt andline of credit borrowings, most of which are subject to balloon payments ofprincipal. We do not expect to have sufficient cash flows from operations tomake all of such balloon payments when due under these mortgages and the lineof

 

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credit borrowings.

 

At December 31,2004, these mortgages and lines of credit borrowings had the followingscheduled principal payments:

 

2005—$18.7 million;

 

2006—$24.7 million;

 

2007—$280.7 million(includes lines of credit balance of $155.8 million as of December 31,2004);

 

2008—$154.5 million;

 

2009—$139.9 million(includes lines of credit balance of $93.7 million as of December 31,2004);

 

2010 and thereafter—$698.5million.

 

We may not be able torefinance such mortgage indebtedness or lines of credit. The properties subjectto these mortgages could be foreclosed upon or otherwise transferred to themortgagee. This could cause us to lose income and asset value. Alternatively,we may be required to refinance the debt at higher interest rates. If we areunable to make such payments when due, a mortgage lender could foreclose on theproperty securing the mortgage, which could have a material adverse effect onour financial condition and results of operations.

 

***EconomicEnvironment and Impact on Operating Results***

 

Both the national economyand the economies of the western states in which we own, manage and developproperties, some of which are concentrated in high-tech sectors, have beenaffected by an economic downturn and may in the future again be affected by aneconomic downturn. The impact of such downturn on our operating results caninclude, without limitation, reduction in rental rates, occupancy levels,property valuations and increases in operating costs such as advertising,turnover and repair and maintenance expense.

 

Our property type anddiverse geographic locations provide some degree of risk moderation but we arenot immune to a prolonged economic downturn in the real estate markets in whichwe operate. Although we believe we are well positioned to meet the challengesahead, it is possible that reductions in occupancy and market rental rates willresult in reduction of rental revenues, operating income, cash flows, and themarket value of our shares. A prolonged downturn could also affect our abilityto obtain financing at acceptable rates of interest and to access funds fromthe disposition of properties at acceptable prices.

 

***Riskof Rising Interest Rates***

 

At December 31,2004, we had approximately $188.8 million of long-term variable rateindebtedness bearing interest at floating rates tied to the rate of short-termtax-exempt revenue bonds (which mature at various dates from 2006 through2034), and $249.5 million of variable rate indebtedness under our lines ofcredit, of which $155.8 million bears interest at 1.0% over LIBOR and $93.7million bearing interest at the Freddie Mac Reference Rate plus from 0.55% to0.60%. A portion of the long-term variable rate indebtedness of approximately$152.7 million is subject to interest rate protection agreements, which mayreduce the risks associated with fluctuations in interest rates. The remaining$285.6 million of long-term variable rate indebtedness is not subject to anyinterest rate protection agreements. An increase in interest rates may have anadverse effect on our net income and results of operations.

 

Current interest ratesare at historic lows and could potentially increase rapidly.  Significant and rapid interest rate increaseswould result in higher interest expense on our variable rate indebtedness.Prolonged interest rate increases could negatively impact our ability to makeacquisitions and develop properties at economic returns on investment and ourability to refinance existing borrowings at acceptable rates.

 

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***Risk ofInflation /Deflation***

 

Substantial inflationaryor deflationary pressures could have a negative effect on rental rates andproperty operating expenses.

 

***Riskof Losses on Interest Rate Hedging Arrangements***

 

We have, from time totime, entered into agreements to reduce the risks associated with increases ininterest rates, and may continue to do so. Although these agreements maypartially protect against rising interest rates, these agreements also mayreduce the benefits to us when interest rates decline. We cannot assure youthat we can refinance any such hedging arrangements or that we will be able toenter into other hedging arrangements to replace existing ones if interestrates decline. Furthermore, interest rate movements during the term of interestrate hedging arrangements may result in a gain or loss on our investment in thehedging arrangement. In addition, if a hedging arrangement is not indexed tothe same rate as the indebtedness that is hedged, we may be exposed to lossesto the extent that the rate governing the indebtedness and the rate governingthe hedging arrangement change independently of each other. Finally,nonperformance by the other party to the hedging arrangement may subject us toincreased credit risks. In order to minimize counterparty credit risk, ourpolicy is to enter into hedging arrangements only with large financialinstitutions.

 

***AcquisitionActivities: Risks that Acquisitions Will Fail to Meet Expectations***

 

We intend to continue toacquire multifamily residential properties. There are risks that acquired propertieswill fail to perform as expected. Our estimates of future income, expenses andthe costs of improvements or redevelopment that are necessary to allow us tomarket an acquired property as originally intended may prove to be inaccurate.We expect to finance future acquisitions, in whole or in part, under variousforms of secured or unsecured financing or through the issuance of partnershipunits by the Operating Partnership or related partnerships or additional equityby Essex. The use of equity financing, rather than debt, for futuredevelopments or acquisitions could dilute the interest of Essex’s existingstockholders. If we finance new acquisitions under existing lines of credit,there is a risk that, unless we obtain substitute financing, Essex may not beable to secure further lines of credit for new development or such lines ofcredit may be not available on advantageous terms.

 

Also, we may not be ableto refinance our existing lines of credit upon maturity, or the terms of suchrefinancing may not be as favorable as the terms of the existing indebtedness.Further, acquisitions of properties are subject to the general risks associatedwith real estate investments. For further information regarding these risks,please see “Adverse Effect to Property Income and Value Due to General RealEstate Investment Risks.”

 

***Risksthat Development Activities Will Be Delayed, not Completed, and/or Fail toAchieve Expected Results***

 

We pursue multifamilyresidential property development projects and these projects generally requirevarious governmental and other approvals, which we cannot assure you that wewill receive. Our development activities generally entail certain risks,including the following:

 

•                  fundsmay be expended and management’s time devoted to projects that may not becompleted;

 

•                  constructioncosts of a project may exceed original estimates, possibly making the projecteconomically unfeasible;

 

•                  developmentprojects may be delayed due to, without limitation, adverse weather conditions,labor shortages, or unforeseen complications;

 

•                  occupancyrates and rents at a completed project may be less than anticipated; and

 

•                  costsat a completed development may be higher than anticipated.

 

These risks may reducethe funds available for distribution to Essex’s stockholders. Further, the

 

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development of propertiesis also subject to the general risks associated with real estate investments.For further information regarding these risks, please see “Adverse Effect toProperty Income and Value Due to General Real Estate Investment Risks.”

 

***TheGeographic Concentration of the Properties and Fluctuations in Local MarketsMay Adversely Impact Our Financial Conditions and Results of Operations***

 

We derived significantamounts of rental revenues for the year ended December 31, 2004 fromproperties concentrated in Southern California (Los Angeles, Ventura, Orange,San Diego and Riverside counties), Northern California (the San Francisco BayArea), and the Pacific Northwest (the Seattle, Washington and Portland, Oregonmetropolitan areas). As of December 31, 2004, of our 120 ownershipinterests in multifamily residential properties, 90 are located in California.As a result of this geographic concentration, if a local property marketperforms poorly, the income from the properties in that market could decrease.As a result of such a decrease in income, we may be unable to pay expecteddividends to our stockholders. The performance of the economy in each of theseareas affects occupancy, market rental rates and expenses and, consequently,impacts the income generated from the properties and their underlying values.The financial results of major local employers also may impact the cash flowand value of certain of the properties. Economic downturns in the local marketsin which we own properties could have a negative impact on our financialcondition and results of operations.

 

***Competitionin the Multifamily Residential Market May Adversely Affect Operations and theRental Demand For Our Properties***

 

There are numeroushousing alternatives that compete with our multifamily properties in attractingresidents. These include other multifamily rental apartments and single-familyhomes that are available for rent in the markets in which the properties arelocated. The properties also compete for residents with new and existing homesand condominiums that are for sale. If the demand for our properties is reducedor if competitors develop and/or acquire competing properties on a morecost-effective basis, rental rates may drop, which may have a material adverseaffect on our financial condition and results of operations.

 

We also face competitionfrom other real estate investment trusts, businesses and other entities in theacquisition, development and operation of properties. Some of the competitorsare larger and have greater financial resources than we do. This competitionmay result in increased costs of properties we acquire and/or develop.

 

***DebtFinancing on Properties May Result in Insufficient Cash Flow***

 

Where possible, we intendto continue to use leverage to increase the rate of return on our investmentsand to provide for additional investments that we could not otherwise make.There is a risk that the cash flow from the properties will be insufficient tomeet both debt payment obligations and the distribution requirements of thereal estate investment trust provisions of the Internal Revenue Code. We mayobtain additional debt financing in the future, through mortgages on some orall of the properties. These mortgages may be recourse, non-recourse, orcross-collateralized. As of December 31, 2004, Essex had 75 of its 115consolidated multifamily properties encumbered by debt. Of the 75 properties,53 are secured by deeds of trust relating solely to those properties, and withrespect to the remaining 22 properties, 5 cross-collateralized mortgages aresecured by 8 properties, 6 properties, 3 properties, 3 properties and 2properties, respectively. The holders of this indebtedness will have a claimagainst these properties and, to the extent indebtedness iscross-collateralized, lenders may seek to foreclose upon properties, which arenot the primary collateral for their loan. This, in turn, may accelerate otherindebtedness secured by properties. Foreclosure of properties would reduce ourincome and asset value.

 

***DividendRequirements as a Result Of Preferred Stock May Lead to a Possible Inability toSustain Dividends***

 

The Operating Partnershipcurrently has $130 million in aggregate of Series B Cumulative RedeemablePreferred Units (the “Series B Preferred Units”)and Series D CumulativeRedeemable Preferred Units (the “Series D Preferred Units”) outstanding. Inaddition, the Company has approximately $25 million of Series F Cumulative

 

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Redeemable PreferredStock (“Series F Preferred Stock”) outstanding. The Series B Preferred Units,the Series D Preferred Units, and the Series F Preferred Stock are collectivelyreferred to as the “Preferred Equity”.

 

The terms of the Series FPreferred Stock and of the preferred stock into which each series of PreferredUnits are exchangeable provide for certain cumulative preferential cashdistributions per each share of preferred stock. These terms also provide thatwhile such preferred stock is outstanding, Essex cannot authorize, declare, orpay any distributions on the Common Stock, unless all distributions accumulatedon all shares of such preferred stock have been paid in full. The distributionspayable on such preferred stock may impair Essex’s ability to pay dividends onits Common Stock.

 

If Essex wishes to issueany Common Stock in the future (including, upon exercise of stock options), thefunds required to continue to pay cash dividends at current levels will beincreased. Essex’s ability to pay dividends will depend largely upon theperformance of the Properties and other properties that may be acquired in thefuture.

 

Essex’s ability to paydividends on its stock is further limited by the Maryland General CorporationLaw. Under the Maryland General Corporation Law, Essex may not make adistribution on stock if, after giving effect to such distribution, either:

 

•                  wewould not be able to pay our indebtedness as it becomes due in the usual courseof business; or

 

•                  ourtotal assets would be less than our total liabilities.

 

If Essex cannot paydividends on its stock, Essex’s status as a real estate investment trust may bejeopardized.

 

***Resaleof Shares Pursuant to our Effective Registration Statement May Have an AdverseEffect on the Market Price of the Shares***

 

Pursuant to theacquisition of John M. Sachs, Inc., a real estate company, in December 2002,we issued 2,719,875 shares of common stock, as partial consideration for theacquisition, to the trusts that were the shareholders of that company.  In connection with the acquisition, Essexentered into a registration rights agreement with these trusts, pursuant towhich in January 2003 we filed a registration statement on Form S-3 inorder to enable the resale of these shares of common stock. In an amendment tothis registration statement filed in April 2003, we also registered,pursuant to certain registration rights, 50,000 shares of common stock whichare issuable to the trusts in connection with certaincontractual obligations and 2,270,490 shares of common stock which are issuable upon exchange of limited partnership interests inthe Operating Partnership. These limited partnership interests are held bysenior members of our management, certain members of our Board of Directors andcertain outside investors, or the Operating Partnership holders, and compriseapproximately 9.7% of the limited partnership interests of the OperatingPartnership as of December 31, 2004. In addition, the OperatingPartnership has invested in certain real estate partnerships. In the 2003registration statement, we also registered, pursuant to certain registrationrights, 1,473,125 shares of common stock, which are issuableupon redemption of all of the limited partnership interests in such real estatepartnerships. In sum, this 2003 registration statement covers in aggregate6,513,490 shares of our common stock. The resale of the shares of common stockpursuant to the registration statement may have an adverse effect on the marketprice of our shares.

 

***OurChairman is Involved in Other Real Estate Activities and Investments, Which MayLead to Conflicts of Interest***

 

Our Chairman, George M.Marcus is not an employee of Essex. Mr. Marcus owns interests in various otherreal estate-related businesses and investments. He is the Chairman of TheMarcus & Millichap Company, or “MM”, which is aholding company for certain real estate brokerage and services companies. MMhas an interest in Pacific Property Company, a company that invests in WestCoast multifamily residential properties. In 1999 we sold an office building toMM, which Essex previously occupied as its corporate headquarters.

 

Mr. Marcus has agreed notto divulge any information that may be received by him in his capacity as

 

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Chairman of Essex to anyof his affiliated companies and that he will absent himself from any and alldiscussions by the Essex Board of Directors regarding any proposed acquisitionand/or development of a multifamily property where it appears that there may bea conflict of interest with any of his affiliated companies. Notwithstanding this agreement, Mr. Marcus and his affiliated entities maypotentially compete with us in acquiring and/or developing multifamilyproperties, which competition may be detrimental to us.  In addition, due to such potentialcompetition for real estate investments, Mr. Marcus and his affiliated entitiesmay have a conflict of interest with us, which may be detrimental to theinterests of Essex’s stockholders.

 

***TheInfluence of Executive Officers, Directors and Significant Stockholders May BeDetrimental to Holders of Common Stock***

 

As of December 31,2004, George M. Marcus, the Chairman of our Board of Directors, wholly orpartially owned 1,752,111 shares of common stock (including shares issuable upon exchange of limited partnership interests inthe Operating Partnership and certain other partnerships and assuming exerciseof all vested options). This represents approximately 7.6% of the outstandingshares of our common stock. Mr. Marcus currently does not have majority controlover us. However, he currently has, and likely will continue to have,significant influence with respect to the election of directors and approval ordisapproval of significant corporate actions. Consequently, his influence couldresult in decisions that do not reflect the interests of all our stockholders.

 

Under the partnershipagreement of the Operating Partnership, the consent of the holders of limitedpartnership interests is generally required for any amendment of the agreementand for certain extraordinary actions. Through their ownership of limitedpartnership interests and their positions with us, our directors and executiveofficers, including Mr. Marcus and Mr. William A. Millichap,a director of Essex, have substantial influence on us. Consequently, theirinfluence could result in decisions that do not reflect the interests of allstockholders.

 

Further pursuant to our acquisition of John M. Sachs,Inc. in December 2002, we issued, as partial consideration for theacquisition, 2,719,875 shares of our common stock and an additional 35,860shares of common stock in July 2003 to the trusts that were theshareholders of that company. As a result of this issuance, these trusts own,as of December 31, 2004, in aggregate, approximately 10% of ouroutstanding common stock. Pursuant to their ownership interest in Essex, thesetrusts may have significant influence over us. Such influence could result indecisions that do not reflect the interest of all our stockholders.

 

***TheVoting Rights of Preferred Stock May Allow Holders of Preferred Stock to ImpedeActions that Otherwise Benefit Holders of Common Stock***

 

In general, the holdersof Series F Preferred stock and of the preferred stock into which our preferredunits are exchangeable do not have any voting rights. However, if fulldistributions are not made on any outstanding preferred stock for six quarterlydistributions periods, the holders of preferred stock who have not receiveddistributions, voting together as a single class, will have the right to electtwo additional directors to serve on Essex’s Board of Directors. These votingrights continue until all distributions in arrears and distributions for thecurrent quarterly period on the preferred stock have been paid in full. At thattime, the holders of the preferred stock are divested of these voting rights,and the term and office of the directors so elected immediately terminates.

 

In addition, while any shares of Series F PreferredStock or shares of preferred stock into which the preferred units areexchangeable are outstanding, Essex may not without the consent of the holdersof two-thirds of the outstanding shares of each series of preferred stock, eachvoting separately as a single class:

 

•                  authorizeor create any class of series of stock that ranks senior to such preferredstock with respect to the payment of dividends, rights upon liquidation,dissolution or winding-up of our business;

 

•                  amend,alter or repeal the provisions of Essex’s Charter or Bylaws, that wouldmaterially and adversely affect the rights of such preferred stock; or

 

•                  inthe case of the preferred stock into which our preferred units areexchangeable, merge or consolidate with another entity or transfersubstantially all of its assets to another entity, except if such preferredstock remains outstanding with the surviving entity and has the same terms andin certain other

 

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circumstances.

 

These voting rights of the preferred stock may allowholders of preferred stock to impede or veto actions that would otherwisebenefit the holders of Essex’s Common Stock.

 

***TheRedemption Rights of the Series B Preferred Units, Series D Preferred Units andSeries F Preferred Stock may be Detrimental to Holders of Common Stock***

 

Upon the occurrence of one of the followingevents, the terms of the Operating Partnership’s Series B and D Preferred Unitsrequire it to redeem all of such units and the terms of the Company’s Series FPreferred Stock provide the holders of the majority of the outstanding Series FPreferred Stock the right to require the Company to redeem all of such stock:

 

•                  theCompany completes a “going private” transaction and its common stock is nolonger registered under the Securities Exchange Act of 1934, as amended:

 

•                  theCompany completes a consolidation or merger or sale of substantially all of itsassets and the surviving entity’s debt securities do not possess an investmentgrade rating; or

 

•                  theCompany fails to qualify as a REIT

 

The aggregateredemption price of the Series B Preferred Units would be $80 million, theaggregate redemption price of the Series D Preferred Units would be $50 millionand the aggregate redemption price of the Series F Preferred Stock would be $25million, plus, in each case, any accumulated distributions.

 

These redemptionrights may discourage or impede transactions that might otherwise be in theinterest of holders of common stock. Further, these redemption rights mighttrigger in situations where the Operating Partnership needs to conserve itscash reserves, in which event such redemption might adversely affect theOperating Partnership and its common holders.

 

***MarylandBusiness Combination Law May Not Allow Certain Transactions Between us andAffiliates to Proceed Without Compliance with Such Law***

 

The Maryland GeneralCorporation Law establishes special requirements for “business combinations”between a Maryland corporation and “interested stockholders” unless exemptionsare applicable. An interested stockholder is any person who beneficially ownsten percent or more of the voting power of the then-outstanding voting stock.

 

The law also requires asupermajority stockholder vote for such transactions. This means that thetransaction must be approved by at least:

 

•                  80%of the votes entitled to be cast by holders of outstanding voting shares; and

 

•                  66%of the votes entitled to be cast by holders of outstanding voting shares otherthan shares held by the interested stockholder with whom the businesscombination is to be effected.

 

However, as permitted bythe statute, the Board of Directors of Essex irrevocably has elected to exemptany business combination by us, George M. Marcus, William A. Millichap, who are the chairman and a director of Essex,respectively, and MM or any entity owned or controlled by Messrs. Marcus and Millichap and MM. Consequently, the super-majority voterequirement described above will not apply to any business combination betweenus and Mr. Marcus, Mr. Millichap, or MM. As a result,we may in the future enter into business combinations with Messrs. Marcus and Millichap and MM, without compliance with thesuper-majority vote requirements and other provisions of the Maryland GeneralCorporation Law.

 

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***Anti-TakeoverProvisions Contained in the Operating Partnership Agreement, Charter, Bylaws,and Certain Provisions of Maryland Law Could Delay, Defer or Prevent a Changein Control***

 

While Essex is the solegeneral partner of the Operating Partnership, and generally has full andexclusive responsibility and discretion in the management and control of theOperating Partnership, certain provisions of the Operating Partnership’spartnership agreement place limitations on Essex’s ability to act with respectto the Operating Partnership. Such limitations could delay, defer or prevent atransaction or a change in control that might involve a premium price for ourstock or otherwise be in the best interest of the stockholders or that couldotherwise adversely affect the interest of Essex’s stockholders. Thepartnership agreement provides that if the limited partners own at least 5% ofthe outstanding units of limited partnership interest in the OperatingPartnership, Essex cannot, without first obtaining the consent of amajority-in-interest of the limited partners in the Operating Partnership,transfer all or any portion of our general partner interest in the OperatingPartnership to another entity. Such limitations on Essex’s ability to act mayresult in our being precluded from taking action that the Board of Directorsbelieves is in the best interests of Essex’s stockholders. In addition, as of December 31,2004, one individual, George M. Marcus, held or controlled more than 50% of theoutstanding units of limited partnership interest in the Operating Partnership,allowing such actions to be blocked by a small number of limited partners.

 

Essex’s Charterauthorizes the issuance of additional shares of common stock or preferred stockand the setting of the preferences, rights and other terms of such preferredstock without the approval of the holders of the common stock. We may establishone or more series of preferred stock that could delay, defer or prevent atransaction or a change in control. Such a transaction might involve a premiumprice for our stock or otherwise be in the best interests of the holders ofcommon stock. Also, such a class of preferred stock could have dividend, votingor other rights that could adversely affect the interest of holders of commonstock.

 

Essex’s Charter, as wellas Essex’s stockholder rights plan, also contains other provisions that maydelay, defer or prevent a transaction or a change in control that might be inthe best interest of Essex’s stockholders. Essex’s stockholder rights plan isdesigned, among other things, to prevent a person or group from gaining controlof us without offering a fair price to all of Essex’s stockholders. Also, theBylaws may be amended by the Board of Directors to include provisions thatwould have a similar effect, although Essex presently has no such intention.The Charter contains ownership provisions limiting the transferability andownership of shares of capital stock, which may have the effect of delaying,deferring or preventing a transaction or a change in control. For example,subject to receiving an exemption from the Board of Directors, potentialacquirers may not purchase more than 6% in value of the stock (other thanqualified pension trusts which can acquire 9.9%). This may discourage tenderoffers that may be attractive to the holders of common stock and limit theopportunity for stockholders to receive a premium for their shares of commonstock.

 

In addition, the MarylandGeneral Corporations Law restricts the voting rights of shares deemed to be “controlshares.” Under the Maryland General Corporations Law, “control shares” arethose which, when aggregated with any other shares held by the acquirer,entitle the acquirer to exercise voting power within specified ranges. Althoughthe Bylaws exempt Essex from the control share provisions of the MarylandGeneral Corporations Law, the Board of Directors may amend or eliminate theprovisions of the Bylaws at any time in the future. Moreover, any suchamendment or elimination of such provision of the Bylaws may result in theapplication of the control share provisions of the Maryland GeneralCorporations Law not only to control shares which may be acquired in thefuture, but also to control shares previously acquired. If the provisions ofthe Bylaws are amended or eliminated, the control share provisions of theMaryland General Corporations Law could delay, defer or prevent a transactionor change in control that might involve a premium price for the stock orotherwise be in the best interests of Essex’s stockholders.

 

***BondCompliance Requirements May Limit Income From Certain Properties***

 

At December 31,2004, we had approximately $188.8 million of variable rate tax-exempt financingrelating to the Inglenook Court Apartments, Wandering Creek Apartments,Treetops Apartments, Huntington Breakers Apartments, Camarillo Oaks Apartments,Fountain Park and Parker Ranch Apartments and $15.5 million of fixed rate tax-exemptfinancing related to Meadowood Apartments. Thistax-exempt financing subjects these properties to certain deed restrictions andrestrictive covenants. We expect to engage in tax-exempt financings in thefuture. In addition, the Internal Revenue Code and rules and regulations thereunder impose various restrictions, conditions andrequirements excluding interest on qualified bond obligations from gross incomefor federal income tax purposes.

 

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The Internal Revenue Codealso requires that at least 20% of apartment units be made available toresidents with gross incomes that do not exceed a specified percentage,generally 50%, of the median income for the applicable family size asdetermined by the Housing and Urban Development Department of the federalgovernment. In addition to federal requirements, certain state and localauthorities may impose additional rental restrictions. These restrictions maylimit income from the tax-exempt financed properties if we are required tolower rental rates to attract residents who satisfy the median income test. IfEssex does not reserve the required number of apartment homes for residentssatisfying these income requirements, the tax-exempt status of the bonds may beterminated, the obligations under the bond documents may be accelerated and wemay be subject to additional contractual liability.

 

***AdverseEffect To Property Income And Value Due To General Real Estate Investment Risks***

 

Real property investmentsare subject to a variety of risks. The yields available from equity investmentsin real estate depend on the amount of income generated and expenses incurred.If the properties do not generate sufficient income to meet operating expenses,including debt service and capital expenditures, cash flow and the ability tomake distributions to stockholders will be adversely affected. The performanceof the economy in each of the areas in which the properties are located affectsoccupancy, market rental rates and expenses.

 

Consequently, the incomefrom the properties and their underlying values may be impacted. The financialresults of major local employers may have an impact on the cash flow and valueof certain of the properties as well.

 

Income from theproperties may be further adversely affected by, among other things, thefollowing factors:

 

•                  thegeneral economic climate;

 

•                  localeconomic conditions in which the properties are located, such as oversupply ofhousing or a reduction in demand for rental housing;

 

•                  theattractiveness of the properties to tenants;

 

•                  competitionfrom other available space;

 

•                  Essex’sability to provide for adequate maintenance and insurance; and

 

•                  increasedoperating expenses.

 

Also, as leases on theproperties expire, tenants may enter into new leases on terms that are lessfavorable to us. Income and real estate values also may be adversely affectedby such factors as applicable laws (e.g., the Americans With Disabilities Actof 1990 and tax laws), interest rate levels and the availability and terms offinancing. In addition, real estate investments are relatively illiquid and,therefore, our ability to vary our portfolio promptly in response to changes ineconomic or other conditions may be quite limited.

 

***Essex’sJoint Ventures and Joint Ownership of Properties and Partial Interests inCorporations and Limited Partnerships Could Limit Essex’s Ability to ControlSuch Properties and Partial Interests***

 

Instead of purchasingproperties directly, we have invested and may continue to invest as a co-venturer. Joint venturers oftenhave shared control over the operation of the joint venture assets. Therefore,it is possible that the co-venturer in an investmentmight become bankrupt, or have economic or business interests or goals that areinconsistent with our business interests or goals, or be in a position to takeaction contrary to our instructions or requests, or our policies or objectives.Consequently, a co-venturer’s actions might subjectproperty owned by the joint venture to additional risk. Although we seek tomaintain sufficient influence of any joint venture to achieve its objectives,we may be unable to take action without our joint venture partners’ approval,or joint venture partners could take actions binding on the joint venture withoutconsent. Additionally, should a joint venture partner become bankrupt, we couldbecome liable for such partner’s share of joint venture liabilities.

 

From time to time, we,through the Operating Partnership, invest in corporations, limited partnerships,limited liability companies or other entities that have been formed for thepurpose of acquiring, developing or managing real property. In certaincircumstances, the Operating Partnership’s interest in a particular entity maybe

 

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less than a majority ofthe outstanding voting interests of that entity. Therefore, the OperatingPartnership’s ability to control the daily operations of such an entity may belimited. Furthermore, the Operating Partnership may not have the power toremove a majority of the board of directors (in the case of a corporation) orthe general partner or partners (in the case of a limited partnership) of suchan entity in the event that its operations conflict with the Operating Partnership’sobjectives. In addition, the Operating Partnership may not be able to disposeof its interests in such an entity. In the event that such an entity becomesinsolvent, the Operating Partnership may lose up to its entire investment inand any advances to the entity. In addition, we have and in the future mayenter into transactions that could require us to pay the tax liabilities ofpartners, which contribute assets into joint ventures or the OperatingPartnership, in the event that certain taxable events, which are within ourcontrol, occur. Although we plan to hold the contributed assets or deferrecognition of gain on their sale pursuant to the like-kind exchange rulesunder Section 1031 of the Internal Revenue Code we can provide noassurance that we will be able to do so and if such tax liabilities wereincurred they can expect to have a material impact on our financial position.

 

***DedicatedInvestment Activities and Other Factors Specifically Related to Essex ApartmentValue Fund II, L.P.***

 

In 2004, we organized aninvestment fund, Essex Apartment Value Fund II, L.P.(“Fund II”), which will be,subject to specific exceptions, our exclusive investment vehicle for newinvestment until at least 90% of Fund II’s committedcapital has been invested or committed for investments, or if earlier, October 31,2006. We are committed to invest 28.2% of the aggregate capital committed toFund II. Fund II involves risks to us such as the following: our partners inFund II might become bankrupt (in which event we might become generally liablefor the liabilities of Fund II); have economic or business interests or goalsthat are inconsistent with our business interests or goals; fail to fundcapital commitments as contractually required; or fail to approve decisions regardingFund II that are in our best interest. We will, however, generally seek tomaintain sufficient influence over Fund II to permit it to achieve its businessobjectives.

 

***InvestmentsIn Mortgages And Other Real Estate Securities***

 

We may invest in securitiesrelated to real estate, which could adversely affect our ability to makedistributions to stockholders. We may purchase securities issued by entities,which own real estate and may also invest in mortgages or unsecured debtobligations. These mortgages may be first, second or third mortgages that mayor may not be insured or otherwise guaranteed. In general, investments inmortgages include the following risks:

 

•                  that the valueof mortgaged property may be less than the amounts owed, causing realized orunrealized losses;

 

•                  theborrower may not pay indebtedness under the mortgage when due, requiring us toforeclose, and the amount recovered in connection with the foreclosure may beless than the amount owed;

 

•                  thatinterest rates payable on the mortgages may be lower than our cost of funds;and

 

•                  inthe case of junior mortgages, that foreclosure of a senior mortgage wouldeliminate the junior mortgage.

 

If any of the above wereto occur, cash flows from operations and our ability to make expected dividendsto stockholders could be adversely affected.

 

***PossibleEnvironmental Liabilities***

 

Under various federal,state and local laws, ordinances and regulations, an owner or operator of realestate is liable for the costs of removal or remediation of certain hazardousor toxic substances on, in, to or migrating from such property. Such laws oftenimpose liability without regard as to whether the owner or operator knew of, orwas responsible for, the presence of such hazardous or toxic substances. The presenceof such substances, or the failure to properly remediate such substances, mayadversely affect the owner’s or operator’s ability to sell or rent such

 

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property or to borrowusing such property as collateral. In addition, persons exposed to suchsubstances, either through soil vapor or ingestion of the substances, may claimpersonal injury damages. Persons who arrange for the disposal or treatment ofhazardous or toxic substances or wastes also may be liable for the costs ofremoval or remediation of such substances at the disposal or treatment facilityto which such substances or wastes were sent, whether or not such facility isowned or operated by such person. In addition, certain environmental lawsimpose liability for release of asbestos-containing materials (“ACMs”) into the air, and third parties may seek recoveryfrom owners or operators of real properties for personal injury associated withACMs. In connection with the ownership (direct or indirect),operation, management and development of real properties, the OperatingPartnership could be considered an owner or operator of such properties or ashaving arranged for the disposal or treatment of hazardous or toxic substancesand, therefore, may be potentially liable for removal or remediation costs, aswell as certain other costs, including governmental fines and costs related toinjuries of persons and property.

 

Investments in realproperty create a potential for environmental liabilities on the part of theowner of such real property. We carry certain limited insurance coverage forthis type of environmental risk. We have conducted environmental studies whichrevealed the presence of groundwater contamination at certain properties. Suchcontamination at certain of these properties was reported to have migratedon-site from adjacent industrial manufacturing operations. The formerindustrial users of the properties were identified as the source ofcontamination. The environmental studies noted that certain properties arelocated adjacent to any possible down gradient from sites with knowngroundwater contamination, the lateral limits of which may extend onto suchproperties. The environmental studies also noted that at certain of theseproperties, contamination existed because of the presence of underground fuelstorage tanks, which have been removed. In general, in connection with theownership, operation, financing, management and development of real properties,we may be potentially liable for removal or clean-up costs, as well as certainother costs and environmental liabilities. We may also be subject togovernmental fines and costs related to injuries to persons and property.

 

Recently there has beenan increasing number of lawsuits against owners and managers of multifamilyproperties alleging personal injury and property damage caused by the presenceof mold in residential real estate. Some of these lawsuits have resulted insubstantial monetary judgments or settlements. Essex has been sued for moldrelated matters and has settled some, but not all, of such matters. Insurancecarriers have reacted to mold related liability awards by excluding moldrelated claims from standard policies and pricing mold endorsements atprohibitively high rates. We have adopted programs designed to manage theexistence of mold in our properties as well as guidelines for promptlyaddressing and resolving reports of mold to minimize any impact mold might haveon residents or the property.

 

California has enactedlegislation commonly referred to as “Proposition 65” requiring that “clear andreasonable” warnings be given to consumers who are exposed to chemicals knownto the State of California to cause cancer or reproductive toxicity, includingtobacco smoke. Although we have sought to comply with Proposition 65requirements, we cannot assure you that we will not be adversely affected bylitigation relating to Proposition 65.

 

Methane gas is anaturally-occurring gas that is commonly found below the surface in several areasof California, particularly in the Southern California coastal areas. Methane is a non-toxic gas, but can be ignitable in confined spaces. Although naturally-occurring, methane gas is not regulated at the state orfederal level, some local governments, such as the County of Los Angeles, haveimposed requirements that new buildings install detection systems in areaswhere methane gas is known to be located.  Methane gas is also associatedwith certain industrial activities, such as former municipal waste landfills.

 

Except with respect tothree Properties, the Operating Partnership has no indemnification agreementsfrom third parties for potential environmental clean-up costs at itsProperties. The Operating Partnership has no way of determining at this timethe magnitude of any potential liability to which it may be subject arising outof unknown environmental conditions or violations with respect to theproperties formerly owned by the Operating Partnership. No assurance can begiven that existing environmental studies with respect to any of the Propertiesreveal all environmental liabilities, that any prior owner or operator of aProperty did not create any material environmental condition not known to theOperating Partnership, or that a material environmental condition does notexist as to any one or more of the Properties. The Operating Partnership haslimited insurance coverage for the types of environmental liabilities describedabove.

 

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***General Uninsured Losses***

 

We have a comprehensive insurance program covering ourproperty and operating activities. There are, however, certain types ofextraordinary losses for which we may not have sufficient insurance.Accordingly, we may sustain uninsured losses due to insurance deductibles,self-insured retention, uninsured claims or casualties,  or losses in excess of applicable coverage.

 

***Changes In Real Estate Tax And Other Laws***

 

Generally we do not directly pass through costsresulting from changes in real estate tax laws to residential property tenants.We also do not generally pass through increases in income, service or othertaxes, to tenants under leases. These costs may adversely affect funds fromoperations and the ability to make distributions to stockholders. Similarly,compliance with changes in (i) laws increasing the potential liability forenvironmental conditions existing on properties or the restrictions ondischarges or other conditions or (ii) rent control or rent stabilization lawsor other laws regulating housing may result in significant unanticipatedexpenditures, which would adversely affect funds from operations and theability to make distributions to stockholders.

 

***Changes In Financing Policy; No Limitation On Debt***

 

We have adopted a policy of maintaining adebt-to-total-market-capitalization ratio of less than 50%. The calculation ofdebt-to-total-market-capitalization is as follows: total property indebtednessdivided by the sum of total property indebtedness plus total equity marketcapitalization.

 

As used in the above formula, total equity marketcapitalization is equal to the aggregate market value of the outstanding sharesof common stock (based on the greater of current market price or the grossproceeds per share from public offerings of the outstanding shares plus anyundistributed net cash flow), assuming the conversion of all limitedpartnership interests in the Operating Partnership into shares of common stockand the gross proceeds of the preferred units of the Operating Partnership.Based on this calculation (including the current market price and excludingundistributed net cash flow), our debt-to-total-market-capitalization ratio wasapproximately 36.4% as of December 31, 2004.

 

Our organizational documents do not limit the amountor percentage of indebtedness that may be incurred. Accordingly, the Board ofDirectors of Essex could change current policies and the policies of theOperating Partnership regarding indebtedness. If we changed these policies, wecould incur more debt, resulting in an increased risk of default on ourobligations and the obligations of the Operating Partnership, and an increasein debt service requirements that could adversely affect our financialcondition and results of operations. Such increased debt could exceed theunderlying value of the properties.

 

# ***We are Subject to Certain Tax Risks***

# *** ***

We have elected to be taxedas a REIT under the Internal Revenue Code. Our qualification as a REIT requiresus to satisfy numerous requirements (some on an annual and quarterly basis)established under highly technical and complex Internal Revenue Code provisionsfor which there are only limited judicial or administrative interpretations,and involves the determination of various factual matters and circumstances notentirely within our control. Although we intend that our current organizationand method of operation enable us to qualify as a REIT, we cannot assure youthat we so qualify or that we will be able to remain so qualified in thefuture.  Future legislation, newregulations, administrative interpretations or court decisions could adverselyaffect our ability to qualify as a REIT or adversely affect our stockholders.If we fail to qualify as a REIT in any taxable year, we would be subject to federalincome tax (including any applicable alternative minimum tax) on our taxableincome at corporate rates, and would not be allowed to deduct dividends paid toour shareholders in computing our taxable income. We may also be disqualifiedfrom treatment as a REIT for the four taxable years following the year in whichwe failed to qualify. The additional tax liability would reduce our netearnings available for investment or distribution to stockholders. In addition,we would no longer be required to make distributions to our stockholders. Evenif we continue to qualify as a REIT, we will continue to be subject to certainfederal, state and local taxes on 

 

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our income and property.

 

We have established severaltaxable REIT subsidiaries. Despite our qualifications as a REIT, our taxableREIT subsidiaries must pay federal income tax on their taxable income. While wewill attempt to ensure that our dealings with our taxable REIT subsidiarieswill not adversely affect our REIT qualification, we cannot provide assurancethat we will successfully achieve that result. Furthermore, we may be subjectto a 100% penalty tax, or our taxable REIT subsidiaries may be denieddeductions, to the extent our dealings with our taxable REIT subsidiaries arenot deemed to be arm’s length in nature.

 

**Other Matters**

 

***Certain Policies of the Operating Partnership***

 

The Operating Partnership intends to continue tooperate in a manner that will not subject it to regulation under the InvestmentCompany Act of 1940. The Operating Partnership has in the past five years andmay in the future (i) issue securities senior to its Common Stock, (ii) fundacquisition activities with borrowings under its line of credit and (iii) offershares of Common Stock and/or units of limited partnership interest in theOperating Partnership or affiliated partnerships as partial consideration forproperty acquisitions. The Operating Partnership from time to time acquirespartnership interests in partnerships and joint ventures, either directly orindirectly through subsidiaries of the Operating Partnership, when suchentities’ underlying assets are real estate. In general, the OperatingPartnership does not (i) underwrite securities of other issuers or (ii) activelytrade in loans or other investments.

 

The Operating Partnership primarily invests inmultifamily properties in Southern California (Los Angeles, Ventura, Orange,San Diego and Riverside counties), Northern California (the San Francisco BayArea), and the Pacific Northwest (the Seattle, Washington and Portland, Oregonmetropolitan areas). The Operating Partnership currently intends to continue toinvest in multifamily properties in such regions, but may change such policywithout a vote of the stockholders. In connection with the Sachs’ portfolioacquisition in December 2002, the Operating Partnership has acquired twoproperties in Nevada and one property in Texas. The two properties located inNevada were disposed of in January 2005.

 

The policies discussed above may be reviewed and modified from time totime by the Board of Directors without the vote of the stockholders.

 

**Item 2.Properties**

 

The Operating Partnership’s property portfolio as ofDecember 31, 2004 (including partial ownership interests) consists of ownershipinterests in 120 multifamily properties (comprising 25,518 apartment units), ofwhich 13,755 units are located in Southern California (Los Angeles, Ventura,Orange, San Diego and Riverside counties), 5,810 units are located in NorthernCalifornia (the San Francisco Bay Area), 5,651 of which are located in thePacific Northwest (4,776 units in the Seattle metropolitan area and 875 unitsin the Portland, Oregon metropolitan area), and 302 units are located inHouston, Texas. In addition, at December 31, 2004, the Operating Partnershipowns other real estate assets consisting of four recreational vehicle parks(comprising 698 spaces), five office buildings (totaling approximately 173,540square feet) and two manufactured housing communities (containing 607sites).  One office building, which islocated in Northern California (Palo Alto), has approximately 17,400 squarefeet and houses the Operating Partnership’s headquarters. Another officebuilding, located in Southern California (Woodland Hills), has approximately38,940 square feet, of which the Operating Partnership occupies approximately11,200 square feet. The Woodland Hills office building has eight third partytenants occupying approximately 26,600 feet. The Operating Partnership alongwith its affiliated entities and joint ventures also have entered intocommitments for the development of 645 units in four multifamily communities;two of which are in Northern California and two in Southern California.  See “Development” in Item 1 of this AnnualReport on Form 10-K for a list of our properties under development.

 

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The Operating Partnership’s multifamily propertiesaccounted for 99% of the Operating Partnership’s property revenues for the yearended December 31, 2004.

 

***Occupancy Rates***

** **

The 120 multifamily residential properties had anaverage occupancy, based on “financial occupancy,” during the year endedDecember 31, 2004, of approximately 96%. With respect to stabilized multifamilyproperties with sufficient operating history, occupancy figures are based onfinancial occupancy, which is defined as the percentage resulting from dividingactual rental revenue by total possible rental revenue. Actual rental revenuerepresents contractual revenue pursuant to leases without consideringdelinquency and concessions. Total possible rental revenue represents the valueof all apartment units, with occupied units valued at contractual rental ratespursuant to leases and vacant units valued at estimated market rents. Webelieve that financial occupancy is a meaningful measure of occupancy becauseit considers the value of each vacant unit at its estimated market rate.Financial occupancy may not completely reflect short-term trends in physical occupancyand financial occupancy rates as disclosed by other REITs may not be comparableto our calculation of financial occupancy.

 

As of December 31, 2004, the headquarters building was100% occupied by the Operating Partnership and the Southern California officebuilding was 97% occupied, based on physical occupancy. With respect to officebuildings, occupancy figures are based on “physical occupancy” which refers tothe percentage resulting from dividing leased and occupied square footage byrentable square footage. With respect to recreational vehicle parks,manufactured housing communities, or multifamily properties which have not yetstabilized or have insufficient operating history, occupancy figures are basedon “physical occupancy” which refers to the percentage resulting from dividingleased and occupied units by rentable units.

 

For the year ended December 31, 2004, none of theOperating Partnership’s Properties had book values equal to 10% or more oftotal assets of the Operating Partnership or gross revenues equal to 10% ormore of aggregate gross revenues of the Operating Partnership.

 

***Multifamily Residential Properties***

 

The Operating Partnership’s multifamily Properties aregenerally suburban garden apartments and townhomes comprising multiple clustersof two and three story buildings situated on three to fifteen acres of land.The multifamily properties have on average 210 units, with a mix of studio,one, two and some three-bedroom units. A wide variety of amenities areavailable at each apartment community, including covered parking, fireplaces,swimming pools, clubhouses with complete fitness facilities, volleyball andplayground areas and tennis courts.

 

The Operating Partnership selects, trains andsupervises a full team of on-site service and maintenance personnel. TheOperating Partnership believes that its customer service approach enhances itsability to retain tenants and that its multifamily Properties were built welland have been maintained well since acquisition.

 

***Office Buildings***

 

The Operating Partnership’s corporate headquarters islocated in a two-story office building with approximately 17,400 square feetlocated at 925 East Meadow Drive, Palo Alto, California. The OperatingPartnership acquired this property in 1997. The Operating Partnership also ownsan office building in Southern California (Woodland Hills), comprised ofapproximately 38,940 square feet building, of which the Operating Partnershipoccupies approximately 11,200 square feet at December 31, 2004. The building haseight third party tenants occupying approximately 26,600 feet. The largestsingle tenant occupies approximately 10,900 square feet. The OperatingPartnership acquired this property in 2001. The Operating Partnership also hastwo small office buildings comprising approximately 7,200 square feet that arelocated in San Diego, California, which were sold in January 2005 for $1.3million.  The Operating Partnership has amortgage loan receivable on an office building with approximately 110,000square feet located in Irvine, California, which is consolidated under FIN 46R.

 

25

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***Recreational Vehicle Parks***

 

The Operating Partnership owns four recreationalvehicle parks (comprising of 698 spaces), acquired in the Operating Partnership’sDecember 2002 acquisition of John M. Sachs, Inc., located in El Cajon,California; San Jaciento, California; and Las Vegas Nevada. The recreationalvehicle park located in Las Vegas, Nevada was sold in January 2005.

 

# ***ManufacturedHousing Communities***

# *** ***

The Operating Partnership owns manufactured housingcommunities (containing 607 sites), acquired in the Operating Partnership’sDecember 2002 acquisition of John M. Sachs, Inc., located in Vista, Californiaand Las Vegas, Nevada.

 

During the fourth quarter of 2003, the OperatingPartnership entered into lease and purchase option agreements with unrelatedthird parties related to its five recreational vehicle parks that are comprisedof 1,717 spaces, and two manufactured housing communities that contain 607sites.  Based on the agreements, theunrelated third parties have an option to purchase the assets in approximatelyfour years for approximately $41.7 million – a 5% premium to the gross bookvalue of the assets.  Under the leaseagreements Essex is to receive a fixed monthly lease payment in addition to anon-refundable upfront payment that will be amortized over approximately fiveyears (the life of the lease).  During2004, the Operating Partnership granted the lessees of one manufactured housingcommunity and two recreational vehicle parks the right to exercise theirpurchase agreements in 2004. On July 18, 2004 the Operating Partnership soldGolden Village Recreational Vehicle Park for $6.7 million. As of December 31,2004 Riviera RV Resort and Riviera Mobile Home Park met the “held for sale”criteria under SFAS 144. In accordance with SFAS 144, assets and liabilitiesand the results of operations of the properties are presented as discontinuedoperations in the consolidated financial statements for all periods presented.On January 20, 2005 the Operating Partnership sold Riviera RV Resort andRiviera Mobile Home Park for $14.9 million.

 

The following tables describe the OperatingPartnership’s Properties as of December 31, 2004. The first table describes theOperating Partnership’s multifamily residential properties and the second tabledescribes the Operating Partnership’s other real estate assets.

 

26

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| **Multifamily  Residential Properties (1)** | ** ** | **Location**            | ** ** | **Units** | ** ** | **Rentable  Square  Footage** | ** ** | **Year  Built** | ** ** | **Year  Acquired** | ** ** | **Occupancy(2)** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------|------------|-------------------------------|------------|-----------------|------------|--------------------|------------|------------------|------------|
| **Southern  California**                    |       |                    |       |      |       |                          |       |            |       |               |       |             |       |
| Alpine Country                              |       | Alpine, CA              |       | 108       |       | 81,900                        |       | 1986            |       | 2002               |       | 92               | %          |
| Alpine Village                              |       | Alpine, CA              |       | 306       |       | 254,400                       |       | 1971            |       | 2002               |       | 94               | %          |
| Barkley  Apartments(3)(4)                   |       | Anaheim, CA             |       | 161       |       | 139,800                       |       | 1984            |       | 2000               |       | 96               | %          |
| Vista Pointe(5)                             |       | Anaheim, CA             |       | 286       |       | 242,400                       |       | 1968            |       | 1985               |       | 94               | %          |
| Bonita Cedars                               |       | Bonita, CA              |       | 120       |       | 120,800                       |       | 1983            |       | 2002               |       | 97               | %          |
| Camarillo Oaks                              |       | Camarillo, CA           |       | 564       |       | 459,000                       |       | 1985            |       | 1996               |       | 94               | %          |
| Mountain View                               |       | Camarillo, CA           |       | 106       |       | 83,900                        |       | 1980            |       | 2004               |       | 95               | %          |
| Cambridge                                   |       | Chula Vista, CA         |       | 40        |       | 22,100                        |       | 1965            |       | 2002               |       | 96               | %          |
| Woodlawn  Colonial                          |       | Chula Vista, CA         |       | 159       |       | 104,500                       |       | 1974            |       | 2002               |       | 96               | %          |
| Mesa Village                                |       | Clairemont, CA          |       | 133       |       | 43,600                        |       | 1963            |       | 2002               |       | 97               | %          |
| Parcwood(6)                                 |       | Corona, CA              |       | 312       |       | 270,000                       |       | 1989            |       | 2004               |       | 97               | %          |
| Casa Tierra                                 |       | El Cajon, CA            |       | 40        |       | 28,700                        |       | 1972            |       | 2002               |       | 98               | %          |
| Coral Gardens                               |       | El Cajon, CA            |       | 200       |       | 182,000                       |       | 1976            |       | 2002               |       | 96               | %          |
| Tierra del  Sol/Norte                       |       | El Cajon, CA            |       | 156       |       | 117,000                       |       | 1969            |       | 2002               |       | 97               | %          |
| Grand Regency                               |       | Escondido, CA           |       | 60        |       | 42,400                        |       | 1967            |       | 2002               |       | 99               | %          |
| Valley Park(7)                              |       | Fountain Valley, CA     |       | 160       |       | 169,700                       |       | 1969            |       | 2001               |       | 97               | %          |
| Capri at Sunny  Hills(7)                    |       | Fullerton, CA           |       | 100       |       | 128,100                       |       | 1961            |       | 2001               |       | 96               | %          |
| Wilshire  Promenade(8)                      |       | Fullerton, CA           |       | 149       |       | 128,000                       |       | 1992            |       | 1997               |       | 95               | %          |
| Montejo(7)                                  |       | Garden Grove, CA        |       | 124       |       | 103,200                       |       | 1974            |       | 2001               |       | 98               | %          |
| Hampton Court  (Columbus)                   |       | Glendale, CA            |       | 83        |       | 71,500                        |       | 1974(9)         |       | 1999               |       | 98               | %          |
| Hampton Place  (Loraine)                    |       | Glendale, CA            |       | 132       |       | 141,500                       |       | 1970(10)        |       | 1999               |       | 97               | %          |
| Devonshire                                  |       | Hemet, CA               |       | 276       |       | 207,200                       |       | 1988            |       | 2002               |       | 94               | %          |
| Huntington  Breakers                        |       | Huntington Beach, CA    |       | 342       |       | 241,700                       |       | 1984            |       | 1997               |       | 97               | %          |
| Hillsborough  Park                          |       | La Habra, CA            |       | 235       |       | 215,500                       |       | 1999            |       | 1999               |       | 98               | %          |
| Trabuco Villas                              |       | Lake Forest, CA         |       | 132       |       | 131,000                       |       | 1985            |       | 1997               |       | 98               | %          |
| Marbrisa                                    |       | Long Beach, CA          |       | 202       |       | 122,800                       |       | 1987            |       | 2002               |       | 97               | %          |
| Pathways                                    |       | Long Beach, CA          |       | 296       |       | 197,700                       |       | 1975            |       | 1991               |       | 97               | %          |
| Bunker Hill                                 |       | Los Angeles, CA         |       | 456       |       | 346,600                       |       | 1968            |       | 1998               |       | 96               | %          |
| City Heights(5)                             |       | Los Angeles, CA         |       | 687       |       | 424,100                       |       | 1968            |       | 2000               |       | 96               | %          |
| Cochran  Apartments                         |       | Los Angeles, CA         |       | 58        |       | 51,400                        |       | 1989            |       | 1998               |       | 99               | %          |
| Kings Road(11)                              |       | Los Angeles, CA         |       | 196       |       | 132,100                       |       | 1979            |       | 1997               |       | 93               | %          |
| Park Place                                  |       | Los Angeles, CA         |       | 60        |       | 48,000                        |       | 1988            |       | 1997               |       | 99               | %          |
| Windsor Court                               |       | Los Angeles, CA         |       | 58        |       | 46,600                        |       | 1988            |       | 1997               |       | 99               | %          |
| Marina City  Club(12)                       |       | Los Angeles, CA         |       | 101       |       | 127,200                       |       | 1971            |       | 2004               |       | 94               | %          |
| Mirabella                                   |       | Marina Del Rey, CA      |       | 188       |       | 176,800                       |       | 2000            |       | 2000               |       | 96               | %          |
| Mira Woods  Villa(13)                       |       | Mira Mesa, CA           |       | 355       |       | 262,600                       |       | 1962            |       | 2002               |       | 95               | %          |
| Hillcrest Park  (Mirabella)                 |       | Newbury Park, CA        |       | 608       |       | 521,900                       |       | 1973(14)(15)    |       | 1998               |       | 94               | %          |
| Coronado at  Newport South(16)              |       | Newport Beach, CA       |       | 715       |       | 498,700                       |       | 1968            |       | 1999               |       | 96               | %          |
| Fairways(17)                                |       | Newport Beach, CA       |       | 74        |       | 107,100                       |       | 1972            |       | 1999               |       | 95               | %          |
| Country Villas                              |       | Oceanside, CA           |       | 180       |       | 179,700                       |       | 1976            |       | 2002               |       | 95               | %          |
| Mariners Place                              |       | Oxnard, CA              |       | 105       |       | 77,200                        |       | 1987            |       | 2000               |       | 98               | %          |
| Tierra Vista(18)                            |       | Oxnard, CA              |       | 404       |       | 387,100                       |       | 2001            |       | 2001               |       | 95               | %          |
| Monterey Villas  (Village Apartments)       |       | Oxnard, CA              |       | 122       |       | 122,100                       |       | 1974(19)        |       | 1997               |       | 96               | %          |
| Monterra del Mar  (Windsor Terrace)         |       | Pasadena, CA            |       | 123       |       | 74,400                        |       | 1972(20)        |       | 1999               |       | 98               | %          |
| Monterra del Rey  (Glenbrook)               |       | Pasadena, CA            |       | 84        |       | 73,100                        |       | 1972(21)        | ** ** | 1999               |       | 97               | %          |
| Monterra del Sol  (Euclid)                  |       | Pasadena, CA            |       | 85        |       | 69,200                        |       | 1972(22)        |       | 1999               |       | 96               | %          |
| Villa  Angelina(7)                          |       | Placentia, CA           |       | 256       |       | 217,600                       |       | 1970            |       | 2001               |       | 97               | %          |
| Fountain Park                               |       | Playa Vista, CA         |       | 705       |       | 608,900                       |       | 2002            |       | 2004               |       | 92               | %          |
| Highridge(7)                                |       | Rancho Palos Verdes, CA |       | 255       |       | 290,200                       |       | 1972            |       | 1997               |       | 97               | %          |

 

27

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| **Multifamily  Residential Properties (1)** | ** ** | **Location**       | ** ** | **Units**  | ** ** | **Footage**    | ** ** | **Built**  | ** ** | **Acquired** | ** ** | **Occupancy(2)** | ** ** |
|---------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|------------|------------|--------------|------------|------------------|------------|
| **Southern  California (continued)**        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** **   | ** ** | ** **       | ** ** |
| Bluffs II,  The(23)                         |       | San Diego, CA      |       | 224        |       | 126,700        |       | 1974       |       | 1997         |       | 97               | %          |
| Emerald Palms                               |       | San Diego, CA      |       | 152        |       | 133,000        |       | 1986       |       | 2002         |       | 96               | %          |
| Summit Park                                 |       | San Diego, CA      |       | 300        |       | 229,400        |       | 1972       |       | 2002         |       | 96               | %          |
| Vista Capri -  East                         |       | San Diego, CA      |       | 26         |       | 16,800         |       | 1967       |       | 2002         |       | 97               | %          |
| Vista Capri -  North                        |       | San Diego, CA      |       | 106        |       | 51,800         |       | 1975       |       | 2002         |       | 97               | %          |
| Hearthstone(7)                              |       | Santa Ana, CA      |       | 140        |       | 154,800        |       | 1970       |       | 2001         |       | 95               | %          |
| Treehouse(7)                                |       | Santa Ana, CA      |       | 164        |       | 135,700        |       | 1970       |       | 2001         |       | 95               | %          |
| Carlton Heights                             |       | Santee, CA         |       | 70         |       | 48,400         |       | 1979       |       | 2002         |       | 97               | %          |
| Meadowood                                   |       | Simi Valley, CA    |       | 320        |       | 264,500        |       | 1986       |       | 1996         |       | 94               | %          |
| Hidden Valley  (Parker Ranch)(24)           |       | Simi Valley, CA    |       | 324        |       | 310,900        |       | 2004       |       | 2004         |       | 90               | %          |
| Shadow Point                                |       | Spring Valley, CA  |       | 172        |       | 131,200        |       | 1983       |       | 2002         |       | 96               | %          |
| Lofts at  Pinehurst, The (Villa Scandia)    |       | Ventura, CA        |       | 118        |       | 71,100         |       | 1971(25)   |       | 1997         |       | 96               | %          |
| Pinehurst                                   |       | Ventura, CA        |       | 28         |       | 21,200         |       | 1973       |       | 2004         |       | 100              | %          |
| Woodside Village                            |       | Ventura, CA        |       | 145        |       | 136,500        |       | 1987       |       | 2004         |       | 97               | %          |
| Walnut Heights                              |       | Walnut, CA         |       | 163        |       | 146,700        |       | 1964       |       | 2003         |       | 93               | %          |
| Avondale at  Warner Center(26)              |       | Woodland Hills, CA |       | 446        |       | 331,000        |       | 1970       |       | 1999         |       | 96               | %          |
| ** **                                  | ** ** | ** **         | ** ** | **13,755** | ** ** | **11,202,700** | ** ** | ** ** | ** ** | ** **   | ** ** | **96**           | **%**      |
|                                        |       |               |       |       |       |           |       |       |       |         |       |             |       |
| **Northern  California**                    |       |               |       |       |       |           |       |       |       |         |       |             |       |
| Carlmont  Woods(6)                          |       | Belmont, CA        |       | 195        |       | 107,200        |       | 1971       |       | 2004         |       | 99               | %          |
| Brookside Oaks  (7)                         |       | Cupertino, CA      |       | 170        |       | 119,900        |       | 1973       |       | 2000         |       | 95               | %          |
| Point at  Cupertino, The (Westwood)(18)     |       | Cupertino, CA      |       | 116        |       | 135,200        |       | 1963(27)   |       | 1998         |       | 95               | %          |
| Harbor Cove(7)                              |       | Foster City, CA    |       | 400        |       | 306,600        |       | 1971       |       | 2004         |       | 98               | %          |
| Mountain  Vista(28).                        |       | Fremont, CA        |       | 526        |       | 433,100        |       | 1975       |       | 2000         |       | 94               | %          |
| Stevenson Place                             |       | Fremont, CA        |       | 200        |       | 146,200        |       | 1971(29)   |       | 1983         |       | 94               | %          |
| Treetops                                    |       | Fremont, CA        |       | 172        |       | 131,200        |       | 1978       |       | 1996         |       | 95               | %          |
| Wimbledon Woods                             |       | Hayward, CA        |       | 560        |       | 462,400        |       | 1975       |       | 1998         |       | 95               | %          |
| Summerhill  Commons                         |       | Newark, CA         |       | 184        |       | 139,000        |       | 1987       |       | 1987         |       | 94               | %          |
| San Marcos  (Vista del Mar)                 |       | Richmond, CA       |       | 312        |       | 292,700        |       | 2003       |       | 2003         |       | 89               | %          |
| Mt. Sutro  Terrace                          |       | San Francisco, CA  |       | 99         |       | 64,000         |       | 1973       |       | 1999         |       | 95               | %          |
| The Carlyle                                 |       | San Jose, CA       |       | 132        |       | 129,200        |       | 2000       |       | 2000         |       | 95               | %          |
| Waterford Place                             |       | San Jose, CA       |       | 238        |       | 219,600        |       | 2000       |       | 2000         |       | 99               | %          |
| Esplanade.                                  |       | San Jose, CA       |       | 278        |       | 279,000        |       | 2002       |       | 2004         |       | 95               | %          |
| Bel Air                                     |       | San Ramon, CA      |       | 462        |       | 391,000        |       | 1988(30)   |       | 1995         |       | 97               | %          |
| Eastridge                                   |       | San Ramon, CA      |       | 188        |       | 174,100        |       | 1988       |       | 1996         |       | 95               | %          |
| Foothill Gardens                            |       | San Ramon, CA      |       | 132        |       | 155,100        |       | 1985       |       | 1997         |       | 97               | %          |
| Twin Creeks                                 |       | San Ramon, CA      |       | 44         |       | 51,700         |       | 1985       |       | 1997         |       | 97               | %          |
| Le Parc Luxury  Apartments (Plumtree)       |       | Santa Clara, CA    |       | 140        |       | 113,200        |       | 1975(31)   |       | 1994         |       | 98               | %          |
| Marina Cove (32)                            |       | Santa Clara, CA    |       | 292        |       | 250,200        |       | 1974       |       | 1994         |       | 97               | %          |
| Bristol Commons                             |       | Sunnyvale, CA      |       | 188        |       | 142,600        |       | 1989       |       | 1995         |       | 97               | %          |
| Oak Pointe                                  |       | Sunnyvale, CA      |       | 390        |       | 294,100        |       | 1973       |       | 1988         |       | 96               | %          |
| Summerhill Park                             |       | Sunnyvale, CA      |       | 100        |       | 78,500         |       | 1988       |       | 1988         |       | 95               | %          |
| Windsor Ridge                               |       | Sunnyvale, CA      |       | 216        |       | 161,800        |       | 1989       |       | 1989         |       | 97               | %          |
| Vista Belvedere.                            |       | Tiburon, CA        |       | 76         |       | 78,300         |       | 1963       |       | 2004         |       | 95               | %          |
| ** **                                  | ** ** | ** **         | ** ** | **5,810**  | ** ** | **4,855,900**  | ** ** | ** ** | ** ** | ** **   | ** ** | **96**           | **%**      |

 

28

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| **Multifamily  Residential Properties (1)** | ** ** | **Location**   | ** ** | **Units**  | ** ** | **Rentable  Square  Footage** | ** ** | **Year  Built** | ** ** | **Year  Acquired** | ** ** | **Occupancy(2)** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|-------------------------------|------------|-----------------|------------|--------------------|------------|------------------|------------|
| **Pacific  Northwest**                      |       |           |       |       |       |                          |       |            |       |               |       |             |       |
| **Seattle,  Washington Metropolitan Area**  |       |           |       |       |       |                          |       |            |       |               |       |             |       |
| Emerald Ridge                               |       | Bellevue, WA   |       | 180        |       | 144,000                       |       | 1987            |       | 1994               |       | 95               | %          |
| Foothill Commons                            |       | Bellevue, WA   |       | 360        |       | 288,300                       |       | 1978            |       | 1990               |       | 95               | %          |
| Palisades, The                              |       | Bellevue, WA   |       | 192        |       | 159,700                       |       | 1977            |       | 1990               |       | 97               | %          |
| Sammamish View                              |       | Bellevue, WA   |       | 153        |       | 133,500                       |       | 1986            |       | 1994               |       | 98               | %          |
| Woodland Commons                            |       | Bellevue, WA   |       | 236        |       | 172,300                       |       | 1978            |       | 1990               |       | 95               | %          |
| Canyon Pointe                               |       | Bothell, WA    |       | 250        |       | 210,400                       |       | 1990            |       | 2003               |       | 94               | %          |
| Inglenook Court                             |       | Bothell, WA    |       | 224        |       | 183,600                       |       | 1985            |       | 1994               |       | 95               | %          |
| Salmon Run at  Perry Creek                  |       | Bothell, WA    |       | 132        |       | 117,100                       |       | 2000            |       | 2000               |       | 94               | %          |
| Stonehedge  Village                         |       | Bothell, WA    |       | 196        |       | 214,800                       |       | 1986            |       | 1997               |       | 95               | %          |
| Park Hill at  Issaquah (33)                 |       | Issaquah, WA   |       | 245        |       | 277,700                       |       | 1999            |       | 1999               |       | 94               | %          |
| Peregrine Point                             |       | Issaquah, WA   |       | 67         |       | 85,900                        |       | 2003            |       | 2003               |       | 96               | %          |
| Wandering Creek                             |       | Kent, WA       |       | 156        |       | 124,300                       |       | 1986            |       | 1995               |       | 96               | %          |
| Bridle Trails                               |       | Kirkland, WA   |       | 92         |       | 73,400                        |       | 1986            |       | 1997               |       | 96               | %          |
| Evergreen  Heights                          |       | Kirkland, WA   |       | 200        |       | 188,300                       |       | 1990            |       | 1997               |       | 95               | %          |
| Laurels at Mill  Creek                      |       | Mill Creek, WA |       | 164        |       | 134,300                       |       | 1981            |       | 1996               |       | 97               | %          |
| Anchor Village  (7)                         |       | Mukilteo, WA   |       | 301        |       | 245,900                       |       | 1981            |       | 1997               |       | 95               | %          |
| Castle Creek                                |       | Newcastle, WA  |       | 216        |       | 191,900                       |       | 1997            |       | 1997               |       | 95               | %          |
| Brighton Ridge                              |       | Renton, WA     |       | 264        |       | 201,300                       |       | 1986            |       | 1996               |       | 94               | %          |
| Forest View                                 |       | Renton, WA     |       | 192        |       | 182,500                       |       | 1998            |       | 2003               |       | 95               | %          |
| Fairwood Pond                               |       | Renton, WA     |       | 194        |       | 189,200                       |       | 1997            |       | 2004               |       | 95               | %          |
| Fountain Court                              |       | Seattle, WA    |       | 320        |       | 207,000                       |       | 2000            |       | 2000               |       | 96               | %          |
| Linden Square                               |       | Seattle, WA    |       | 183        |       | 142,200                       |       | 1994            |       | 2000               |       | 94               | %          |
| Maple Leaf                                  |       | Seattle, WA    |       | 48         |       | 35,500                        |       | 1986            |       | 1997               |       | 97               | %          |
| Spring Lake                                 |       | Seattle, WA    |       | 69         |       | 42,300                        |       | 1986            |       | 1997               |       | 97               | %          |
| Wharfside Pointe                            |       | Seattle, WA    |       | 142        |       | 119,200                       |       | 1990            |       | 1994               |       | 97               | %          |
| **Portland,  Oregon Metropolitan Area**     | ** ** | ** **     | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **         | ** ** | ** **       | ** ** |
| Jackson School  Village                     |       | Hillsboro, OR  |       | 200        |       | 196,800                       |       | 1996            |       | 1996               |       | 96               | %          |
| Landmark                                    |       | Hillsboro, OR  |       | 285        |       | 282,900                       |       | 1990            |       | 1996               |       | 96               | %          |
| Meadows at Cascade  Park                    |       | Vancouver, WA  |       | 198        |       | 199,300                       |       | 1989            |       | 1997               |       | 96               | %          |
| Village at  Cascade Park                    |       | Vancouver, WA  |       | 192        |       | 178,100                       |       | 1989            |       | 1997               |       | 96               | %          |
| ** **                                  | ** ** | ** **     | ** ** | **5,651**  | ** ** | **4,921,700**                 | ** ** | ** **      | ** ** | ** **         | ** ** | **96**           | **%**      |
| ** **                                  | ** ** | ** **     | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **         | ** ** | ** **       | ** ** |
| **Other  areas**                            | ** ** | ** **     | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **         | ** ** | ** **       | ** ** |
| St. Cloud                                   |       | Houston, TX    |       | 302        |       | 306,800                       |       | 1968            |       | 2002               |       | 86               | %          |
| ** **                                  | ** ** | ** **     | ** ** | **302**    | ** ** | **306,800**                   | ** ** | ** **      | ** ** | ** **         | ** ** | **86**           | **%**      |
| **Total/Weighted  Average**                 | ** ** | ** **     | ** ** | **25,518** | ** ** | **21,287,100**                | ** ** | ** **      | ** ** | ** **         | ** ** | **96**           | **%**      |
|                                             |            |                |            |            |            |                               |            |                 |            |                    |            |                  |            |  |

 

29

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| **Other  real estate assets(1)**            | ** ** | **Location**       | ** ** | **Tenants**    | ** ** | **Rentable  Square  Footage** | ** ** | **Year  Built** | ** ** | **Year  Acquired** | ** ** | **Occupancy(2)** | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------------|------------|-------------------------------|------------|-----------------|------------|--------------------|------------|------------------|------------|
| **Office  Buildings**                       |       |               |       |           |       |                          |       |            |       |               |       |             |       |
| 925 East Meadow  Drive                      |       | Palo Alto, CA      |       | 1              |       | 17,400                        |       | 1988            |       | 1997               |       | 100              | %(34)      |
| 17461 Derian  Ave(35)                       |       | Irvine, CA         |       | 3              |       | 110,000                       |       | 1983            |       | 2000               |       | 66               | %(36)      |
| 2399 Camino Del  Rio South(37)              |       | San Diego, CA      |       | 2              |       | 5,200                         |       | 1978            |       | 2002               |       | 100              | %          |
| 3205 Moore  Street(37)                      |       | San Diego, CA      |       | 3              |       | 2,000                         |       | 1957            |       | 2002               |       | 100              | %          |
| 22110-22120  Clarendon Street               |       | Woodland Hills, CA |       | 8              |       | 38,940                        |       | 1982            |       | 2001               |       | 97               | %(38)      |
| **Total  Office Buildings**                 | ** ** | ** **         | ** ** | **17**         | ** ** | **173,540**                   | ** ** | ** **      | ** ** | ** **         | ** ** | **78**           | **%**      |
|                                        |       |               |       |           |       |                          |       |            |       |               |       |             |       |
| **Recreational  Vehicle Parks**             |       |               |       |           |       |                          |       |            |       |               |       |             |       |
| Circle RV.                                  |       | El Cajon, CA       |       | 179 spaces     |       |                          |       | 1977            |       | 2002               |       |             | (39)       |
| Vacationer                                  |       | El Cajon, CA       |       | 159 spaces     |       |                          |       | 1973            |       | 2002               |       |             | (39)       |
| Diamond Valley                              |       | San Jaciento, CA   |       | 224 spaces     |       |                          |       | 1974            |       | 2002               |       |             | (39)       |
| Riviera RV(37).                             |       | Las Vegas, NV      |       | 136 spaces     |       |                          |       | 1969            |       | 2002               |       |             | (39)       |
| **Total  Recreational Vehicle Parks**       | ** ** | ** **         | ** ** | **698 spaces** | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **         | ** ** | ** **       | ** ** |
|                                        |       |               |       |           |       |                          |       |            |       |               |       |             |       |
| **Manufactured  Housing Communities**       |       |               |       |           |       |                          |       |            |       |               |       |             |       |
| Green Valley.                               |       | Vista, CA          |       | 157 sites      |       |                          |       | 1973            |       | 2002               |       |             | (39)       |
| Riviera(37).                                |       | Las Vegas, NV      |       | 450 sites      |       |                          |       | 1969            |       | 2002               |       |             | (39)       |
| **Total  Manufactured Housing Communities** | ** ** | ** **         | ** ** | **607 sites**  | ** ** | ** **                    | ** ** | ** **      | ** ** | ** **         | ** ** | ** **       | ** ** |

 

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(1)                Unlessotherwise specified, the Operating Partnership has a 100% ownership interest ineach Property.

(2)                Formultifamily residential properties, occupancy rates are based on financialoccupancy for the year ended December 31, 2004; for the office buildings,recreational vehicle parks, manufactured housing communities or propertieswhich have not yet stabilized or have insufficient operating history, occupancyrates are based on physical occupancy as of December 31, 2004. For anexplanation of how financial occupancy and physical occupancy are calculated,see “Properties-Occupancy Rates” in this Item 2.

(3)                TheOperating Partnership has a 30% special limited partnership interest in theentity, that owns this multifamily property. This investment was made underarrangements whereby EMC became the general partner and the existing partnerswere granted the right to require the applicable partnership to redeem theirinterest for cash. Subject to certain conditions, the Operating Partnershipmay, however, elect to deliver an equivalent number of shares of the Company’sCommon Stock in satisfaction of the applicable partnership’s cash redemptionobligation.

(4)                Theproperty is subject to a ground lease, which, unless extended, will expire in2082.

(5)                TheOperating Partnership owns the land and has leased the improvements to anunrelated third party. The leasehold interest entitles the OperatingPartnership to receive a monthly payment for the 34-year term of the landlease. The Company may be required to sell its interest in the property anytimefollowing the seventh anniversary of the leasehold date which was created in2002.

(6)                This property isowned by Fund II. The Operating Partnership has a 28.2% interest in Fund II andis accounted for using the equity method of accounting.

(7)                The OperatingPartnership holds a 1% special limited partner interest in the partnershipswhich own these multifamily properties. These investments were made underarrangements whereby EMC became the 1% sole general partner and the otherlimited partners were granted the right to require the applicable partnershipto redeem their interest for cash. Subject to certain conditions, the OperatingPartnership may, however, elect to deliver an equivalent number of shares ofthe Company’s Common Stock in satisfaction of the applicable partnership’s cashredemption obligation.

(8)                In 2002 the OperatingPartnership purchased an additional 21 units adjacent to this property for $3million. This property was built in 1991.

(9)                The OperatingPartnership completed an approximate $1.6 million redevelopment on thisproperty in 2000.

(10)          The OperatingPartnership completed an approximate $2.3 million redevelopment on thisproperty in 2000.

(11)          The OperatingPartnership is in the process of performing a $6.0 million redevelopment onthis property.

(12)          This property is subjectto a ground lease, which, unless extended will expire in 2067.

 

30

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(13)          The OperatingPartnership is in the process of performing a $4.9 million redevelopment onthis property.

(14)          The OperatingPartnership completed an $11.0 million redevelopment on this property in 2001.

(15)          The OperatingPartnership is in the process of performing a $3.6 million redevelopment onthis property.

(16)          The OperatingPartnership has an approximate 49.9% direct ownership interest in thisproperty. Fund I has an approximate 49.9% direct ownership in this property.The Operating Partnership has a 21.4% interest in Fund I and is accounted forusing the equity method of accounting. The Operating Partnership is in theprocess of performing a $13.3 million redevelopment on this property, and theOperating Partnership has entered into an agreement to sell this property.

(17)          This property is subjectto a ground lease, which, unless extended, will expire in 2027.

(18)          The OperatingPartnership had a 20.0% ownership interest this property. In 2004, theOperating Partnership acquired the remaining 80%.

(19)          The OperatingPartnership completed an approximate $3.2 million redevelopment on thisproperty in 2002.

(20)          The OperatingPartnership completed a $1.9 million redevelopment on this property in 2000.

(21)          The OperatingPartnership completed a $1.9 million redevelopment on this property in 2001.

(22)          The OperatingPartnership completed a $1.7 million redevelopment on this property in 2001.

(23)          The Operating Partnershiphas an 85.0% controlling limited partnership interest in this property.

(24)          The OperatingPartnership and EMC have a 74.0% and 1% member interests, respectively, in thisproperty.

(25)          The OperatingPartnership completed an approximate $3.5 million redevelopment on thisproperty in 2002.

(26)          The OperatingPartnership is in the process of performing a $5.5 million redevelopment onthis property.

(27)          The partnership thatowned this property completed a $2.7 million redevelopment on this property in2001.

(28)          The OperatingPartnership has a preferred limited partnership interest in this property.

(29)          The OperatingPartnership completed an approximately $4.5 million redevelopment on thisproperty in 1998.

(30)          The OperatingPartnership completed construction of 114 units of the property’s 462 totalunits in 2000.

(31)          The OperatingPartnership completed an approximate $3.4 million redevelopment on thisproperty in 2002.

(32)          A portion of thisProperty on which 84 units are presently located is subject to a ground lease,which, unless extended, will expire in 2028.

(33)          The OperatingPartnership had an approximate 45% preferred limited partnership interest inthis property. In 2004 the Operating Partnership acquired the remaining 55%partnership interest.

(34)          The OperatingPartnership occupies 100% of this property.

(35)          The OperatingPartnership has a mortgage receivable on this property in which the owner wasin default as of December 31, 2004 and consolidates this property pursuant toFIN 46R.

(36)          The OperatingPartnership occupies 4.6% of this property.

(37)          The property was sold inJanuary 2005.

(38)          The OperatingPartnership occupies 29% of this property.

(39)          The OperatingPartnership leased this property in 2003 to an unrelated third party for approximately5 years with an option to purchase the property in approximately 4 years.

 

**Item 3. Legal Proceedings**

 

In April 2004, a lawsuit entitled Chace Nelson andDouglas Korte, et al. v. Essex Property Trust was filed against the Company inthe California Superior Court in the County of Alameda.  In this lawsuit, two former OperatingPartnership maintenance employees seek unpaid wages, associated penalties andattorneys’ fees on behalf of a putative class of the Operating Partnership’scurrent and former maintenance employees who were required to wear a pagerwhile they were on call during evening and weekend hours.  The Operating Partnership intends tovigorously defend against the claims alleged in this litigation. However,litigation is subject to inherent uncertainties, and no assurance can be giventhat the Operating Partnership will prevail in this lawsuit.

 

The Operating Partnership is subject to various otherlawsuits arising in the ordinary course of its business operations.  Accordingly, such lawsuits, as well as theclass action lawsuit described above, could result in substantial costs anddiversion of resources and could have a material adverse effect on theOperating Partnership’s financial condition, results of operation or cashflows.

 

31

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**Item 4. Submission of Matters toa Vote of Security Holders**

 

During the fourth quarter of 2004, no matters weresubmitted to a vote of security holders.

 

**Part II**

 

**Item 5. Market for Registrant’sCommon Equity and Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

***Unregistered Sales of Securities***

 

During the fourth quarter of 2004, there were no salesof unregistered securities.

 

32

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** **

**Item 6. Selected Financial Data**

 

The following tables setforth summary financial and operating information for the Operating Partnershipfrom January 1, 2000 through December 31, 2004.

 
| ** **                                                            | ** ** | **Years Ended December 31,**                                 | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                                     | ** ** | **2003(1)** | ** ** | **2002(1)** | ** ** | **2001(1)** | ** ** | **2000(1)** | ** ** |
| ** **                                                            | ** ** | **(Dollars in thousands, except unit and per unit amounts)** | ** ** |
| **OPERATING  DATA:**                                                  | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **PROPERTY  REVENUES**                                                | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental                                                                |       | $                                                            | 273,878    |   | $ | 243,412 |   | $ | 204,570 |   | $ | 175,894 |   | $ | 161,097 |   |
| Other property  income                                                |       | 9,605                                                        |       | 8,164 |   | 6,513 |   | 5,493 |   | 4,790 |   |
| Total property  revenues                                              |       | 283,483                                                      |       | 251,576 |   | 211,083 |   | 181,387 |   | 165,887 |   |
| **EXPENSES**                                                          | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property  operating expenses, excluding depreciation and amortization |       | 96,856                                                       |       | 81,781 |   | 64,679 |   | 52,277 |   | 46,091 |   |
| Depreciation and  amortization                                        |       | 72,616                                                       |       | 57,190 |   | 43,909 |   | 35,915 |   | 30,442 |   |
| Amortization of  deferred financing costs                             |       | 1,587                                                        |       | 1,197 |   | 814 |   | 657 |   | 639 |   |
| General and  administrative                                           |       | 18,341                                                       |       | 9,637 |   | 8,636 |   | 7,498 |   | 6,062 |   |
| Interest(2)                                                           |       | 63,023                                                       |       | 52,410 |   | 43,186 |   | 38,746 |   | 30,163 |   |
| Total expenses                                                        |       | 252,423                                                      |       | 202,215 |   | 161,224 |   | 135,093 |   | 113,397 |   |
| Gain on the  sales of real estate                                     |       | 7,909                                                        |       | — |   | 145 |   | 3,788 |   | 4,022 |   |
| Interest and  other income                                            |       | 8,027                                                        |       | 6,715 |   | 12,505 |   | 8,723 |   | 9,143 |   |
| Equity income in  co-investments                                      |       | 59,522                                                       |       | 3,296 |   | 5,402 |   | 13,429 |   | 1,826 |   |
| Minority  interests                                                   |       | (3,498                                                       | )          | (4,134 | ) | (3,664 | ) | (196 | ) | (372 | ) |
| Income from  continuing operations                                    |       | 103,020                                                      |       | 55,238 |   | 64,247 |   | 72,038 |   | 67,109 |   |
| Discontinued  operations:                                             |       |                                                         |       |   |   |   |   |   |   |   |   |
| Operating income  from real estate sold                               |       | 1,614                                                        |       | 1,728 |   | 332 |   | 710 |   | 622 |   |
| Gain on sale of  real estate                                          |       | —                                                       |       | — |   | 9,051 |   | — |   | — |   |
| Impairment loss                                                       |       | (826                                                         | )          | — |   | — |   | — |   | — |   |
| Net income                                                            |       | 103,808                                                      |       | 56,966 |   | 73,630 |   | 72,748 |   | 67,731 |   |
| Write off of  Series C preferred units offering costs                 |       | —                                                       |       | (625 | ) | — |   | — |   | — |   |
| Write off of  Series E preferred unit offering costs                  |       | (1,575                                                       | )          | — |   | — |   | — |   | — |   |
| Amortization of  discount on general partner preferred equity         |       | —                                                       |       | (336 | ) | — |   | — |   | — |   |
| Dividend on  preferred units - general partner                        |       | (1,952                                                       | )          | (195 | ) | — |   | — |   | (245 | ) |
| Dividend on preferred  units - limited partner                        |       | (14,175                                                      | )          | (17,996 | ) | (18,319 | ) | (18,319 | ) | (18,319 | ) |
| Net income  available to common units                                 |       | $                                                            | 86,106     |   | $ | 37,814 |   | $ | 55,311 |   | $ | 54,429 |   | $ | 49,167 |   |
|                                                                  |       |                                                         |       |   |   |   |   |   |   |   |   |
| Per common unit:                                                      |       |                                                         |       |   |   |   |   |   |   |   |   |
| Basic:                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |
| Net income from  continuing operations available to common units      |       | $                                                            | 3.38       |   | $ | 1.52 |   | $ | 2.21 |   | $ | 2.60 |   | $ | 2.40 |   |
| Net income  available to common units                                 |       | $                                                            | 3.41       |   | $ | 1.59 |   | $ | 2.66 |   | $ | 2.63 |   | $ | 2.42 |   |
| Weighted average  common units outstanding-  (in thousands)           |       | 25,255                                                       |       | 23,737 |   | 20,812 |   | 20,688 |   | 20,308 |   |
| Diluted:                                                              |       |                                                         |       |   |   |   |   |   |   |   |   |
| Net income from  continuing operations available to common units      |       | $                                                            | 3.35       |   | $ | 1.51 |   | $ | 2.19 |   | $ | 2.56 |   | $ | 2.35 |   |
| Net income  available to common units                                 |       | $                                                            | 3.38       |   | $ | 1.58 |   | $ | 2.64 |   | $ | 2.59 |   | $ | 2.37 |   |
| Weighted average  common units outstanding-  (in thousands)           |       | 25,490                                                       |       | 23,948 |   | 21,008 |   | 21,005 |   | 20,731 |   |
| Cash  distributions per common unit                                   |       | $                                                            | 3.16       |   | $ | 3.12 |   | $ | 3.08 |   | $ | 2.80 |   | $ | 2.38 |   |

 

33

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| ** **                                                   | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2004**               | ** ** | **2003(1)** | ** ** | **2002(1)** | ** ** | **2001(1)** | ** ** | **2000(1)** | ** ** |
| **BALANCE  SHEET DATA:**                                     | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment in  real estate (before accumulated depreciation) |       | $                      | 2,371,194  |   | $ | 1,984,122 |   | $ | 1,762,221 |   | $ | 1,175,200 |   | $ | 1,156,408 |   |
| Net investment  in real estate                               |       | 2,035,952              |       | 1,718,359 |   | 1,554,209 |   | 1,018,931 |   | 1,036,909 |   |
| Real estate  under development                               |       | 38,320                 |       | 55,183 |   | 143,818 |   | 93,256 |   | 38,231 |   |
| Total assets                                                 |       | 2,217,217              |       | 1,916,811 |   | 1,806,299 |   | 1,329,458 |   | 1,281,849 |   |
| Total property  indebtedness                                 |       | 1,316,984              |       | 989,045 |   | 949,889 |   | 638,660 |   | 595,535 |   |
| Partners’  capital                                      |       | 777,403                |       | 811,808 |   | 741,870 |   | 631,727 |   | 629,441 |   |
|                                                              |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                 | ** ** | **As of and for the years ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                       | ** ** | **2003(1)** | ** ** | **2002(1)** | ** ** | **2001(1)** | ** ** | **2000(1)** | ** ** |
| **OTHER  DATA:**                                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest  coverage ratio(3)                                                |       | 3.1                                            | X          | 3.2 | X | 3.6 | X | 3.7 | X | 4.1 | X |
| Gross operating  margin(4)                                                 |       | 66                                             | %          | 67 | % | 69 | % | 71 | % | 72 | % |
| Average same  property monthly rental rate per apartment unit(5)(6)        |       | $                                              | 1,055      |   | $ | 1,088 |   | $ | 1,108 |   | $ | 1,153 |   | $ | 1,039 |   |
| Average same  property monthly operating expenses per apartment unit(5)(7) |       | $                                              | 331        |   | $ | 325 |   | $ | 310 |   | $ | 293 |   | $ | 271 |   |
| Total  multifamily units (at end of period)                                |       | 25,518                                         |       | 26,012 |   | 23,699 |   | 20,762 |   | 18,673 |   |
| Same property  occupancy rate(8)                                           |       | 96                                             | %          | 96 | % | 95 | % | 95 | % | 97 | % |
| Total Properties  (at end of period)                                       |       | 131                                            |       | 132 |   | 123 |   | 94 |   | 87 |   |

 
| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2004**                     | ** ** | **2003(1)** | ** ** | **2002(1)** | ** ** | **2001(1)** | ** ** | **2000(1)** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**   | ** ** |
| **RECONCILIATION  OF NET INCOME TO**                |       |                         |       |   |   |   |   |   |   |   |   |
| **ADJUSTED  EBITDA (3):**                           |       |                         |       |   |   |   |   |   |   |   |   |
| Net income                                          |       | $                            | 103,808    |   | $ | 56,966 |   | $ | 73,630 |   | $ | 72,748 |   | $ | 67,731 |   |
| Interest expense(2)                                 |       | 63,023                       |       | 52,410 |   | 43,186 |   | 38,746 |   | 30,163 |   |
| Depreciation and  amortization                      |       | 72,616                       |       | 57,190 |   | 43,909 |   | 35,915 |   | 30,442 |   |
| Amortization of  deferred financing costs           |       | 1,587                        |       | 1,197 |   | 814 |   | 657 |   | 639 |   |
| Gain on the  sales of real estate                   |       | (7,909                       | )          | — |   | (145 | ) | (3,788 | ) | (4,022 | ) |
| Gain on the  sales of co-investment activities, net |       | (39,242                      | )          | — |   | (705 | ) | — |   | — |   |
| Minority  interests                                 |       | 3,498                        |       | 4,134 |   | 3,664 |   | 196 |   | 372 |   |
| Income from  discontinued operations                |       | (788                         | )          | (1,728 | ) | (9,383 | ) | (710 | ) | (622 | ) |
| Adjusted EBITDA(3)                                  |       | 196,593                      |       | 170,169 |   | 154,970 |   | 143,764 |   | 124,703 |   |
| Interest expense(2)                                 |       | 63,023                       |       | 52,410 |   | 43,186 |   | 38,746 |   | 30,163 |   |
| Interest  coverage ratio(3)                         |       | 3.1                          | X          | 3.2 | X | 3.6 | X | 3.7 | X | 4.1 | X |
|                                                     |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          The above financial andoperating information from January 1, 2002 through December 31, 2003 reflectthe retroactive adoption of FIN 46R and SFAS 123. The above financial andoperating information from January 1, 2000 through December 31, 2001 have notbeen restated to reflect the retroactive adoption of FIN 46R and SFAS 123 andhave not been reclassified to present properties sold as discontinuedoperations. Because the 2000 and 2001 balances have not been restated, theresults for those periods may not be comparable to the results for the laterperiods set forth above.

34

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(2)          Extraordinary item –loss on early extinguishment of debt of $119 for the year ended December 31,2000 has been reclassified as interest expense in accordance with the adoptionof SFAS No. 145 on January 1, 2003.

 

(3)          Interest coverage ratiorepresents earnings before minority interests, gain on sales of real estate,interest expense, taxes, depreciation and amortization (“adjusted EBITDA”)divided by interest expense.  TheOperating Partnership believes that the interest coverage ratio is useful toreaders because it is frequently used by investors, lenders, security analystsand other interested parties in the evaluation of companies in ourindustry.  In addition, the OperatingPartnership believes that this ratio is useful in evaluating our performancecompared to that of other companies in our industry because the calculation ofthe adjusted EBITDA component of the interest coverage ratio generallyeliminates the effects of financing costs, income taxes, and depreciation andamortization, which items may vary for different companies for reasonsunrelated to operating performance.

 

The adjusted EBITDA component of the interest coverageratio, however, is not a recognized measurement under U.S. generally acceptedaccounting principles, or GAAP.  Whenanalyzing our operating performance, readers should use the interest coverageratio and its adjusted EBITDA component in addition to, and not as analternative for, net income, as determined in accordance with GAAP.  Because not all companies use identicalcalculations, our presentation of the interest coverage ratio and its adjustedEBITDA component may not be comparable to similarly titled measures of othercompanies.  Furthermore, the interestcoverage ratio is not intended to be a measure of free cash flow for ourmanagement’s discretionary use, as it does not consider certain cashrequirements such as income tax payments, debt service requirements, capitalexpenditures and other fixed charges. The amounts shown for the interest coverage ratio and adjusted EBITDAmay also differ from the amounts calculated under similarly titled definitionsin our debt instruments, which can be further adjusted to reflect certain othercash and non-cash charges and are used to determine compliance with financialcovenants and our ability to engage in certain activities such as incurringadditional debt and making certain restricted payments.

 

(4)          Gross operating marginrepresents rental revenues and other property income less property operatingexpenses, exclusive of depreciation and amortization, divided by rentalrevenues and other property income.

 

5)              Same propertyapartment units are those units in properties that the Operating Partnershiphas consolidated for the entire two years ended as of the end of the period setforth. The number of same property apartment units in such properties may varyat each year-end. Percentage changes in averages per unit do not correspond tototal same property revenues and expense percent changes which are discussed inItem 7—Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.

 

(6)          Average same propertymonthly rental rate per apartment unit represents total scheduled rent for thesame property apartment units for the period (actual rental rates on occupiedapartment units plus market rental rates on vacant apartment units) divided bythe number of such apartment units and further divided by the number of monthsin the period.

 

(7)          Average same propertymonthly expenses per apartment unit represents total monthly operatingexpenses, exclusive of depreciation and amortization, for the same propertyapartment units for the period divided by the total number of such apartmentunits and further divided by the number of months in the period.

 

(8)          Occupancy rates arebased on financial occupancy. For an explanation of how financial occupancy iscalculated, see “Properties-Occupancy Rates” in Item 2 of Part I of this Form10-K.

 

35

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**Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

The following discussion is based on the consolidatedfinancial statements of the Operating Partnership as of and for the years endedDecember 31, 2004, 2003 and 2002. This information should be read inconjunction with the accompanying consolidated financial statements and notesthereto. These consolidated financial statements include all adjustments whichare, in the opinion of management, necessary to reflect a fair statement of theresults and all such adjustments are of a normal recurring nature.

 

Effective January 1, 2004, the Operating Partnershipconsolidated various entities pursuant to its adoption of FIN 46R, which isdiscussed further below.  The Company isthe sole general partner of the Operating Partnership and, as of December 31,2004, owned an approximate 90.3% general partnership interest in the OperatingPartnership. The Company has elected to be treated as a real estate investmenttrust (“REIT”) for federal income tax purposes.

 

# ***ForwardLooking Statements***

# *** ***

Certain statements in this “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” and elsewherein this Annual Report which are not historical facts may be considered forwardlooking statements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities and Exchange Act of 1934,as amended, including statements regarding the Operating Partnership’sexpectations, hopes, intentions, beliefs and strategies regarding the future.Forward looking statements include statements under the caption “BusinessObjectives” in this Part I, statements regarding the Operating Partnership’sexpectation as to performance of future acquisitions properties, expectationsof the future multifamily fundamentals and operating results in variousgeographic regions and the Operating Partnership’s investment focus in suchregions, expectation as to the timing of completion of current developmentprojects and the stabilization dates of such projects, expectation as to thetotal projected costs and rental rates of current development projects, beliefsas to the adequacy of future cash flows to meet operating requirements and toprovide for dividend payments in accordance with REIT requirements,expectations to meet all REIT requirements, expectations as to the amount ofcapital expenditures, expectations as to the amount of non-revenue generatingcapital expenditures, future acquisitions and developments, the future sales ofthe remaining properties of the Essex Apartment Value Fund, L.P., theanticipated performance of the Essex Apartment Value Fund II, L.P., theanticipated performance of existing properties, and statements regarding theOperating Partnership’s financing activities and the use of proceeds from suchactivities.

 

Such forward-looking statements involve known andunknown risks, uncertainties and other factors including, but not limited to,that the Operating Partnership will fail to achieve its business objectives,that estimates of future income from an acquired property may prove to beinaccurate, acquisition and development projects will fail to meetexpectations, that the actual completion of development projects will besubject to delays, that the stabilization dates of such projects will bedelayed, that the total projected costs of current development projects willexceed expectations, that such development projects will not be completed, thatfuture cash flows will be inadequate to meet operating requirements and/or willbe insufficient to provide for dividend payments in accordance with REITrequirements, the Operating Partnership will fail to meet all REITrequirements, that the actual non-revenue generating capital expenditures willexceed the Operating Partnership’s current expectations, that there will bedelays in the future sales of the remaining properties of the Essex ApartmentValue Fund, L.P., that Essex Apartment Value Fund II, L.P. will fail to performas anticipated, that the Operating Partnership’s partners in the Funds fail tofund capital commitments as contractually required, that there may be adownturn in the markets in which the Operating Partnership’s properties arelocated, and that the terms of any refinancing may not be as favorable as theterms of existing indebtedness, and the Operating Partnership will not be ableto complete property acquisitions, as anticipated, for which the proceeds fromrecent equity issuances were intended to be used, as well as those risks,special considerations, and other factors discussed under the caption “RiskFactors” in Item 1 of this Report on Form 10-K for the year ended December 31,2004, and those other risk factors and special considerations set forth in theOperating Partnership’s other filings with the Securities and ExchangeCommission (the “SEC”) which may cause the actual results, performance orachievements of the Operating Partnership to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements. All forward-looking statements and reasons whyresults may differ included in this Form 10-K are made as of the date hereof,and we assume no obligation to update any such forward-looking statement orreason why actual results may differ.

 

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# ***Overview***

# *** ***

The Operating Partnership believes that its operating results havelargely been a result of its business strategy of investing in submarkets thatprovide the greatest potential for rental growth at the lowest relativerisk.  Essex believes that its marketresearch process, which includes an analysis of both metropolitan statisticalareas (MSAs) and submarkets, provides it with a distinct competitiveadvantage.  Essex researches markets byreviewing data from private and government sources as well as informationdeveloped or verified by its field personnel. Essex then utilizes its proprietary research model to project marketrent trends, allowing the Operating Partnership to allocate capital to themarkets with the best risk-adjusted return potential.

 

Essex’s research process begins with a macro-economic analysis ofvarious MSAs, followed by an evaluation of the submarkets within that MSA.  The objective of the economic researchdepartment is to estimate the amount of new demand for housing, comparing it tothe number of single family and multifamily homes being constructed within asubmarket.  Historically, markets withdemand for multifamily housing that is greater than supply generate increasingoccupancy levels and growth in rents.

 

Key components of Essex’s analysis are as follows:

 

Job Growth:  The OperatingPartnership believes that quality job growth will lead to demand formultifamily and for-sale housing.  Basedon a variety of considerations, the Operating Partnership estimates how thetotal demand for housing will be allocated between rental and for-sale housing.

 

Housing Supply:  Limited housingsupply, both rental and for-sale, is a very important factor in maintaininghigh occupancy levels, particularly in periods of recession or slow economicgrowth.  The Operating Partnership seeksto identify markets in which there is a low level of housing construction,measured as a percentage of existing housing stock.

 

Cost of for-sale housing:  TheOperating Partnership prefers areas with relatively expensive for-sale housing,which is usually caused by an insufficient amount of single-family housing construction.  The Operating Partnership seeks to identifyareas where the cost of rent is low relative to both median income levels andthe cost of homeownership.

 

Demographic trends:  TheOperating Partnership evaluates areas with long-term positive immigration anddemographic trends, and areas that provide an attractive quality of life.

 

Based on its evaluation of multifamily housing supply and demandfactors, the Operating Partnership forecasts the occupancy and rent trends forits targeted submarkets, and actively seeks to expand its multifamily portfolioin the submarkets with the greatest risk-adjusted return.

 

By region, the Operating Partnership’s operating results and investmentstrategy are as follows:

 

Southern California Region:  Atthe time of the Company’s 1994 initial public offering (IPO), the Company hadownership interests in this region representing 17% of its multifamilyunits.  Following the IPO, the OperatingPartnership, using its research process, determined that various markets in theSouthern California region were attractive for multifamily property investmentand, accordingly, the Operating Partnership increased its ownership in suchmarkets. As of December 31, 2004, we had ownership interests in this regionrepresenting 54% of our multifamily units. During the year ended December 31, 2004, the region continued to performwell, with same property revenues increasing by 3.6% as compared to 2003.  The Operating Partnership expects this regionto generate positive rent growth of approximately 3.3% in 2005.

 

Northern California Region:  Asof December 31, 2004, the Operating Partnership had ownership interests in thisregion representing 23% of its multifamily units.  In 2004, same property revenues decreased4.0% as compared to 2003.  The OperatingPartnership expects market rents to increase by approximately 1.0% in2005.  As a result, the OperatingPartnership will begin to increase its investment focus in this region.

 

Pacific Northwest Region: As of December 31, 2004, the Operating Partnershiphad ownership interests in this region representing 22% of its multifamilyunits.  This region created jobs in 2004,and same property revenues increased by 1.4% as compared to 2003.  The Operating Partnership expects continuedjob growth, lending to rental revenue growth of approximately 1.8% in 2005.

 

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***Accounting Changes***

 

*VariableInterest Entities*

 

In December, 2003 the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 46 Revised (FIN 46R), “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51.” FIN 46Restablished new measurement techniques to evaluate whether entities should beconsolidated in accordance with Accounting Research Bulletin (ARB) No. 51, “ConsolidatedFinancial Statements.”  FIN 46R definedvariable interest entities (VIEs), in which equity investors lack an essentialcharacteristic of a controlling financial interest or do not have sufficientequity investment at risk to permit the entity to finance its activitieswithout additional subordinated financial support from other parties.  As of January 1, 2004, the OperatingPartnership adopted the provisions of FIN 46R using the retroactive restatementapproach, and amounts have been restated for the years ended December 31, 2003and 2002 to reflect the adoption of FIN 46R.

 

Based on our analysis of FIN 46R, the OperatingPartnership consolidated Essex Management Corporation (EMC), Essex Fidelity ICorporation (EFC), 17 Down REIT limited partnerships (comprising tenproperties), an office building that is subject to loans made by the OperatingPartnership, and the multifamily improvements owned by a third party in whichthe Operating Partnership owns the land underlying these improvements and fromwhich the Operating Partnership receives fees, including land lease,subordination and property management fees. The Operating Partnership consolidated these entities because it isdeemed the primary beneficiary under FIN 46R. The Operating Partnership’s total assets and liabilities related tothese VIEs, net of intercompany eliminations, were approximately $238.1 millionand $155.1 million, respectively, at December 31, 2004 and $246.1 million and$156.5 million, respectively, at December 31, 2003.

 

The Down REIT entities that collectively own tenmultifamily properties (1,831 units) were investments made under arrangementswhereby EMC became the general partner, the Operating Partnership became aspecial limited partner, and the other limited partners were granted rights ofredemption for their interests. Such limited partners can request to beredeemed and the Operating Partnership can elect to redeem their rights forcash or by issuing shares of its common stock on a one share per unit basis.Conversion values will be based on the market value of the Company’s commonstock at the time of redemption multiplied by the number of units stipulatedunder the above arrangements. The other limited partners receive distributionsbased on the Company’s current dividend rate times the number of units held. AtDecember 31, 2004, the maximum number of shares that could be issued to meetredemption of these Down REIT entities is 1,345,003.  As of December 31, 2004 and December 31,2003, the carrying value of the other limited partners’ interests is presentedat their historical cost and is classified within minority interests in theaccompanying consolidated balance sheets.

 

Interest holders in VIEs consolidated by the OperatingPartnership are allocated a priority of net income equal to the cash paymentsmade to those interest holders for services rendered or distributions from cashflow.  The remaining results ofoperations are generally allocated to the Operating Partnership.

 

Properties consolidated in accordance with FIN 46Rwere encumbered by third party, non-recourse loans totaling $151.3 million and$152.7 million as of December 31, 2004 and December 31, 2003, respectively.

 

During 2004, the Operating Partnership entered intotwo new arrangements that are deemed to be VIEs:

 

1) The entity that purchased The Essex at Lake Merrittproperty as discussed in Item 1 – Dispositions, is a VIE. The OperatingPartnership’s participating loan to the entity, while representing a variableinterest, does not result in the Operating Partnership being the primarybeneficiary.

 

2) The joint venture the Operating Partnership enteredinto to develop a 5-story building in Los Angeles, California as discussed inItem 1 – Development, is an entity in which the Operating Partnership is theprimary beneficiary, and the joint venture was consolidated as of December 31,2004.

 

As of December 31, 2004 the Operating Partnership isinvolved with two VIEs in which the Operating Partnership is not deemed to bethe primary beneficiary.  Total assetsand liabilities of these entities as of December 31, 2004 were approximately$116.0 million and $107.0 million, respectively.  The Operating Partnership does not have asignificant exposure to loss resulting from its involvement with theseunconsolidated VIEs. 

 

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*Stock-BasedCompensation*

 

As of January 1, 2004, the Company adopted the fairvalue method of accounting for its stock-based compensation plans using theretroactive restatement method as provided by Statement of Financial AccountingStandards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.”  Under the fair value method, stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is expensed over the vesting period. Stock-based compensation expense under the fair value method for theyears ended December 31, 2004, 2003 and 2002 was $784, $991 and $933,respectively.  The fair value of stockoptions granted for the years ended December 31, 2004, 2003 and 2002 was $8.84,$4.18 and $4.69, respectively, and was estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions used for grants:

 
| ** **                | ** ** | **2004**      | ** ** | **2003**      | ** ** | **2002**      | ** ** |
|---------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Stock price               |       | $62.34-$84.46 |       | $51.01-$61.58 |       | $46.98-$52.04 |       |
| Risk-free  interest rates |       | 3.34-3.94%    |       | 2.58-3.21%    |       | 3.08-4.64%    |       |
| Expected lives            |       | 5 years       |       | 5-6 years     |       | 6 years       |       |
| Volatility                |       | 19.07-19.14%  |       | 17.89-19.18%  |       | 18.92%        |       |
| Dividend yield            |       | 4.26-5.07%    |       | 5.66-6.12%    |       | 6.30%         |       |

 

*Reconciliationto previously reported amounts*

 

The accounting effect of adopting FIN 46R and SFAS 123 on net incomepreviously reported for the years ended December 31, 2003 and 2002 is asfollows (dollars in thousands, except per unit amounts):

 

| ** **                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income  available to comon unitholders previously reported |       | $        | 40,865     |     | $          | 59,568 |   |
| Adjustment for  effect of adopting SFAS 123                    |       | (468     | )          | (222     | )          |
| Adjustment for  effect of adopting FIN 46 Revised              |       | (2,583   | )          | (4,035   | )          |
| Net income  available to common unitholders as reported        |       | $        | 37,814     |     | $          | 55,311 |   |
|                                                           |       |     |       |     |       |
| Per common unit  data:                                         |       |     |       |     |       |
| Basic:                                                         |       |     |       |     |       |
| Per share as  previously reported                              |       | $        | 1.72       |     | $          | 2.86 |   |
| Adjustment for  effect of adopting SFAS 123                    |       | (0.02    | )          | (0.01    | )          |
| Adjustment for  effect of adopting FIN 46 Revised              |       | (0.11    | )          | (0.19    | )          |
| Per basic unit  as reported                                    |       | $        | 1.59       |     | $          | 2.66 |   |
|                                                           |       |     |       |     |       |
| Diluted:                                                       |       |     |       |     |       |
| Per share as  previously reported                              |       | $        | 1.71       |     | $          | 2.84 |   |
| Adjustment for  effect of adopting SFAS 123                    |       | (0.02    | )          | (0.01    | )          |
| Adjustment for  effect of adopting FIN 46 Revised              |       | (0.11    | )          | (0.19    | )          |
| Per diluted  units as reported                                 |       | $        | 1.58       |     | $          | 2.64 |   |

 

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The accounting effect of adopting FIN 46R and SFAS 123 on partners’capital at January 1, 2002 for previously reported amounts is as follows(dollars in thousands):

 
| ** **                                                                                 | ** ** | **General Partner  Common  Equity** | ** ** | **Limited Partner  Common  Equity** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| Statement of  Partners’ Capital:                                                      |       |                                |       |                                |       |      |       |
|                                                                                       |       |                                |       |                                |       |      |       |
| Balance at  January 1,2002 as previously reported                                          |       | $                                   | 381,674    |                                | $          | 45,563    |       | $ | 427,237 |   |
| Adjustments for cumulative  effect on prior years of retroactively applying SFAS 123       |       | 166                                 |       | 674                                 |       | 840       |       |
| Adjustments for  cumulative effect on prior years of retroactively applying FIN 46 Revised |       | (2,228                              | )          | (1,041                              | )          | (3,269    | )          |
|                                                                                       |       |                                |       |                                |       |      |       |
| Balance at  January 1, 2002, as adjusted                                                   |       | $                                   | 379,612    |                                | $          | 45,196    |       | $ | 424,808 |   |

 

*Depreciation*

 

Beginning in 2003, the Operating Partnership implemented an upgrade toits subsidiary ledger for accounting for fixed assets.  The Operating Partnership completed thissystem upgrade in the first quarter of 2004. In conjunction with this system upgrade, the Operating Partnership hasdetermined that cumulative depreciation expense generated by consolidated orequity method rental properties was understated by approximately $2.1 millionthrough December 31, 2003 and this amount was recorded during the quarter endedMarch 31, 2004.  Had the correction beenmade in 2003, depreciation expense would have increased by approximately$640,000, $1.3 million, and $1.0 million in the first, second and thirdquarters of 2003, respectively.  In thefourth quarter 2003, depreciation expense would have decreased by approximately$1.4 million.  The Operating Partnershipdoes not believe that the correction is material to any previously reportedfinancial statements and is not material to any consolidated earnings trends.

 

***Critical Accounting Policies and Estimates***

 

The preparation of consolidated financial statements,in accordance with accounting principles generally accepted in the UnitedStates of America, requires the Operating Partnership to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and related disclosures of contingent assets and liabilities. Wedefine critical accounting policies as those accounting policies that requireour management to exercise their most difficult, subjective and complexjudgments. Our critical accounting policies relate principally to the followingkey areas: (i) consolidation under applicable accounting standards of variousentities; (ii) assessing the carrying values of our real estate properties andinvestments in and advances to joint ventures and affiliates; (iii) and internalcost capitalization. The Operating Partnership bases its estimates onhistorical experience, current market conditions, and on various otherassumptions that are believed to be reasonable under the circumstances. Actualresults may differ from those estimates made by management.

 

The Operating Partnership assesses each entity inwhich it has an investment or contractual relationship to determine if it maybe deemed to be a VIE.  If such an entityis a VIE, then the Operating Partnership analyzes the expected losses andexpected residual returns to determine who is the primary beneficiary.  If the Operating Partnership is the primarybeneficiary, then the entity is consolidated. The analysis required to identify VIEs and primary beneficiaries iscomplex and judgmental, and the analysis must be applied to various types ofentities and legal structures.

 

Rental properties are recorded at cost lessaccumulated depreciation. Depreciation components on rental properties havebeen provided over estimated useful lives ranging from 3 to 30 years using thestraight-line method. Development costs include acquisition, direct andindirect construction costs, interest and real estate taxes incurred during theconstruction and property stabilizations periods. Maintenance and repairexpenses that do not add to the value or prolong the useful life of theproperty are expensed as incurred. Asset replacements and improvements arecapitalized and depreciated over their estimated useful lives.

 

The Operating Partnership assesses the carrying valueof its real estate investments by monitoring 

 

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investment market conditions and performance compared to budget foroperating properties and joint ventures, and by monitoring estimated costs forproperties under development. Local market knowledge and data is used to assesscarrying values of properties and the market value of acquisitionopportunities. Whenever events or changes in circumstances indicate that thecarrying amount of a property held for investment may not be fully recoverable,the carrying amount is evaluated. If the sum of the property’s expected futurecash flows (undiscounted and without interest charges) is less than thecarrying amount of the property, then the Operating Partnership will recognizean impairment loss equal to the excess of the carrying amount over the fairvalue of the property. Adverse changes in market conditions or poor operatingresults of real estate investments could result in impairment charges. When theOperating Partnership determines that a property is held for sale, itdiscontinues the periodic depreciation of that property. The criteria fordetermining when a property is held for sale requires judgment and haspotential financial statement impact as depreciation would cease and animpairment loss could occur upon determination of held for sale status. Assetsheld for sale are reported at the lower of the carrying amount or estimatedfair value less costs to sell. With respect to investments in and advances tojoint ventures and affiliates, the Operating Partnership looks to theunderlying properties to assess performance and the recoverability of carryingamounts for those investments in a manner similar to direct investments in realestate properties. An impairment charge or investment valuation charge isrecorded if the carrying value of the investment exceeds its fair value.

 

The Operating Partnership capitalizes all direct andcertain indirect costs, including interest and real estate taxes, incurredduring development and redevelopment activities. Interest is capitalized onreal estate assets that require a period of time to get them ready for theirintended use. The amount of interest capitalized is based upon the averageamount of accumulated development expenditures during the reporting period.Included in capitalized costs are management’s estimates of the direct andincremental personnel costs and indirect project costs associated with ourdevelopment and redevelopment activities. Indirect project costs consistprimarily of personnel costs associated with construction administration and developmentaccounting, legal fees, and various office costs that clearly relate toprojects under development.

 

The Operating Partnership bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results may vary from thoseestimates and those estimates could be different under different assumptions orconditions.

 

***General Background***

 

The Operating Partnership’s property revenues aregenerated primarily from multifamily property operations, which accounted forgreater than 95% of its property revenues for the years ended December 31,2004, 2003, and 2002. The Operating Partnership’s properties (“the Properties”)are located in Southern California (Los Angeles, Ventura, Orange, San Diego andRiverside counties), Northern California (the San Francisco Bay Area), thePacific Northwest (The Seattle, Washington and Portland, Oregon metropolitanareas), and other areas (Las Vegas, Nevada, and Houston, Texas). The averageoccupancy level of the Operating Partnership’s portfolio has equaled orexceeded 95% for the last five years.

 

Essex Apartment Value Fund, L.P. (“Fund I”), is aninvestment fund organized by the Operating Partnership in 2001 to add valuethrough rental growth and asset appreciation, utilizing the OperatingPartnership’s acquisition, development, redevelopment and asset managementcapabilities. Fund I was considered fully invested in 2003. An affiliate of theOperating Partnership, Essex VFGP, L.P. (“VFGP”), is a 1% general partner andis a 20.4% limited partner. The Operating Partnership owns a 99% limitedpartnership interest in VFGP.

 

Since its formation, Fund I has acquired or developedownership interests in 19 multifamily residential properties, representing5,406 apartment units with an aggregate cost of approximately $618.0million.  Fund I also owns the KelvinAve. land parcel in Irvine, California, which has been planned for developmentinto a 132-unit apartment community.

 

Prior to 2004, Fund I had disposed of two multifamilyresidential properties, consisting of 530 apartments units for a aggregatecontract sales price of approximately $73.2 million.

 

On August 26, 2004, Fund I sold Palermo Apartments,230-unit multifamily community located in San Diego, California for a net salesprice of $58.2 million.  Fund I completedthe development of this property at an approximate cost of  $44.9 million in 2004.

 

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In the third quarter of 2004, Fund I entered into apurchase and sale agreement with United Dominion Realty, L.P. (“UDR”) for asale of sixteen apartment communities, totaling 4,646 units owned by Fund I andwith respect to Coronado at Newport North and South, both Fund I’s and theOperating Partnership’s separate ownership interests, for a contract price of$756.0 million.  In connection with thetransaction, UDR remitted a $10 million earnest money deposit directly to FundI, which is refundable only in limited circumstances.  On September 30, 2004, under the UDR purchaseand sale agreement, Fund I sold seven of the multifamily communities,aggregating 1,777 apartment units at a contract price of approximately $264.0million. On October 27, 2004, an additional seven of the remaining nineproperties were sold to UDR for a contract price of $322.0 million, of which$267.6 million is Fund I’s allocated portion of the contract price based on itsownership interest.  The remaining twomultifamily properties under the UDR agreement that are anticipated to close in2005 are Coronado at Newport - South, a 715-unit apartment community in NewportBeach, California currently undergoing redevelopment and River Terrace, a newlydeveloped 250-unit apartment community in Santa Clara which is currently inlease up.

 

In connection with the Fund I dispositions whichoccurred in 2004, based on the Operating Partnership’s limited partnershipinterest in Fund I, combined with the sale of its 49.9% direct ownershipinterest in Coronado at Newport North, the Operating Partnership recognizedequity income in investments of $38.8 million representing the OperatingPartnership’s share of the gain on the sale of real estate of $39.3 million anda $505,000 non-cash loss on the early extinguishment of debt related to thewrite-off of un-amortized loan fees on those property sales.  The Operating Partnership’s generalpartnership interest provides for “promote distributions” upon attainment ofcertain financial return benchmarks. During 2004, the Operating Partnership recognized $18.3 million ofadditional equity income associated with its promote interest.  The Operating Partnership accrued $4.0million of employee incentive compensation expense related to the Fund I sale,which is included in general and administrative expense.

 

On September 27, 2004 the Operating Partnershipannounced the final closing of the Essex Apartment Value Fund II (“Fund II”).Fund II has eight institutional investors including Essex with combined equitycommitments of $265.9 million. Essex has committed $75.0 million to Fund II,which represents a 28.2% interest as general partner and limited partner. FundII expects to utilize leverage of approximately 65% of the estimated value ofthe underlying real estate. Fund II will invest in multifamily properties inthe Operating Partnership’s targeted West Coast markets with an emphasis oninvestment opportunities in the Seattle metropolitan area and the San FranciscoBay Area. Subject to certain exceptions, Fund II will be Essex’s exclusiveinvestment vehicle until October 31, 2006, or when Fund II’s committed capitalhas been invested, whichever occurs first. Consistent with Fund I, Essex willbe compensated for its asset management, property management, development andredevelopment services and may receive promote distributions if Fund II exceedscertain financial return benchmarks.

 

The Company has elected to be treated as a real estateinvestment trust (“REIT”) for federal income tax purposes, commencing with theyear ended December 31, 1994.  In orderto maintain the Company’s compliance with REIT rules, the Operating Partnershiputilizes taxable REIT subsidiaries (“TRS”) for various revenue generating orinvestment activities. The TRS’s are consolidated by the Operating Partnership.

 

The Operating Partnership (excluding Fund I’sdevelopment communities) has ownership interests in and is developing twomultifamily residential communities, with an aggregate of 395 multifamilyunits. In connection with these development projects, the Operating Partnershiphas directly, or in some cases through its joint venture partners, entered intocontractual construction related commitments with unrelated third parties. Thetotal projected estimated cost for these projects is approximately $89.6million. As of December 31, 2004, the remaining commitment to fund theseprojects is approximately $51.3 million.

 

***Results of Operations***

 

**Comparison of Year Ended December 31, 2004 to YearEnded December 31, 2003**

 

Average financial occupancy rates of the OperatingPartnership’s multifamily “Same Store Properties” (properties consolidated bythe Operating Partnership for each of the years ended December 31, 2004 and2003) increased to 96.0% for the year ended December 31, 2004 from 95.8% forthe year ended December 31, 2003. Financial occupancy is defined as thepercentage resulting from dividing actual rental revenue by total possiblerental revenue. Actual rental revenue represents contractual rental revenuepursuant to leases without considering delinquency and concessions. Totalpossible rental revenue represents the value of all apartment units, withoccupied units valued at contractual rental rates pursuant to leases and vacantunits valued at estimated market rents. We believe that financial occupancy isa meaningful measure of occupancy because it considers the value of each vacant

 

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unit at its estimated market rate. Financial occupancy may notcompletely reflect short-term trends in physical occupancy and financialoccupancy rates as disclosed by other REITs may not be comparable to ourcalculation of financial occupancy.

 

The regional breakdown of financial occupancy for theSame Store Properties for the years ended December 31, 2004 and 2003 are asfollows:

 

| ** **           | ** ** | **Years ended  December 31,** | ** ** |
|----------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Southern  California |       | 96.1                          | %          | 96.0 | % |
| Northern  California |       | 96.1                          | %          | 95.9 | % |
| Pacific  Northwest   |       | 95.6                          | %          | 95.1 | % |

 

Total Property Revenues increased by $31,907,000 or by12.7% to $283,483,000 in 2004 from $251,576,000 in 2003. The following tablesets forth a breakdown of these revenue amounts, including the revenuesattributable to the Same Store Properties.

 
| ** **                                                                | ** ** | **Number of  Properties** | ** **  | **Years Ended  December 31,** | ** ** | **Dollar  Change** | ** ** | **Percentage  Change** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------|-------------|-------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                | **2004**   | ** **                | **2003(1)** | ** **                    |
| ** **                                                                | ** ** | ** **                | ** **  | **(dollars in thousands)**    | ** ** | ** **         | ** ** | ** **             | ** ** |
| Revenues                                                                  |       |                      |        |                          |       |               |       |                   |       |   |   |
| Property  revenues                                                        |       |                      |        |                          |       |               |       |                   |       |   |   |
| Same Store  Properties:                                                   |       |                      |        |                          |       |               |       |                   |       |   |   |
| Southern  California                                                      |       | 40                        |        | $                             | 89,605     |               | $          | 86,460                 |       | $ | 3,145 |   | 3.6 | % |
| Northern  California                                                      |       | 17                        |        | 50,356                        |       | 52,466             |       | (2,110                 | )          | (4.0 | ) |
| Pacific  Northwest                                                        |       | 22                        |        | 39,572                        |       | 39,039             |       | 533                    |       | 1.4 |   |
| Total property  revenues                                                  |       |                      |        |                          |       |               |       |                   |       |   |   |
| Same Store  Properties                                                    |       | 79                        |        | 179,533                       |       | 177,965            |       | 1,568                  |       | 0.9 |   |
| Property  revenues - properties acquired subsequent to January 1, 2003(1) |       |                      |        | 103,950                       |       | 73,611             |       | 30,339                 |       | 41.2 |   |
| Total property  revenues                                                  |       |                      |        | $                             | 283,483    |               | $          | 251,576                |       | $ | 31,907 |   | 12.7 | % |

 

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(1)          Also includes fiveoffice buildings (one consolidated in accordance with FIN 46R), fourrecreational vehicle parks, two manufactured housing communities, redevelopmentcommunities, development communities, and 12 multifamily propertiesconsolidated retroactively as of January 1, 2004 in accordance with FIN 46R.

 

As set forth in the above table, the $31,907,000 netincrease in total revenues was primarily due to an increase of $30,339,000attributable mostly to multifamily properties acquired subsequent to January 1,2003.  Subsequent to January 1, 2003, theOperating Partnership acquired interests in 14 multifamily properties andachieved stabilized operations in three development communities and had fivecommunities in redevelopment (the “Acquisition Properties”).

 

*Propertyrevenues* from the Same Store Properties increased by$1,568,000 or 0.9% to $179,533,000 in 2004 from $177,965,000 in 2003. Themajority of this increase was attributable to the 40 Same Store Propertieslocated in Southern California and the 22 Same Store Properties located in thePacific Northwest. The property revenues of the Same Store Properties inSouthern California increased by $3,145,000 or 3.6% to $89,605,000 in 2004 from$86,460,000 in 2003. The increase in Southern California is primarilyattributable to rental rate increases and a slight increase in financialoccupancy to 96.1% in 2004 from 96.0% in 2003. The property revenues of theSame Store Properties in the Pacific Northwest increased by $533,000 or 1.4% to$39,572,000 in 2004 from $39,039,000 in 2003. The $533,000 increase in thePacific Northwest is primarily attributable to rental rate increases and anincrease in financial occupancy to 95.6% in 2004 from 95.1% in 2003. The 17multifamily residential properties located in Northern California offset thenet increase in total property revenues from the other Same Store Properties.The property revenues for these properties decreased by $2,110,000 or 4.0% to$50,356,000 in 2004 from $52,466,000 in 2003. The $2,110,000 decrease isprimarily attributable to rental rate decreases offset by an 

 

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increase in financial occupancy to 96.1% in 2004 from 95.9% in 2003.

 

*TotalExpenses* increased by $50,208,000 or approximately 24.8% to$252,423,000 in 2004 from $202,215,000 in 2003. This increase was mainly due toan increase in property operating expenses of $30,501,000 or 21.9% to$169,472,000 in 2004 from $138,971,000 in 2003. Of such operating expenseincrease, $13,461,000 was attributable to the Acquisition Properties, excludingdepreciation and amortization expense. Depreciation and amortization expenseincreased by $15,426,000, which was attributable to the Acquisition Propertiesand a correction of depreciation expense recorded in the first quarter of 2004.Interest expense increased by $10,613,000 or 20.2% to $63,023,000 in 2004 from$52,410,000 in 2003.  The increase ininterest expense is primarily due to increases in the mortgage notes payableand line of credit balances, the majority of which relates to the AcquisitionProperties. General and Administrative (G&A) expenses increased by$8,704,000 or 90.3% to $18,341,000 in 2004 from $9,637,000 in 2003.  The increase in G&A was primarilyattributable to incentive compensation, increases in headcount and relatedcompensation expense, compliance with Rule 404 of the Sarbanes-Oxley Act of2002, and accrued litigation costs.

 

*Gain onsale of real estate* increased to $7,909,000 in 2004 from $0in 2003 due to the sale of The Essex at Lake Merritt, a 270-unit multifamilycommunity located in Oakland, California, which was sold on August 3, 2004.

 

*Interestand other income* increased by $1,312,000 or 19.5% to$8,027,000 in 2004 from $6,715,000 in 2003. The increase relates primarily toan increase in leasing income related to the recreational vehicle parks andmanufactures housing communities.

 

*Equityincome in co- investments*increased by $56,226,000 or1,705.9% to $59,522,000 in 2004 from $3,296,000 in 2003. The increase relatesprimarily to an increase in promote distributions from Fund I of $18,300,000and the net gain on sale of co-investments of $38,800,000 which represents theOperating Partnership’s pro-rata allocation of gain from the Fund I sale andthe sale of its direct interest in Coronado at Newport - North.

 

*Discontinued operations*decreased by $940,000 to $788,000 in 2004from $1,728,000 in 2003. The decrease in income from discontinued operationswas mainly due to an impairment charge of $828,000 in 2004 for Golden VillageRecreational Vehicle Park, located in Hemet, California. This property was soldon July 18, 2004 for $6.7 million.

 

**Comparison of Year Ended December 31, 2003 to YearEnded December 31, 2002**

 

Average financial occupancy rates of the OperatingPartnership’s multifamily “2003/2002 Same Store Properties” (propertiesconsolidated by the Operating Partnership for each of the years ended December31, 2003 and 2002) increased to 95.8% for the year ended December 31, 2003 from94.7% for the year ended December 31, 2002. Financial occupancy is defined asthe percentage resulting from dividing actual rental revenue by total possiblerental revenue. Actual rental revenue represents contractual rental revenuepursuant to leases without considering delinquency and concessions. Totalpossible rental revenue represents the value of all apartment units, withoccupied units valued at contractual rental rates pursuant to leases and vacantunits valued at estimated market rents. We believe that financial occupancy isa meaningful measure of occupancy because it considers the value of each vacantunit at its estimated market rate. Financial occupancy may not completelyreflect short-term trends in physical occupancy and financial occupancy ratesas disclosed by other REITs may not be comparable to our calculation offinancial occupancy.

 

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The regional breakdown of financial occupancy for the2003/2002 Same Store Properties for the years ended December 31, 2003 and 2002are as follows:

 

| ** **           | ** ** | **Years ended  December 31,** | ** ** |
|----------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| Southern  California |       | 96.3                          | %          | 94.7 | % |
| Northern  California |       | 95.8                          | %          | 95.9 | % |
| Pacific  Northwest   |       | 95.1                          | %          | 93.1 | % |

 

Total Property Revenues increased by $40,493,000 or19.2% to $251,576,000 in 2003 from $211,083,000 in 2002. The following tablesets forth a breakdown of these revenue amounts, including the revenuesattributable to the 2003/2002 Same Store Properties.

 
| ** **                                                                | ** **  | **Number of  Properties** | ** **  | **Years Ended  December 31,** | ** ** | **Dollar  Change** | ** ** | **Percentage  Change** | ** ** |
|---------------------------------------------------------------------------|-------------|---------------------------|-------------|-------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                | **2003(1)** | ** **                | **2002(1)** | ** **                    |
| ** **                                                                | ** **  | ** **                | ** **  | **(dollars in thousands)**    | ** ** | ** **         | ** ** | ** **             | ** ** |
| Revenues                                                                  |        |                      |        |                          |       |               |       |                   |       |   |   |
| Property  revenues -                                                      |        |                      |        |                          |       |               |       |                   |       |   |   |
| Same Store  Properties:                                                   |        |                      |        |                          |       |               |       |                   |       |   |   |
| Southern  California                                                      |        | 22                        |        | $                             | 71,192     |               | $          | 67,905                 |       | $ | 3,287 |   | 4.8 | % |
| Northern  California                                                      |        | 16                        |        | 50,346                        |       | 55,556             |       | (5,210                 | )          | (9.4 | ) |
| Pacific  Northwest                                                        |        | 23                        |        | 40,726                        |       | 41,989             |       | (1,263                 | )          | (3.0 | ) |
| Total property  revenues                                                  |        |                      |        |                          |       |               |       |                   |       |   |   |
| Same Store  Properties                                                    |        | 61                        |        | 162,264                       |       | 165,450            |       | (3,186                 | )          | (1.9 | ) |
| Property  revenues - properties acquired subsequent to January 1, 2002(1) |        |                      |        | 89,312                        |       | 45,633             |       | 43,679                 |       | 95.7 |   |
| Total property  revenues                                                  |        |                      |        | $                             | 251,576    |               | $          | 211,083                |       | $ | 40,493 |   | 19.2 | % |

 

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(1)          Also includes fiveoffice buildings (one consolidated in accordance with FIN 46R), fourrecreational vehicle parks, two manufactured housing communities, redevelopmentcommunities, development communities, and 12 multifamily propertiesconsolidated retroactively as of January 1, 2004 in accordance with FIN 46R.

 

As set forth in the above table, the $40,493,000 netincrease in total revenues was due primarily to an increase of $43,679,000attributable to multifamily properties acquired subsequent to January 1, 2002,offset by a decrease in 2003/2002 Same Store Property revenue of $3,186,000.  Subsequent to January 1, 2002 and prior toDecember 31, 2003, the Operating Partnership acquired interests in 25multifamily properties and achieved stabilized operations in two developmentcommunities and had three communities in redevelopment (the “2003/2002Acquisition Properties”).

 

*Propertyrevenues* from the 2003/2002 Same Store Properties decreasedby $3,186,000 or 1.9% to $162,264,000 in 2003 from $165,450,000 in 2002. Themajority of this decrease was attributable to the 16 2003/2002 Same Store Propertieslocated in Northern California and the 23 2003/2002 Same Store Propertieslocated in the Pacific Northwest. The property revenues of the 2003/2002 SameStore Properties in Northern California decreased by $5,210,000 or 9.4% to$50,346,000 in 2003 from $55,556,000 in 2002. The decrease in NorthernCalifornia is primarily attributable to rental rate decreases and a slightdecrease in financial occupancy to 95.8% in 2003 from 95.9% in 2002. Theproperty revenues of the 2003/2002 Same Store Properties in the PacificNorthwest decreased by $1,263,000 or 3.0% to $40,726,000 in 2003 from$41,989,000 in 2002. The $1,263,000 decrease in the Pacific Northwest isprimarily attributable to rental rate decreases offset by an increase infinancial occupancy to 95.1% in 2003 from 93.1% in 2002. The 22 multifamilyresidential properties located in Southern California offset the net decreasein total property revenues from the other 2003/2002 Same Store Properties. Theproperty revenues for these properties increased by $3,287,000 or 4.8% to$71,192,000 in 2003 from $67,905,000 in 2002. The $3,287,000 increase isprimarily attributable to an increase in rental rates and financial occupancyto 96.3% in 2003 from 94.7% in 2002.

 

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*TotalExpenses* increased by $40,991,000 or approximately 25.4% to$202,215,000 in 2003 from $161,224,000 in 2003. This increase was mainly due toan increase in property operating expenses of $30,383,000 or 28.0% to$138,971,000 in 2003 from $108,588,000 in 2002. Of such operating expenseincrease, $15,736,000 was attributable to the 2003/2002 Acquisition Properties,excluding depreciation and amortization expense. Depreciation and amortizationexpense increased by $13,281,000, which was mainly attributable to the2003/2002 Acquisition Properties. Interest expense increased by $9,224,000 or21.4% to $52,410,000 in 2003 from $43,186,000 in 2002.  The increase in interest expense is due toincreases in mortgage notes payable.

 

*Interestand other income* decreased by $5,790,000 or 46.3% to$6,715,000 in 2003 from $12,505,000 in 2002. The decrease primarily relates tothe repayment of notes receivable which resulted in a decrease in interestincome on notes receivable.

 

*Equityincome in co- investments*decreased by $2,106,000 or 39.0% to$3,296,000 in 2003 from $5,402,000 in 2002. The decrease relates primarily tothe sale of certain co-investment assets resulting in the decrease in incomeearned on the Operating Partnership’s co-investments.

 

*Discontinued Operations*decreased by $7,655,000 to $1,728,000 in2003 from $9,383,000 in 2002. This decrease is due to the reduction of gain onsale of real estate and operating income from Tara Village, a 168-unitapartment community located in Tarzana, California, which was sold on June 18,2002.

 

***Liquidity and Capital Resources Including Non-consolidated Investments***

 

On July 26, 2004, Standard and Poor’s publiclyannounced its existing issuer credit ratings of BBB/Stable for Essex PropertyTrust, Inc. and Essex Portfolio L.P., and issued a new rating of BBB- on itsSenior Unsecured Debt for Essex Portfolio L.P.

 

At December 31, 2004, the Operating Partnership had$10,644,000 of unrestricted cash and cash equivalents. The OperatingPartnership expects to meet its short-term liquidity requirements by using itsworking capital, cash generated from operations, and amounts available underlines of credit or other financings. The Operating Partnership believes thatits current net cash flows will be adequate to meet operating requirements andto provide for payment of dividends by the Operating Partnership in accordancewith the Company’s REIT qualification requirements. The Operating Partnershipexpects to meet its long-term liquidity requirements relating to property acquisitionsand development (beyond the next 12 months) and balloon debt maturities byusing a combination of some or all of the following sources: working capital,amounts available on lines of credit, net proceeds from public and private debtissuances, equity contributions from equity issuances by the Company andproceeds from the disposition of properties that may be sold from time to time.There can, however, be no assurance that the Operating Partnership will haveaccess to the debt and equity markets in a timely fashion to meet such futurefunding requirements or that future working capital and borrowings under thelines of credit will be available, or if available, will be sufficient to meetthe Operating Partnership’s requirements or that the Operating Partnership willbe able to dispose of properties in a timely manner and under terms andconditions that the Operating Partnership deems acceptable.

 

Non-revenue generating capital expenditures areimprovements and upgrades that extend the useful life of the property. For theyear ended December 31, 2004, non-revenue generating capital expenditurestotaled approximately $406 per weighted average occupancy unit. The OperatingPartnership expects to incur approximately $410 per weighted average occupancyunit in non-revenue generating capital expenditures for the year ended December31, 2005. These expenditures do not include the improvements required inconnection with the origination of mortgage loans, expenditures forunidentified deferred maintenance renovations on acquisition properties,expenditures for property renovations and improvements which are expected toreposition a property and generate additional revenue, and renovationexpenditures required pursuant to tax-exempt bond financings. The OperatingPartnership expects that cash from operations and/or its lines of credit willfund such expenditures. However, there can be no assurance that the actualexpenditures incurred during 2005 and/or the funding thereof will not besignificantly different than the Operating Partnership’s current expectations.

 

The Operating Partnership is currently developing twomultifamily residential projects, with an aggregate of 395 units. Such projectsinvolve certain risks inherent in real estate development. See “Risk Factors—Risksthat Development Activities Will be Delayed or Not Completed and/or Fail toAchieve Expected Results” in Item 1 of 

 

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this Annual Report on Form 10-K for the year ended December 31, 2004.In connection with these development projects, the Operating Partnership hasdirectly, or in some cases through its joint venture partners entered intocontractual construction related commitments with unrelated third parties andthe total projected estimated cost for these projects is approximately$89,600,000. As of December 31, 2004, the remaining commitment to fund thesedevelopment projects is approximately $51,300,000. The Operating Partnershipexpects to fund such commitments by using a combination of some or all of thefollowing sources: its working capital, amounts available on its lines ofcredit, net proceeds from public and private equity and debt issuances, andproceeds from the disposition of properties, if any.

 

On September 27, 2004 the Operating Partnershipannounced the final closing of the Essex Apartment Value Fund II (“Fund II”).Fund II has eight institutional investors including Essex with combined equitycommitments of $265.9 million. Essex has committed $75.0 million to Fund II,which represents a 28.2% interest as general partner and limited partner. FundII expects to utilize leverage of approximately 65% of the estimated value ofthe underlying real estate. Fund II will invest in multifamily properties inthe Operating Partnership’s targeted West Coast markets with an emphasis oninvestment opportunities in Seattle and the San Francisco Bay Area. Subject tocertain exceptions, Fund II will be Essex’s exclusive investment vehicle untilOctober 31, 2006, or when Fund II’s committed capital has been invested,whichever occurs first. Consistent with Fund I, Essex will be compensated forits asset management, property management, development and redevelopmentservices and may receive promote distributions if Fund II exceeds certainfinancial return benchmarks. The Operating Partnership’s remaining unfundedcapital commitment as of December 31, 2004 is approximately $58.2 million.

 

The Operating Partnership has an outstanding unsecuredline of credit for an aggregate amount of $185,000,000, which could beexpandable to $225,000,000.  At December31, 2004, the Operating Partnership had $155,800,000 outstanding on this lineof credit.  At December 31, 2004, thisline of credit bore an interest rate of approximately 3.4%.  This facility matures in April 2007, with anoption to extend it for one year thereafter. The underlying interest rate on this line is based on a tiered ratestructure tied to the Company’s corporate ratings and is currently LIBOR plus1.0%. In addition, the Operating Partnership has a $100 million credit facilityfrom Freddie Mac secured by five of Essex’s multifamily communities.  At December 31, 2004, the OperatingPartnership had $93,735,000 outstanding under this line of credit. At December31, 2004, this line of credit bore an interest rate of approximately 2.9%.  This facility matures in December 2008. Theunderlying interest rate on this line is between 55 and 59 basis points overthe Freddie Mac Reference Rate.

 

On February 23, 2005, Fund II obtained a creditfacility for an aggregate amount of $50,000,000. This line bears interest atLIBOR plus 0.875%, and matures in August 2005.

 

The Operating Partnership has $1,067,449,000 ofsecured indebtedness at December 31, 2004. Such indebtedness consisted of$878,617,000 in fixed rate debt with interest rates varying from 4.3% to 8.2%and maturity dates ranging from 2005 to 2026. The secured indebtedness includes$188,832,000 of tax-exempt variable rate demand bonds with interest rates paidduring 2004 ranging from approximately 1.4% to 3.3% and maturity dates rangingfrom 2006 to 2034. Most of the tax-exempt variable rate demand bonds aresubject to interest rates caps.

 

Pursuant to existing shelf registration statements,the Company has the capacity to issue up to $219,455,250 of equity securitiesand the Operating Partnership has the capacity to issue up to $250,000,000 ofdebt securities**.**The Company paysquarterly dividends from cash available for distribution. Until it isdistributed, cash available for distribution is invested by the OperatingPartnership primarily in short-term investment grade securities or is used bythe Operating Partnership to reduce balances outstanding under its line ofcredit.

 

*Financing and equity issuances*

 

On July 30, 2003, in connection with the OperatingPartnership’s acquisition, by merger, of John M. Sachs, Inc. (“Sachs”) that wascompleted on December 17, 2002, and under the terms of the merger agreement, afinal analysis was prepared, which indicated that the actual net liabilities ofSachs were less than the net liabilities of Sachs estimated to be outstandingas of the merger date.  Based on the final analysis and as a post-closingadjustment payment pursuant to the merger agreement, the Operating Partnershipmade a final payment of approximately $1,766,000 in cash and issued anadditional 35,860 shares of common stock to certain of the pre-mergershareholders of Sachs.

 

On September 23, 2003,the Company issued 1,000,000 shares of its Series F Cumulative RedeemablePreferred Stock (“Series F Preferred Stock”) at a fixed price of $24.664 pershare, a discount from the $25.00 per share liquidation value of theshares.  Quarterly distributions are at an annualized rate of 7.8125% peryear of the

 

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liquidationvalue and are redeemable by the Company on or after September 23,2008.  The Operating Partnership amortized the original discount inconnection with the issuance of these shares in the fourth quarter of 2003,resulting in a charge of approximately $336,000.  The shares were issuedpursuant to the Company’s existing shelf registration statement.  TheOperating Partnership used the net proceeds from this sale of Series FPreferred Stock to redeem all of the 9.125% Series C Cumulative Redeemable PreferredUnits (the “Series C Preferred Units”) of Essex Portfolio, L.P., of which theCompany is the general partner.

 

On October 6, 2003, the Company sold 1.6million newly issued shares of common stock and received offering proceeds(before expenses) of $60.67 per share, representing a 3.25% discount to thecommon stock’s closing price on September 30, 2003, the date of theunderwriting agreement between the Company and the underwriter, pursuant towhich the shares were sold.  The shares were issued pursuant to theCompany’s existing shelf registration statement.  The proceeds of theoffering were approximately $97,072,000. Subsequent to the offerings, the netproceeds generated from the offering were used to acquire multifamilycommunities located in the Operating Partnership’s targeted West Coast marketsand for general corporate purposes, including the repayment of debt and thefunding of development activities.

 

Using the proceeds of its September 2003 saleof its 7.8125% Series F Cumulative Redeemable Preferred Stock, the Company on November 24,2003, redeemed all of the outstanding 9.125% Series C Cumulative RedeemablePreferred Units of the Operating Partnership. In connection with thisredemption the Operating Partnership wrote-off issuance costs of $625,000 againstnet income available to common unitholders.

 

In January 2004, the Operating Partnershiprestructured its previously issued $50 million, 9.30% Series D CumulativeRedeemable Preferred Units (“Series D Units”), and its previously issued $80million, 7.875% Series B Cumulative Redeemable Preferred Units (“Series B Units”).  The existing distribution rate of 9.30% ofthe Series D Units continued until July 27, 2004 – the end of the currentnon-call period.  On July 28, 2004,the distribution rate on the Series D Units was reduced to 7.875%.  The date that the Series D Units can first beredeemed at the Operating Partnership’s option has been extended by six yearsto July 28, 2010.  The dates thatthe Series B Units can first be redeemed at the Operating Partnership’s optionwill be extended from February 6, 2003 to December 31, 2009.

 

On June 14, 2000 the Operating Partnershippurchased Waterford Place, a 238-unit apartment community located in San Jose,California for a contract price of $35.0 million and an additional contingentpayment.  The amount of the contingentpayment was disputed and submitted to binding arbitration.  As a result of the arbitration, the OperatingPartnership was directed to issue an additional 109,874 units of limited partnershipinterest (“Units”) in the Operating Partnership to the sellers of WaterfordPlace.  On March 31, 2004, theOperating Partnership completed the issuance of these Units to thesellers.  In connection with thisissuance, on March 31, 2004, the Operating Partnership also redeemed forcash 55,564 Units from these sellers.

 

On September 3, 2004, the Operating Partnershipredeemed all of its outstanding, $55 million, 9.25% Series E CumulativeRedeemable Preferred Units of the Operating Partnership.  In connection with this redemption theOperating Partnership wrote-off issuance costs of $1.6 million against netincome available to common unitholders.

 

***Contractual Obligations andCommercial Commitments***

 

The following table summarizes the maturation or duedates of our contractual obligations and other commitments at December 31,2004, and the effect such obligations could have on our liquidity and cash flowin future periods:

 
| **(In thousands)**                                      | ** ** | **2005** | ** ** | **2006 and   2007** | ** ** | **2008 and   2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|----------|------------|---------------------|------------|---------------------|------------|----------------|------------|-----------|------------|
| Mortgage  notes payable                                 |       | $        | 18,721     |                | $          | 149,529             |       | $              | 200,661    |      | $          | 698,538 |   | $ | 1,067,449 |   |
| Lines of  credit                                        |       | —   |       | 155,800             |       | 93,735              |       | —         |       | 249,535   |       |
| Development  commitments                                |       | 51,300   |       | —              |       | —              |       | —         |       | 51,300    |       |
| Redevelopment  commitments                              |       | 20,443   |       | —              |       | —              |       | —         |       | 20,443    |       |
| Essex Apartment  Value Fund II, L.P. capital commitment |       | 58,200   |       | —              |       | —              |       | —         |       | 58,200    |       |
|                                                    |       | $        | 148,664    |                | $          | 305,329             |       | $              | 294,396    |      | $          | 698,538 |   | $ | 1,446,927 |   |

 

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***New Accounting Pronouncements IssuedBut Not Yet Adopted***

 

In December 2004, the FASB issued SFAS No. 123revised, “*Share-Based Payment”.*Thisstatement is a revision of SFAS No. 123, *“Accountingfor Stock-Based Compensation”,*and supercedes APB No. 25, *“Accounting for Stock Issued to Employees”.*TheStatement requires companies to recognize in the income statement thegrant-date fair value of stock options and other equity based compensationissued to employees. This Statement is effective as of the beginning of thefirst interim or annual period that commences after June 15, 2005. We donot believe that the adoption of SFAS No. 123 revised will have a materialimpact on our financial position, net earnings or cash flows.

 

In December, 2004, the FASB issuedSFAS No. 152, “Accounting for Real Estate Time-Sharing Transactionsan amendment of FASB Statements No. 66 and 67”. This Statement amendsSFAS No. 66, “Accounting for Sales of Real Estate” to reference thefinancial accounting and reporting guidance for real estate time-sharingtransactions that is provided in AICPA Statement of Position (SOP) 04-2, “Accountingfor Real Estate Time-Sharing Transactions.” This Statement also amendsSFAS No. 67, “Accounting for Costs and Initial Rental Operations ofReal Estate Projects” to specify that guidance relating to (a) incidentaloperations (b) costs incurred to sell real estate projects does not applyto real estate time-sharing transactions. This Statement is effective forfiscal years beginning after June 15, 2005. We do not believe that theadoption of SFAS No. 152 will have a material impact on our financialposition, net earnings or cash flows.

 

In December 2004, the FASB issuedSFAS No. 153, “Exchanges of Non-monetary Assets an amendment of APBNo. 29”. This Statement amends APB Opinion No. 29, “Accounting forNon-monetary Transactions” to eliminate the exception for non-monetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of non-monetary assets that do not have commercial substance.That exception required that some non-monetary exchanges be recorded on acarryover basis versus this Statement, which requires that an entity record anon-monetary exchange at fair value and recognize any gain or loss if thetransaction has commercial substance. This Statement is effective for fiscalyears beginning after June 15, 2005. We do not believe that the adoptionof SFAS No. 153 will have a material impact on our financialposition, net earnings or cash flows.

 

In March 2004, the FASB issued EITF IssueNo. 03-6, “Participating Securities and the Two-Class Method underFASB Statement No. 128, Earnings per Share” (EITF No. 03-6). Thisissue address whether the two-class method requires the presentation of basicand diluted EPS for all participating securities and how a participatingsecurity should be defined. The guidance to this issue should be applied toreporting periods beginning after March 31, 2004. Prior period earningsper share amounts presented for comparative purposes should be restated toconform to the guidance in this consensus. The impact of adopting EITFNo. 03-6 on earnings per share has not yet been determined.

 

In October 2004, the FASB issued EITF IssueNo. 04-8, *“The Effect of ContingentlyConvertible Instruments on Diluted Earnings Per Share”*(EITFNo. 04-8). This Issue addresses when contingently convertible instrumentsshould be included in diluted earnings per share and should be applied forreporting periods ending after December 15, 2004. The adoption of EITFNo. 04-8 had no impact on our financial position, net earnings or cashflows.

 

In November 2004, the FASB issued EITF IssueNo. 03-13, “Applying the Conditions in Paragraph 42 of FASB StatementNo. 144, Accounting for Impairment or Disposal of Long-Lived Assets, inDetermining Whether to Report Discontinued Operations”(EITF No. 03-13). This issue assists in the development of a modelfor evaluating (a) which cash flows are to be considered in determiningwhether cash flows have been or will be eliminated and (b) what types ofcontinuing involvement constitute significant continuing involvement. Theguidance in this issue should be applied to a component of an enterprise thatis either disposed of or classified as held for sale in fiscal periodsbeginning after December 15, 2004. Previously reported operating resultsrelated to disposal transactions initiated within an enterprise’s fiscal yearthat includes the date that this consensus was ratified (November 30,2004) may be reclassified. The adoption of EITF No. 03-13 had noimpact on our financial position, net earnings or cash flows. This EITF mayhave an impact in future periods.

 

In September 2004, the FASB issuedEITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments” (EITF No. 03-1). The guidancein EITF No. 03-1 was effective for other-than-temporary impairmentevaluations made in reporting periods beginning after June 15, 2004.Certain provisions regarding the assessment of whether an impairment is otherthan temporary have been delayed. e. The adoption of EITF No. 03-1had no impact on our financial position, net earnings or cash flows.

 

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# ***Potential Factors Affecting FutureOperating Results***

#  

Many factors affect the Operating Partnership’sactual financial performance and may cause the Operating Partnership’s futureresults to be different from past performance or trends. These factors includethose set forth under the caption “Risk Factors” in Item I of this AnnualReport on Form 10-K and the following: Economic Environment and Impact onOperating Results.

 

Both the national economy and the economies of thewestern states in which the Operating Partnership owns, manages and developsproperties, some of which are concentrated in high-tech sectors, have been andmay be in an economic downturn. The impacts of such downturns on operatingresults can include, and are not limited to, reduction in rental rates,occupancy levels, property valuations and increases in operating costs such asadvertising, turnover and repair and maintenance expense.

 

The Operating Partnership’s property type anddiverse geographic locations provide some degree of risk moderation but are notimmune to a prolonged down cycle in the real estate markets in which theOperating Partnership operates. Although the Operating Partnership believes itis well positioned to meet the challenges ahead, it is possible that reductionsin occupancy and market rental rates will result in a reduction of rentalrevenues, operating income, cash flows, and market value of the OperatingPartnership’s shares. Prolonged recession could also affect the OperatingPartnership’s ability to obtain financing at acceptable rates of interest andto access funds from the refinance or disposition of properties at acceptableprices.

 

# ***Interest Rate Fluctuations***

#  

The Operating Partnership monitors changes ininterest rates and believes that it is well positioned from both a liquidityand interest rate risk perspective. However, current interest rates are athistoric lows and potentially could increase rapidly to levels more in linewith historic levels. The immediate effect of significant and rapid interestrate increases would be higher interest expense on the Operating Partnership’svariable interest rate debt (see Item 7A and Notes 7 and 8 to consolidatedfinancial statements). The effect of prolonged interest rate increases couldnegatively impact the Operating Partnership’s ability to make acquisitions anddevelop properties at economic returns on investment and the OperatingPartnership’s ability to refinance existing borrowings at acceptable rates.

 

# ***Inflation/Deflation***

#  

Substantial inflationary or deflationary pressurescould have a negative effect on rental rates and property operating expenses.The Operating Partnership believes it effectively manages its property andother expenses but understands that substantial annual rates of inflation ordeflation could adversely impact operating results.

 

# ***Failure to Qualify as A REIT***

 

The Company has elected to be taxed as a REITunder the Internal Revenue Code and we operate the Operating Partnership in amanner to preserve the Company’s REIT tax rule compliance. However, we cannotassure you that the Company qualifies as a REIT or that it will continue to soqualify in the future. If the Company fails to qualify as a REIT in any taxableyear, it would be subject to federal income tax on its taxable income atcorporate rates. The Company may also be disqualified from treatment as a REITfor the four taxable years following the year in which the Company failed toqualify. This would reduce its net earnings available for investment ordistribution to stockholders because of the additional tax liability. Even ifthe Company continues to qualify as a REIT, it will be subject to certainfederal, state and local taxes on its income and property.

 

50

----

 

**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

The Operating Partnership is exposed to interestrate changes primarily as a result of its line of credit and long-term debtused to maintain liquidity and fund capital expenditures and expansion of theOperating Partnership’s real estate investment portfolio and operations. TheOperating Partnership’s interest rate risk management objective is to limit theimpact of interest rate changes on earnings and cash flows and to lower itsoverall borrowing costs. To achieve its objectives the Operating Partnershipborrows primarily at fixed rates and may enter into derivative financialinstruments such as interest rate swaps, caps and treasury locks in order tomitigate its interest rate risk on a related financial instrument. TheOperating Partnership does not enter into derivative or interest ratetransactions for speculative purposes.

 

The Operating Partnership’s interest rate risk ismonitored using a variety of techniques. The table below presents the principalamounts and weighted average interest rates by year of expected maturity toevaluate the expected cash flows. Management believes that the carrying amountsof its LIBOR debt approximates fair value as of December 31, 2004 becauseinterest rates, yields and other terms for these instruments are consistentwith yields and other terms currently available to the Operating Partnershipfor similar instruments. Management has estimated that the fair value of theOperating Partnership’s $878,617,000 of fixed rate mortgage notes payable at December 31,2004 is approximately $945,607,000 based on the terms of existing mortgage notespayable compared to those available in the marketplace.

 
| ** **                | ** ** | **For the Years Ended December 31** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| **(In thousands)**        | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** |
| Fixed rate  debt          |       | $                                        | 18,721     |   | $ | 16,603 |   | $ | 124,846 |   | $ | 154,452 |   | $ | 46,209 |   | $ | 517,786 |   | $ | 878,617 |   | $ | 945,607 |   |
| Average  interest rate    |       | 6.7                                      | %          | 6.7 | % | 6.7 | % | 6.7 | % | 6.7 | % | 6.7 | % |   |   |   |   |
| Variable  rate LIBOR debt |       | $                                        | —     |   | $ | 8,080 |   | $ | 155,800 |   | $ | — |   | $ | — |   | $ | 274,487 | (1) | $ | 438,367 |   | $ | 438,367 |   |
| Average  interest rate    |       | —                                   |       | 3.2 | % | 2.3 | % | — |   | — |   | 2.7 | % |   |   |   |   |

 

----

(1)          $152,749 subject to interest rate caps.

 

The table incorporates only those exposures thatexist as of December 31, 2004; it does not consider those exposures orpositions that could arise after that date. As a result, our ultimate realizedgain or loss, with respect to interest rate fluctuations, would depend on theexposures that arise during the period, our hedging strategies at the time, andinterest rates.

 

**Item 8. Financial Statements and Supplemental Data**

 

The response to this item is submitted as a separatesection of this Form 10-K. See Item 15.

 

**Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure**

 

None.

 

**Item 9A. Controls and Procedures**

 

As of December 31, 2004, our general partnercarried out an evaluation, under the supervision and with the participation ofmanagement, including the Chief Executive Officer and Chief Financial Officerof our general partner, of the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Rules 13a-15 of the SecuritiesExchange Act of 1934, as amended.  Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officer ofour general partner concluded that our disclosure controls and procedures areeffective in timely alerting management to material information relating to theOperating Partnership that is required to be included in our periodic filingswith the Securities and Exchange Commission.

 

There were no changes in theOperating Partnership’s internal control over financial reporting, that

 

51

----

 

occurred during the quarter ended December 31,2004, that have materially affected, or are reasonably likely to materiallyaffect, the Operating Partnership’s internal control over financial reporting.

 

Our management, includingthe Chief Executive Officer and Chief Financial Officer of our general partner,does not expect that our disclosure controls and procedures or our internalcontrols over financial reporting will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of their inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Operating Partnershiphave been detected.

 

***Management’sReport on Internal Control Over Financial Reporting***

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934, as amended). Our management assessed the effectiveness ofour internal control over financial reporting as of December 31, 2004. Inmaking this assessment, our management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. Our management has concluded that, as ofDecember 31, 2004, our internal control over financial reporting waseffective based on these criteria. Our independent registered public accountingfirm, KPMG LLP, has issued an audit report on our assessment of our internalcontrol over financial reporting, which is included herein.

 

**Item 9B****. Other Information**

 

None.

 

52

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### **PART III**

###  

**Item 10. Directors and Executive Officers of the Registrant**

 

The information required by Item 10 is incorporatedby reference from the Company’s definitive proxy statement for its annualstockholders’ meeting to be held on May 10, 2005.

 

**Item 11. Executive Compensation**

 

The information required by Item 11 is incorporatedby reference from the Company’s definitive proxy statement for its annualstockholders’ meeting to be held on May 10, 2005.

 

**Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

 

The information required by Item 12 is incorporatedby reference from the Company’s definitive proxy statement for its annualstockholders’ meeting to be held on May 10, 2005.

 

**Item 13. Certain Relationships and Related Transactions**

 

The information required by Item 13 is incorporatedby reference from the Company’s definitive proxy statement for its annualstockholders’ meeting to be held on May 10, 2005.

 

**Item 14. Principal Accounting Fees and Services**

 

The information required by Item 14 is incorporatedby reference from the Company’s definitive proxy statement for its annualstockholders’ meeting to be held on May 10, 2005.

 

53

----

 

**Item 15. Exhibits and Financial Statement Schedules**

 

(A)Financial Statements 

 
| (1)    | Consolidated Financial Statements                                                                                                                                     |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                  |   |
|   | Reports  of Independent Registered Public Accounting Firm                                                                                                             |   |
|   |                                                                                                                                                                  |   |
|   | Balance Sheets:  As of December 31, 2004 and December 31, 2003                                                                                              |   |
|   |                                                                                                                                                                  |   |
|   | Statements of  Operations:  Years ended December 31, 2004, 2003 and 2002                                                                                         |   |
|   |                                                                                                                                                                  |   |
|   | Statements of  Partners’ Capital:  Years ended December 31, 2004, 2003 and 2002                                                                             |   |
|   |                                                                                                                                                                  |   |
|   | Statements of  Cash Flows:  Years ended December 31, 2004, 2003 and 2002                                                                                         |   |
|   |                                                                                                                                                                  |   |
|   | Notes to the  Consolidated Financial Statements                                                                                                                       |   |
|   |                                                                                                                                                                  |   |
| (2)    | Financial Statement Schedule - Schedule III - Real Estate  and Accumulated Depreciation as of December 31, 2004                                        |   |
|   |                                                                                                                                                                  |   |
| (3)    | See the Exhibit Index immediately following the signature page and  certifications for a list of exhibits filed or incorporated by reference as  part of this report. |   |

 

(B)Exhibits

 

The Operating Partnershiphereby files, as exhibits to this Form 10-K, those exhibits listed on theExhibit Index referenced in Item 15(A)(3) above.

 

54

----

 

**Report of Independent Registered Public Accounting Firm**

 

ThePartnersEssex Portfolio, L.P.:

 

Wehave audited management’s assessment, included in Management’s Report onInternal Control over Financial Reporting, appearing under Item 9A, that EssexPortfolio, L.P. maintained effective internal control over financial reportingas of December 31, 2004, based on criteria established in InternalControl–Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Essex Portfolio, L.P.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the EssexPortfolio, L.P.’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, management’s assessment that Essex Portfolio, L.P. maintainedeffective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on criteria establishedin Internal Control–Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, EssexPortfolio, L.P. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2004, based oncriteria established in Internal Control–Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

F-1

----

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofEssex Portfolio, L.P. and subsidiaries as of December 31, 2004 and 2003,and the related consolidated statements of operations, partners’ capital, andcash flows for each of the years in the three-year period ended December 31,2004 and the related financial statement schedule III, and our reportdated March 31, 2005, expressed an unqualified opinion on thoseconsolidated financial statements.

 

 
|   | /S/ KPMG LLP |   |
|--------|--------------|--------|
|   | KPMG LLP     |

 

 

SanFrancisco, CaliforniaMarch 31, 2005

 

F-2

----

 

**Report of Independent Registered Public Accounting Firm**

 

ThePartners Essex Portfolio, L.P.:

 

Wehave audited the accompanying consolidated balance sheets of Essex Portfolio,L.P. and subsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, partners’ capital, and cash flows foreach of the years in the three-year period ended December 31, 2004. Inconnection with our audits of the consolidated financial statements, we havealso audited the accompanying financial statement schedule III. Theseconsolidated financial statements and the accompanying financial statement schedule IIIare the responsibility of the Essex Portfolio, L.P.’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements and the accompanying financial statement schedule III based onour audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Essex Portfolio,L.P. and subsidiaries as of December 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles. Also in our opinion, the related financial statement schedule III,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

 

Asfurther discussed in Note 2(a), the Essex Portfolio, L.P.’s implementedStatement of Financial Accounting Standards No. 123 *Accounting for Stock Based Compensation* and FinancialAccounting Standards Board Interpretation No. 46R *Consolidation of Variable Interest Entities* effective January 1,2004 and applied the retroactive restatement method of adoption.  Accordingly, all periods presented have beenrestated to give effect to the change.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of EssexPortfolio, L.P.’s internal control over financial reporting as of December 31,2004, based on criteria established in Internal Control–Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 31, 2005, expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

 

 
|   | /S/ KPMG LLP |   |
|--------|--------------|--------|
|   | KPMG LLP     |

 

 

SanFrancisco, CaliforniaMarch 31, 2005

 

F-3

----

 

**ESSEXPORTFOLIO, L.P. AND SUBSIDIARIESConsolidated Balance SheetsDecember 31, 2004 and 2003(Dollars in thousands, except share amounts)**

 
| ** **                                                                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate:                                                                                                   |       |       |       |       |       |
| Rental  properties:                                                                                            |       |       |       |       |       |
| Land and  land improvements                                                                                    |       | $          | 536,600    |       | $          | 469,347 |   |
| Buildings  and improvements                                                                                    |       | 1,834,594  |       | 1,514,775  |       |
|                                                                                                           |       | 2,371,194  |       | 1,984,122  |       |
| Less  accumulated depreciation                                                                                 |       | (335,242   | )          | (265,763   | )          |
|                                                                                                           |       | 2,035,952  |       | 1,718,359  |       |
| Real estate  investments held for sale, net of accumulated depreciation of $496 as of December 31,  2004  |       | 14,445     |       | —     |       |
| Investments.                                                                                                   |       | 49,712     |       | 79,567     |       |
| Real estate  under development                                                                                 |       | 38,320     |       | 55,183     |       |
|                                                                                                           |       | 2,138,429  |       | 1,853,109  |       |
| Cash and  cash equivalents-unrestricted                                                                        |       | 10,644     |       | 14,768     |       |
| Cash and  cash equivalents-restricted cash                                                                     |       | 21,255     |       | 11,175     |       |
| Notes  receivable from investees and other related parties                                                     |       | 1,435      |       | 5,738      |       |
| Notes and  other receivables                                                                                   |       | 9,535      |       | 6,021      |       |
| Prepaid  expenses and other assets                                                                             |       | 25,181     |       | 17,426     |       |
| Deferred  charges, net                                                                                         |       | 10,738     |       | 8,574      |       |
| Total assets                                                                                                   |       | $          | 2,217,217  |       | $          | 1,916,811 |   |
|                                                                                                           |       |       |       |       |       |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                    |       |       |       |       |       |
| Mortgage  notes payable                                                                                        |       | $          | 1,067,449  |       | $          | 895,945 |   |
| Lines of  credit                                                                                               |       | 249,535    |       | 93,100     |       |
| Accounts  payable and accrued liabilities                                                                      |       | 29,997     |       | 20,834     |       |
| Dividends  payable                                                                                             |       | 21,976     |       | 22,379     |       |
| Other  liabilities                                                                                             |       | 11,853     |       | 17,153     |       |
| Deferred  gain.                                                                                                |       | 5,000      |       | —     |       |
| Total  liabilities                                                                                             |       | 1,385,810  |       | 1,049,411  |       |
| Minority  interests                                                                                            |       | 49,254     |       | 55,592     |       |
| Redeemable  convertible limited partnership units                                                              |       | 4,750      |       | —     |       |
|                                                                                                           |       |       |       |       |       |
| Partners’  capital:                                                                                       |       |       |       |       |       |
| General  partner:                                                                                              |       |       |       |       |       |
| Common  equity.                                                                                                |       | 566,865    |       | 556,987    |       |
| Preferred  equity (liquidation value of $25,000)                                                               |       | 24,412     |       | 24,412     |       |
|                                                                                                           |       | 591,277    |       | 581,399    |       |
|                                                                                                           |       |       |       |       |       |
| Limited  partners:                                                                                             |       |       |       |       |       |
| Common  equity                                                                                                 |       | 59,436     |       | 50,294     |       |
| Preferred  equity (liquidation value of $130,000 and $185,000 as of December 31, 2004  and 2003, respectively) |       | 126,690    |       | 180,115    |       |
|                                                                                                           |       | 186,126    |       | 230,409    |       |
| Total  partners’ capital.                                                                                 |       | 777,403    |       | 811,808    |       |
| Commitments  and contingencies                                                                                 |       |       |       |       |       |
| Total  liabilities and partners’ capital                                                                  |       | $          | 2,217,217  |       | $          | 1,916,811 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-4

----

 

**ESSEXPORTFOLIO, L.P. AND SUBSIDIARIESConsolidated Statements ofOperationsYears ended December 31, 2004, 2003 and 2002(Dollars in thousands, except per unit and unit amounts)**

 
| ** **                                                           | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues:                                                            |       |       |       |       |       |       |       |
| Rental                                                               |       | $          | 273,878    |       | $          | 243,412    |       | $ | 204,570 |   |
| Other  property                                                      |       | 9,605      |       | 8,164      |       | 6,513      |       |
| Total  property revenues                                             |       | 283,483    |       | 251,576    |       | 211,083    |       |
| Expenses:                                                            |       |       |       |       |       |       |       |
| Property  operating expenses:                                        |       |       |       |       |       |       |       |
| Maintenance  and repairs                                             |       | 21,057     |       | 18,623     |       | 13,687     |       |
| Real estate  taxes                                                   |       | 24,920     |       | 19,490     |       | 15,003     |       |
| Utilities                                                            |       | 12,992     |       | 12,664     |       | 10,630     |       |
| Administrative                                                       |       | 28,934     |       | 22,912     |       | 19,242     |       |
| Advertising                                                          |       | 4,169      |       | 4,174      |       | 3,497      |       |
| Insurance                                                            |       | 4,784      |       | 3,918      |       | 2,620      |       |
| Depreciation  and amortization                                       |       | 72,616     |       | 57,190     |       | 43,909     |       |
| Total  property operating expenses                                   |       | 169,472    |       | 138,971    |       | 108,588    |       |
| Interest                                                             |       | 63,023     |       | 52,410     |       | 43,186     |       |
| Amortization  of deferred financing costs                            |       | 1,587      |       | 1,197      |       | 814        |       |
| General and  administrative                                          |       | 18,341     |       | 9,637      |       | 8,636      |       |
| Total  expenses                                                      |       | 252,423    |       | 202,215    |       | 161,224    |       |
| Gain on the  sale of real estate                                     |       | 7,909      |       | —     |       | 145        |       |
| Interest and  other including from related parties (Note 6)          |       | 8,027      |       | 6,715      |       | 12,505     |       |
| Equity  income in co-investments                                     |       | 59,522     |       | 3,296      |       | 5,402      |       |
| Minority  interests                                                  |       | (3,498     | )          | (4,134     | )          | (3,664     | )          |
| Income from  continuing operations                                   |       | 103,020    |       | 55,238     |       | 64,247     |       |
|                                                                 |       |       |       |       |       |       |       |
| Discontinued  operations:                                            |       |       |       |       |       |       |       |
| Operating  income from real estate sold                              |       | 1,614      |       | 1,728      |       | 332        |       |
| Gain on sale  of real estate                                         |       | —     |       | —     |       | 9,051      |       |
| Impairment  loss                                                     |       | (826       | )          | —     |       | —     |       |
| Income from  discontinued operations                                 |       | 788        |       | 1,728      |       | 9,383      |       |
| Net income                                                           |       | 103,808    |       | 56,966     |       | 73,630     |       |
| Write off of  Series C preferred unit offering costs                 |       | —     |       | (625       | )          | —     |       |
| Write off of  Series E preferred unit offering costs                 |       | (1,575     | )          | —     |       | —     |       |
| Amortization  of discount on general partner preferred equity        |       | —     |       | (336       | )          | —     |       |
| Preferred  return to general partner - Series F                      |       | (1,952     | )          | (195       | )          | —     |       |
| Distribution  to preferred units - limited partners                  |       | (14,175    | )          | (17,996    | )          | (18,319    | )          |
| Net income  available to common unitholders                          |       | $          | 86,106     |       | $          | 37,814     |       | $ | 55,311 |   |
| Per common  unit data:                                               |       |       |       |       |       |       |       |
| Basic:                                                               |       |       |       |       |       |       |       |
| Income from  continuing operations available to common units         |       | $          | 3.38       |       | $          | 1.52       |       | $ | 2.21 |   |
| Income from  discontinued operations                                 |       | 0.03       |       | 0.07       |       | 0.45       |       |
| Net income  available to common units                                |       | $          | 3.41       |       | $          | 1.59       |       | $ | 2.66 |   |
|                                                                 |       |       |       |       |       |       |       |
| Weighted  average number of common units outstanding during the year |       | 25,255,190 |       | 23,737,077 |       | 20,812,272 |       |
| Diluted:                                                             |       |       |       |       |       |       |       |
| Income from  continuing operations available to common units         |       | $          | 3.35       |       | $          | 1.51       |       | $ | 2.19 |   |
| Income from  discontinued operations                                 |       | 0.03       |       | 0.07       |       | 0.45       |       |
| Net income  available to common units                                |       | $          | 3.38       |       | $          | 1.58       |       | $ | 2.64 |   |
|                                                                 |       |       |       |       |       |       |       |
| Weighted  average number of common units outstanding during the year |       | 25,490,266 |       | 23,947,930 |       | 21,007,501 |       |

 

See accompanying notes to consolidated financialstatements.

 

F-5

----

 

**ESSEXPORTFOLIO, L.P. AND SUBSIDIARIESConsolidated Statements ofPartners’ CapitalYears ended December 31, 2004, 2003 and 2002(Dollars and units in thousands)**

 
| ** **                                                     | ** ** | **General Partner** | ** ** | **Limited Partners**   | ** ** | ** **        | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                     | ** ** | **Common Equity**   | ** ** | **Preferred   Equity** | ** ** | **Common Equity** | ** ** | **Preferred   Equity** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Units**           | ** ** | **Amount**             | ** ** | **Amount**        | ** ** | **Units** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Balances at December 31,  2001                            |       | 18,428              |       | 379,612                |       | —            |       | 2,286 |   | 45,196 |   | 204,490 |   | 629,298 |   |
|                                                           |       |                |       |                   |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  common units under stock-based compensation plans |       | 246                 |       | 4,049                  |       | —            |       | — |   | — |   | — |   | 4,049 |   |
| Shares purchased  by Operating Partnership                     |       | (411                | )          | (19,715                | )          | —            |       | — |   | — |   | — |   | (19,715 | ) |
| Issuance of  general partner common units                      |       | 2,720               |       | 136,809                |       | —            |       | — |   | — |   | — |   | 136,809 |   |
| Redemption of  limited partner common units                    |       | —              |       | —                 |       | —            |       | (6 | ) | (309 | ) | — |   | (309 | ) |
| Vested  series Z incentive units                               |       | —              |       | —                 |       | —            |       | 40 |   | 413 |   | — |   | 413 |   |
| Reallocation  of partners’ capital                        |       | —              |       | (6,937                 | )          | —            |       | — |   | 6,937 |   | — |   | — |   |
| Net income                                                     |       | —              |       | 48,640                 |       | —            |       | — |   | 6,671 |   | 18,319 |   | 73,630 |   |
| Partners’  distributions                                  |       | —              |       | (56,767                | )          | —            |       | — |   | (7,219 | ) | (18,319 | ) | (82,305 | ) |
| Balances at December 31,  2002                            |       | 20,983              |       | 485,691                |       | —            |       | 2,320 |   | 51,689 |   | 204,490 |   | 741,870 |   |
|                                                           |       |                |       |                   |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of common  units under stock-based compensation plans |       | 207                 |       | 7,501                  |       | —            |       | — |   | — |   | — |   | 7,501 |   |
| Issuance of  general partner common units                      |       | 1,636               |       | 99,202                 |       | —            |       | — |   | — |   | — |   | 99,202 |   |
| Contribution  of general partner preferred equity              |       | —              |       | —                 |       | 24,076            |       | — |   | — |   | — |   | 24,076 |   |
| Amortization  of discount on general partner preferred equity  |       | —              |       | (302                   | )          | 336               |       | — |   | (34 | ) | — |   | — |   |
| Redemption of  limited partner common units                    |       | —              |       | —                 |       | —            |       | (15 | ) | (769 | ) | — |   | (769 | ) |
| Redemption  of Series C preferred unit                         |       | —              |       | —                 |       | —            |       | — |   | — |   | (25,000 | ) | (25,000 | ) |
| Write off of  Series C preferred unit offering costs           |       | —              |       | (562                   | )          | —            |       | — |   | (63 | ) | 625 |   | — |   |
| Vested  series Z incentive units                               |       | —              |       | —                 |       | —            |       | 16 |   | 545 |   | — |   | 545 |   |
| Reallocation  of partners’ capital                        |       | —              |       | (2,203                 | )          | —            |       | — |   | 2,203 |   | — |   | — |   |
| Net income                                                     |       | —              |       | 34,798                 |       | 195               |       | — |   | 3,977 |   | 17,996 |   | 56,966 |   |
| Partners’  distributions                                  |       | —              |       | (67,138                | )          | (195              | )          | — |   | (7,254 | ) | (17,996 | ) | (92,583 | ) |
| Balances at December 31,  2003                            |       | 22,826              |       | 556,987                |       | 24,412            |       | 2,321 |   | 50,294 |   | 180,115 |   | 811,808 |   |
|                                                           |       |                |       |                   |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  common units under stock-based compensation plans |       | 155                 |       | 6,058                  |       | —            |       | — |   | — |   | — |   | 6,058 |   |
| Issuance of  general partner common units                      |       | 53                  |       | 2,307                  |       | —            |       | — |   | — |   | — |   | 2,307 |   |
| Issuance of  limited partners’ common units               |       | —              |       | —                 |       | —            |       | 184 |   | 7,213 |   | — |   | 7,213 |   |
| Redemption  of limited partner common units                    |       | —              |       | —                 |       | —            |       | (62 | ) | (3,757 | ) | — |   | (3,757 | ) |
| Redemption  of Series E preferred unit                         |       | —              |       | —                 |       | —            |       | — |   | — |   | (55,000 | ) | (55,000 | ) |
| Write off of  Series E preferred unit offering costs           |       | —              |       | (1,422                 | )          | —            |       | — |   | (153 | ) | 1,575 |   | — |   |
| Vested  series Z and Z-1 incentive units                       |       | —              |       | —                 |       | —            |       | 35 |   | 537 |   | — |   | 537 |   |
| Reallocation  of partners’ capital                        |       | —              |       | (4,264                 | )          | —            |       | — |   | 4,264 |   | — |   | — |   |
| Net income                                                     |       | —              |       | 79,163                 |       | 1,952             |       | — |   | 8,518 |   | 14,175 |   | 103,808 |   |
| Partners’  distributions                                  |       | —              |       | (71,964                | )          | (1,952            | )          | — |   | (7,480 | ) | (14,175 | ) | (95,571 | ) |
| Balances at December 31,  2004                            |       | 23,034              |       | $                      | 566,865    |              | $          | 24,412 |   | 2,478 |   | $ | 59,436 |   | $ | 126,690 |   | $ | 777,403 |   |
|                                                                |            |                     |            |                        |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidatedfinancial statements.

 

F-6

----

 

**ESSEXPORTFOLIO, L.P. AND SUBSIDIARIESConsolidated Statements ofCash FlowsYears ended December 31, 2004, 2003 and 2002(Dollars in thousands)**

 
| ** **                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows  from operating activities:                                                         |       |     |       |     |       |     |       |
| Net income                                                                                     |       | $        | 103,808    |     | $          | 56,966   |       | $ | 73,630 |   |
| Minority  interests                                                                            |       | 3,430    |       | 4,135    |       | 3,664    |       |
| Adjustments  to reconcile net income to net cash provided by operating activities:             |       |     |       |     |       |     |       |
| Gain on the  sales of real estate                                                              |       | (7,909   | )          | —   |       | (9,196   | )          |
| The Company’s  share of gain on the sales of co-investment assets                         |       | (39,241  | )          | —   |       | (1,391   | )          |
| Impairment  charge                                                                             |       | 826      |       | —   |       | —   |       |
| Equity  income of limited partnerships                                                         |       | (20,281  | )          | (3,296   | )          | (5,402   | )          |
| Depreciation  and amortization                                                                 |       | 72,923   |       | 57,587   |       | 44,100   |       |
| Amortization  of deferred financing costs                                                      |       | 1,587    |       | 1,197    |       | 814      |       |
| Changes in  operating assets and liabilities, net of effects of                                |       |     |       |     |       |     |       |
| Sachs merger  in 2002:                                                                         |       |     |       |     |       |     |       |
| Prepaid  expenses and other assets                                                             |       | (1,189   | )          | (3,103   | )          | (2,393   | )          |
| Accounts  payable and accrued liabilities                                                      |       | 5,942    |       | (6,212   | )          | (7,243   | )          |
| Other  liabilities                                                                             |       | 1,842    |       | 682      |       | (1,515   | )          |
| Net cash provided  by operating activities                                                     |       | 121,738  |       | 107,956  |       | 95,068   |       |
| Cash flows  from investing activities:                                                         |       |     |       |     |       |     |       |
| Additions to  real estate:                                                                     |       |     |       |     |       |     |       |
| Acquisitions  of real estate                                                                   |       | (176,888 | )          | (65,607  | )          | (9,323   | )          |
| Acquisition  of Sachs’ Portfolio                                                          |       | —   |       | (1,766   | )          | (96,637  | )          |
| Improvements  to recent acquisitions                                                           |       | (10,062  | )          | (9,319   | )          | (3,273   | )          |
| Redevelopment                                                                                  |       | (10,258  | )          | (3,329   | )          | (7,739   | )          |
| Revenue  generating capital expenditures                                                       |       | (281     | )          | (219     | )          | (1,203   | )          |
| Non-revenue  generating capital expenditures                                                   |       | (10,095  | )          | (9,248   | )          | (7,847   | )          |
| Disposition  of real estate                                                                    |       | 90,962   |       | —   |       | 3,775    |       |
| (Increase)  decrease in restricted cash                                                        |       | (10,080  | )          | 3,724    |       | 7,623    |       |
| Additions to  notes receivable from investees, other related parties and other receivables     |       | (5,365   | )          | (3,228   | )          | (3,399   | )          |
| Repayments  of notes from investees, other related parties and other receivables               |       | 4,251    |       | 183      |       | 42,786   |       |
| Net  distribution from (contribution) to investments in corporations and limited  partnerships |       | 31,129   |       | (26,814  | )          | 29,026   |       |
| Additions to  real estate under development                                                    |       | (28,372  | )          | (30,441  | )          | (55,519  | )          |
| Net cash  used in investing activities                                                         |       | (125,059 | )          | (146,064 | )          | (101,730 | )          |
| Cash flows  from financing activities:                                                         |       |     |       |     |       |     |       |
| Proceeds  from mortgage and other notes payable and lines of credit                            |       | 447,870  |       | 306,238  |       | 242,194  |       |
| Repayment of  mortgage and other notes payable and lines of credit                             |       | (287,359 | )          | (271,229 | )          | (129,814 | )          |
| Additions to  deferred charges                                                                 |       | (4,050   | )          | (1,758   | )          | (1,376   | )          |
| Net proceeds  from stock options exercised                                                     |       | 5,483    |       | 6,865    |       | 3,376    |       |
| Net proceeds  for issuance of common units to general partner                                  |       | —   |       | 97,072   |       | —   |       |
| Net proceeds  for issuance of preferred equity to general partner                              |       | —   |       | 24,664   |       | —   |       |
| General  partner shares purchased by limited partners                                          |       | —   |       | —   |       | (19,715  | )          |
| Redemption  of limited partner units and minority interest                                     |       | (7,080   | )          | (27,399  | )          | (2,032   | )          |
| Redemption  of limited preferred partner series E unit                                         |       | (55,000  | )          | —   |       | —   |       |
| Contributions  from minority interest partners                                                 |       | —   |       | —   |       | (14      | )          |
| Distributions  to limited partner units and minority interest                                  |       | (27,948  | )          | (30,487  | )          | (30,238  | )          |
| Distributions  to general partner                                                              |       | (72,719  | )          | (63,166  | )          | (55,603  | )          |
| Net cash  provided by (used in) financing activities                                           |       | (803     | )          | 40,800   |       | 6,778    |       |
| Net increase  (decrease) in cash and cash equivalents                                          |       | (4,124   | )          | 2,692    |       | 116      |       |
| Cash and  cash equivalents at beginning of year                                                |       | 14,768   |       | 12,076   |       | 11,960   |       |
| Cash and  cash equivalents at end of year                                                      |       | $        | 10,644     |     | $          | 14,768   |       | $ | 12,076 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-7

----

 
| ** **                                                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Supplemental  disclosure of cash flow information:                                                                                      |       |     |       |     |       |     |       |
| Cash paid  for interest, net of $1,997, $4,084 and $6,814 capitalized in 2004, 2003 and  2002, respectively                             |       | $        | 60,007     |     | $          | 48,284   |       | $ | 37,097 |   |
| Supplemental  disclosure of noncash investing and financing activities:                                                                 |       |     |       |     |       |     |       |
| Real estate  under development transferred to rental properties                                                                         |       | $        | 48,239     |     | $          | 124,459  |       | $ | 16,907 |   |
| Real estate  investment transferred to rental properties                                                                                |       | $        | (1,400     | )        | $          | —   |       | $ | — |   |
| Mortgage  notes payable assumed in connection with the purchase of real estate                                                          |       | $        | 167,635    |     | $          | —   |       | $ | — |   |
| Issuance of redeemable  convertible limited partnership and Operating Partnership units in connection  with the purchase of real estate |       | $        | 4,805      |     | $          | —   |       | $ | — |   |
| Capitalized  costs relating to arbitration agreement in connection with the purchase of  real estate                                    |       | $        | —     |     | $          | 7,200    |       | $ | — |   |
| Common units  issued to the general partner pursuant to phantom stock plan                                                              |       | $        | 328        |     | $          | 254      |       | $ | 317 |   |
| Receipt of  note receivable from third party in connection with the sale of real estate                                                 |       | $        | —     |     | $          | —   |       | $ | 40,000 |   |
| Issuance of  common units to general partner in exchange for the redemption of Down REIT  units                                         |       | $        | 2,307      |     | $          | —   |       | $ | — |   |
| Proceeds  from disposition of real estate held by exchange facilitator                                                                  |       | $        | 52,549     |     | $          | —   |       | $ | 19,477 |   |
| Real estate  assets acquired due to merger:                                                                                             |       |     |       |     |       |     |       |
| Real estate                                                                                                                             |       | $        | —     |     | $          | 3,970    |       | $ | 306,708 |   |
| Prepaid  expenses                                                                                                                       |       | —   |       | —   |       | 2,053    |       |
| Deferred  charges                                                                                                                       |       | —   |       | —   |       | 490      |       |
| Notes  payable                                                                                                                          |       | —   |       | —   |       | (64,640  | )          |
| Accounts  payable and accrued liabilities                                                                                               |       | —   |       | —   |       | (8,411   | )          |
| Other liabilities                                                                                                                       |       | —   |       | —   |       | (2,754   | )          |
| Additional  paid in capital                                                                                                             |       | —   |       | (2,170   | )          | (136,809 | )          |
|                                                                                                                                    |       | $        | —     |     | $          | 1,800    |       | $ | 96,637 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-8

----

 

**ESSEXPORTFOLIO, L.P. AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002(Dollars in thousands, except for per share and per unit amounts)**

 

**(1) Organization**

 

The accompanying consolidated financial statementspresent the accounts of Essex Portfolio, L.P. (the Operating Partnership), andits subsidiaries. The Company was incorporated in the state of Maryland in March 1994.On June 13, 1994, the Company commenced operations with the completion ofan initial public offering (the Offering) in which it issued 6,275,000 sharesof common stock at $19.50 per share. The net proceeds of the Offering of$112,070 were used to acquire a 77.2% general partnership interest in theOperating Partnership.

 

The common equity limited partners own a 9.7%interest in the Operating Partnership as of December 31, 2004. The commonequity limited partners may convert their 2,386,938 Operating Partnership unitsinto an equivalent number of shares of Copmany common stock or cash (based uponthe trading price of the Company’s common stock on the conversion date.) TheCompany has reserved shares of common stock for such conversions. Theseconversion rights may be exercised by the common equity limited partners at anytime through 2024.

 

On December 17, 2002, the Operating Partnershipacquired, by merger, John M. Sachs, Inc. (“Sachs Portfolio”) resulting in theacquisition of its real estate portfolio, which consisted of 20 multifamilyproperties, five recreational vehicle parks, two manufactured housingcommunities and two small office buildings. Total consideration in thetransaction was $306,700 and was structured as a tax-free reorganizationwhereby the Company: (i) issued 2,719,875 shares of its common stock valued at$136,800, (ii) assumed mortgages on four of the newly acquired properties forapproximately $64,600 with a fixed interest rate of 5.51%, maturing in January 2013,(iii) assumed and repaid unsecured liabilities in the amount of approximately$33,000, and (iv) paid the balance in cash of $72,200. The cash portion wasfunded through four new non-recourse mortgages on four previously unencumberedproperties, with a weighted average interest rate of 5.64%, maturing in January 2013and draws upon new and existing lines of credit. The Operating Partnershipaccounted for this transaction using the purchase method of accounting whichresulted in the allocation of the purchase price to the assets and liabilitiesacquired based on their fair values.  Thefair value of assets and liabilities were based on management’s estimates.  No goodwill was recognized in connection withthis purchase.  The Operating Partnership’sresults of operations for the period December 17, 2002 through December 31,2002 include the Sachs Portfolio. On July 30, 2003, and under terms of themerger agreement, a final analysis was prepared, which indicated that theactual net liabilities of Sachs were less than the net liabilities of Sachsestimated to be outstanding as of the merger date.  Based on this final analysis and as apost-closing adjustment pursuant to the merger agreement, the OperatingPartnership made a final payment of $1,800 in cash and issued an additional35,860 shares of common stock valued at $2,170 to certain of the pre-mergershareholders of Sachs.

 

Unaudited pro forma information reflecting theacquisition of the Sachs Portfolio is presented in the following table. Theamounts included therein assume that the acquisition had taken place at thebeginning of the year.

 
| ** **                                              | ** ** | **2002**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| Total  property revenues                                |       | $          | 250,355    |   |
| Total  expenses                                         |       | 195,309    |       |
| Minority  interests                                     |       | (3,664     | )          |
| Gain on sale  of real estate                            |       | 145        |       |
| Interest and  other income                              |       | 12,505     |       |
| Equity  income in co-investments                        |       | 5,402      |       |
| Income from  continuing operations                      |       | 69,434     |       |
| Basic  earnings per share from continuing operations    |       | 2.96       |       |
| Diluted  earnings per share from continuing operations  |       | 2.94       |       |
|                                                    |       |       |       |
| Weighted  average number of proforma units outstanding: |       |       |       |
| Basic                                                   |       | 23,427,873 |       |
| Diluted                                                 |       | 23,623,102 |       |
|                                                         |            |            |            |  |

 

F-9

----

 

As of December 31, 2004, the OperatingPartnership operates and has ownership interests in 120 multifamily properties(containing 25,518 units), four recreational vehicle parks (containing 698spaces), five office buildings (totaling approximately 173,540 square feet),and two manufactured housing communities (containing 607 sites) (collectively,the Properties). The Properties are located in Southern California (LosAngeles, Ventura, Orange, San Diego, and Riverside counties), NorthernCalifornia (the San Francisco Bay Area), the Pacific Northwest (Seattle,Washington, and Portland, Oregon metropolitan areas) and other areas (LasVegas, Nevada and Houston, Texas).

 

**(2) Summary of Critical and Significant Accounting Policies**

 

***(a) Adoption of New AccountingPrinciples***

 

As more fully described below in Notes 2 (b), 2(m)and 2(n), the accompanying 2003 and 2002 consolidated financial statements havebeen restated.  The restatement for theretroactive adoption of the provisions of FASB Interpretation No. 46R andStatement of Financial Accounting Standard No. 123 has been reflected in all ofthe notes to the consolidated financial statements including the unauditedquarterly results of operations.

 

***(b) Principles of Consolidation***

 

The accounts of the Operating Partnership, itscontrolled subsidiaries and its variable interest entities in which it is theprimary beneficiary are consolidated in the accompanying financial statements.All significant inter-company accounts and transactions have been eliminated.We use the equity method to account for investments that do not qualify asvariable interest entities or where we do not own a majority of the economicinterest, but have the ability to exercise significant influence over theoperating and financial policies of the investee. For an investee accounted forunder the equity method, our share of net earnings or losses of the investee isreflected in income as earned and distributions are credited against theinvestment as received.

 

As of January 1, 2004, we adopted FASBInterpretation No. 46 “Consolidation of Variable Interest Entities”(revised) using the retroactive restatement approach, and amounts havebeen restated for the years ended December 31, 2003 and 2002. As a result,the accompanying consolidated financial statements have been restated toreflect the consolidated financial position and results of operations of EssexProperty Trust, Essex Management Corporation (EMC), Essex Fidelity ICorporation (EFC), 17 Down REIT limited partnerships (comprising tenproperties), an office building that is subject to loans made by the OperatingPartnership, and the multifamily improvements owned by a third party in whichthe Operating Partnership owns the land underlying these improvements and fromwhich the Operating Partnership receives fees, including land lease,subordination and property management fees in accordance with U.S. generallyaccepted accounting principles. The Operating Partnership’s total assets andliabilities related to these VIEs, net of intercompany eliminations, wereapproximately $238.1 million and $155.1 million, respectively, at December 31,2004 and $246.1 million and $156.5 million, respectively, at December 31,2003. We previously accounted for EMC, EFC, and the Down REIT limitedpartnerships using the equity method of accounting.

 

The Down REIT entities that collectively own tenmultifamily properties (1,831 units) were investments made under arrangementswhereby EMC became the general partner, the Operating Partnership became aspecial limited partner, and the other limited partners were granted rights ofredemption for their interests. Such limited partners can request to beredeemed and the Operating Partnership can elect to redeem their rights forcash or by issuing shares of the Company’s common stock on a one share per unitbasis. Conversion values will be based on the market value of the Company’scommon stock at the time of redemption multiplied by the number of unitsstipulated under the above arrangements. The other limited partners receivedistributions based on the Company’s current dividend rate times the number ofunits held. At December 31, 2004, the maximum number of shares that couldbe issued to meet redemption of these Down REIT entities is 1,345,003.  As of December 31, 2004 and December 31,2003, the carrying value of the other limited partners’ interests is presentedat their historical cost and is classified within minority interests in theaccompanying consolidated balance sheets.

 

Interest holders in VIEs consolidated by theOperating Partnership are allocated a priority of net income equal to the cashpayments made to those interest holders for services rendered or distributionsfrom cash flow.  The remaining results ofoperations are generally allocated to the Operating Partnership.

 

Properties consolidated in accordance with FIN 46Rwere encumbered by third party, non-recourse loans totaling $151.3 million and$152.7 million as of December 31, 2004 and December 31, 2003,respectively.

 

F-10

----

 

During December 31, 2004, the OperatingPartnership entered into two arrangements that are deemed VIEs. The entity thatpurchased The Essex at Lake Merritt property as discussed in Note 3 –Dispositions, is a VIE. We have concluded that the Operating Partnership’sparticipating loan to the entity does not result in the Operating Partnershipbeing the primary beneficiary.  TheOperating Partnership entered into a joint venture to develop a 5-story buildingin Los Angeles, California. The Operating Partnership is the primarybeneficiary, and the joint venture is consolidated as of December 31,2004.

 

As of December 31, 2004 the OperatingPartnership is involved with two VIEs in which the Operating Partnership is notdeemed to be the primary beneficiary. Total assets and liabilities of these entities as of December 31,2004 were approximately $116.0 million and $107.0 million, respectively.  The Operating Partnership’s maximum exposureto loss resulting from these unconsolidated VIEs is not considered significant.

 

***(c) Real Estate Rental Propertiesand Discontinued Operations***

 

Significant expenditures, which improve or extendthe life of an asset and have a useful life of greater than one year, arecapitalized.  Operating real estateassets are stated at cost and consist of land, buildings and improvements,furniture, fixtures and equipment, and other costs incurred during theirdevelopment, redevelopment and acquisition. Expenditures for maintenance and repairs are charged to expense asincurred.

 

The depreciable life ofvarious categories of fixed assets are as follows:

 
| Computer equipment                                                |   | 3 years  |   |
|-------------------------------------------------------------------|--------|----------|--------|
| Interior unit improvements                                        |   | 5 years  |   |
| Land improvement and certain exterior components of real property |   | 10 years |   |
| Real estate structures                                            |   | 30 years |   |

 

In accordance with SFAS No. 67, “Accounting forCosts and Initial Rental Operations of Real Estate Projects,” the OperatingPartnership capitalizes pre-development costs incurred in pursuit of newdevelopment opportunities for which the Operating Partnership currentlybelieves future development is probable. Pre-development costs for which a future development is no longerconsidered probable are charged to expense.

 

Costs incurred with the development or redevelopmentof real estate assets are capitalized if they are clearly associated with thedevelopment or redevelopment of rental property, or are associated with theconstruction or expansion of real property. Such capitalized costs include land, land improvements, allocated costsof the Operating Partnership’s project management staff, construction costs, aswell as interest and related loan fees, property taxes and insurance.Capitalization begins when active development commences or when a redevelopmentasset is taken out-of-service. Capitalization ends when the apartment home iscompleted and the property is available for a new residence.

 

In accordance with Financial Accounting StandardsBoard’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 141,“Business Combinations,” the Operating Partnership allocates the purchase priceof real estate to land and building, and identifiable intangible assets, suchas the value of above, below and at-market in-place leases. The values of theabove and below market leases are amortized and recorded as either a decrease(in the case of above market leases) or an increase (in the case of belowmarket leases) to rental revenue over the remaining term of the associatedleases acquired. Acquired at-market leases are amortized to expense over theterm the Operating Partnership expects to retain the acquired tenant, which isgenerally 20 months.

 

In accordance with SFAS 141 and its applicability toacquired in-place leases, we perform the following evaluation for properties weacquire:

 

(1)          estimate the value of the real estate “as if vacant” as of theacquisition date;

 

(2)          allocate that value among land and building and determine theassociated asset life for each;

 

(3)          compute the value of the difference between the “as if vacant” valueand the purchase price, which will represent the total intangible assets;

 

(4)          allocate the value of the above and below market leases to theintangible assets and determine the associated life of the above market/ belowmarket leases;

 

F-11

----

 

(5)          allocate the remaining intangible value to the at-market in-placeleases or customer relationships, if any, and the associated lives of theseassets;

 

Whenever events or changes in circumstances indicatethat the carrying amount of a property held for investment or held for sale maynot be fully recoverable, the carrying amount will be evaluated for impairment.If the sum of the property’s expected future cash flows (undiscounted andwithout interest charges) is less than the carrying amount (includingintangible assets) of the property, then the Operating Partnership willrecognize an impairment loss equal to the excess of the carrying amount overthe fair value of the property.  Suchfair value of a property is determined using conventional real estate valuationmethods, such as discounted cash flow, the property’s unleveraged yield incomparison to the unleveraged yields and sales prices of similar propertiesthat have been recently sold, and other third party information, if available.As of December 31, 2004, no properties were impaired.

 

In accordance with Statement of Financial AccountingStandard No. 144 “Accounting for Impairment of Disposal of Long-Lived Assets”the Operating Partnership presents income and gains/losses on properties soldas discontinued operations net of minority interests. Real estate investmentsaccounted for under the equity method of accounting remain classified incontinuing operations upon disposition. During 2004, the Operating Partnershipgranted the lessees of one manufactured housing community and two recreationalvehicle parks the right to exercise their purchase agreements in 2004. On July 18,2004, the Operating Partnership sold Golden Village Recreational Vehicle Parkfor $6,700. As of December 31, 2004, Riviera RV Resort and Riviera MobileHome Park met the “held for sale” criteria under SFAS 144. In accordance withSFAS 144, assets and liabilities and the results of operations of theproperties are presented as discontinued operations in the consolidatedfinancial statements for all periods presented.

 

***(d) Investments and Joint Ventures***

 

The Operating Partnership owns investments in jointventures and affiliates and has significant influence but its ownership interestdoes not meet the criteria for consolidation in accordance with FIN 46R andAccounting Research Bulletin No. 51. Therefore, we account for our interestusing the equity method of accounting. Under the equity method of accounting,the investment is carried at the cost of assets contributed or distributed,plus the Operating Partnership’s equity in undistributed GAAP earnings orlosses since its initial investment. The Operating Partnership’s share ofequity in income and gains on sales of real estate are included in other incomein the accompanying consolidated statements of operations.

 

Some of these investments and/or joint venturescompensate the Operating Partnership for its asset management services and mayprovide promote distributions if certain financial return benchmarks areachieved.  Asset management fees andpromote fees are recognized when the earnings events have occurred and there isGAAP earnings in the underlying entities. Asset management fees and promotefees are reflected in interest and other and equity income in co-investmentsrespectively, in the accompanying consolidated statements of operations.

 

***(e) Revenues and Gains on Sale ofReal Estate***

 

Rental revenue is reported on the accrual basis ofaccounting.

 

Revenues from tenants renting or leasing apartmentunits, recreational vehicle park spaces or manufactured housing communityspaces are recorded when due from tenants and are recognized monthly as it isearned, which is not materially different than on a straight-line basis.  Units or spaces are rented under short-termleases (generally, lease terms of 6 to 12 months) and may provide no rent forone or two months, depending on the market conditions and leasing practices ofour competitors in each sub-market at the time the leases are executed.

 

The Operating Partnership recognizes gains on salesof real estate when a contract is in place, a closing has taken place, thebuyer’s initial and continuing investment is adequate to demonstrate acommitment to pay for the property and the Operating Partnership does not havea substantial continuing involvement in the property.

 

***(f) Income Taxes***

 

No provisionfor income taxes has been made as the Operating Partnership’s taxable income orloss is reportable on the tax returns of the individual partners based on theirproportionate interest in the Operating Partnership.

 

F-12

----

 

In order to maintain the Company's compliance withREIT tax rules, the Operating Partnership utilizes taxable REIT subsidiaries(“TRS”) for various revenue generating or investment activities. The TRS’s areconsolidated by the Operating Partnership. The activities and tax relatedprovisions, assets and liabilities are not material.

 

***(g) Notes Receivable and InterestIncome***

 

Notes receivable relate to real estate financingarrangements that exceed one year. They bear interest at a market rate based onthe borrower’s credit quality and are recorded at face value. Interest isrecognized over the life of the note. The Operating Partnership requirescollateral for the notes.

 

Each note is analyzed to determine if it is impairedpursuant to FASB’s SFAS No. 114, Accounting by Creditors for Impairment ofa Loan. A note is impaired if it is probable that the Operating Partnershipwill not collect all principal and interest contractually due. The impairmentis measured periodically based on the present value of expected future cashflows discounted at the note’s effective interest rate. The OperatingPartnership does not accrue interest when a note is considered impaired. Allcash receipts on impaired notes are applied to reduce the principal amount ofsuch notes until the principal has been recovered and, thereafter, arerecognized as interest income.

 

***(h) Interest Rate Protection, Swap,and Forward Contracts***

 

The Operating Partnership has from time to time usedinterest rate protection, swap and forward contracts to manage its interestrate exposure on current or identified future debt transactions. The OperatingPartnership accounts for such derivative contracts using SFAS No. 133. UnderSFAS No. 133, derivative instruments are required to be included in the balancesheet at fair value. The changes in the fair value of the derivatives areaccounted for depending on the use of the derivative and whether it has beendesignated and qualifies as a part of a hedging relationship. If the hedgedexposure is a cash flow exposure, changes in fair value of the effectiveportion of the gain or loss on the derivative instrument are reported initiallyas a component of other comprehensive income and subsequently reclassified intoearnings when the forecasted transaction affects earnings. Changes in theineffective portion of the gain or loss are reported in earnings immediately.

 

***(i) Deferred Charges***

 

Deferred charges are principally comprised of loanfees and related costs which are amortized over the terms of the relatedborrowing in a manner which approximates the effective interest method.

 

***(j) Interest***

 

The Operating Partnership capitalized $1,997,$4,084, and $6,814 of interest related to the development of real estate during2004, 2003, and 2002, respectively.

 

F-13

----

 

***(k) Cash Equivalents and RestrictedCash***

 

Highly liquid investments with original maturitiesof three months or less when purchased are classified as cash equivalents.Restricted cash relates to reserve requirements in connection with theOperating Partnership’s mortgage debt.

 

***(l) Minority Interest***

 

The Down REIT entities that collectively own tenmultifamily properties (1,831 units) were investments made under arrangementswhen EMC became the general partner, the Operating Partnership became a speciallimited partner, and the other limited partners were granted rights ofredemption for their interests. Such limited partners can request to beredeemed and the Company can elect to redeem their rights for cash or byissuing shares of its common stock on a one share per unit basis. Conversionvalues will be based on the market value of the Company’s common stock at thetime of redemption multiplied by the number of units stipulated under the abovearrangements. The other limited partners receive distributions based on theCompany’s current dividend rate times the number of units held. At December 31,2004, the maximum number of shares that could be issued to meet redemption ofthese Down REIT entities is 1,345,003. As of December 31, 2004 and December 31, 2003, the carryingvalue of the other limited partners’ interests is presented at their historicalcost and is classified within minority interests in the accompanyingconsolidated balance sheets.

 

***(m) Stock-based Compensation***

 

As of January 1, 2004, the Company adopted thefair value method of accounting for its stock-based compensation plans usingthe retroactive restatement method as provided by Statement of FinancialAccounting Standards No. 123 (SFAS 123), “Accounting for Stock-BasedCompensation.”  Under the fair valuemethod, stock-based compensation cost is measured at the grant date based onthe fair value of the award and is expensed over the vesting period.  Stock-based compensation expense under thefair value method for the years ended December 31, 2004, 2003 and 2002 was$784, $991 and $933, respectively.  Thefair value of stock options granted for the years ended December 31, 2004,2003 and 2002 was $8.84, $4.18 and $4.69, respectively, and was estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted average assumptions used for grants:

 
| ** **                | ** ** | **2004**      | ** ** | **2003**      | ** ** | **2002**      |
|---------------------------|------------|---------------|------------|---------------|------------|---------------|
| Stock price               |       | $62.34-$84.46 |       | $51.01-$61.58 |       | $46.98-$52.04 |
| Risk-free  interest rates |       | 3.34%-3.94%   |       | 2.58%-3.21%   |       | 3.08%-4.64%   |
| Expected  lives           |       | 5 years       |       | 5-6 years     |       | 6 years       |
| Volatility                |       | 19.07%-19.14% |       | 17.89%-19.18% |       | 18.92%        |
| Dividend  yield           |       | 4.26%-5.07%   |       | 5.66%-6.12%   |       | 6.30          |

 

F-14

----

 

***(n) Reconciliation to previouslyreported amounts***

 

The accounting effect of adopting FIN 46R and SFAS123 on net income previously reported for the years ended December 31,2003 and 2002 is as follows (dollars in thousands, except per unit amounts):

 
| ** **                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income  available to common unitholders previously reported |       | $        | 40,865     |     | $          | 59,568 |   |
| Adjustment for  effect of adopting SFAS 123                     |       | (468     | )          | (222     | )          |
| Adjustment  for effect of adopting FIN 46 Revised               |       | (2,583   | )          | (4,035   | )          |
| Net income  available to common unitholders as reported         |       | $        | 37,814     |     | $          | 55,311 |   |
|                                                            |       |     |       |     |       |
| Per common  unit data:                                          |       |     |       |     |       |
| Basic:                                                          |       |     |       |     |       |
| Per unit as  previously reported                                |       | $        | 1.72       |     | $          | 2.86 |   |
| Adjustment for  effect of adopting SFAS 123                     |       | (0.02    | )          | (0.01    | )          |
| Adjustment  for effect of adopting FIN 46 Revised               |       | (0.11    | )          | (0.19    | )          |
| Per basic  unit as reported                                     |       | $        | 1.59       |     | $          | 2.66 |   |
|                                                            |       |     |       |     |       |
| Diluted:                                                        |       |     |       |     |       |
| Per unit as  previously reported                                |       | $        | 1.71       |     | $          | 2.84 |   |
| Adjustment for  effect of adopting SFAS 123                     |       | (0.02    | )          | (0.01    | )          |
| Adjustment  for effect of adopting FIN 46 Revised               |       | (0.11    | )          | (0.19    | )          |
| Per diluted  unit as reported                                   |       | $        | 1.58       |     | $          | 2.64 |   |

 

The accounting effect of adopting FIN 46R and SFAS123 on partners’ capital at January 1, 2002 for previously reportedamounts is as follows (dollars in thousands):

 
| ** **                                                                                 | ** ** | **General Partner  Common   Equity** | ** ** | **Limited Partner  Common   Equity** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| Statement of  Partners’ Capital:                                                      |       |                                 |       |                                 |       |      |       |
|                                                                                       |       |                                 |       |                                 |       |      |       |
| Balance at January 1,  2002, as previously reported                                   |       | $                                    | 381,674    |                                 | $          | 45,563    |       | $ | 427,237 |   |
| Adjustments  for cumulative effect on prior years of retroactively applying SFAS 123       |       | 166                                  |       | 674                                  |       | 840       |       |
| Adjustments  for cumulative effect on prior years of retroactively applying FIN 46 Revised |       | (2,228                               | )          | (1,041                               | )          | (3,269    | )          |
|                                                                                       |       |                                 |       |                                 |       |      |       |
| Balance at January 1,  2002, as adjusted                                              |       | $                                    | 379,612    |                                 | $          | 45,196    |       | $ | 424,808 |   |

 

***(o) Legal costs***

 

Legal costs associated with matters arising out ofthe normal course of our business are expensed as incurred. Legal costsincurred in connection with non-recurring litigation that is not covered byinsurance are accrued when amounts are probable and estimatable.

 

***(p) Accounting Estimates andReclassifications***

 

The preparation of consolidated financialstatements, in accordance with accounting principles generally accepted in theUnited States of America, requires the Operating Partnership to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses and related disclosures of contingent assets and liabilities. Onan on-going basis, the Operating Partnership evaluates its estimates, includingthose related to acquiring, developing and assessing the carrying values of itsreal estate properties, its investments in and advances to joint ventures andaffiliates, and its notes receivables. The Operating Partnership bases itsestimates on historical experience, current market conditions, and on variousother assumptions that are believed to be reasonable under the circumstances.Actual results may vary from those

 

F-15

----

 

estimatesand those estimates could be different under different assumptions orconditions.

 

Certain prior year balances have been reclassifiedto conform to the current year presentation. Interest and other income areconsidered non-operating income and have been reclassified for all periodspresented.

 

**(3) Real Estate**

 

***(a) Rental Properties***

 

Rental properties consist of multifamily propertieswith a net book value of $1,990,607 and other rental properties (officebuildings, recreational vehicle parks, and manufactured housing communities)with a net book value of $45,345.

 

The properties are located in California,Washington, Oregon, Nevada and Texas. The operations of the properties could beadversely affected by a recession, general economic downturn or a naturaldisaster in the areas where the properties are located.

 

For the years ended December 31, 2004, 2003,and 2002, depreciation expense on real estate within continuing operations was$72,616, $57,190, and $43,909, respectively. For the years ended December 31, 2004, 2003, and 2002, depreciationexpense on real estate within discontinued operations was $308, $397, and $191,respectively.

 

***(b) Sales of Real Estate and AssetsHeld for Sale***

 

The Operating Partnership recognizes sales of realestate when a contract has been executed, a closing has occurred, the buyer’sinitial and continuing investment is adequate to demonstrate a commitment topay for the property and the Operating Partnership does not have a substantialcontinuing involvement in the property. Each property is considered aseparately identifiable component of the Operating Partnership and is reportedin discontinued operations when the operations and cash flows of the propertyhave been (or will be) eliminated from the ongoing operations of the OperatingPartnership as a result of a disposal transaction. Interest expense associatedwith a mortgage loan is classified as a component of discontinued operations ifthat loan is directly secured by a property classified as a discontinuedoperation.

 

For the year ended December 31, 2004, the gainon the sale of The Essex at Lake Merritt was $12,909, of which $5,000 isdeferred and will be recognized on the cost recovery method. The $5,000 was deferredbecause of our continuing involvement with the property.

 

At December 31, 2004, we had two non-coreassets that were acquired in conjunction with the merger with John M. Sachs,Inc. in 2002, classified as held for sale under the provisions of SFAS No. 144.The two non-core assets were: The Riviera Recreational Vehicle Park and TheRiviera Manufactured Home Park, both located in Las Vegas, Nevada, for whichthe Operating Partnership has previously entered into master lease and optionagreements with an unrelated entity. These properties were sold in January 2005. Accordingly, we haveclassified the lease income from The Riviera Recreational Vehicle Park and TheRiviera Manufactured Home Park within discontinued operations for the yearsended December 31, 2004, 2003 and 2002. Assets held for sale as of December 31,2004, represented gross real estate of $14,941.

 

During 2002, we sold Tara Village, a 168-unitapartment community located in Tarzana, California. The operating results andthe related gain on sale of $8,061 were included in discontinued operations forthe twelve months ended December 31, 2002.

 

In 2002, the Operating Partnership sold MoanaluaHillside Apartments, a 700-unit apartment community located in Honolulu, Hawaiifor a contract price of $44.1 million. The Operating Partnership recognized a net gain of $145 on the sale ofthis property.  This property was heldfor sale at December 31, 2001, and therefore has been included as acomponent of continued operations in 2002.

 

***(c) Investments***

 

The Operating Partnership has investments in anumber of affiliates, which are accounted for under the equity method. Theaffiliates own and operate multifamily rental properties.

 

F-16

----

 

Essex Apartment Value Fund, L.P. (“Fund I”), is aninvestment fund organized by the Operating Partnership in 2001 to add valuethrough rental growth and asset appreciation, utilizing the OperatingPartnership’s acquisition, development, redevelopment and asset management capabilities.Fund I was considered fully invested in 2003. An affiliate of the OperatingPartnership, Essex VFGP, L.P. (“VFGP”), is a 1% general partner and is a 20.4%limited partner. The Operating Partnership owns a 99% limited partnershipinterest in VFGP.

 

Since its formation, Fund I acquired or developedownership interests in 19 multifamily residential properties, representing5,406 apartment units with an aggregate cost of approximately $618.0million.  Fund I also owns the KelvinAve. land parcel in Irvine, California, which is planned for development into a132-unit apartment community.

 

Prior to 2004, Fund I disposed of two multifamilyresidential properties, consisting of 530 apartments units for a aggregatecontract sales price of approximately $73.2 million.

 

On August 26, 2004, Fund I sold PalermoApartments, a 230-unit multifamily community located in San Diego, Californiafor a net sales price of $58.2 million. Fund I completed the development of this property at an approximate costof $44.9 million in 2004.

 

In the third quarter of 2004, Fund I entered into apurchase and sale agreement with United Dominion Realty, L.P. (“UDR”) for asale of sixteen apartment communities, totaling 4,646 units owned by Fund Iand, with respect to Coronado at Newport North and South, both Fund I’s and theOperating Partnership’s separate ownership interests, for a contract price of$756.0 million.  In connection with thetransaction, UDR remitted a $10 million earnest money deposit directly to FundI, which is refundable only in limited circumstances.  On September 30, 2004, pursuant to theUDR purchase and sale agreement, Fund I sold seven of the multifamilycommunities, aggregating 1,777 apartment units at a contract price ofapproximately $264.0 million. On October 27, 2004, an additional seven ofthe remaining nine properties, including the Company’s approximate 49.9%ownership interest in Coronado at Newport – North, were sold to UDR for acontract price of $322.0 million, of which $267.6 million represents Fund I’sallocated portion of the contract price based on its ownership interest.  The remaining two multifamily propertiesunder the UDR agreement that are anticipated to close in 2005 are Coronado atNewport - South, a 715-unit apartment community in Newport Beach, Californiacurrently undergoing redevelopment and River Terrace, a newly developed250-unit apartment community in Santa Clara which is currently in lease up.

 

The Fund I dispositions in 2004, combined with thesale of its 49.9% direct ownership interest in Coronado at Newport North,resulted in the Operating Partnership recognizing equity income frominvestments of $38.8 million. The Operating Partnership’s share of the gain onthe sale of real estate of $39.3 million was reduced by a $505 non-cash loss onthe early extinguishment of debt related to the write-off of unamortized loanfees.  The Operating Partnership’sgeneral partnership interest provides for “promote distributions” uponattainment of certain financial return benchmarks.  During 2004, the Operating Partnershiprecognized $18.3 million of additional equity income associated with itspromote interest.  The OperatingPartnership accrued $4.0 million of employee incentive compensation expenserelated to the Fund I sale, which is included in general and administrativeexpense.

 

On September 27, 2004 the Operating Partnershipannounced the final closing of the Essex Apartment Value Fund II (“Fund II”).Fund II has eight institutional investors including Essex with combined equitycommitments of $265.9 million. Essex has committed $75.0 million to Fund II,which represents a 28.2% interest as general partner and limited partner. FundII expects to utilize leverage of approximately 65% of the estimated value ofthe underlying real estate. Fund II will invest in multifamily properties inthe Operating Partnership’s targeted West Coast markets with an emphasis oninvestment opportunities in the Seattle metropolitan area and the San FranciscoBay Area. Subject to certain exceptions, Fund II will be Essex’s exclusiveinvestment vehicle until October 31, 2006, or when Fund II’s committedcapital has been invested, whichever occurs first. Consistent with Fund I,Essex will be compensated for its asset management, property management,development and redevelopment services and may receive promote distributions ifFund II exceeds certain financial return benchmarks.

 

In October 1999, the Operating Partnershipentered into two separate joint venture arrangements and through two separateprivate REITs, Newport Beach North, Inc. and Newport Beach South, Inc.,received an approximate 49.9% equity interest in each. Generally, profit andloss are allocated to the partners in accordance with their ownershipinterests. In addition to its equity earnings, the Operating Partnership isentitled to management and redevelopment fees from the joint ventures.  On July 11, 2003 Fund I acquired a 49.9%ownership interest in these joint ventures from an unrelated co-investmentpartner. In connection with the sale of the Fund I assets, Fund I distributedits 49.9% direct ownership interest in Newport Beach North, Inc. to theOperating Partnership during the quarter ended December 31, 2004 and nowconsolidates Newport Beach North, Inc. Immediately following the distributionof Fund I’s ownership interest to the Operating Partnership, the Newport BeachNorth property was sold 

 

F-17

----

 

to UDR as part of the transaction describedabove. The share of the proceeds from this sale that otherwise would have beendistributable to the non-Essex limited partners in Fund I was distributed tothe Operating Partnership, and the Operating Partnership accepted a reduceddistribution from the sale of other assets that were part of the same transaction.

 

In December 1999, the Operating Partnershipentered into a joint venture arrangement (AEW joint venture) and received anapproximate 20% equity interest in the joint venture. The Operating Partnershipcontributed its investment in Riverfront Apartments, Casa Mango Apartments, andThe Pointe at Cupertino (formerly Westwood Apartments) into the joint venture.The Operating Partnership also contributed land and development rights for adevelopment community, Tierra Vista, located in Oxnard, California. The AEWjoint venture completed construction and reached stabilized operations ofTierra Vista in 2001. On April 17, 2002, Riverfront Apartments and CasaMango Apartments were sold to an unrelated third party.  The combined sales price was approximately$52,000.  The buyer of these twoproperties assumed two non-recourse mortgages in the cumulative amount ofapproximately $26,500, with a 6.5% fixed interest rate, and maturing in February 2009.  The Operating Partnership’s equity in incomefrom the gain on the sale of real estate was $2,000 and is presented as equityincome from co-investments in the accompanying consolidated statement ofoperations.  The Operating Partnershipcontributed the assets to the joint venture in December 1999 at costs ofapproximately $41,000.  In addition, theOperating Partnership earned a fee in conjunction with the sale of these assetsin the amount of $1,110 and this fee is presented as equity income fromco-investments in the accompanying consolidated statement of operations. In thethird quarter of 2002, the Operating Partnership recognized an incentive fee itearned related specifically to these two asset sales in the amount of $475.Generally, profit and loss are allocated to the partners in accordance withtheir ownership interests. In addition to its equity earnings, the OperatingPartnership is entitled to management, redevelopment and development fees fromthe joint venture and incentive payments based on the financial success of thejoint venture. During the second quarter of 2004, the Operating Partnershipacquired its partner’s 80% interests in Tierra Vista and The Pointe atCupertino. The combined contract price for the interests was approximately$74.6 million.  In conjunction with thetransaction, the Operating Partnership assumed a $37.3 million loan with aninterest rate of 5.93% that matures on July 1, 2007 for Tierra Vista, anda $14.1 million loan with an interest rate of 4.86%, which matures on November 1,2012 for The Pointe at Cupertino.  As aresult of these transactions, the Operating Partnership now consolidates theseproperties.

 

In November 2001, the Operating Partnershipreceived a loan for approximately $6,800 from Mountain Vista, LLC (“MountainVista”), which is due on December 1, 2011. The Operating Partnershiprecorded the loan as a reduction to the balance of the Operating Partnership’sinvestment in Mountain Vista since the substance of the transaction was adistribution from an equity method investee.

 
| ** **                                                                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Investments  in joint ventures:                                                                                            |       |     |       |     |       |
| Direct and  indirect LLC member interests of approximately 49.9%:                                                          |       |     |       |     |       |
| Newport  Beach North, LLC(1)                                                                                               |       | $        | —     |     | $          | 6,270 |   |
| Newport  Beach South, LLC                                                                                                  |       | 11,524   |       | 6,750    |       |
| Limited  partnership interest of 20.4% and general partner interest of 1% in Essex  Apartment Value Fund, L.P (Fund I)     |       | 14,140   |       | 51,110   |       |
| Limited  partnership interest of 27.2% and general partner interest of 1% in Essex  Apartment Value Fund II, L.P (Fund II) |       | 17,242   |       | —   |       |
| Limited  partnership interest of 20% in AEW joint venture(2)                                                               |       | —   |       | 4,406    |       |
| Class A  member interest of 45% in Park Hill LLC(3)                                                                        |       | —   |       | 5,731    |       |
| Preferred  limited partnership interest in Mountain Vista Apartments(4)                                                    |       | 6,806    |       | 5,276    |       |
| Other                                                                                                                      |       | —   |       | 24       |       |
| Total  investments                                                                                                         |       | $        | 49,712     |     | $          | 79,567 |   |

 

----

(1)          In connection with the sale of the Fund I assets, Fund I distributedits 49.9% direct ownership interest in Newport Beach North, LLC to theOperating Partnership during the quarter ended December 31, 2004 and nowconsolidates Newport Beach North, LLC

 

(2)          The Operating Partnership acquired the other partner’s 80% interest inthis joint venture during the quarter ended June 30, 2004 and nowconsolidates this investment.

 

(3)          The Operating Partnership acquired the other partner’s 55% interest inthis joint venture during the quarter ended September 30, 2004 and nowconsolidates this investment.

 

(4)          The preferred limited partnership interest is held in an entity thatincludes an affiliate of Marcus & Millichap Company. Marcus & MillichapCompany’s Chairman is also the Chairman of the Company.

 

F-18

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The combined summarized financial informationof investments, which are accounted for under the equity method, are asfollows. Individual investments are removed from this data as of the date atwhich they are sold or the outside interest is acquired by the OperatingPartnership.

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Balance  sheets:                               |       |                  |       |   |   |
| Real estate  and real estate under development |       | $                     | 322,233    |   | $ | 725,990 |   |
| Other assets                                   |       | 36,709                |       | 25,481 |   |
| Total assets                                   |       | $                     | 358,942    |   | $ | 751,471 |   |
|                                           |       |                  |       |   |   |
| Mortgage  notes payable                        |       | $                     | 203,171    |   | $ | 494,322 |   |
| Other  liabilities                             |       | 21,276                |       | 19,319 |   |
| Partners’  equity                         |       | 134,495               |       | 237,830 |   |
| Total  liabilities and partners’ equity   |       | $                     | 358,942    |   | $ | 751,471 |   |
|                                           |       |                  |       |   |   |
| Operating  Partnership’s share of equity  |       | $                     | 49,712     |   | $ | 79,567 |   |

 
| ** **                                        | ** ** | **Years ended**       | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **December 31,** | ** ** |
| ** **                                        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Statements  of operations:                        |       |                  |       |   |   |   |   |
| Total  property revenue                           |       | $                     | 53,960     |   | $ | 68,011 |   | $ | 74,929 |   |
| Total gain  on the sale of real estate            |       | 138,657               |       | — |   | — |   |
| Total  expenses                                   |       | (50,957               | )          | (66,241 | ) | (54,589 | ) |
| Total net  income                                 |       | $                     | 141,660    |   | $ | 1,770 |   | $ | 20,340 |   |
|                                              |       |                  |       |   |   |   |   |
| Operating  Partnership’s share of net income |       | $                     | 59,522     |   | $ | 3,296 |   | $ | 5,402 |   |

 

***(d) Real Estate Under Development***

 

The Operating Partnership is developing twomultifamily residential communities, with an aggregate of 395 units. Inconnection with these development projects, the Operating Partnership hasdirectly, or in some cases through its joint venture partners, entered intocontractual construction related commitments with unrelated third parties andthe total estimated cost for these projects is approximately $89,600. As of December 31,2004, the Operating Partnership’s remaining development commitment, includingthose held in joint ventures, is approximately $51,300.

 

F-19

----

 

**(4) Notes Receivable from Investees andOther Related Parties**

 

Notes receivable from joint venture investeesand other related party receivables consist of the following as of December 31,2004 and 2003:

 
| ** **                                                                                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Notes  receivable from joint venture investees:                                                                                                                         |       |     |       |     |       |
| Note  receivable to Highridge Apartments (Down REIT), from the Marcus &  Millichap Company, secured, bearing interest at 12.75%, paid on October 1,  2004 |       | $        | —     |     | $          | 2,952 |   |
| Receivable  from Newport Beach North LLC and Newport Beach South LLC, unsecured, non  interest bearing, due on demand                                                   |       | —   |       | 200      |       |
| Other related party receivables, unsecured:                                                                                                                             |       |     |       |     |       |
| Loans made  to officers prior to July 31, 2002, bearing interest at 8%, due  beginning April 2006                                                             |       | 625      |       | 633      |       |
| Other related  party receivables, substantially all due on demand                                                                                                       |       | 810      |       | 1,953    |       |
|                                                                                                                                                                    |       | $        | 1,435      |     | $          | 5,738 |   |

 

The Operating Partnership’s officers anddirectors do not have a substantial economic interest in these joint ventureinvestees.

 

Other related party receivables consistprimarily of accrued interest income on related party notes receivable fromloans to officers, advances and accrued management fees from joint ventureinvestees.

 

**(5) Notes and Other Receivables**

 

Notes and other receivables consist of thefollowing as of December 31, 2004 and 2003:

 
| ** **                                                                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note  receivable from Lennar Emerald Merritt Partners, LLC, secured, bearing  interest at 14%, due August 2008 |       | $        | 5,000      |     | $          | — |   |
| Other  receivables                                                                                                  |       | 4,535    |       | 6,021    |       |
|                                                                                                                |       | $        | 9,535      |     | $          | 6,021 |   |

 

Other receivables consist primarily of otheradvances including subordination fees and land lease fees.

 

**(6) Related Party Transactions**

 

The Company’s Chairman, George Marcus, isalso the Chairman of the Marcus & Millichap Company (MM), which is areal estate brokerage firm. During the years ended December 31, 2004,2003, and 2002, the Operating Partnership paid brokerage commissions totaling$350, $854, and $0 to MM on the purchase and sales of real estate. Thecommissions are either capitalized as a cost of acquisition or are reflected asa reduction of the gain on sales of real estate in the accompanyingconsolidated statements of operations.

 

Interest and other income includes managementfee income from the Operating Partnership’s investees of $3,554, $3,849, and$5,177 for the years ended December 31, 2004, 2003, and 2002,respectively.

 

F-20

----

 

**(7) MortgageNotes Payable**

** **

Mortgage notes payable consist of thefollowing as of December 31, 2004 and 2003:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |     |       |     |       |
| Mortgage  notes payable to a pension fund, secured by deeds of trust, bearing interest  at rates ranging from 6.62% to 8.18%, interest only payments due monthly for  periods ranging from October 2001 through November 2004, principal  and interest payments due monthly thereafter, and maturity dates ranging from  October 2008 through October 2010. Under certain conditions a  portion of these loans can be converted to an unsecured note payable. Three  loans are cross-collateralized by a total of 13 properties                                                                                                                                                                                                                                                                                                                                  |       | $        | 235,492    |     | $          | 237,986 |   |
| Mortgage  notes payable, secured by deeds of trust, bearing interest at rates ranging  from 4.25% to 8.06%, principal and interest payments due monthly, and  maturity dates ranging from February 2006 through January 2014. At December 31,  2003, four mortgage notes payable totaling $42,410 had a variable interest  rate priced at Freddie Mac’s Reference Rate plus 1.3%; these notes were  converted to a fixed interest rate of 5.65% in January 2004. A mortgage  note payable of $8,700 was repaid in February 2004                                                                                                                                                                                                                                                                                                                        |       | 620,732  |       | 514,879  |       |
| Multifamily  housing mortgage revenue bonds secured by deeds of trust on rental properties  and guaranteed by collateral pledge agreements, payable monthly at a variable  rate as defined in the Loan Agreement (approximately 2.68% at December 2004  and 2.66% at December 2003), puls credit enhancement and underwriting  fees ranging from approximately 1.2% to 1.9%. The bonds are convertible to a  fixed rate at the Company’s option. Among the terms imposed on the  properties, which are security for the bonds, is that depending on the bonds,  20% of the units are subject to tenant income criteria. Principal balances  are due in full at various maturity dates from July 2020 through March 2034.  These bonds are subject to various interest rate cap agreements which limit  the maximum interest rate with respect to such bonds |       | 188,832  |       | 94,125   |       |
| Mortgage  notes payable, secured by deeds of trust, bearing interest at rates ranging  from 7.00% to 7.08%, principal and interest payments due monthly, and  maturity dates ranging from January 2005 through April 2005. Under  certain conditions these loans can be converted to unsecured notes payable.  As of December 31, 2003, one loan is cross-collateralized by three  properties, and was repaid in November 2004                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 6,846    |       | 33,072   |       |
| Multifamily  housing mortgage revenue bonds secured by deed of trust on a rental property  and guaranteed by a collateral pledge agreement, bearing interest at 6.455%,  principal and interest payments due monthly through January 2026. Among  the terms imposed on the property, which is security for the bonds, is a  requirement that 20% of the units are subject to tenant income criteria. The  interest rate will be repriced in February 2008 at the then current  tax-exempt bond rate                                                                                                                                                                                                                                                                                                                                                                        |       | 15,547   |       | 15,883   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |     |       |     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | $        | 1,067,449  |     | $          | 895,945 |   |

 

F-21

----

 

Theaggregate scheduled maturities and principal payments of mortgage notes payableare as follows:

 

| 2005       |   | $       | 18,721    |   |
|------------|--------|---------|-----------|--------|
| 2006       |   | 24,683  |      |
| 2007       |   | 124,846 |      |
| 2008       |   | 154,452 |      |
| 2009       |   | 46,209  |      |
| Thereafter |   | 698,538 |      |
|       |   |    |      |
|       |   | $       | 1,067,449 |   |

 

Repayment of debt before the scheduledmaturity date could result in prepayment penalties.

 

The Operating Partnership has historicallyused interest rate swap and cap agreements to reduce the impact of interestrate fluctuations and to comply with contractual obligations of lenders. TheOperating Partnership has not entered into any interest rate hedge agreementsfor trading or other speculative purposes. As of December 31, 2004 and December 31,2003, the Operating Partnership was party to interest cap agreements (“InterestCap Agreements”) that limited approximately $152.7 million and $69.6 million,respectively, of the Operating Partnership’s tax-exempt debt to weightedaverage bond interest rates ranging from approximately 5.49% to 6.34%.  For such dates, the actual weighted averageeffective rates on such $152.7 million and $69.6 million of indebtedness were2.6% and 2.9%, respectively.  TheseInterest Cap Agreements have maturity dates through 2010. The Interest CapAgreements did not meet the criteria for hedge accounting. The estimated fairvalue of these Interest Cap Agreements as of December 31, 2004 and December 31,2003 was zero based on management’s estimate of fair value. Therefore, for theperiods presented, interest cap agreements have been charged to earnings inaccordance with SFAS 133, as amended.

 

**(8) Linesof Credit**

** **

The Operating Partnership has two outstandinglines of credit in the aggregate committed amount of $285,000. The first line,in the committed amount of $185,000, matures in April 2007, with an optionto extend it for one year thereafter. Outstanding balances under this line of credit bear interest at a rate,determined using a tiered rate structure tied to the Company’s corporateratings, if any, and leverage rating, which has been priced at LIBOR plus 1.00%and LIBOR plus 1.10% during 2004 and 2003, respectively. As of December 31,2004 and 2003, the interest rate was approximately 3.40% and 2.10%, respectively.At December 31, 2004 the Operating Partnership had $155,800 outstanding onthis line of credit. In December 2003, the Operating Partnership obtaineda 5-year, $90,000 credit facility from Freddie Mac. The aggregate maximumprincipal amount of the facility increased to $100,000 in July 2004 and issecured by six of Essex’s multifamily communities.  The Operating Partnership borrowed $93,735under this facility, comprised of three tranches as follows: $33,235 locked for360 days at an all-in rate of 2.966% (59 basis points over Freddie Mac’sReference Rate), $30,000 locked for 360 days at an all-in rate of 2.834% (59basis points over Freddie Mac’s Reference Rate), and $30,500 locked for 360days at an all-in rate of 3.376% (59 basis points over Freddie Mac’s ReferenceRate). The credit agreements contain debt covenants related to limitations onindebtedness and liabilities, maintenance of minimum levels of consolidatedearnings before depreciation, interest and amortization and maintenance ofminimum tangible net worth.

 

The Operating Partnership was in compliancewith the line of credit covenants as of December 31, 2004

 

F-22

----

 

**(9) LeaseAgreements**

** **

During the fourth quarter of 2003, theOperating Partnership entered into lease and purchase option agreements withunrelated third parties related to its five recreational vehicle parks that arecomprised of 1,717 spaces, and two manufactured housing communities thatcontain 607 sites.  Based on theagreements, the unrelated third parties have an option to purchase the assetsin approximately four years for approximately $41,700 – a 5% premium to thegross book value of the assets. The Operating Partnership received $474 asconsideration for entering into the option agreement and a non-refundableupfront payment of $4,030, which has been recorded as deferred revenue and hasbeen classified with accounts payable and accrued liabilities in theaccompanying consolidated balance sheets. Under the lease agreements Essex isto receive a fixed monthly lease payment in addition to the non-refundableupfront payment that will be amortized using the straight-line method overapproximately five years (the life of the lease).  These operating leases also provide for theOperating Partnership to pass through all executory costs such as propertytaxes.

 

The Operating Partnership is a lessor under aland lease associated with a property located in Southern California. The landlease entitles the Operating Partnership to receive fixed annual land leasepayments totaling a minimum of $477 over a thirty-four year term ended 2034.The Operating Partnership has the option to purchase the property in 2006 orcan be required to sell the land in 2006 as specified in the buyout provisionsof the agreement.

 

The Operating Partnership is a lessor of anoffice building located in Southern California. The tenants lease terms expireat various times through 2009 with average annual lease payments ofapproximately $737.

 

The future minimum non-cancelable base rentto be received under these operating leases for each of the years ending after December 31,2004 are summarized as follows:

 

| ** **           | ** ** | **Future  Minimum  Rent** | ** ** |
|----------------------|------------|---------------------------|------------|
| 2005                 |       | $                         | 2,494      |   |
| 2006                 |       | 2,494                     |       |
| 2007                 |       | 2,494                     |       |
| 2008                 |       | 2,214                     |       |
| 2009                 |       | 1,138                     |       |
| 2010 and  thereafter |       | 12,853                    |       |
|                 |       | $                         | 23,687     |   |

 

The carryingvalue of the rental properties as of December 31, 2004 is $33,970.

 

**(10) Equity Transactions**

 

As of December 31, 2004, the OperatingPartnership has the following cumulative redeemable preferred securitiesoutstanding.

 

| **Description**                                                | ** ** | **Issue Date**      | ** ** | ** **       | ** ** | **Liquidation  Preference** | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|------------------|------------|-----------------------------|------------|
| **Cumulative redeemable preferred limited  partner units:**    | ** ** | ** **          | ** ** | ** **       | ** ** |
| 7.875% Series B                                           |       | February 1998  |       | 1,200,000  units |       | $                           | 60,000     |   |
| 7.875% Series B                                           |       | April 1998     |       | 400,000  units   |       | 20,000                      |       |
| 7.875% Series D                                           |       | July 1999      |       | 2,000,000  units |       | 50,000                      |       |
|                                                           |       |                |       |             |       | $                           | 130,000    |   |
|                                                           |       |                |       |             |       |                        |       |
| **Cumulative  redeemable preferred general partner interest:** |       |                |       |             |
| 7.8125% Series F                                          |       | September 2003 |       |             |       | $                           | 25,000     |   |

 

F-23

----

 

Distributions on the securities are payablequarterly. The holders of the securities have limited voting rights if therequired dividends are in arrears.  Thepreferred units can be exchanged for Series Band D preferred stock of theCompany under limited conditions.

 

On July 30, 2003, inconnection with the Operating Partnership’s acquisition, by merger, of John M.Sachs, Inc. (“Sachs”) that was completed on December 17, 2002, andunder the terms of the merger agreement, a final analysis was prepared, whichindicated that the actual net liabilities of Sachs were less than the netliabilities of Sachs estimated to be outstanding as of the merger date. Based on the final analysis and as a post-closing adjustment payment pursuantto the merger agreement, the Operating Partnership made a final paymentof approximately $1,766 in cash and issued an additional 35,860 shares ofthe Company’s common stock valued at $2,170 to certain of the pre-mergershareholders of Sachs.

 

On September 23, 2003,the Company issued 1,000,000 shares of its Series F Cumulative RedeemablePreferred Stock (“Series F Preferred Stock”) at a fixed price of $24.664per share, a discount from the $25.00 per share liquidation value of theshares.  The shares pay quarterly distributions at an annualized rate of7.8125% per year of the liquidation value and will be redeemable by the Companyon or after September 23, 2008.  The Operating Partnership amortizedthe original discount in connection with the issuance of these shares in thefourth quarter of 2003, resulting in a reduction to net income available tocommon unitholders of approximately $336.  The shares were issued pursuantto the Company’s existing shelf registration statement.  The OperatingPartnership used the net proceeds from this sale of Series F PreferredStock to redeem all of the 9.125% Series C Cumulative Redeemable PreferredUnits (the “Series C Preferred Units”).

 

On October 6, 2003, theCompany sold 1.6 million newly issued shares of common stock and receivedoffering proceeds (before expenses) of $60.67 per share, representing a 3.25%discount to the common stock’s closing price on September 30, 2003, thedate of the underwriting agreement between the Company and the underwriter,pursuant to which the shares were sold.  The shares were issued pursuantto the Company’s existing shelf registration statement.  The proceeds ofthe offering of approximately $97,072 were used for the acquisition ofmultifamily communities located in the Operating Partnership’s targeted WestCoast markets and general corporate purposes, including the repayment of debtand the funding of development activities.

 

On October 14, 2003, the OperatingPartnership issued a notice of redemption to the holders of its 9.125% Series CCumulative Redeemable Preferred Units. Pursuant to the provisions of the Amended and Restated Agreement ofLimited Partnership of Essex Portfolio, L.P., the Operating Partnershipredeemed all outstanding Series C Preferred Units on November 24,2003.  In connection with this redemptionthe Operating Partnership wrote-off issuance cost of $625 against net incomeavailable to common unitholders.

 

In January 2004, the OperatingPartnership restructured its previously issued $50,000, 9.30% Series DCumulative Redeemable Preferred Units (“Series D Units”), and itspreviously issued $80,000, 7.875% Series B Cumulative Redeemable PreferredUnits (“Series B Units”).  Theexisting distribution rate of 9.30% of the Series D Units continued until July 27,2004 – the end of the non-call period. Effective July 28, 2004, the distribution rate on the Series DUnits was reduced to 7.875%.  The datethat the Series D Units can first be redeemed at the Operating Partnership’soption was extended by six years to July 28, 2010.  The date that the Series B Units can firstbe redeemed at the Operating Partnership’s option was extended from February 6,2003 to December 31, 2009.

 

On June 14, 2000 the OperatingPartnership purchased Waterford Place, a 238-unit apartment communitylocated in San Jose, California for a contract price of $35,000 and anadditional contingent payment.  Theamount of the contingent payment was disputed and submitted to bindingarbitration.   As a result of thearbitration, the Operating Partnership was directed to issue an additional109,874 units of limited partnership interest (“Units”) in the OperatingPartnership to the sellers of Waterford Place. On March 31, 2004, the Operating Partnership completed the issuanceof these Units to the sellers.  Inconnection with this issuance, on March 31, 2004, the OperatingPartnership also redeemed for cash 55,564 Units from these sellers.

 

On September 3, 2004, the OperatingPartnership redeemed all of its outstanding, $55,000, 9.25% Series ECumulative Redeemable Preferred Units of the Operating Partnership.  In connection with this redemption theOperating Partnership wrote-off issuance costs of $1,575 against net incomeavailable to common unitholders.

 

On August 6, 2004, the OperatingPartnership acquired Vista Belvedere, a 76-unit apartment communitylocated in the Marin County town of Tiburon, California.  Essex acquired the multifamily community in aUPREIT structured transaction for an agreed upon value of approximately $17.1million.  The Operating Partnershipissued 73,088 redeemable limited partnership units to the prior owner.

 

F-24

----

 

**(11) Per Unit Data**

 

Basic and diluted income from continuingoperations per unit are calculated as follows for the years ended December 31:

 
| ** **                                                   | ** ** | **2004**   | ** ** | **2003**                              | ** ** | **2002**                      | ** ** |
|--------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                                   | ** ** | **Income** | ** ** | **Weighted-  average  Common  Units** | ** ** | **Per  Common  Unit  Amount** | ** ** | **Income** | ** ** | **Weighted-  average  Common  Units** | ** ** | **Per  Common  Unit  Amount** | ** ** | **Income** | ** ** | **Weighted-  average  Common  Units** | ** ** | **Per  Common  Unit  Amount** | ** ** |
| Basic:                                                       |       |       |       |                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from  continuing operations available to common units |       | $          | 85,318     |                                  | 25,255,190 |                          | $          | 3.38 |   | $ | 36,086 |   | 23,737,077 |   | $ | 1.52 |   | $ | 45,928 |   | 20,812,272 |   | $ | 2.21 |   |
| Income from  discontinued operations                         |       | 788        |       | 25,255,190                            |       | 0.03                          |       | 1,728 |   | 23,737,077 |   | 0.07 |   | 9,383 |   | 20,812,272 |   | 0.45 |   |
|                                                         |       | 86,106     |       |                                  |       | $                             | 3.41       |   | 37,814 |   |   |   | $ | 1.59 |   | 55,311 |   |   |   | $ | 2.66 |   |
|                                                         |       |       |       |                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of  Dilutive Securities:                              |       |       |       |                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock  options(1)                                            |       | —     |       | 154,364                               |       |                          |       | — |   | 154,941 |   |   |   | — |   | 155,229 |   |   |   |
| Vested  series Z incentive units                             |       | —     |       | 80,712                                |       |                          |       | — |   | 55,912 |   |   |   | — |   | 40,000 |   |   |   |
|                                                         |       | —     |       | 235,076                               |       |                          |       | — |   | 210,853 |   |   |   | — |   | 195,229 |   |   |   |
| Diluted:                                                     |       |       |       |                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from  continuing operations available to common units |       | 85,318     |       | 25,490,266                            |       | $                             | 3.35       |   | 36,086 |   | 23,947,930 |   | $ | 1.51 |   | 45,928 |   | 21,007,501 |   | $ | 2.19 |   |
| Income from  discontinued operations                         |       | 788        |       | 25,490,266                            |       | 0.03                          |       | 1,728 |   | 23,947,930 |   | 0.07 |   | 9,383 |   | 21,007,501 |   | 0.45 |   |
|                                                         |       | $          | 86,106     |                                  |       |                          | $          | 3.38 |   | $ | 37,814 |   |   |   | $ | 1.58 |   | $ | 55,311 |   |   |   | $ | 2.64 |   |

 

----

 

The Operating Partnership has the ability andintent to redeem DownREIT Limited Partnership units for cash and does notconsider them as common unit equivalents.

 

(1)          The followingstock options are not included in the diluted earnings per share calculationbecause the exercise price of the option was greater than the average marketprice of the common shares for the year and, therefore,were anti-dilutive:

 

| ** **                | ** ** | **2004**       | ** ** | **2003** | ** ** | **2002**       | ** ** |
|---------------------------|------------|----------------|------------|----------|------------|----------------|------------|
| Number of  options        |       | 29,500         |       | —   |       | 76             |       |
| Range of  exercise prices |       | $78.760-84.460 |       | n/a      |       | $50.480-54.250 |       |

 

**(12) Stock Based Compensation Plans**

 

The Essex Property Trust, Inc. 2004Stock Incentive Plan provides incentives to attract and retain officers,directors and key employees. The Stock Incentive Plan provides for the grantsof options to purchase a specified number of shares of common stock or grantsof restricted shares of common stock. Under the Stock Incentive Plan, the totalnumber of shares available for grant is approximately 1,200,000. The Board ofDirectors (the Board) may adjust the aggregate number and type of sharesreserved for issuance. Participants in the Stock Incentive Plans are selectedby the Stock Incentive Plan Committee of the Board, which is comprised ofindependent directors. The Stock Incentive Plan Committee is authorized toestablish the exercise price; however, the exercise price cannot be less than100% of the fair market value of the common stock on the grant date. TheCompany’s options have a life of ten years. Option grants fully vest betweenone year and five years after the grant date. For every stock option issued topurchase Company common stock, an option is issued to the general partner bythe Operating Partnership to purchase Operating Partnership units withidentical terms.

 

In connection with the Company’s 1994 initialpublic offering, the Company provided a one-time grant of options to Marcus &Millichap (“MM”) to purchase 220,000 shares of common stock at the initialpublic offering price of $19.50 per share pursuant to an agreement wherebyMarcus & Millichap Real Estate Investment Brokerage Company, asubsidiary of MM, will provide real estate transaction, trend and otherinformation to the Operating Partnership for a period of ten years.  The Operating Partnership has not used suchresearch information provided by M&M in any material way since 1998.  In February 2002, MM exercised and soldthe shares underlying this one-time grant. This option was exercised in a “cashless”transaction pursuant to FAS 123, whereby MM was issued 129,302 shares ofCompany common stock based on the current market price of the Company’s commonstock of $47.30 at the time of exercise.

 

F-25

----

 

A summary of the status of the Company’sstock option plans as of December 31, 2004, 2003, and 2002 and changesduring the years ended on those dates is presented below:

 
| ** **                        | ** ** | **2004**   | ** ** | **2003**                                | ** ** | **2002**   | ** ** |
|-----------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** |
| Outstanding  at beginning of year |       | 590,231    |       | $                                       | 42.93      |       | 743,692    |   | $ | 39.81 |   | 918,676 |   | $ | 32.15 |   |
| Granted                           |       | 49,500     |       | 74.10                                   |       | 73,500     |       | 55.09 |   | 162,750 |   | 49.15 |   |
| Exercised                         |       | (142,835   | )          | 38.71                                   |       | (197,741   | )          | 34.72 |   | (322,944 | ) | 22.57 |   |
| Forfeited  and canceled           |       | (33,520    | )          | 49.72                                   |       | (29,220    | )          | 49.52 |   | (14,790 | ) | 43.65 |   |
| Outstanding  at end of year       |       | 463,376    |       | 47.07                                   |       | 590,231    |       | 42.93 |   | 743,692 |   | 39.81 |   |
|                              |       |       |       |                                    |       |       |       |   |   |   |   |   |   |
| Options  exercisable at year end  |       | 267,366    |       | 40.58                                   |       | 301,851    |       | 37.70 |   | 383,442 |   | 34.25 |   |
|                                   |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |

 

The following table summarizes information about stock optionsoutstanding as of December 31, 2004:

 

| ** **                    | ** ** | **Options outstanding**                                 | ** ** | **Options exercisable**                              | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Range of  exercise prices** | ** ** | **Number  outstanding  as of  December 31,  2004** | ** ** | **Weighted-  average  remaining  contractual  life** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Number  exercisable  as of  December 31,  2004** | ** ** | **Weighted-  average  exercise  price** | ** ** |
| $16.89-25.34                  |       | 850                                                     |       | 0.8 years                                            |       | $ | 19.06 |   | 850 |   | $ | 19.06 |   |
| 25.34-33.78                   |       | 77,661                                                  |       | 3.5 years                                            |       | 30.13 |   | 77,661 |   | 30.13 |   |
| 33.78-42.23                   |       | 87,955                                                  |       | 4.0 years                                            |       | 36.38 |   | 77,355 |   | 35.87 |   |
| 42.23-50.68                   |       | 136,800                                                 |       | 6.8 years                                            |       | 48.75 |   | 51,000 |   | 48.43 |   |
| 50.68-59.12                   |       | 103,910                                                 |       | 7.5 years                                            |       | 52.97 |   | 59,160 |   | 53.49 |   |
| 59.12-67.57                   |       | 26,700                                                  |       | 9.2 years                                            |       | 62.18 |   | 1,340 |   | 61.70 |   |
| 67.57-76.01                   |       | —                                                  |       | n/a                                                  |       | n/a |   | n/a |   | n/a |   |
| 76.01-84.46                   |       | 29,500                                                  |       | 9.9 years                                            |       | 82.07 |   | — |   | — |   |
|                          |       | 463,376                                                 |       | 6.2 years                                            |       | 47.07 |   | 267,366 |   | 40.58 |   |
|                               |            |                                                         |            |                                                      |            |  |  |  |  |  |  |  |  |

 

On June 28, 2001, the OperatingPartnership issued 200,000 Series Z Incentive Units of limited partnerinterest (the “Series Z Incentive Units”) to eleven senior executives ofthe Operating Partnership in exchange for a capital commitment of $1.00 per Series ZIncentive Unit, for an aggregate offering price of $200. Upon certaintriggering events, the Series Z Incentive Units will automatically convertinto common Operating Partnership units based on a conversion ratio that mayincrease over time upon satisfaction of specific conditions. The conversionratio, initially set at zero, will increase by 10% (20% in 2002) on January 1of each year for each participating executive who remains employed by theOperating Partnership if the Operating Partnership has met the criteriaestablished by the agreement. The conversion ratio as of January 1, 2002was 20%, which resulted in 40,000 Series Z Incentive Units beingconvertible into up to an equal amount of common Operating Partnership Units.On January 1, 2003 and 2004, the conversion ratio increased by 8% and7.5%, respectively, to 35.5% based on the approval of the Board of Directors.In certain change of control situations, the participating executives will alsobe given the option to convert their units at the then-effective conversionratio. In addition, the Operating Partnership has the option to redeem Series ZIncentive Units held by any executive whose employment has been terminated forany reason and the obligation to redeem any such units following the death ofthe holder. In such event, the Operating Partnership will redeem the units for,at its option, either common Operating Partnership units or shares of theCompany’s common stock based on the then-effective conversion ratio. TheOperating Partnership obtained a qualified independent third-party valuation ofthe Series Z Incentive Units.  Ascompensation expense for such units, the Operating Partnership records eachyear an amount, per unit, equal to the percentage increase in the conversionratio for that year as multiplied by the third party valuation of the unit lessits $1.00 purchase price.

 

On June 28, 2004, the OperatingPartnership issued 95,953 Series Z-1 Incentive Units of limitedpartner interest (the “Series Z-1 Incentive Units”) to fourteensenior executives of the Operating Partnership in exchange for cash or acapital commitment of $1.00 per Series Z-1 Incentive Unit, for anaggregate offering price of $96.0. Any capital commitment will be payable upondemand or to be offset by any distributions paid with respect to such

 

F-26

----

 

Series Z-1 unit, until the capital commitment has beenreduced to zero. In the event a Series Z-1 partner becomes a directoror executive officer of the general partner, such capital commitment willbecome immediately due and payable to the Operating Partnership prior to suchevent.  Upon certain triggering events,the Series Z-1 Incentive Units will automatically convert intocommon Operating Partnership units based on a conversion ratio that mayincrease over time upon satisfaction of specific conditions. The conversionratio was set at 20% upon issuance and will increase an additional 10% on January 1of each year for each participating executive who remains employed by theOperating Partnership if the Operating Partnership has met the criteriaestablished by the agreement. The conversion ratio as of June 28, 2004,was 20%, which resulted in 19,191 Series Z-1 Incentive Units beingconvertible into up to an equal amount of common Operating Partnership Units.In certain change of control situations, the participating executives will alsobe given the option to convert their units at the then-effective conversionratio. In addition, the Operating Partnership has the option to redeem Series Z-1Incentive Units held by any executive whose employment has been terminated forany reason and the obligation to redeem any such units following the death ofthe holder. In such event, the Operating Partnership will redeem the units for,at its option, either common Operating Partnership units or shares of theCompany’s common stock based on the then-effective conversion ratio. TheOperating Partnership obtained a qualified independent third-party valuation ofthe Series Z-1 Incentive Units. As compensation expense for such units, the Operating Partnershiprecords each year an amount, per unit, equal to the percentage increase in theconversion ratio for that year as multiplied by the third party valuation ofthe unit less its $1.00 purchase price.

 

Through February 2000, the OperatingPartnership has granted 42,586 stock units under the Operating Partnership’sPhantom Stock Unit Agreement to two of the Operating Partnership’s executives.The units vest in installments in accordance with the vesting schedule setforth in the Phantom Stock Unit Agreement such that the units will be fullyvested five years from the date of issuance. At that time, the OperatingPartnership expects to issue to the executives the number of shares of commonstock equal to the number of units vested, or at the Operating Partnership’soption, an equivalent amount in cash. The Operating Partnership has issuedcommon stock each year since inception of the agreement. Dividends are paid bythe Operating Partnership on the vested and unvested portion of shares and arerecorded as a component of general and administrative expense. For accountingpurposes, the Operating Partnership estimates that the fair value of a phantom stockunit at the date of grant is equal to the market value of one share of theCompany’s common stock at that time, and the accounting for phantom stock unitsis identical to the accounting for restricted stock under SFAS 123.

 

**(13) Segment Information**

 

In accordance with FASB No. 131, *Disclosures about Segments of an Enterprise andRelated Information,*the Operating Partnership defines itsreportable operating segments as the three geographical regions in which itsmultifamily residential properties are located: Northern California, SouthernCalifornia, and the Pacific Northwest.

 

Nonsegment revenues and net operating incomeincluded in the following schedule consist of revenue generated from thecommercial properties, recreational vehicle parks, and manufactured housingcommunities. Also excluded from segment revenues are interest and othercorporate income. Other nonsegment assets include investments, real estateunder development, cash, notes receivables, other assets and deferred charges.

 

The accounting policies of the segments arethe same as those described in note 2. The Operating Partnership evaluatesperformance based upon net operating income from the combined properties ineach segment.

 

F-27

----

 

The revenues, net operating income, andassets for each of the reportable operating segments are summarized as followsfor the years ended and as of December 31, 2004, 2003, and 2002:

 
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|
| ** **                                | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                 |       |                              |       |   |   |   |   |
| Southern  California                      |       | $                                 | 167,047    |   | $ | 137,662 |   | $ | 100,079 |   |
| Northern  California                      |       | 63,655                            |       | 63,761 |   | 62,405 |   |
| Pacific  Northwest                        |       | 49,963                            |       | 44,913 |   | 44,592 |   |
| Other areas                               |       | 2,818                             |       | 5,240 |   | 4,007 |   |
| Total  property revenues                  |       | $                                 | 283,483    |   | $ | 251,576 |   | $ | 211,083 |   |
|                                      |       |                              |       |   |   |   |   |
| Net  operating income:                    |       |                              |       |   |   |   |   |
| Southern  California                      |       | $                                 | 112,371    |   | $ | 95,309 |   | $ | 69,968 |   |
| Northern  California                      |       | 42,234                            |       | 43,533 |   | 45,859 |   |
| Pacific  Northwest                        |       | 31,580                            |       | 29,278 |   | 29,618 |   |
| Other areas                               |       | 442                               |       | 1,675 |   | 959 |   |
| Total  segment net operating income       |       | 186,627                           |       | 169,795 |   | 146,404 |   |
|                                      |       |                              |       |   |   |   |   |
| Depreciation  and amortization:           |       |                              |       |   |   |   |   |
| Southern  California                      |       | (39,263                           | )          | (28,554 | ) | (19,638 | ) |
| Northern  California                      |       | (16,436                           | )          | (13,715 | ) | (11,659 | ) |
| Pacific  Northwest                        |       | (11,021                           | )          | (12,202 | ) | (11,686 | ) |
| Other areas                               |       | (5,896                            | )          | (2,719 | ) | (926 | ) |
|                                      |       | (72,616                           | )          | (57,190 | ) | (43,909 | ) |
| Interest:                                 |       |                              |       |   |   |   |   |
| Southern  California                      |       | (26,900                           | )          | (22,595 | ) | (15,253 | ) |
| Northern  California                      |       | (13,955                           | )          | (12,044 | ) | (12,512 | ) |
| Pacific  Northwest                        |       | (6,539                            | )          | (4,844 | ) | (6,382 | ) |
| Nonsegment                                |       | (15,629                           | )          | (12,927 | ) | (9,039 | ) |
|                                      |       | (63,023                           | )          | (52,410 | ) | (43,186 | ) |
|                                      |       |                              |       |   |   |   |   |
| Amortization  of deferred financing costs |       | (1,587                            | )          | (1,197 | ) | (814 | ) |
| General and  administrative               |       | (18,341                           | )          | (9,637 | ) | (8,636 | ) |
| Gain on sale  or real estate              |       | 7,909                             |       | — |   | 145 |   |
| Interest and  other income                |       | 8,027                             |       | 6,715 |   | 12,505 |   |
| Equity  income in co-investments          |       | 59,522                            |       | 3,296 |   | 5,402 |   |
| Minority  interests                       |       | (3,498                            | )          | (4,134 | ) | (3,664 | ) |
|                                      |       |                              |       |   |   |   |   |
| Income from  continuing operations        |       | $                                 | 103,020    |   | $ | 55,238 |   | $ | 64,247 |   |
|                                      |       |                              |       |   |   |   |   |
| Assets:                                   |       |                              |       |   |   |   |   |
| Southern  California                      |       | $                                 | 1,162,803  |   | $ | 874,591 |   |   |   |
| Northern  California                      |       | 458,199                           |       | 439,749 |   |   |   |
| Pacific  Northwest                        |       | 358,219                           |       | 314,409 |   |   |   |
| Other areas                               |       | 56,731                            |       | 89,610 |   |   |   |
| Net real  estate assets                   |       | 2,035,952                         |       | 1,718,359 |   |   |   |
| Nonsegment  assets                        |       | 181,265                           |       | 198,452 |   |   |   |
| Total assets                              |       | $                                 | 2,217,217  |   | $ | 1,916,811 |   |   |   |

 

F-28

----

 

**(14) 401(k) Plan**

 

The Operating Partnership has a 401(k)benefit plan (the Plan) for all full-time employees who have completed sixmonths of service. Employees may contribute up to 23% of their compensation,limited by the maximum allowed under Section 401(k) of the InternalRevenue Code. The Operating Partnership matches the employee contributions fornonhighly compensated personnel, up to 50% of their contribution up to aspecified maximum. Operating Partnership contributions to the Plan wereapproximately $98, $93, and $107 for the years ended December 31, 2004,2003, and 2002.

 

**(15) Fair Value of Financial Instruments**

 

Management believes that the carrying amountsof its variable rate mortgage notes payable, lines of credit, notes receivablefrom investees and other related parties and notes and other receivablesapproximate fair value as of December 31, 2004 and 2003, because interestrates, yields and other terms for these instruments are consistent with yieldsand other terms currently available to the Operating Partnership for similarinstruments. Management has estimated that the fair value of the OperatingPartnership’s $878,617 of fixed rate mortgage notes payable at December 31,2004 is approximately $945,607 based on the terms of existing mortgage notespayable compared to those available in the marketplace.  At December 31, 2003, the OperatingPartnership’s fixed rate mortgage notes payable of $801,819 had an approximatemarket value of $838,743.  Managementbelieves that the carrying amounts of cash and cash equivalents, restrictedcash, accounts payable and accrued liabilities, other liabilities and dividendspayable approximate fair value as of December 31, 2004 and 2003 due to theshort-term maturity of these instruments.

 

**(16) Commitments and Contingencies**

 

At December 31, 2004 we had fournon-cancelable ground leases for certain apartment communities and buildingsthat expire between 2027 and 2080. Land lease payments are typically thegreater of a stated minimum or a percentage of gross rents generated by theseapartment communities. We also lease office space under non-cancelableoperating leases. Total lease commitments, under land leases and operatingleases, are approximately $1,600 per year.

 

At December 31, 2004 the OperatingPartnership has a $1,212 letter of credit outstanding and a payment guaranteeof $4,750 relating to financing and development transactions.

 

To the extent that an environmental matterarises or is identified in the future that has other than a remote risk, asdefined in SFAS 5, of having a material impact on the financial statements, theOperating Partnership will disclose the estimated range of possible outcomes,and, if an outcome is probable, accrue appropriate liability for remediationand other potential liability. In addition, it will consider whether suchoccurrence results in an impairment of value on the affected property and, ifso, accrue an appropriate reserve for impairment.

 

Except with respect to three Properties, theOperating Partnership has no indemnification agreements from third parties forpotential environmental clean-up costs at its Properties. The OperatingPartnership has no way of determining at this time the magnitude of anypotential liability to which it may be subject arising out of unknownenvironmental conditions or violations with respect to the properties formerlyowned by the Operating Partnership. No assurance can be given that existingenvironmental studies with respect to any of the Properties reveal allenvironmental liabilities, that any prior owner or operator of a Property didnot create any material environmental condition not known to the OperatingPartnership, or that a material environmental condition does not otherwiseexist as to any one or more of the Properties. The Operating Partnership haslimited insurance coverage for the types of environmental liabilities describedabove.

 

TheOperating Partnership may enter into transactions that could require us to paythe tax liabilities of the partners in the Down REIT entities, which are withinour control. Although the Operating Partnership plans to hold the contributedassets or defer recognition of gain on their sale pursuant to like-kindexchange rules under Section 1031 of the Internal Revenue Code we canprovide no assurance that we will be able to do so and if such tax liabilitieswere incurred they can expect to have a material impact on our financialposition.

 

In April 2004, a lawsuit entitled ChaceNelson and Douglas Korte, et al. v. Essex Property Trust was filed 

 

F-29

----

 

against the Company in the California Superior Court in the County ofAlameda.  In this lawsuit, two formerOperating Partnership maintenance employees seek unpaid wages, associatedpenalties and attorneys’ fees on behalf of a putative class of the OperatingPartnership’s current and former maintenance employees who were required towear a pager while they were on call during evening and weekend hours.  The Operating Partnership intends tovigorously defend against the claims alleged in this litigation. At December 31,2004, no accrual for settlement cost has been recorded. However, litigation issubject to inherent uncertainties, and no assurance can be given that theOperating Partnership will prevail in this lawsuit.

 

The Operating Partnership is subject tovarious other lawsuits in the normal course of its business operations.  Accordingly, such lawsuits, as well as theclass action lawsuit described above, could result in substantial costs anddiversion of resources and could have a material adverse effect on theOperating Partnership’s financial condition, results of operation or cashflows.

 

F-30

----

 

**(17) Quarterly Results of Operations**

 

The following is a summary of quarterlyresults of operations for 2004 and 2003:

 
| ** **                                  | ** ** | **Quarter ended  December 31(1)(2)** | ** ** | **Quarter ended  September 30(1)(2)** | ** ** | **Quarter ended  June 30(1)(2)** | ** ** | **Quarter ended  March 31(1)(2)** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| **2004:**                                   |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Total  property revenues                    |       | $                                         | 74,412     |                                       | $          | 72,432                                |       | $                                      | 70,308     |   | $ | 66,331 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Income from  continuing operations          |       | $                                         | 38,173     | (3)                                        | $          | 43,355                                |       | $                                      | 10,685     |   | $ | 10,807 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Net income                                  |       | $                                         | 38,476     |                                       | $          | 43,722                                |       | $                                      | 10,358     |   | $ | 11,252 |   |
| Net income  available to common unitholders |       | $                                         | 35,428     |                                       | $          | 38,157                                |       | $                                      | 5,861      |   | $ | 6,660 |   |
| Per unit  data:                             |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Net income:                                 |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Basic                                       |       | $                                         | 1.40       |                                       | $          | 1.51                                  |       | $                                      | 0.23       |   | $ | 0.27 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Diluted                                     |       | $                                         | 1.40       |                                       | $          | 1.49                                  |       | $                                      | 0.23       |   | $ | 0.26 |   |
| Distributions  per common unit              |       | $                                         | 0.79       |                                       | $          | 0.79                                  |       | $                                      | 0.79       |   | $ | 0.79 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| **2003:**                                   |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Total  property revenues                    |       | $                                         | 64,331     |                                       | $          | 62,372                                |       | $                                      | 62,388     |   | $ | 62,485 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Income from  continuing operations          |       | $                                         | 11,350     |                                       | $          | 14,054                                |       | $                                      | 15,125     |   | $ | 14,709 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Net income                                  |       | $                                         | 11,821     |                                       | $          | 14,303                                |       | $                                      | 15,453     |   | $ | 15,389 |   |
| Net income  available to common unitholders |       | $                                         | 6,409      |                                       | $          | 9,723                                 |       | $                                      | 10,873     |   | $ | 10,809 |   |
| Per unit  data:                             |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Net income:                                 |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Basic                                       |       | $                                         | 0.24       |                                       | $          | 0.42                                  |       | $                                      | 0.47       |   | $ | 0.46 |   |
|                                        |       |                                      |       |                                       |       |                                  |       |                                   |       |
| Diluted                                     |       | $                                         | 0.25       |                                       | $          | 0.41                                  |       | $                                      | 0.46       |   | $ | 0.46 |   |
| Distributions  per common unit              |       | $                                         | 0.78       |                                       | $          | 0.78                                  |       | $                                      | 0.78       |   | $ | 0.78 |   |

 

----

(1)          Net earnings fromdiscontinued operations have been reclassified for all periods presented.

(2)          Beginningin 2003, the Operating Partnership implemented an upgrade to its subsidiaryledger for accounting for fixed assets. The Operating Partnership completed this system upgrade in the firstquarter of 2004.  In conjunction withthis system upgrade, the Operating Partnership has determined that cumulativedepreciation expense generated by consolidated or equity method rentalproperties was understated by approximately $2.1 million through December 31,2003 and this amount was recorded during the quarter ended March 31,2004.  Had the correction been made in2003, depreciation expense would have increased by approximately $640, $1.3million, and $1.0 million in the first, second and third quarters of 2003,respectively.  In the fourth quarter2003, depreciation expense would have decreased by approximately $1.4million.  The Operating Partnership doesnot believe that the correction is material to any previously reportedfinancial statements and is not material to any consolidated earnings trends.

(3)          Includes the followingnon-recurring items:

(a)          Gains of $25.2 millionresulting from the sale of seven Fund I multifamily properties.

(b)         Promote income of $3.8million from incentive income allocations from Fund I.

 

F-31

----

 

**(18)Subsequent Events**

 

In January 2005, the OperatingPartnership sold four non-core assets that were acquired in conjunction withthe John M. Sachs’s Merger in 2002.  Thefour non-core assets were: The Riviera Recreational Vehicle Park and aManufactured Home Park, located in Las Vegas, Nevada, for which the OperatingPartnership had previously entered into master lease and option agreements withan unrelated entity; and two small office buildings, located in San DiegoCalifornia, aggregating 7,200 square feet. The sale proceeds were in excess of the carrying value of each of theseassets.

 

On February 1, 2005, the OperatingPartnership obtained a non-recourse mortgage on a previously unencumberedproperty in the amount of $21.8 million with a 4.94% fixed interest rate for a 9-yearterm, maturing in March 2014, with an option to extend the maturity forone year thereafter at a floating rate of 2.4% over one month LIBOR. During theextension period, the loan may be paid in full with no prepayment penalty.

 

On February 2, 2005, the OperatingPartnership acquired Cedar Terrace Apartments, a 180-unit apartmentcommunity, located in Bellevue, Washington, for approximately $22.3 million.The property is unencumbered.

 

On February 16, 2005, the OperatingPartnership entered into a $50 million notional forward-starting swap with PNCBank at a fixed rate of 4.927% and a settlement date on or around October 1,2007. This derivative will be used to hedge the cash flows associated with theforecasted issuance of debt expected to occur in 2007. At inception, thetransaction is considered highly effective at offsetting changes in future cashflows for forecasted transactions and qualifies for hedge accounting. Changesto the derivative’s fair value prior to settlement will be reflected in OtherComprehensive Income on the Operating Partnership’s consolidated financialstatements.

 

F-32

----

 

**ESSEXPORTFOLIO, L.P. AND SUBSIDIARIESFinancial Statement Schedule III**

**RealEstate and Accumulated DepreciationDecember 31, 2004(Dollars in thousands)**

 
| * *                            | ** ** |      |   |             |   |            |   | **Initial cost** |   |                            |   | **Gross amount carried at close of period**        |   |                       |   |                            |   |         |   |                          |   |
|-------------------------------------|------------|-----------|--------|------------------|--------|-----------------|--------|------------------|--------|---------------------------------|--------|----------------------------------------------------|--------|----------------------------|--------|---------------------------------|--------|--------------|--------|-------------------------------|--------|
| **Property**                        | ** ** | **Units** |   | **Location**     |   | **Encumbrance** |   | **Land**         |   | **Buildings and  improvements** |   | **Costs  capitalized  subsequent to  acquisition** |   | **Land and  improvements** |   | **Buildings and  improvements** |   | **Total(1)** |   | **Accumulated  depreciation** |   | **Date of  construction** |   | **Date  acquired** |   | **Lives  (years)** |   |
| *Encumbered multifamily properties* | ** ** |      |   |             |   |            |   |             |   |                            |   |                                               |   |                       |   |                            |   |         |   |                          |   |   |   |   |   |   |   |
| Foothill Commons                    | ** ** | 360       |   | Bellevue, WA     |   | $               |   |             | $      | 2,435                           |   | $                                                  | 9,821  |                       | $      | 3,817                           |   | $            | 2,440  |                          | $      | 13,633 |   | 16,073 |   | $ | 7,371 |   | 1978 |   | 03/90 |   | 3-30 |   |
| Oak Pointe                          | ** ** | 390       |   | Sunnyvale, CA    |   |            |   | 4,842            |   | 19,776                          |   | 7,571                                              |   | 4,847                      |   | 27,342                          |   | 32,189       |   | 14,663                        |   | 1973 |   | 12/88 |   | 3-30 |   |
| Palisades                           | ** ** | 192       |   | Bellevue, WA     |   |            |   | 1,560            |   | 6,242                           |   | 2,631                                              |   | 1,565                      |   | 8,868                           |   | 10,433       |   | 4,561                         |   | 1969/1977(2) |   | 05/90 |   | 3-30 |   |
| Pathways                            | ** ** | 296       |   | Long Beach, CA   |   |            |   | 4,083            |   | 16,757                          |   | 9,007                                              |   | 6,239                      |   | 23,608                          |   | 29,847       |   | 10,046                        |   | 1975 |   | 02/91 |   | 3-30 |   |
| Stevenson Place (The Apple)         | ** ** | 200       |   | Fremont, CA      |   |            |   | 996              |   | 5,582                           |   | 6,638                                              |   | 1,001                      |   | 12,215                          |   | 13,216       |   | 7,419                         |   | 1971 |   | 04/82 |   | 3-30 |   |
| Summerhill Commons                  | ** ** | 184       |   | Newark, CA       |   |            |   | 1,608            |   | 7,582                           |   | 1,836                                              |   | 1,525                      |   | 9,501                           |   | 11,026       |   | 5,530                         |   | 1987 |   | 07/87 |   | 3-30 |   |
| Summerhill Park                     | ** ** | 100       |   | Sunnyvale, CA    |   |            |   | 2,654            |   | 4,918                           |   | 844                                                |   | 2,656                      |   | 5,760                           |   | 8,416        |   | 3,261                         |   | 1988 |   | 09/88 |   | 3-30 |   |
| Woodland Commons                    | ** ** | 236       |   | Bellevue, WA     |   |            |   | 2,040            |   | 8,727                           |   | 2,254                                              |   | 2,044                      |   | 10,977                          |   | 13,021       |   | 5,793                         |   | 1978 |   | 03/90 |   | 3-30 |   |
|                                | ** ** |      |   |             |   | 95,434          |   | 20,218           |   | 79,405                          |   | 34,598                                             |   | 22,317                     |   | 111,904                         |   | 134,221      |   | 58,644                        |   |   |   |   |   |   |   |
| Bonita Cedars                       | ** ** | 120       |   | Bonita, CA       |   |            |   | 2,496            |   | 9,983                           |   | 530                                                |   | 2,503                      |   | 10,506                          |   | 13,009       |   | 805                           |   | 1983 |   | 12/02 |   | 3-30 |   |
| Castle Creek                        | ** ** | 216       |   | Newcastle, WA    |   |            |   | 4,149            |   | 16,028                          |   | 1,196                                              |   | 4,834                      |   | 16,539                          |   | 21,373       |   | 4,456                         |   | 1997 |   | 12/97 |   | 3-30 |   |
| Foothill/Twincreeks                 | ** ** | 176       |   | San Ramon, CA    |   |            |   | 5,875            |   | 13,992                          |   | 1,587                                              |   | 5,964                      |   | 15,490                          |   | 21,454       |   | 5,017                         |   | 1985 |   | 02/97 |   | 3-30 |   |
| Trabucco Villas                     | ** ** | 132       |   | Lake Forest, CA  |   |            |   | 3,638            |   | 8,640                           |   | 1,141                                              |   | 3,842                      |   | 9,577                           |   | 13,419       |   | 2,706                         |   | 1985 |   | 10/97 |   | 3-30 |   |
| Walnut Heights                      | ** ** | 163       |   | Walnut, CA       |   |            |   | 4,858            |   | 19,400                          |   | 350                                                |   | 4,886                      |   | 19,722                          |   | 24,608       |   | 933                           |   | 1964 |   | 10/03 |   | 3-30 |   |
|                                | ** ** |      |   |             |   | 93,735          |   | 21,016           |   | 68,043                          |   | 4,804                                              |   | 22,029                     |   | 71,834                          |   | 93,863       |   | 13,917                        |   |   |   |   |   |   |   |
| Fountain Court                      | ** ** | 320       |   | Bellevue, WA     |   |            |   | 6,702            |   | 27,306                          |   | 629                                                |   | 6,985                      |   | 27,652                          |   | 34,637       |   | 4,538                         |   | 2000 |   | 03/00 |   | 3-30 |   |
| Hillcrest Park (Mirabella)          | ** ** | 608       |   | Newbury Park, CA |   |            |   | 15,318           |   | 40,601                          |   | 11,633                                             |   | 15,920                     |   | 51,632                          |   | 67,552       |   | 10,864                        |   | 1973 |   | 03/98 |   | 3-30 |   |
| Hillsborough Park                   | ** ** | 235       |   | La Habra, CA     |   |            |   | 6,291            |   | 15,455                          |   | 415                                                |   | 6,272                      |   | 15,889                          |   | 22,161       |   | 2,868                         |   | 1999 |   | 09/99 |   | 3-30 |   |
|                                | ** ** |      |   |             |   | 79,702          |   | 28,311           |   | 83,362                          |   | 12,677                                             |   | 29,177                     |   | 95,173                          |   | 124,350      |   | 18,270                        |   |   |   |   |   |   |   |
| The Shores                          | ** ** | 462       |   | San Ramon, CA    |   |            |   | 12,105           |   | 18,252                          |   | 16,093                                             |   | 12,682                     |   | 33,768                          |   | 46,450       |   | 8,337                         |   | 1988 |   | 01/97 |   | 3-30 |   |
| Waterford                           | ** ** | 238       |   | San Jose, CA     |   |            |   | 11,808           |   | 24,500                          |   | 10,213                                             |   | 15,160                     |   | 31,361                          |   | 46,521       |   | 4,180                         |   | 2000 |   | 06/00 |   | 3-30 |   |
|                                | ** ** |      |   |             |   | 60,356          |   | 23,913           |   | 42,752                          |   | 26,306                                             |   | 27,842                     |   | 65,129                          |   | 92,971       |   | 12,517                        |   |   |   |   |   |   |   |
| Alpine Village                      | ** ** | 306       |   | Alpine, CA       |   | 17,835          |   | 4,967            |   | 19,868                          |   | 817                                                |   | 4,981                      |   | 20,671                          |   | 25,652       |   | 1,547                         |   | 1971 |   | 12/02 |   | 3-30 |   |
| Anchor Village                      | ** ** | 301       |   | Mukilteo, WA     |   | 10,750          |   | 2,498            |   | 10,595                          |   | 3,103                                              |   | 2,587                      |   | 13,609                          |   | 16,196       |   | 5,084                         |   | 1981 |   | 01/97 |   | 3-30 |   |
| Bridle Trails                       | ** ** | 92        |   | Kirkland, WA     |   | 4,027           |   | 1,500            |   | 5,930                           |   | 535                                                |   | 1,531                      |   | 6,434                           |   | 7,965        |   | 1,775                         |   | 1986 |   | 10/97 |   | 3-30 |   |
| Brookside Oaks                      | ** ** | 170       |   | Sunnyvale, CA    |   | 14,720          |   | 7,301            |   | 16,310                          |   | 1,300                                              |   | 7,584                      |   | 17,327                          |   | 24,911       |   | 2,942                         |   | 1973 |   | 06/00 |   | 3-30 |   |
| Bunker Hill Towers                  | ** ** | 456       |   | Los Angeles, CA  |   | 17,398          |   | 11,498           |   | 27,871                          |   | 1,877                                              |   | 11,639                     |   | 29,607                          |   | 41,246       |   | 7,415                         |   | 1968 |   | 03/98 |   | 3-30 |   |
| Camarillo Oaks                      | ** ** | 564       |   | Camarillo, CA    |   | 54,993          |   | 10,953           |   | 25,254                          |   | 3,297                                              |   | 11,075                     |   | 28,429                          |   | 39,504       |   | 10,031                        |   | 1985 |   | 07/96 |   | 3-30 |   |
| Capri at Sunny Hills                | ** ** | 100       |   | Fullerton, CA    |   | 12,080          |   | 3,337            |   | 13,320                          |   | 1,344                                              |   | 3,448                      |   | 14,553                          |   | 18,001       |   | 1,642                         |   | 1961 |   | 09/01 |   | 3-30 |   |
| City Heights(3)                     | ** ** | 687       |   | Los Angeles, CA  |   | 32,850          |   | 9,655            |   | 37,078                          |   | 4,018                                              |   | 9,900                      |   | 40,851                          |   | 50,751       |   | 7,358                         |   | 1968 |   | 12/00 |   | 3-30 |   |
| Coral Gardens                       | ** ** | 200       |   | El Cajon, CA     |   | 11,469          |   | 3,638            |   | 14,552                          |   | 275                                                |   | 3,648                      |   | 14,817                          |   | 18,465       |   | 1,126                         |   | 1976 |   | 12/02 |   | 3-30 |   |
| Devonshire                          | ** ** | 276       |   | Hemet, CA        |   | 11,612          |   | 3,470            |   | 13,882                          |   | 631                                                |   | 3,480                      |   | 14,503                          |   | 17,983       |   | 1,125                         |   | 1988 |   | 12/02 |   | 3-30 |   |
| Emerald Ridge                       | ** ** | 180       |   | Bellevue, WA     |   | 11,184          |   | 3,449            |   | 7,801                           |   | 1,330                                              |   | 3,449                      |   | 9,131                           |   | 12,580       |   | 3,748                         |   | 1987 |   | 11/94 |   | 3-30 |   |
| Evergreen Heights                   | ** ** | 200       |   | Kirkland, WA     |   | 11,382          |   | 3,566            |   | 13,395                          |   | 1,211                                              |   | 3,649                      |   | 14,523                          |   | 18,172       |   | 4,007                         |   | 1990 |   | 06/97 |   | 3-30 |   |
| Fountain Park                       | ** ** | 705       |   | Playa Vista, CA  |   | 83,179          |   | 25,073           |   | 94,980                          |   | 466                                                |   | 25,194                     |   | 95,325                          |   | 120,519      |   | 5,100                         |   | 2002 |   | 02/04 |   | 3-30 |   |
| Hampton Park (Columbus)             | ** ** | 83        |   | Glendale, CA     |   | 4,355           |   | 2,407            |   | 5,672                           |   | 1,425                                              |   | 2,426                      |   | 7,078                           |   | 9,504        |   | 1,265                         |   | 1974 |   | 06/99 |   | 3-30 |   |
| Hampton Place (Lorraine)            | ** ** | 132       |   | Glendale, CA     |   | 8,205           |   | 4,288            |   | 11,081                          |   | 1,496                                              |   | 4,307                      |   | 12,558                          |   | 16,865       |   | 2,296                         |   | 1970 |   | 06/99 |   | 3-30 |   |
|                                     |            |           |        |                  |        |                 |        |                  |        |                                 |        |                                                    |        |                            |        |                                 |        |              |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-33

----

 
| * *                                        |   |      |   |                    |   |            |   | **Initial cost** |   |                            |   | **Gross amount carried at close of period**        |   |                       |   |                            |   |         |   |                          |   |
|-------------------------------------------------|--------|-----------|--------|-------------------------|--------|-----------------|--------|------------------|--------|---------------------------------|--------|----------------------------------------------------|--------|----------------------------|--------|---------------------------------|--------|--------------|--------|-------------------------------|--------|
| **Property**                                    |   | **Units** |   | **Location**            |   | **Encumbrance** |   | **Land**         |   | **Buildings and  improvements** |   | **Costs  capitalized  subsequent to  acquisition** |   | **Land and  improvements** |   | **Buildings and  improvements** |   | **Total(1)** |   | **Accumulated  depreciation** |   | **Date of  construction** |   | **Date  acquired** |   | **Lives  (years)** |   |
| *Encumbered multifamily properties (continued)* |   |      |   |                    |   |            |   |             |   |                            |   |                                               |   |                       |   |                            |   |         |   |                          |   |   |   |   |   |   |   |
| Hearthstone II                                  |   | 140       |   | Santa Ana, CA           |   | 9,795           |   | 2,833            |   | 11,303                          |   | 971                                                |   | 3,021                      |   | 12,086                          |   | 15,107       |   | 1,314                         |   | 1970 |   | 11/01 |   | 3-30 |   |
| Hidden Valley — Parker Ranch               |   | 324       |   | Simi Valley, CA         |   | 28,002          |   | 14,174           |   | 34,065                          |   | —                                             |   | 14,174                     |   | 34,065                          |   | 48,239       |   | 630                           |   | 2004 |   | 12/04 |   | 3-30 |   |
| Highridge                                       |   | 255       |   | Rancho Palos  Verde, CA |   | 19,385          |   | 5,419            |   | 18,347                          |   | 4,220                                              |   | 5,615                      |   | 22,371                          |   | 27,986       |   | 6,223                         |   | 1972 |   | 05/97 |   | 3-30 |   |
| Huntington Breakers                             |   | 342       |   | Huntington Beach,  CA   |   | 22,058          |   | 9,306            |   | 22,720                          |   | 2,536                                              |   | 9,315                      |   | 25,247                          |   | 34,562       |   | 6,342                         |   | 1984 |   | 10/97 |   | 3-30 |   |
| Inglenook Court                                 |   | 224       |   | Bothell, WA             |   | 8,300           |   | 3,467            |   | 7,881                           |   | 2,115                                              |   | 3,474                      |   | 9,989                           |   | 13,463       |   | 4,204                         |   | 1985 |   | 10/94 |   | 3-30 |   |
| Kings Road                                      |   | 196       |   | Los Angeles, CA         |   | 15,296          |   | 4,023            |   | 9,527                           |   | 3,039                                              |   | 4,031                      |   | 12,558                          |   | 16,589       |   | 3,152                         |   | 1979 |   | 06/97 |   | 3-30 |   |
| Le Parc (Plumtree)                              |   | 140       |   | Santa Clara, CA         |   | 14,349          |   | 3,090            |   | 7,421                           |   | 4,377                                              |   | 3,092                      |   | 11,796                          |   | 14,888       |   | 3,585                         |   | 1975 |   | 02/94 |   | 3-30 |   |
| Maple Leaf                                      |   | 48        |   | Seattle, WA             |   | 1,919           |   | 805              |   | 3,283                           |   | 182                                                |   | 828                        |   | 3,442                           |   | 4,270        |   | 932                           |   | 1986 |   | 10/97 |   | 3-30 |   |
| Mariners Place                                  |   | 105       |   | Oxnard, CA              |   | 4,077           |   | 1,555            |   | 6,103                           |   | 590                                                |   | 1,562                      |   | 6,686                           |   | 8,248        |   | 1,205                         |   | 1987 |   | 05/00 |   | 3-30 |   |
| Meadowood                                       |   | 320       |   | Simi Valley, CA         |   | 15,547          |   | 7,852            |   | 18,592                          |   | 2,012                                              |   | 7,898                      |   | 20,558                          |   | 28,456       |   | 6,417                         |   | 1986 |   | 11/96 |   | 3-30 |   |
| Montejo                                         |   | 124       |   | Garden Grove, CA        |   | 6,058           |   | 1,925            |   | 7,685                           |   | 644                                                |   | 2,096                      |   | 8,158                           |   | 10,254       |   | 887                           |   | 1974 |   | 11/01 |   | 3-30 |   |
| Monterey Villas (The Village)                   |   | 122       |   | Oxnard, CA              |   | 12,494          |   | 2,349            |   | 5,579                           |   | 3,956                                              |   | 2,424                      |   | 9,460                           |   | 11,884       |   | 2,060                         |   | 1974 |   | 07/97 |   | 3-30 |   |
| Monterra del Rey (Glenbrook)                    |   | 84        |   | Pasadena, CA            |   | 4,197           |   | 2,312            |   | 4,923                           |   | 2,185                                              |   | 2,435                      |   | 6,985                           |   | 9,420        |   | 1,435                         |   | 1972 |   | 04/99 |   | 3-30 |   |
| Monterra del Sol (Euclid)                       |   | 85        |   | Pasadena, CA            |   | 2,755           |   | 2,202            |   | 4,794                           |   | 2,005                                              |   | 2,386                      |   | 6,615                           |   | 9,001        |   | 1,258                         |   | 1972 |   | 04/99 |   | 3-30 |   |
| Mt. Sutro                                       |   | 99        |   | San Francisco, CA       |   | 5,948           |   | 2,334            |   | 8,507                           |   | 698                                                |   | 2,725                      |   | 8,814                           |   | 11,539       |   | 1,615                         |   | 1973 |   | 06/01 |   | 3-30 |   |
| Park Hill                                       |   | 245       |   | Issaquah, CA            |   | 22,123          |   | 7,284            |   | 21,937                          |   | 55                                                 |   | 7,284                      |   | 21,992                          |   | 29,276       |   | 221                           |   | 1999 |   | 02/99(4) |   | 3-30 |   |
| Park Place/Windsor Court/Cochran                |   | 176       |   | Los Angeles, CA         |   | 18,399          |   | 4,965            |   | 11,806                          |   | 1,274                                              |   | 5,015                      |   | 13,030                          |   | 18,045       |   | 3,784                         |   | 1988 |   | 08/97 |   | 3-30 |   |
| Peregrine Point                                 |   | 67        |   | Issaquah, CA            |   | 8,080           |   | 3,384            |   | 13,523                          |   | (219                                               | )(5)   | 3,317                      |   | 13,371                          |   | 16,688       |   | 1,117                         |   | 2003 |   | 1/03 |   | 3-30 |   |
| Pointe at Cupertino (Westwood)                  |   | 116       |   | Cupertino, CA           |   | 13,551          |   | 4,505            |   | 17,605                          |   | 87                                                 |   | 4,505                      |   | 17,692                          |   | 22,197       |   | 389                           |   | 1963 |   | 08/98(6) |   | 3-30 |   |
| Sammamish View                                  |   | 153       |   | Bellevue, WA            |   | 11,244          |   | 3,324            |   | 7,501                           |   | 1,155                                              |   | 3,331                      |   | 8,649                           |   | 11,980       |   | 3,266                         |   | 1986 |   | 11/94 |   | 3-30 |   |
| San Marcos                                      |   | 312       |   | Richmond, CA            |   | 30,507          |   | 15,563           |   | 36,204                          |   | 307                                                |   | 15,857                     |   | 36,217                          |   | 52,074       |   | 1,936                         |   | 2003 |   | 11/03 |   | 3-30 |   |
| Spring Lake                                     |   | 69        |   | Seattle, WA             |   | 2,153           |   | 838              |   | 3,399                           |   | 228                                                |   | 859                        |   | 3,606                           |   | 4,465        |   | 1,001                         |   | 1986 |   | 10/97 |   | 3-30 |   |
| Stonehedge Village                              |   | 196       |   | Bothell, WA             |   | 8,665           |   | 3,167            |   | 12,603                          |   | 1,386                                              |   | 3,201                      |   | 13,955                          |   | 17,156       |   | 3,448                         |   | 1986 |   | 10/97 |   | 3-30 |   |
| Summit Park                                     |   | 300       |   | San Diego, CA           |   | 22,116          |   | 5,959            |   | 23,836                          |   | 969                                                |   | 5,976                      |   | 24,788                          |   | 30,764       |   | 1,948                         |   | 1972 |   | 12/02 |   | 3-30 |   |
| The Barkley                                     |   | 161       |   | Anahiem, CA             |   | 5,170           |   | 2,272            |   | 8,520                           |   | 1,256                                              |   | 2,334                      |   | 9,714                           |   | 12,048       |   | 1,922                         |   | 1984 |   | 04/00 |   | 3-30 |   |
| The Bluffs                                      |   | 224       |   | San Diego, CA           |   | 12,763          |   | 3,405            |   | 7,743                           |   | 724                                                |   | 3,442                      |   | 8,430                           |   | 11,872       |   | 2,492                         |   | 1974 |   | 06/97 |   | 3-30 |   |
| The Carlyle                                     |   | 132       |   | San Jose, CA            |   | 16,044          |   | 3,954            |   | 15,277                          |   | 8,782                                              |   | 5,800                      |   | 22,213                          |   | 28,013       |   | 2,828                         |   | 2000 |   | 04/00 |   | 3-30 |   |
| Tierra Vista                                    |   | 404       |   | Oxnard, CA              |   | 38,213          |   | 13,652           |   | 53,336                          |   | 127                                                |   | 13,651                     |   | 53,464                          |   | 67,115       |   | 1,489                         |   | 2001 |   | 01/01(7 | ) | 3-30 |   |
| Treehouse                                       |   | 164       |   | Santa Ana, CA           |   | 8,156           |   | 2,626            |   | 10,485                          |   | 874                                                |   | 2,818                      |   | 11,167                          |   | 13,985       |   | 1,209                         |   | 1970 |   | 11/01 |   | 3-30 |   |
| Treetops                                        |   | 172       |   | Fremont, CA             |   | 9,800           |   | 3,520            |   | 8,182                           |   | 1,604                                              |   | 3,579                      |   | 9,727                           |   | 13,306       |   | 3,392                         |   | 1978 |   | 01/96 |   | 3-30 |   |
| Valley Park                                     |   | 160       |   | Fountain Valley         |   | 10,332          |   | 3,361            |   | 13,420                          |   | 1,027                                              |   | 3,550                      |   | 14,258                          |   | 17,808       |   | 1,566                         |   | 1969 |   | 11/01 |   | 3-30 |   |
| Villa Angelina                                  |   | 256       |   | Placentia               |   | 13,971          |   | 4,498            |   | 17,962                          |   | 900                                                |   | 4,731                      |   | 18,629                          |   | 23,360       |   | 1,972                         |   | 1970 |   | 11/01 |   | 3-30 |   |
| Vista Belvedere                                 |   | 76        |   | Tiburon, CA             |   | 11,792          |   | 5,573            |   | 11,901                          |   | 95                                                 |   | 5,573                      |   | 11,996                          |   | 17,569       |   | 148                           |   | 1963 |   | 08/04 |   | 3-30 |   |
| Wandering Creek                                 |   | 156       |   | Kent, WA                |   | 5,300           |   | 1,285            |   | 4,980                           |   | 1,444                                              |   | 1,296                      |   | 6,413                           |   | 7,709        |   | 2,436                         |   | 1986 |   | 11/95 |   | 3-30 |   |
| Wharfside Pointe                                |   | 142       |   | Seattle, WA             |   | 8,166           |   | 2,245            |   | 7,020                           |   | 1,422                                              |   | 2,256                      |   | 8,431                           |   | 10,687       |   | 3,440                         |   | 1990 |   | 06/94 |   | 3-30 |   |
| Wilshire Promenade                              |   | 149       |   | Fullerton, CA           |   | 6,847           |   | 3,118            |   | 7,385                           |   | 4,677                                              |   | 3,797                      |   | 11,383                          |   | 15,180       |   | 2,982                         |   | 1992 |   | 01/97 |   | 3-30 |   |
| Wimbledon Woods                                 |   | 560       |   | Hayward, CA             |   | 53,837          |   | 9,883            |   | 37,670                          |   | 4,143                                              |   | 10,350                     |   | 41,346                          |   | 51,696       |   | 9,512                         |   | 1975 |   | 03/98 |   | 3-30 |   |
| Windsor Ridge                                   |   | 216       |   | Sunnyvale, CA           |   | 12,034          |   | 4,017            |   | 10,315                          |   | 1,724                                              |   | 4,021                      |   | 12,035                          |   | 16,056       |   | 6,356                         |   | 1989 |   | 03/89 |   | 3-30 |   |
|                                            |   |      |   |                    |   | 1,154,709       |   | 367,102          |   | 1,124,491                       |   | 165,081                                            |   | 381,882                    |   | 1,274,792                       |   | 1,656,674    |   | 259,922                       |   |   |   |   |   |   |   |

 

F-34

----

 
| **Property**                          | ** ** | **Units**                       | ** **                 | **Location**        | ** **                      | **Encumbrance** | ** **   | **Initial cost** | ** ** | **Costs  capitalized  subsequent to  acquisition** | ** ** | **Gross amount carried at close of period** | ** ** | **Accumulated  depreciation** | ** ** | **Date of  construction** | ** ** | **Date  acquired** | ** ** | **Lives  (years)** | ** ** |
|---------------------------------------|------------|---------------------------------|----------------------------|---------------------|---------------------------------|-----------------|--------------|------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|
| **Land**                              | ** ** | **Buildings and  improvements** | **Land and  improvements** | ** **          | **Buildings and  improvements** | ** **      | **Total(1)** |
| *Unencumbered multifamily properties* |       |                            |                       |                | ** **                      | ** **      | ** **   | ** **       | ** ** | ** **                                         | ** ** | ** **                                  | ** ** | ** **                    | ** ** | ** **                | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Alpine Country                        |       | 108                             |                       | Alpine, CA          | ** **                      | ** **      | ** **   | 1,741            |       | 6,964                                              |       | 158                                         |       | 1,746                         |       | 7,117                     |       | 8,863              |       | 545                |       | 1986 |   | 12/02 |   | 3-30 |   |
| Avondale at Warner Center             |       | 446                             |                       | Woodland Hills,  CA | ** **                      | ** **      | ** **   | 10,536           |       | 24,522                                             |       | 3,760                                       |       | 10,601                        |       | 28,217                    |       | 38,818             |       | 5,909              |       | 1989 |   | 01/97 |   | 3-30 |   |
| Brighton Ridge                        |       | 264                             |                       | Renton, WA          | ** **                      | ** **      | ** **   | 2,623            |       | 10,800                                             |       | 1,717                                       |       | 2,656                         |       | 12,484                    |       | 15,140             |       | 4,318              |       | 1986 |   | 12/96 |   | 3-30 |   |
| Bristol Commons                       |       | 188                             |                       | Sunnyvale, CA       | ** **                      | ** **      | ** **   | 5,278            |       | 11,853                                             |       | 1,448                                       |       | 5,293                         |       | 13,286                    |       | 18,579             |       | 4,147              |       | 1989 |   | 01/97 |   | 3-30 |   |
| Cambridge                             |       | 40                              |                       | Chula Vista, CA     | ** **                      | ** **      | ** **   | 497              |       | 1,986                                              |       | 104                                         |       | 498                           |       | 2,089                     |       | 2,587              |       | 155                |       | 1965 |   | 12/02 |   | 3-30 |   |
| Canyon Ponte                          |       | 250                             |                       | Bothell, WA         | ** **                      | ** **      | ** **   | 4,692            |       | 18,600                                             |       | 8                                           |       | 4,693                         |       | 18,607                    |       | 23,300             |       | 956                |       | 1990 |   | 10/03 |   | 3-30 |   |
| Carlton Heights                       |       | 70                              |                       | Santee, CA          | ** **                      | ** **      | ** **   | 1,099            |       | 4,397                                              |       | 150                                         |       | 1,102                         |       | 4,544                     |       | 5,646              |       | 348                |       | 1979 |   | 12/02 |   | 3-30 |   |
| Casa Tierra                           |       | 40                              |                       | El Cajon, CA        | ** **                      | ** **      | ** **   | 522              |       | 2,088                                              |       | 123                                         |       | 523                           |       | 2,210                     |       | 2,733              |       | 172                |       | 1972 |   | 12/02 |   | 3-30 |   |
| Country Villas                        |       | 180                             |                       | Oceanside, CA       | ** **                      | ** **      | ** **   | 4,174            |       | 16,698                                             |       | 732                                         |       | 4,186                         |       | 17,418                    |       | 21,604             |       | 1,332              |       | 1976 |   | 12/02 |   | 3-30 |   |
| Eastridge                             |       | 188                             |                       | San Ramon, CA       | ** **                      | ** **      | ** **   | 6,068            |       | 13,628                                             |       | 998                                         |       | 6,092                         |       | 14,602                    |       | 20,694             |       | 4,553              |       | 1988 |   | 08/96 |   | 3-30 |   |
| Emerald Palms                         |       | 152                             |                       | San Diego, CA       | ** **                      | ** **      | ** **   | 2,909            |       | 11,637                                             |       | 307                                         |       | 2,918                         |       | 11,935                    |       | 14,853             |       | 927                |       | 1986 |   | 12/02 |   | 3-30 |   |
| Esplanade                             |       | 278                             |                       | San Jose, CA        | ** **                      | ** **      | ** **   | 18,170           |       | 41,043                                             |       | 19                                          |       | 18,170                        |       | 41,062                    |       | 59,232             |       | 165                |       | 2002 |   | 11/04 |   | 3-30 |   |
| Fairway (8)                           |       | 74                              |                       | Newport Beach, CA   | ** **                      | ** **      | ** **   | —           |       | 7,850                                              |       | 1,977                                       |       | 9                             |       | 9,818                     |       | 9,827              |       | 2,217              |       | 1972 |   | 06/99 |   | 3-30 |   |
| Fairwood Pond                         |       | 194                             |                       | Renton, WA          | ** **                      | ** **      | ** **   | 5,296            |       | 15,564                                             |       | 11                                          |       | 5,296                         |       | 15,575                    |       | 20,871             |       | 110                |       | 1997 |   | 10/04 |   | 3-30 |   |
| Forest View                           |       | 192                             |                       | Renton, WA          | ** **                      | ** **      | ** **   | 3,731            |       | 14,530                                             |       | 149                                         |       | 3,731                         |       | 14,679                    |       | 18,410             |       | 783                |       | 1998 |   | 10/03 |   | 3-30 |   |
| Grand Regency                         |       | 60                              |                       | Escondido, CA       | ** **                      | ** **      | ** **   | 881              |       | 3,522                                              |       | 108                                         |       | 883                           |       | 3,628                     |       | 4,511              |       | 278                |       | 1967 |   | 12/02 |   | 3-30 |   |
| Jackson School Village                |       | 200                             |                       | Hillsboro, OR       | ** **                      | ** **      | ** **   | 2,588            |       | 10,452                                             |       | 800                                         |       | 2,698                         |       | 11,142                    |       | 13,840             |       | 1,660              |       | 1996 |   | 09/00 |   | 3-30 |   |
| Landmark                              |       | 285                             |                       | Hillsboro, OR       | ** **                      | ** **      | ** **   | 3,655            |       | 14,200                                             |       | 1,602                                       |       | 3,700                         |       | 15,757                    |       | 19,457             |       | 4,999              |       | 1990 |   | 08/96 |   | 3-30 |   |
| Linden Square                         |       | 183                             |                       | Seattle, WA         | ** **                      | ** **      | ** **   | 4,374            |       | 11,588                                             |       | 469                                         |       | 4,202                         |       | 12,229                    |       | 16,431             |       | 1,899              |       | 1994 |   | 06/00 |   | 3-30 |   |
| Lofts at Pinehurst (Villa Scandia)    |       | 118                             |                       | Ventura, CA         | ** **                      | ** **      | ** **   | 1,570            |       | 3,912                                              |       | 3,732                                       |       | 1,618                         |       | 7,596                     |       | 9,214              |       | 1,630              |       | 1971 |   | 06/97 |   | 3-30 |   |
| Marbrisa                              |       | 202                             |                       | Long Beach, CA      | ** **                      | ** **      | ** **   | 4,700            |       | 18,800                                             |       | 451                                         |       | 4,760                         |       | 19,191                    |       | 23,951             |       | 1,723              |       | 1987 |   | 09/02 |   | 3-30 |   |
| Marina City Club (9)                  |       | 101                             |                       | Marina Del Rey,  CA | ** **                      | ** **      | ** **   | —           |       | 28,167                                             |       | 1,182                                       |       | —                        |       | 29,349                    |       | 29,349             |       | 948                |       | 1971 |   | 01/04 |   | 3-30 |   |
| Marina Cove (10)                      |       | 292                             |                       | Santa Clara, CA     | ** **                      | ** **      | ** **   | 5,320            |       | 16,431                                             |       | 2,799                                       |       | 5,323                         |       | 19,227                    |       | 24,550             |       | 8,000              |       | 1974 |   | 06/94 |   | 3-30 |   |
| Meadows @ Cascade                     |       | 198                             |                       | Vancouver, WA       | ** **                      | ** **      | ** **   | 2,261            |       | 9,070                                              |       | 1,599                                       |       | 2,337                         |       | 10,593                    |       | 12,930             |       | 3,025              |       | 1988 |   | 11/97 |   | 3-30 |   |
| Mesa Village                          |       | 133                             |                       | Clairemont, CA      | ** **                      | ** **      | ** **   | 1,888            |       | 7,552                                              |       | 230                                         |       | 1,893                         |       | 7,777                     |       | 9,670              |       | 580                |       | 1963 |   | 12/02 |   | 3-30 |   |
| Mira Woods                            |       | 355                             |                       | Mira Mesa, CA       | ** **                      | ** **      | ** **   | 7,165            |       | 28,660                                             |       | 772                                         |       | 7,185                         |       | 29,412                    |       | 36,597             |       | 2,210              |       | 1982 |   | 12/02 |   | 3-30 |   |
| Mirabella                             |       | 188                             |                       | Marina Del Rey,  CA | ** **                      | ** **      | ** **   | 6,180            |       | 26,673                                             |       | 823                                         |       | 6,254                         |       | 27,422                    |       | 33,676             |       | 4,336              |       | 2000 |   | 05/00 |   | 3-30 |   |
| Monterra del Mar (Windsor Terrace)    |       | 123                             |                       | Pasadena, CA        | ** **                      | ** **      | ** **   | 2,188            |       | 5,263                                              |       | 3,697                                       |       | 2,736                         |       | 8,412                     |       | 11,148             |       | 2,070              |       | 1972 |   | 09/97 |   | 3-30 |   |
| Mountain View                         |       | 106                             |                       | Camarillo, CA       | ** **                      | ** **      | ** **   | 3,167            |       | 11,106                                             |       | 59                                          |       | 3,117                         |       | 11,215                    |       | 14,332             |       | 403                |       | 1980 |   | 01/04 |   | 3-30 |   |
| Pinehurst                             |       | 28                              |                       | Ventura, CA         | ** **                      | ** **      | ** **   | 355              |       | 1,356                                              |       | —                                      |       | 355                           |       | 1,356                     |       | 1,711              |       | —             |       | 1973 |   | 12/04 |   | 3-30 |   |
| Salmon Run                            |       | 132                             |                       | Bothell, WA         | ** **                      | ** **      | ** **   | 3,717            |       | 11,483                                             |       | 284                                         |       | 3,801                         |       | 11,683                    |       | 15,484             |       | 1,606              |       | 2000 |   | 10/00 |   | 3-30 |   |
| Shadow Point                          |       | 172                             |                       | Spring Valley, CA   | ** **                      | ** **      | ** **   | 2,812            |       | 11,248                                             |       | 731                                         |       | 2,820                         |       | 11,971                    |       | 14,791             |       | 928                |       | 1983 |   | 12/02 |   | 3-30 |   |
| St. Cloud                             |       | 302                             |                       | Houston, TX         | ** **                      | ** **      | ** **   | 2,140            |       | 8,560                                              |       | 970                                         |       | 2,146                         |       | 9,524                     |       | 11,670             |       | 768                |       | 1968 |   | 12/02 |   | 3-30 |   |

 

F-35

----

 
| **Property**                                     | ** ** | **Units**                       | ** **                 | **Location**        | ** **                      | **Encumbrance** | ** **   | **Initial cost** | ** ** | **Costs  capitalized  subsequent to  acquisition** | ** ** | **Gross amount carried at close of period** | ** ** | **Accumulated  depreciation** | ** ** | **Date of  construction** | ** ** | **Date  acquired** | ** ** | **Lives  (years)** | ** ** |
|--------------------------------------------------|------------|---------------------------------|----------------------------|---------------------|---------------------------------|-----------------|--------------|------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|
| **Land**                                         | ** ** | **Buildings and  improvements** | **Land and  improvements** | ** **          | **Buildings and  improvements** | ** **      | **Total(1)** |
| *Unencumbered multifamily properties(continued)* |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| The Laurels                                      |       | 164                             |                       | Mill Creek, WA      | ** **                      |            |         | 1,559            |       | 6,430                                              |       | 820                                         |       | 1,595                         |       | 7,214                     |       | 8,809              |       | 2,365              |       | 1981 |   | 12/96 |   | 3-30 |   |
| Tierra del Sol/Norte                             |       | 156                             |                       | El Cajon, CA        | ** **                      |            |         | 2,455            |       | 9,822                                              |       | 185                                         |       | 2,462                         |       | 10,000                    |       | 12,462             |       | 778                |       | 1969 |   | 12/02 |   | 3-30 |   |
| Village @ Cascade                                |       | 192                             |                       | Vancouver, WA       | ** **                      |            |         | 2,103            |       | 8,753                                              |       | 609                                         |       | 2,154                         |       | 9,311                     |       | 11,465             |       | 2,400              |       | 1995 |   | 12/97 |   | 3-30 |   |
| Vista Capri - East                               |       | 26                              |                       | San Diego, CA       | ** **                      |            |         | 262              |       | 1,047                                              |       | 59                                          |       | 262                           |       | 1,106                     |       | 1,368              |       | 86                 |       | 1967 |   | 12/02 |   | 3-30 |   |
| Vista Capri - North                              |       | 106                             |                       | San Diego, CA       | ** **                      |            |         | 1,663            |       | 6,653                                              |       | 112                                         |       | 1,668                         |       | 6,760                     |       | 8,428              |       | 502                |       | 1975 |   | 12/02 |   | 3-30 |   |
| Vista Point (3)(11)                              |       | —                          |                       | Anaheim, CA         | ** **                      |            |         | —           |       | —                                             |       | 73                                          |       | 73                            |       | —                    |       | 73                 |       | —             |       | 1968 |   | 07/85 |   | — |   |
| Woodlawn Colonial                                |       | 159                             |                       | Chula Vista, CA     | ** **                      |            |         | 2,344            |       | 9,374                                              |       | 633                                         |       | 2,350                         |       | 10,001                    |       | 12,351             |       | 763                |       | 1974 |   | 12/02 |   | 3-30 |   |
| Woodside Village                                 |       | 145                             |                       | Ventura, CA         | ** **                      |            |         | 5,331            |       | 21,036                                             |       | 9                                           |       | 5,332                         |       | 21,044                    |       | 26,376             |       | 5                  |       | 1987 |   | 12/04 |   | 3-30 |   |
|                                             |       | 23,084                          |                       |                | ** **                      | 1,154,709       |         | 505,116          |       | 1,617,809                                          |       | 199,550                                     |       | 521,120                       |       | 1,801,355                 |       | 2,322,475          |       | 330,521            |       |   |   |   |   |   |   |
| *Other real estate assets*                       |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Office Buildings                                 |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Derian                                           |       |                            |                       | Irvine, CA          | ** **                      |            |         | 3,079            |       | 12,315                                             |       | 2,899                                       |       | 3,079                         |       | 15,214                    |       | 18,293             |       | 1,813              |       | 1983 |   | 07/00 |   | 3-30 |   |
| 925 East Meadow (12)                             |       |                            |                       | Palo Alto, CA       | ** **                      | —          |         | 1,401            |       | 3,172                                              |       | 1,063                                       |       | 1,844                         |       | 3,792                     |       | 5,636              |       | 1,422              |       | 1984 |   | 11/97 |   | 3-30 |   |
| 22120 Clarendon (13)                             |       |                            |                       | Woodland Hills,  CA | ** **                      | —          |         | 903              |       | 3,600                                              |       | 996                                         |       | 1,014                         |       | 4,485                     |       | 5,499              |       | 712                |       | 1982 |   | 03/01 |   | 3-30 |   |
| 2399 Camino Del Rio South                        |       |                            |                       | San Diego, CA       | ** **                      | —          |         | 200              |       | 800                                                |       | 7                                           |       | 202                           |       | 805                       |       | 1,007              |       | 52                 |       | 1978 |   | 12/02 |   | 3-30 |   |
| 3205 Moore Street                                |       |                            |                       | San Diego, CA       | ** **                      | —          |         | 60               |       | 240                                                |       | —                                      |       | 60                            |       | 240                       |       | 300                |       | 18                 |       | 1957 |   | 12/02 |   | 3-30 |   |
|                                             |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Recreational vehicle parks                       |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Circle RV                                        |       |                            |                       | El Cajon, CA        | ** **                      | —          |         | 2,375            |       | 2,375                                              |       | 113                                         |       | 2,506                         |       | 2,357                     |       | 4,863              |       | 188                |       | 1977 |   | 12/02 |   | 3-30 |   |
| Diamond Valley                                   |       |                            |                       | Hemet, CA           | ** **                      | —          |         | 650              |       | 650                                                |       | 29                                          |       | 688                           |       | 641                       |       | 1,329              |       | 60                 |       | 1974 |   | 12/02 |   | 3-30 |   |
| Vacationer                                       |       |                            |                       | El Cajon, CA        | ** **                      | —          |         | 1,975            |       | 1,975                                              |       | 113                                         |       | 2,099                         |       | 1,964                     |       | 4,063              |       | 159                |       | 1973 |   | 12/02 |   | 3-30 |   |
|                                             |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Manufactured housing communities                 |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Green Valley                                     |       |                            |                       | Vista, CA           | ** **                      | 6,475           |         | 3,750            |       | 3,750                                              |       | 229                                         |       | 3,988                         |       | 3,741                     |       | 7,729              |       | 297                |       | 1973 |   | 12/02 |   | 3-30 |   |
|                                             |       |                            |                       |                | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   |   |
| Total multifamily and other real estate assets   |       |                            |                       |                | ** **                      | $               | 1,161,184    |             | $          | 519,509                                            |       | $                                           | 1,646,686  |                          | $          | 204,999                   |       | $                  | 536,600    |               | $          | 1,834,594 |   | $ | 2,371,194 |   | $ | 335,242 |   |   |   |   |   |   |   |
|                                                  |            |                                 |                            |                     |                                 |                 |              |                  |            |                                                    |            |                                             |            |                               |            |                           |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-36

----

 
| **Property**                  | ** ** | **Units**                       | ** **                 | **Location**    | ** **                      | **Encumbrance** | ** **   | **Initial cost** | ** ** | **Costs  capitalized  subsequent to  acquisition** | ** ** | **Gross amount carried at close of period** | ** ** | **Accumulated  depreciation** | ** ** | **Date of  construction** | ** ** | **Date  acquired** | ** ** | **Lives  (years)** | ** ** |
|-------------------------------|------------|---------------------------------|----------------------------|-----------------|---------------------------------|-----------------|--------------|------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|
| **Land**                      | ** ** | **Buildings and  improvements** | **Land and  improvements** | ** **      | **Buildings and  improvements** | ** **      | **Total(1)** |
| Development communities (14)  |       |                            |                       |            | ** **                      | ** **      | ** **   | ** **       | ** ** | ** **                                         | ** ** | ** **                                  | ** ** | ** **                    | ** ** | ** **                | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| The San Marcos (phase II)     |       | 120                             |                       | Richmond, CA    | ** **                      | —          |         | 3,991            |       | —                                             |       | 17,949                                      |       | 21,940                        |       | —                    |       | 21,940             |       | —             |       | — |   | 09/00 |   | — | ** ** |
| Northwest Gateway             |       | 275                             |                       | Los Angeles, CA | ** **                      | —          |         | 8,100            |       | —                                             |       | 5,170                                       |       | 13,270                        |       | —                    |       | 13,270             |       | —             |       | — |   | 12/04 |   | — | ** ** |
| Pre-development costs         |       |                            |                       |            | ** **                      | —          |         | 2,683            |       | —                                             |       | 427                                         |       | 3,110                         |       |                      |       | 3,110              |       | —             |       | — |   |   |   | — | ** ** |
|                          |       |                            |                       |            | ** **                      |            |         |             |       |                                               |       |                                        |       |                          |       |                      |       |               |       |               |       |   |   |   |   |   | ** ** |
| Total development communities |       |                            |                       |            | ** **                      | $               | —       |             | $          | 14,774                                             |       | $                                           | —     |                          | $          | 23,546                    |       | $                  | 38,320     |               | $          | — |   | $ | 38,320 |   | $ | — |   |   |   |   |   |   | ** ** |
|                               |            |                                 |                            |                 |                                 |                 |              |                  |            |                                                    |            |                                             |            |                               |            |                           |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          The aggregate cost for federal income taxpurposes is $1,900,978.

(2)          Phase I was built in 1969 and Phase II wasbuilt in 1977.

(3)          The Operating Partnership has a leaseholdinterest in this land and receives a land lease payment over a 34-year-term.

(4)          The Operating Partnership’s initial 45%interest was obtained in 1999. The remaining 55% interest was acquired in 2004.

(5)          The Operating Partnership sold a single familyhome built on the property for $336 in 2003.

(6)          The Operating Partnership’s initial 20%interest was obtained in 1998. The remaining 80% interest was acquired in 2004.

(7)          The Operating Partnership’s initial 20%interest was obtained in 2001. The remaining 80% interest was acquired in 2004.

(8)          The land is leased pursuant to a ground leaseexpiring 2027.

(9)          The land is leased pursuant to a ground leaseexpiring 2067.

(10)    A portion ofland is leased pursuant to a ground lease expiring in 2028.

(11)    TheOperating Partnership’s interest in the land is subordinate to a loan issued tothe purchaser of the buildings and improvements, and therefore the carryingamount was written off in connection with the sale.

(12)    Totalrentable square footage of 17,404.

(13)    Totalrentable square footage of 38,940.

(14)    Allconstruction costs are reflected as real estate under development in theOperating Partnership’s consolidated balance sheets until the project reachesstabilization.

 

A summary of activity forreal estate and accumulated depreciation is as follows:

 
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Real estate:                          |       |     |       |     |       |      |       |
| Balance at  beginning of year         |       | $        | 1,984,122  |     | $          | 1,762,221 |       | $ | 1,441,521 |   |
| Improvements                          |       | 28,380   |       | 30,895   |       | 24,144    |       |
| Acquisition  of real estate           |       | 406,745  |       | 66,031   |       | 333,500   |       |
| Development  of real estate           |       | 48,239   |       | 124,975  |       | 16,907    |       |
| Disposition  of real estate           |       | (81,351  | )          | —   |       | (53,851   | )          |
| Real estate  investment held for sale |       | (14,941  | )          | —   |       | —    |       |
| Balance at  the end of year           |       | $        | 2,371,194  |     | $          | 1,984,122 |       | $ | 1,762,221 |   |

** **
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accumulated  depreciation:                      |       |     |       |     |       |     |       |
| Balance at  beginning of year                   |       | $        | 265,763    |     | $          | 208,014  |       | $ | 166,609 |   |
| Dispositions                                    |       | (2,948   | )          | —   |       | (2,695   | )          |
| Depreciation  expense - Acquisitions            |       | 5,956    |       | 334      |       | 388      |       |
| Depreciation  expense - Development             |       | 630      |       | 2,344    |       | —   |       |
| Depreciation  expense - Discontinued operations |       | 307      |       | 235      |       | 191      |       |
| Depreciation  expense                           |       | 66,030   |       | 54,836   |       | 43,521   |       |
| Real estate  investment held for sale           |       | (496     | )          | —   |       | —   |       |
| Balance at  the end of year                     |       | $        | 335,242    |     | $          | 265,763  |       | $ | 208,014 |   |

** **

See accompanying IndependentRegistered Public Accounting Firm’s Report.

 

F-37

----

 

**SIGNATURE**

 

Pursuant to the requirements of Section 13of 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized. 

 
|                      | Essex Portfolio, L.P.  (Registrant)                                       |                  |
|---------------------------|---------------------------------------------------------------------------|-----------------------|
|                      |                                                                      |                  |
|                      | By: Essex Property Trust, Inc.                                       |                  |
|                      | Its: General Partner                                                      |                  |
|                      |                                                                      |                  |
|                      |                                                                      |                  |
| Date: March 31, 2005 | By:                                                                       | /s/ MICHAEL J. SCHALL |   |   |
|                      | Michael J. Schall                                                         |                  |
|                      |                                                                      |                  |
|                      |                                                                      |                  |
|                      | *Senior Executive Vice  President, Director and Chief Operating  Officer* |                  |
|                           |                                                                           |                       |  |  |

 

 

### **POWER OF ATTORNEY**

 

KNOWN ALL PERSONS BY THESE PRESENTS, thateach person whose signature appears below constitutes and appoints Keith R.Guericke and Michael J. Schall, and each of them, his attorney-in-fact, eachwith the power of substitution, for him in any and all capacities, to sign anyamendments to this Report on Form 10-K and to file the same, withexhibits thereto and other documents in connection therewith, with theSecurities and Exchange Commission, hereby ratifying and confirming all thateach of said attorney-in-fact, or his substitute or substitutes, may do orcause to be done by virtue hereof.

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacity and on thedate indicated.

 
| **Signature**            | ** ** | **Title**                                                                          | ** **                                           | **Date** |
|--------------------------|------------|------------------------------------------------------------------------------------|------------------------------------------------------|----------|
|                     |       |                                                                               |                                                 |     |
| /s/ KEITH R. GUERICKE    |       |                                                                               | Chief Executive Officer and President,  Director and |     | March 29, 2005 |
| Keith R. Guericke        |       | Vice Chairman of the Board (Principal  Executive Officer)                          |                                                 |     |
|                     |       |                                                                               |                                                 |     |
| /s/ MICHAEL J. SCHALL    |       |                                                                               | Senior Executive Vice President, Director  and Chief |     | March 29, 2005 |
| Michael J. Schall        |       | Operating Officer (Principal Financial  Officer and  Principal Accounting Officer) |                                                 |     |
|                     |       |                                                                               |                                                 |     |
| /s/ GEORGE M. MARCUS     |       |                                                                               | Director and Chairman of the Board                   |     | March 29, 2005 |
| George M. Marcus         |       |                                                                               |                                                 |     |
|                     |       |                                                                               |                                                 |     |
| /s/ WILLIAM A. MILLICHAP |       |                                                                               | Director                                             |     | March 29, 2005 |
| William A. Millichap     |       |                                                                               |                                                 |     |
|                     |       |                                                                               |                                                 |     |
| /s/ DAVID W. BRADY       |       |                                                                               | Director                                             |     | March 29, 2005 |
| David W. Brady           |       |                                                                               |                                                 |     |
|                     |       |                                                                               |                                                 |     |
| /s/ ROBERT E. LARSON     |       |                                                                               | Director                                             |     | March 29, 2005 |
| Robert E. Larson         |       |                                                                               |                                                 |     |
|                          |            |                                                                                    |                                                      |          |  |  |  |  |

 

S-1

----

 
| /s/ GARY P. MARTIN         |   |   | Director |   | March 29, 2005 |
|----------------------------|--------|--------|----------|--------|---------------------|
| Gary P. Martin             |   |   |     |   |
|                       |   |   |     |   |
| /s/ ISSIE N. RABINOVITCH   |   |   | Director |   | March 29, 2005 |
| Issie N. Rabinovitch       |   |   |     |   |
|                       |   |   |     |   |
| /s/ THOMAS E. RANDLETT     |   |   | Director |   | March 29, 2005 |
| Thomas E. Randlett         |   |   |     |   |
|                       |   |   |     |   |
| /s/ WILLARD H. SMITH, JR.  |   |   | Director |   | March 29, 2005 |
| Willard H. Smith, Jr. |   |   |     |   |
|                            |        |        |          |        |                     |  |  |

 

S-2

----

 

**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Note** |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 2.1                  |       | Agreement  and Plan of Reorganization by and among Essex, Merger Sub, Sachs, the Sachs  Shareholders and John M. Sachs, dated December 17, 2002. Certain  exhibits and schedules referenced in the Merger Agreement have been omitted  in accordance with Item 601(b)(2) of Regulation S-K. A copy of any  omitted exhibit or schedule will be furnished supplementally to the  Securities and Exchange Commission upon request. Attached as Exhibit 2.1  to the Company’s Current Report on Form 8-K, filed December 23,  2002, and incorporated herein by reference. |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 2.2                  |       | Agreement of  Purchase and Sale dated as of August 13, 2004, by and between United  Dominion Realty, L.P., a Delaware limited partnership, as Buyer, and Essex  The Crest, L.P., a California limited partnership, Essex El Encanto  Apartments, L.P., a California limited partnership, Essex Hunt Club  Apartments, L.P., a California limited partnership, and the other signatories  named as Sellers therein. Attached as Exhibit 2.1 to the Company’s Current  Report on Form 8-K, filed October 5, 2004, and incorporated  herein by reference.                           |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.1                  |       | Articles of  Amendment and Restatement of Essex dated June 22, 1995, attached as Exhibit 3.1  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 1995, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                         |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.2                  |       | Articles  Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible  Preferred Stock, Series 1996A, attached as Exhibit 3.1 to the  Company’s Current Report on Form 8-K, filed August 13, 1996,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                         |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.3                  |       | First  Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc.,  attached as Exhibit 3.1 to the Company’s 10-Q for the quarter  ended September 30, 1996, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                              |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.4                  |       | Certificate  of Correction to Exhibit 3.2 dated December 20, 1996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | (1)      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.5                  |       | Amended and  Restated Bylaws of Essex Property Trust, Inc., attached as Exhibit 3.2  to the Company’s Current Report on Form 8-K, filed August 13,  1996, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                  |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.6                  |       | Certificate  of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17,  1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | (1)      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.7                  |       | Articles  Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000  shares of 7.875% Series B Cumulative Redeemable Preferred Stock, filed  with the State of Maryland on February 10, 1998, attached as Exhibit 3.1  to the Company’s Current Report on Form 8-K, filed March 3,  1998, and incorporated herein by reference.                                                                                                                                                                                                                             |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.8                  |       | Articles  Supplementary reclassifying 500,000 shares of Common Stock as 500,000 shares  of 9 1/8% Series C Cumulative Redeemable Preferred Stock, filed with the  State of Maryland on November 25, 1998.                                                                                                                                                                                                                                                                                                                                                                                       |       | (2)      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.9                  |       | Certificate  of Correction to Exhibit 3.2 dated February 12, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (2)      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.10                 |       | Articles  Supplementary reclassifying 6,617,822 shares of Common Stock as 6,617,822  shares of Series A Junior Participating Preferred Stock, filed with the  State of Maryland on November 13, 1998, attached as Exhibit 4.0 to  the Company’s Annual Report on Form 10-K for the year ended December 31,  1998, and incorporated herein by reference.                                                                                                                                                                                                                     |       | —   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |     |
| 3.11                 |       | Articles  Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000  shares of 9.30% Series D Cumulative Redeemable Preferred Stock, filed  with the State of Maryland on July 30, 1999, attached as Exhibit 3.1  to the Company’s 10-Q for the quarter ended June 30, 1999 and  incorporated herein by reference.                                                                                                                                                                                                                                               |       | —   |

 

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| 3.12   |   | Articles  Supplementary reclassifying 2,200,000 shares of Common Stock as 2,200,000  shares of 9.25% Series E Cumulative Redeemable Preferred Stock, filed  with the State of Maryland on September 9, 1999, attached as Exhibit 3.1  to the Company’s 10-Q for the quarter ended September 30, 1999 and  incorporated herein by reference. |   | — |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 3.13   |   | Certificate  of Correction to Articles Supplementary reclassifying 2,000,000 shares of  Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable  Preferred Stock, attached as Exhibit 3.1 to the Company’s Form 10-Q  for the quarter ended March 31, 2000, and incorporated herein by  reference.                         |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 3.14   |   | Certificate  of Amendment of the Bylaws of Essex Property Trust, Inc. dated February 14,  2000, attached as Exhibit 3.2 to the Company’s Form 10-Q for  the quarter ended March 31, 2000, and incorporated herein by reference.                                                                                                        |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 3.15   |   | Articles  Supplementary relating to the 7.8125% Series F Cumulative Redeemable  Preferred Stock, attached as Exhibit 3.1 to the Company’s Form 8-K,  dated September 19, 2003, and incorporated herein by reference.                                                                                                                        |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 3.16   |   | Articles  Supplementary reclassifying 2,000,000 shares of 7.875% Series B  Cumulative Redeemable Preferred Stock as 2,000,000 shares of Series B  Cumulative Redeemable Preferred Stock, filed with the State of Maryland on January 14,  2004                                                                                                        |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 3.17   |   | Articles  Supplementary reclassifying 2,000,000 shares of 9.30% Series D  Cumulative Redeemable Preferred Stock as 2,000,000 shares of Series D  Cumulative Redeemable Preferred Stock, filed with the State of Maryland on January 14,  2004                                                                                                         |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 4.1    |   | Rights  Agreement, dated as of November 11, 1998, between Essex Property Trust, Inc.,  and BankBoston, N.A., as Rights Agent, including all exhibits thereto,  attached as Exhibit 1 to the Company’s Registration Statement filed on Form 8-A  dated November 12, 1998, and incorporated herein by reference.                         |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 4.2    |   | Amendment to  Rights Agreement, dated as of December 13, 2000, attached as Exhibit 4.1  to the Company’s Form 10-Q for the quarter ended March 31,  2001 and incorporated herein by reference.                                                                                                                                              |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 4.3    |   | Amendment to  Rights Agreement, dated as of February 28, 2002 attached as Exhibit 4.3  to the Company’s Form 10-K for the year ended December 31,  2001 and incorporated herein by reference.                                                                                                                                               |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.1   |   | Essex  Property Trust, Inc. 1994 Stock Incentive Plan, (amended and restated),  attached as Exhibit 10.1 to the Company’s Form 10-Q for the  quarter ended June 30, 2000 and incorporated herein by reference.*                                                                                                                             |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.2   |   | First Amended  and Restated Agreement of Limited Partnership of Essex Portfolio, L.P.  attached as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 1997, and incorporated herein by  reference.                                                                                                 |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.3   |   | First Amendment  to the First Amended and Restated Agreement of Limited Partnership of Essex  Portfolio, L.P. dated February 6, 1998, attached as Exhibit 10.1 to  the Company’s Current Report on Form 8-K, filed March 3,  1998, and incorporated herein by reference.                                                                    |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.4   |   | Second  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated April 20, 1998, attached as Exhibit 10.1  to the Company’s Current Report on Form 8-K, filed April 23,  1998, and incorporated herein by reference.                                                                    |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.5   |   | Third  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated November 24, 1998.                                                                                                                                                                                                                          |   | (2)    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.6   |   | Fourth  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P., dated July 28, 1999, attached as Exhibit 10.1  to the Company’s 10-Q for the quarter ended June 30, 1999 and  incorporated herein by reference.                                                                                  |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 10.7   |   | Fifth  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P., dated September 3, 1999, attached as Exhibit 10.1  to the Company’s 10-Q for the quarter ended September 30, 1999 and  incorporated herein by reference.                                                                          |   | — |

 

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| 10.8   |   | Form of  Essex Property Trust, Inc. 1994 Non-Employee and Director Stock  Incentive Plan, attached as Exhibit 10.3 to the Company’s Registration  Statement on Form S-11 (Registration No. 33-76578),  which became effective on June 6, 1994, and incorporated herein by  reference.*                                                                                                                                        |   | — |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.9   |   | Form of  Indemnification Agreement between Essex and its directors and officers,  attached as Exhibit 10.7 to the Company’s Registration Statement on Form S-11  (Registration No. 33-76578), which became effective on June 6,  1994, and incorporated herein by reference.                                                                                                                                                       |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.11  |   | First  Amendment to Investor Rights Agreement dated July 1, 1996 by and between  George M. Marcus and The Marcus & Millichap Company, attached as Exhibit 10.3  to the Company’s Current Report on Form 8-K, filed August 13,  1996, and incorporated herein by reference.                                                                                                                                                     |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.12  |   | Co-Brokerage  Agreement by and among Essex, the Operating Partnership, MM REIBC and Essex  Management Corporation attached as Exhibit 10.15 to the Company’s  Registration Statement on Form S-11 (Registration No. 33-76578),  which became effective on June 6, 1994, and incorporated herein by  reference.                                                                                                                          |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.13  |   | General  Partnership Agreement of Essex Washington Interest Partners attached as Exhibit 10.16  to the Company’s Registration Statement on Form S-11 (Registration  No.33-76578), which became effective on June 6, 1994, and  incorporated herein by reference.                                                                                                                                                                             |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.14  |   | Form of  Investor Rights Agreement between Essex and the Limited Partner of the  Operating Partnership attached as Exhibit 10.26 to the Company’s  Registration Statement on Form S-11 (Registration No. 33-76578),  which became effective on June 6, 1994, and incorporated herein by  reference.                                                                                                                                |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.15  |   | Phantom  Stock Unit Agreement for Mr. Guericke, attached as Exhibit 10.1 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  1997, and incorporated herein by reference. (Same form was used for  subsequent phantom stock agreements.)*                                                                                                                                                                   |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.16  |   | Phantom  Stock Unit Agreement for Mr. Schall, attached as Exhibit 10.2 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  1997, and incorporated herein by reference. (Same form was used for  subsequent phantom stock agreements.)*                                                                                                                                                                     |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.17  |   | Replacement  Promissory Note (April 15, 1996) and Pledge Agreement for Mr. Guericke,  attached as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 1997, and incorporated herein by  reference.*                                                                                                                                                                                       |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.25  |   | Promissory  Note (December 31, 1996) and Pledge Agreement for Mr. Guericke,  attached as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 1997, and incorporated herein by  reference. (Same form of Promissory Note and Pledge Agreement used for  subsequent loans.)*                                                                                                                |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.19  |   | Replacement  Promissory Note (April 30, 1996) and Pledge Agreement for Mr. Schall,  attached as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 1997, and incorporated herein by  reference.*                                                                                                                                                                                         |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.20  |   | Promissory  Note (December 31, 1996) and Pledge Agreement for Mr. Schall,  attached as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 1997, and incorporated herein by  reference. (Same form of Promissory Note and Pledge Agreement used for  subsequent loans.)*                                                                                                                  |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.21  |   | First  Amended and Restated Agreement of Limited Partnership of Western Highridge I  Investors, effective as of May 13, 1997, attached as Exhibit 10.1  to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 1997, and incorporated herein by reference.                                                                                                                                                      |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.22  |   | Registration  Rights Agreement, effective as of May 13, 1997, by and between the  Company and the limited partners of Western-Highridge I Investors, Irvington  Square Associates, Western-Palo Alto II Investors, Western Riviera Investors,  and Western-San Jose III Investors, attached as Exhibit 10.6 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  1997, and incorporated herein by reference. |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| 10.23  |   | $100,000,000  Promissory Note between Essex Portfolio, L.P., and Essex Morgan Funding  Corporation, attached as Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 1998, and  incorporated herein by reference.                                                                                                                                                                                |   | — |

 

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| 10.24  |   | Sixth  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated as of June 28, 2001, attached as Exhibit 10.1  to the Company’s 10-Q for the quarter ended June 30, 2001 and  incorporated herein by reference.*                                                           |   | — |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.25  |   | Executive  Severance Plan attached as Exhibit 10.31 to the Company’s Form 10-K  for the year ended December 31, 2001 and incorporated herein by  reference.                                                                                                                                                                    |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.26  |   | Registration  Rights Agreement by and among Essex and the Sachs shareholders, dated December 17,  2002, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K,  filed December 23, 2002, and incorporated herein by reference.                                                                             |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.27  |   | Agreement  between Essex Property Trust, Inc. and George M. Marcus dated March 27,  2003 attached as Exhibit 10.32 to the Company’s Form 10-K for  the year ended December 31, 2002 and incorporated herein by reference.                                                                                            |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.28  |   | Seventh  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated as of June 26, 2003, attached as Exhibit 10.1  to the Company’s 10-Q for the quarter ended June 30, 2003 and  incorporated herein by reference.*                                                         |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.29  |   | Series F  Cumulative Redeemable Preferred Stock Purchase Agreement, dated September 25,  2003, by and between Essex Property Trust, Inc. and Lend Lease Rosen  Real Estate Securities, LLC, attached as Exhibit 10.1 to the Company’s Form 8-K,  dated September 19, 2003 and incorporated herein by reference. |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.30  |   | Eighth  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated as of September 23, 2003, attached as Exhibit 10.2  to the Company’s 10-Q for the quarter ended September 30, 2003 and  incorporated herein by reference.                                                 |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.31  |   | Ninth  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated as of January 8, 2004, attached as Exhibit 10.36  to the Company’s 10-K for the year ended December 31, 2003, and  incorporated herein by reference.                                                       |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.32  |   | Tenth  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated as of January 8, 2004, attached as Exhibit 10.37  to the Company’s 10-K for the year ended December 31, 2003, and  incorporated herein by reference.                                                       |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.33  |   | Eleventh  Amendment to the First Amended and Restated Agreement of Limited Partnership  of Essex Portfolio, L.P. dated as of March 29, 2004, attached as Exhibit 10.1  to the Company’s 10-Q for the quarter ended March 31, 2004, and  incorporated herein by reference. *                                                    |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.34  |   | Third  Amended and Restated Revolving Credit Agreement, dated April 30, 2004,  among Essex Portfolio L.P., Bank of America and other lenders as specified therein,  attached as Exhibit 10.2 to the Company’s 10-Q for the quarter  ended March 31, 2004 and incorporated herein by reference.                                 |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 10.35  |   | Essex  Property Trust, Inc. 2004 Stock Incentive Plan, attached as Exhibit 10.1  to the Company’s quarterly report on Form 10-Q for the quarter  ended June 30, 2004, and incorporated herein by reference. *                                                                                                             |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 12.1   |   | Schedule of  Computation of Ratio of Earnings to Fixed Charges and Preferred Stock  Dividends.                                                                                                                                                                                                                                                |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 21.1   |   | List of  Subsidiaries of Essex Property Trust, Inc.                                                                                                                                                                                                                                                                                           |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 23.1   |   | Consent of  KPMG LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                               |   | — |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 31.1   |   | Certification  of Keith R. Guericke, Principal Executive Officer, pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 31.2   |   | Certification  of Michael J. Schall, Principal Financial Officer, pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                               |   |   |
| 32.1   |   | Certification  of Keith R. Guericke, Principal Executive Officer, pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |   |   |

 

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| 32.2 |   | Certification  of Michael J. Schall, Principal Financial Officer, pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |   |   |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

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|   |   | * Management contract or compensatory plan  or arrangement.                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                      |
|   |   | (1) Incorporated by reference to the  identically numbered exhibit to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1996. |
|   |   |                                                                                                                                                                      |
|   |   | (2) Incorporated by reference to the  identically numbered exhibit to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1998. |

 

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