| **UNITED STATES SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Washington,  D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                  |
| **Form 10-Q**                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **                     **                                                                                                                                                                                                                                                                                                |
| **[x]  QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**                                                                                                                                                                                                                                                                                                                                                           |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                              |
| **                         **                                                                                                                                                                                                                                                                        |
| **For the  quarterly period ended March 31, 2010**                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                     |
| **[ ]  TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**                                                                                                                                                                                                                                                                                                                                                          |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                      |
| **For the  transition period from                              to                  **                                                                                                            |
|                                                                                                                                                                                                                                                                                                                               |
| **Commission File  Number 1-12486**                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                     |
| **Associated Estates Realty  Corporation**                                                                                                                                                                                                                                                                                                                                                                                        |
| *(Exact name of registrant as specified in its  charter)*                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                       |
| **OHIO**                                                                                                                                                                                                                                                                                                                                                                                                                          |    | **34-1747603** |
| *(State or other jurisdiction of*                                                                                                                                                                                                                                                                                                                                                                                                 |    | *(I.R.S. Employer* |
| *incorporation or organization)*                                                                                                                                                                                                                                                                                                                                                                                                  |    | *Identification Number)* |
|                                                                                                                                                                                                                                                                                                                                                                       |    |
| **1 AEC Parkway, Richmond Hts., Ohio  44143-1467**                                                                                                                                                                                                                                                                                                                                                                           |
| *(Address of principal executive offices)*                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                          |
| **(216) 261-5000**                                                                                                                                                                                                                                                                                                                                                                                                                |
| *(Registrant's telephone number, including area code)*                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                      |
| Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during  the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.        Yes [x]  No [ ]      |
|                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark  whether the registrant has submitted electronically and posted on its  corporate Web site, if any, every Interactive Data File required to be  submitted and posted pursuant to Rule 405 of Regulation S-T (subsection  232.405 of this chapter) during the preceding 12 months (or for such shorter  period that the registrant was required to submit and post such files).  Yes  [ ]  No [ ] |
|                                                                                                                                                                                                                                                                                       |
| Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of "large accelerated filer", "accelerated  filer" and "smaller reporting company" in Rule 12b-2 of the  Exchange Act.  (Check one):                                                                   |
|                                                                                                                                                                                                                                                                                            |
| Large accelerated filer [ ]  Accelerated filer [x]   Non-accelerated filer [ ]  (Do not check if a smaller reporting company)  Smaller  reporting company [ ]                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                          |
| Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ]  No [x]                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                              |
| The number of  shares outstanding as of April 23, 2010 was 22,349,302 shares.                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |

 

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**ASSOCIATED ESTATESREALTY CORPORATION**

** **

**Index**

| **PART I – FINANCIAL INFORMATION** | **Page**                                                                                                                                                                                                                 |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                     | ** ** |
| ITEM 1                                  | Consolidated Financial Statements (Unaudited)                                                                                                                                                                            | ** ** |
|                                    |                                                                                                                      |   |
|                                    | Consolidated Balance  Sheets at March 31, 2010 and December 31, 2009                                                                                                                                                     | 3 |
|                                    |                                                                                                                      |   |
|                                    | Consolidated  Statements of Operations for the three month                                                                                                                                                               |   |
|                                    |     periods ended March 31, 2010 and 2009                                                                                                                                                                 | 4 |
|                                    |                                                                                                       |   |
|                                    | Consolidated  Statements of Cash Flows for the three month periods                                                                                                                                                       |   |
|                                    |     ended March 31, 2010 and 2009                                                                                                                                                                         | 5 |
|                                    |                                                                                        |   |
|                                    | Notes to  Consolidated Financial Statements                                                                                                                                                                              | 6 |
|                                    |                                                                                             |   |
| ITEM 2                                  | Management's  Discussion and Analysis of Financial                                                                                                                                                                       |   |
|                                    |     Condition and Results of Operations                                                                                                                                                                   | 16 |
|                                    |                                                                         |   |
| ITEM 3                                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                              | 24 |
|                                    |                                                                                   |   |
| ITEM 4                                  | Controls and Procedures                                                                                                                                                                                                  | 24 |
|                                    |                                      |   |
| **PART II – OTHER INFORMATION**    |                                                                                                                                                                                                                     |
| ** **                              | **                          **                                                         |   |
| ITEM 1                                  | Legal Proceedings                                                                                                                                                                                                        | 24 |
|                                    |                                                                                   |   |
| ITEM 1A                                 | Risk Factors                                                                                                                                                                                                             | 24 |
|                                    |                                                                              |   |
| ITEM 2                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                             | 25 |
|                                    |                                                                                             |   |
| ITEM 6                                  | Exhibits                                                                                                                                                                                                                 | 26 |
|                                    |                                                                              |   |
| **SIGNATURES**                          | 29                                                                                                                                                                                                                       |

 

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**PART 1.  FINANCIALINFORMATIONITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

**ASSOCIATED ESTATES REALTY CORPORATIONCONSOLIDATED BALANCE SHEETS(UNAUDITED)**
| *(In thousands, except  share amounts)*                                                  | March 31,     |          | December 31,  |
|------------------------------------------------------------------------------------------|---------------|---------------|---------------|
| **ASSETS**                                                                               | 2010          |          | 2009          |
| Real estate assets                                                                       |          |          |          |
| Land                                                                                     |  $       | 108,447  |          |  $ | 107,815  |
| Buildings  and improvements                                                              | 798,790  |          | 798,321  |
| Furniture  and fixtures                                                                  | 29,984   |          | 29,710   |
|                                                                                     | 937,221  |          | 935,846  |
| Less:   accumulated depreciation                                                    | (310,246)     |          | (302,108)     |
|                                                                                     | 626,975  |          | 633,738  |
| Construction  in progress                                                                | 6,329    |          | 4,797    |
| Real  estate, net                                                                        | 633,304  |          | 638,535  |
| Cash and cash equivalents                                                                | 3,461    |          | 3,600    |
| Restricted cash                                                                          | 7,012    |          | 7,093    |
| Accounts and notes  receivable, net                                                      |          |          |          |
| Rents                                                                                    | 1,072    |          | 1,115    |
| Affiliates                                                                               | 89       |          | 135      |
| Other                                                                                    | 1,545    |          | 1,910    |
| Goodwill                                                                                 | 1,725    |          | 1,725    |
| Other assets, net                                                                        | 8,928    |          | 8,392    |
| **Total  assets**                                                                        |  $       | 657,136  |          |  $ | 662,505  |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                 |          |          |          |
| Mortgage notes payable                                                                   |  $       | 429,459  |          |  $ | 487,556  |
| Unsecured revolving credit  facility                                                     | 20,400   |          | 12,500   |
| Unsecured debt                                                                           | 25,780   |          | 25,780   |
| Total  debt                                                                              | 475,639  |          | 525,836  |
| Accounts payable, accrued  expenses and other liabilities                                | 21,172   |          | 27,307   |
| Dividends payable                                                                        | 3,815    |          | 2,849    |
| Resident security deposits                                                               | 2,994    |          | 2,956    |
| Accrued interest                                                                         | 2,182    |          | 2,288    |
| **Total  liabilities**                                                                   | 505,802  |          | 561,236  |
| Noncontrolling redeemable  interest                                                      | 1,829    |          | 1,829    |
| Shareholders' equity                                                                     |          |          |          |
| Preferred  shares, without par value; 9,000,000 shares authorized;                       |          |          |          |
| 8.70%  Class B Series II cumulative redeemable, $250 per share                           |          |          |          |
| liquidation  preference, 232,000 issued and 193,050 outstanding                          |          |          |          |
| at  March 31, 2010 and December 31, 2009, respectively                                   | 48,263   |          | 48,263   |
| Common  shares, without par value, $.10 stated value; 41,000,000                         |          |          |          |
| authorized;  28,170,763 issued and 22,349,302 outstanding at                             |          |          |          |
| March  31, 2010 and 22,995,763 issued and 16,675,826                                     |          |          |          |
| outstanding  at December 31, 2009, respectively                                          | 2,817    |          | 2,300    |
| Paid-in  capital                                                                         | 339,928  |          | 283,090  |
| Accumulated  distributions in excess of accumulated net income                           | (177,506)     |          | (168,822)     |
| Accumulated  other comprehensive loss                                                    | (503)         |          | (1,420)       |
| Less:   Treasury shares, at cost, 5,821,461 and 6,319,937 shares                    |          |          |          |
| at  March 31, 2010 and December 31, 2009, respectively                                   | (63,494)      |          | (63,971)      |
| **Total  shareholders' equity**                                                          | 149,505  |          | 99,440   |
| **Total  liabilities and shareholders' equity**                                          |  $       | 657,136  |          |  $ | 662,505  |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 

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**ASSOCIATEDESTATES REALTY CORPORATIONCONSOLIDATED STATEMENTS OFOPERATIONS(UNAUDITED)**
|                                                                                     | Three Months Ended |
|------------------------------------------------------------------------------------------|--------------------|
|                                                                                     | March 31,          |
| *(In thousands, except per  share amounts)*                                              | 2010               |   | 2009 |   |
| **Revenue**                                                                              |               |   |   |   |
| Property  revenue                                                                        |  $            | 31,646  |   |  $ | 31,824  |   |
| Management  and service company revenue:                                                 |               |   |   |   |
| Fees,  reimbursements and other                                                          | 207           |   | 468  |   |
| Construction  and other services                                                         | 1,103         |   | 96  |   |
| Total  revenue                                                                           | 32,956        |   | 32,388  |   |
| **Expenses**                                                                             |               |   |   |   |
| Property  operating and maintenance                                                      | 13,924        |   | 13,754  |   |
| Depreciation  and amortization                                                           | 8,620         |   | 9,207  |   |
| Direct  property management and service company expense                                  | 132           |   | 359  |   |
| Construction  and other services                                                         | 1,416         |   | 213  |   |
| General  and administrative                                                              | 3,705         |   | 3,140  |   |
| Total  expenses                                                                          | 27,797        |   | 26,673  |   |
| Operating income                                                                         | 5,159         |   | 5,715  |   |
| Interest income                                                                          | 9             |   | 15  |   |
| Interest expense                                                                         | (8,061)            |   | (8,183) |   |
| (Loss) income from  continuing operations                                                | (2,893)            |   | (2,453) |   |
| Income from discontinued  operations:                                                    |               |   |   |   |
| Operating  income                                                                        | -             |   | 302  |   |
| Gain  on disposition of properties                                                       | -             |   | 2,278  |   |
| Income from discontinued  operations                                                     | -             |   | 2,580  |   |
| **Net (loss) income**                                                                    | (2,893)            |   | 127  |   |
| Net  income attributable to noncontrolling redeemable interest                           | (13)               |   | (14) |   |
| **Net (loss) income  attributable to AERC**                                              | (2,906)            |   | 113  |   |
| Preferred share dividends                                                                | (1,050)            |   | (1,049) |   |
| **Net (loss) income  applicable to common shares**                                       |  $            | (3,956) |   |  $ | (936) |   |
|                                                                                     |               |   |   |   |
| **Earnings per common share  - basic and diluted:**                                      |               |   |   |   |
| (Loss)  income from continuing operations applicable to common shares                    |  $            | (0.19) |   |  $ | (0.21) |   |
| Income  from discontinued operations                                                     | -             |   | 0.15  |   |
| Net  (loss) income applicable to common shares                                           |  $            | (0.19) |   |  $ | (0.06) |   |
|                                                                                     |               |   |   |   |
| **Weighted average number  of common shares**                                            |               |   |   |   |
| **outstanding  - basic and diluted**                                                     | 21,199        |   | 16,434  |   |
|                                                                                     |               |   |   |   |
| The accompanying notes are an integral part of these  consolidated financial statements. |

** **

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**ASSOCIATEDESTATES REALTY CORPORATIONCONSOLIDATED STATEMENTS OF CASHFLOWS(UNAUDITED)**
|                                                                                     | Three Months Ended |
|------------------------------------------------------------------------------------------|--------------------|
|                                                                                     | March 31,          |
| *(In thousands)*                                                                         | 2010               |   | 2009 |
| **Cash flow from  operations:**                                                          |               |   |   |
| Net  (loss) income                                                                       |  $            | (2,893) |   |  $ | 127  |
| Adjustments  to reconcile net (loss) income to net cash provided by operations:          |               |   |   |
| Depreciation  and amortization (including discontinued operations)                       | 8,620         |   | 9,466  |
| Loss  on fixed asset replacements write-off                                              | 7             |   | 13  |
| Gain  on disposition of properties                                                       | -             |   | (2,278) |
| Amortization  of deferred financing costs and other                                      | 382           |   | 322  |
| Share-based  compensation                                                                | 880           |   | 604  |
| Net  change in assets and liabilities:                                                   |               |   |   |
| Accounts  and notes receivable                                                           | 421           |   | 1,310  |
| Accounts  payable and accrued expenses                                                   | (2,019)            |   | (2,469) |
| Other  operating assets and liabilities                                                  | (796)              |   | (314) |
| Restricted  cash                                                                         | 81            |   | (80) |
| Total  adjustments                                                                       | 7,576         |   | 6,574  |
| Net  cash flow provided by operations                                                    | 4,683         |   | 6,701  |
| **Cash flow from investing  activities:**                                                |               |   |   |
| Recurring  fixed asset additions                                                         | (1,402)            |   | (2,193) |
| Revenue  enhancing/non-recurring fixed asset additions                                   | (413)              |   | (69) |
| Acquisition/development  fixed asset additions                                           | (2,094)            |   | (58) |
| Net  proceeds from disposition of operating properties                                   | -             |   | 3,836  |
| Other  investing activity                                                                | (213)              |   | -  |
| Net  cash flow (used for) provided by investing activities                               | (4,122)            |   | 1,516  |
| **Cash flow from financing  activities:**                                                |               |   |   |
| Principal  amortization payments on mortgage notes payable                               | (829)              |   | (743) |
| Principal  repayments of mortgage notes payable                                          | (57,268)           |   | (72,041) |
| Payment  of debt procurement costs                                                       | -             |   | (686) |
| Proceeds  from mortgage notes obtained                                                   | -             |   | 52,450  |
| Revolving  credit facility borrowings                                                    | 24,950        |   | 78,500  |
| Revolving  credit facility repayments                                                    | (17,050)           |   | (61,700) |
| Common  share dividends paid                                                             | (3,764)            |   | (2,801) |
| Preferred  share dividends paid                                                          | (1,050)            |   | (1,049) |
| Operating  partnership distributions paid                                                | (13)               |   | (14) |
| Issuance  of common shares                                                               | 54,918        |   | -  |
| Purchase  of preferred and/or treasury shares                                            | (594)              |   | (176) |
| Net  cash flow used for financing activities                                             | (700)              |   | (8,260) |
| Decrease in cash and cash  equivalents                                                   | (139)              |   | (43) |
| Cash and cash equivalents,  beginning of period                                          | 3,600         |   | 3,551  |
| **Cash and cash  equivalents, end of period**                                            |  $            | 3,461  |   |  $ | 3,508  |
|                                                                                     |               |   |   |
| Supplemental disclosure of  cash flow information:                                       |               |   |   |
| Dividends  declared but not paid                                                         |  $            | 3,815  |   |  $ | 2,961  |
| Net  change in accounts payable related to fixed asset additions                         | (513)              |   | (780) |
| Reclassification  of deferred directors' compensation                                    | 2,255         |   | -  |
|                                                                                     |               |   |   |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 ** **

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**ASSOCIATEDESTATES REALTY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED**

**1.         BASIS OFPRESENTATION AND ACCOUNTING POLICIES**

*****Except as the context otherwise requires, all references to"we," "our," "us," "AERC" and the"Company" in this report collectively refer to Associated EstatesRealty Corporation and its consolidated subsidiaries.*

**Business**

  We are a self-administered and self-managed equity real estateinvestment trust ("REIT") specializing in multifamily property management,advisory, development, acquisition, disposition, construction, operation andownership activities.  Our primary source of income is rental revenue. Additional income is derived primarily from property and asset management fees.

As of March 31, 2010, our property portfolio consisted of: (i) 48apartment communities containing 12,108 units in seven states that are wholly owned,either directly or indirectly through subsidiaries; (ii) one apartment communitythat we manage for a third party owner consisting of 258 units; and (iii) a 186-unitapartment community and a commercial property containing approximately 145,000square feet that we asset manage for a government sponsored pension fund.

**Basis of Presentation**

 The accompanying unaudited consolidated financial statements have beenprepared by management in accordance with accounting principles generallyaccepted in the United States of America ("GAAP") for interimfinancial information and applicable rules and regulations of the Securitiesand Exchange Commission.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal andrecurring adjustments considered necessary for a fair statement, have beenincluded.  The reported results of operations are not necessarily indicative ofthe results that may be expected for the full year.  These financial statementsshould be read in conjunction with the audited financial statements andaccompanying notes in our Annual Report on Form 10-K for the year endedDecember 31, 2009.  We have evaluated all subsequent events through May 4,2010, which is the date the financial statements were issued.

**SegmentReporting**

 All of our properties are multifamily communities that have similareconomic characteristics.  Management evaluates the performance of our propertieson an individual basis.  Our multifamily properties provided approximately 96.0%of our consolidated revenue for the three months ended March 31, 2010, andtherefore we have only one reportable segment, which is multifamily properties.

**Share-BasedCompensation**

 During the three months ended March 31, 2010 and 2009, we recognized totalshare-based compensation cost of $880,000 and $606,000, respectively,in "General and administrative expense" in the ConsolidatedStatements of Operations.  A portion of this increase is due to a change in theDirectors' Deferred Compensation Plan, which now will be paid with commonshares (see Note 9 for additional information regarding the Directors' DeferredCompensation Plan).

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*Stock Options.*  During the three months ended March 31, 2010,there were no stock options awarded or exercised.  During the three monthsended March 31, 2009, there were 8,000 stock options awarded and no stockoptions were exercised.  We use the Black-Scholes option pricing model toestimate the fair value of share-based awards.  The weighted averageBlack-Scholes assumptions and fair value for options awarded during the threemonths ended March 31, 2009, were as follows:
| Expected volatility                  |   | 36.5%  |
|--------------------------------------|--------|-------------|
| Risk-free interest rate              |   | 2.0%   |
| Expected life of options (in  years) |   | 7.2    |
| Dividend yield                       |   | 12.2%  |
| Grant-date fair value                |   |  $     | 0.44  |

 

 The expected volatility was based upon the historical volatility of ourweekly share closing prices over a period equal to the expected life of theoptions granted.  The risk-free interest rate used was the yield from U.S.Treasury bonds on the date of grant with a maturity approximating the expectedlife of the options.  The expected life of the options was derived using ourhistorical experience for similar awards.  The dividend yield was derived usingour annual dividend rate as a percentage of the price of our shares on the dateof grant.

*Restricted Shares*.  The following table represents restrictedshare activity for the three months ended March 31, 2010:            
|                              |          |   | Weighted   |
|-----------------------------------|---------------|--------|------------|
|                              |          |   | Average    |
|                              | Number of     |   | Grant-Date |
|                              | Shares        |   | Fair Value |
|                              |          |   |       |
| Nonvested at beginning of  period | 184,339  |   |  $    | 7.15  |
| Granted                           | 547,334  |   |  $    | 7.10  |
| Vested                            | 143,234  |   |  $    | 7.86  |
| Forfeited                         | 66       |   |  $    | 10.79  |
| Nonvested at end of period        | 588,373  |   |  $    | 10.20  |

 

At March 31, 2010, therewas $3.6 million of unrecognized compensation cost related to nonvestedrestricted share awards that we expect to recognize over a weighted averageperiod of 2.4 years.

 A portion of therestricted shares granted during 2010 were awards in which the number of sharesthat will ultimately vest are subject to satisfaction of certain market conditions,which include total shareholder return on an absolute basis and on a relativebasis against a peer group consisting of other multifamily apartmentcompanies.  The total estimated grant-date fair value of these awards was $1.1million.  We used the Monte Carlo method to estimate the fair value of theseawards.  The Monte Carlo method, which is similar to the binomial analysis,evaluates the award for changing stock prices over the term of vesting and usesrandom situations that are averaged based on past stock characteristics.  Therewere one million simulation paths used to estimate the fair value of theseawards.  The risk-free interest rate used was based on a yield curve derivedfrom U.S. Treasury zero-coupon bonds on the date of grant with a maturity equalto the market condition performance periods.  The expected life used was themarket condition performance period.  The expected volatility used for AERC wasbased upon the historical volatility of our daily share closing prices over aperiod equal to the market condition performance periods.  The expectedvolatility used for the peer group was a 50%/50% blend of historical volatilityand implied volatility.  Implied volatility was calculated using each company'sstock call option contracts. 

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 The following represents theassumption ranges used in the Monte Carlo method during 2010:

 
| Expected volatility - AERC          |   | 39.5% to 63.1% |
|-------------------------------------|--------|----------------|
| Expected volatility - peer  group   |   | 29.0% to 65.4% |
| Risk-free interest rate             |   | 0.1% to 1.5%   |
| Expected life (performance  period) |   | 3 years        |

** **

**DerivativeInstruments and Hedging Activities**

 We record all derivatives on the balance sheet at fair value.  Theaccounting for changes in the fair value of derivatives depends on the intendeduse of the derivative and the resulting designation.  Derivatives used to hedgethe exposure to changes in the fair value of an asset, liability or firmcommitment attributable to a particular risk, such as interest rate risk, areconsidered fair value hedges.  Derivatives used to hedge the exposure tovariability in expected future cash flows or other types of forecastedtransactions are considered cash flow hedges.

 For derivatives designated as fair value hedges, changes in the fairvalue of the derivative and the hedged item related to the hedged risk arerecognized in earnings.  For derivatives designated as cash flow hedges, theeffective portion of changes in the fair value of the derivative is initiallyreported in other comprehensive income (outside of earnings) and subsequentlyreclassified to earnings when the hedged transaction affects earnings, and theineffective portion of changes in the fair value of the derivative isrecognized directly in earnings.  Hedge ineffectiveness is measured bycomparing the changes in fair value or cash flows of the derivative hedginginstrument with the changes in fair value or cash flows of the designatedhedged item or transaction.  For derivatives not designated as hedges, changesin fair value are recognized in earnings.

 We do not use derivatives for trading or speculative purposes.  Further,we have a policy of only entering into contracts with major financialinstitutions based upon their credit ratings and other factors.  When viewed inconjunction with the underlying and offsetting exposure that the derivativesare designed to hedge, we have not sustained a material loss from these hedges.

 We have utilized interest rate swaps and caps to add stability tointerest expense and to manage our exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt ofvariable-rate amounts in exchange for fixed-rate payments over the life of theagreements without exchange of the underlying principal amount.  Interest ratecaps designated as cash flow hedges involve the receipt of variable-rateamounts if interest rates rise above a certain level in exchange for an upfront premium.  

****Interest Rate Hedge Activity:  ****During 2007, we executedtwo interest rate swaps to hedge the cash flows of two existing variable rate loans. In January 2010, we prepaid one of these loans but we did not terminate thecorresponding interest rate swap and as a result reclassified the fair value ofthe related interest rate swap of $777,000 from other comprehensive income toearnings during the three months ended March 31, 2010.  The change in fairvalue of this derivative is recorded in earnings and the net effect of thereclassification and the change in fair value at March 31, 2010 resulted in anet reduction to earnings of $320,000.  No hedge ineffectiveness on theremaining cash flow hedge was recognized during the three months ended March 31,2010.  Amounts reported in "Accumulated other comprehensive loss"related to the cash flow hedge will be reclassified to "Interest expense"as interest payments are made on the related variable-rate loan.  During thenext twelve months, we estimate that approximately $506,000 will bereclassified from "Accumulated other comprehensive loss" as anincrease to "Interest expense."  The following table presents the notionalamounts of the swaps as of March 31, 2010:
| *(Dollar amount in  thousands)* |   | Number of   |   | Notional |
|---------------------------------|--------|-------------|--------|----------|
| Interest Rate Derivative        |   | Instruments |   | Amounts  |
| Interest rate swaps             |   | 2      |   |  $  | 63,000  |

 

| 8 |
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 The following tablepresents the fair value of our derivative financial instruments as well astheir classification on the Consolidated Balance Sheets (see Note 7 foradditional information regarding the fair value of these derivativeinstruments):
| Fair Value of Derivative Instruments |
|--------------------------------------|
|                                 |   |   |   |   |   |   |   |   |
|                                 |   | Liability Derivatives |
|                                 |   | As of March 31, 2010 |   | As of December 31, 2009 |
|                                 |   |   |   |   |   |   |   |   |
| *(In thousands)*                     |   | Balance Sheet Location |   | Fair Value |   | Balance Sheet Location |   | Fair Value |
| Derivatives designated as            |   |   |   |   |   |   |   |   |
| hedging instruments:                 |   |   |   |   |   |   |   |   |
|                                 |   |   |   |   |   |   |   |   |
| Interest rate swaps                  |   |  Accounts payable, accrued |   |   |   |  Accounts payable, accrued |   |   |
|                                 |   |  expenses  and other liabilities |   |  $ | 503  |   |  expenses  and other liabilities |   |  $ | 1,420  |
|                                 |   |   |   |   |   |   |   |   |
| Derivatives not designated           |   |   |   |   |   |   |   |   |
| as hedging instruments:              |   |   |   |   |   |   |   |   |
|                                 |   |   |   |   |   |   |   |   |
| Interest rate swaps                  |   |  Accounts payable, accrued |   |   |   |  Accounts payable, accrued |   |   |
|                                 |   |  expenses  and other liabilities |   |  $ | 316  |   |  expenses  and other liabilities |   |  $ | -    |

 

 The following table presents the effect of ourderivative financial instruments on the Consolidated Statements of Operations (seeNote 5 for additional information regarding the effect of these derivativeinstruments on total comprehensive income):
| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   | Amount of Gain or |
|                                                                               |   |   |   |   |   |   |   | Amount of Gain or |   |   |   | (Loss) Recognized in |
|                                                                               |   | Amount of Gain or |   |   |   | (Loss) Reclassified |   |   |   | Income on Derivative |
|                                                                               |   | (Loss) Recognized |   |   |   |  from Accumulated |   | Location of Gain or |   | (Ineffective Portion and |
|                                                                               |   | in OCI on Derivative |   |   |   | OCI into Income |   | (Loss) Recognized |   | Amount Excluded from |
|                                                                               |   | (Effective Portion) |   | Location of Gain |   | (Effective Portion) |   | in Income on |   | Effectiveness Testing |
| *(In thousands)*                                                                   |   | Three |   | Three |   | or (Loss) |   | Three |   | Three |   | Derivative (Ineffective |   | Three |   | Three |
|                                                                               |   | Months |   | Months |   | Reclassified from |   | Months |   | Months |   | Portion and |   | Months |   | Months |
| Derivatives in Cash                                                                |   | Ended |   | Ended |   | Accumulated OCI |   | Ended |   | Ended |   | Amount Excluded |   | Ended |   | Ended |
| Flow Hedging                                                                       |   | March 31, |   | March 31, |   | into Income |   | March 31, |   | March 31, |   | from Effectiveness |   | March 31, |   | March 31, |
| Relationships                                                                      |   | 2010 |   | 2009 |   | (Effective Portion) |   | 2010 |   | 2009 |   | Testing |   | 2010 |   | 2009 |
|                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swaps                                                                |   |  $ | (54) |   |  $ | (272) |   |  Interest expense |   |  $ | (193) |   |  $ | 418  |   |  Interest expense |   |  $ | (777) |   |  $ | -  |

 

Wehave agreements with each of our derivative counterparties that contain a provisionwhere if we either default or are capable of being declared in default on anyof our indebtedness, then such counterparty can declare us to be in default on ourderivative obligations. 

Wehave an agreement with a derivative counterparty that incorporates the loancovenant provisions of our indebtedness with a lender affiliate of thederivative counterparty. Failure to comply with the loan covenant provisionswould result in our being in default on any derivative instrument obligationscovered by the agreement.

| 9 |
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 Asof March 31, 2010, the fair value of derivatives in a net liability position,which includes accrued interest but excludes any adjustment for nonperformancerisk, related to these agreements was $1.0 million. As of March 31, 2010, wehave not posted any collateral related to these agreements. If we had breachedany of these provisions at March 31, 2010, we would have been required tosettle our obligations under the agreements at their termination value of $1.0 million.

**Classificationof Fixed Asset Additions**

 We define recurring fixed asset additions to a property to be capitalexpenditures made to replace worn out assets to maintain the property's value. Revenue enhancing/non-recurring fixed asset additions are defined as capitalexpenditures that increase the value of the property and/or enable us toincrease rents.  Acquisition/development fixed asset additions are defined as capitalexpenditures for the purchase or construction of new properties to be added toour portfolio, or fixed asset additions identified at the time of purchase thatare not made until subsequent periods.

**Reclassifications**

 Certain reclassifications have been made to the 2009 financialstatements to conform to the 2010 presentation.

**2.         DEVELOPMENT AND DISPOSITIONACTIVITY**

**DevelopmentActivity**

 During 2009, we commenced construction of a 60-unit expansion of theexisting 240-unit River Forest apartment community located in the Richmond,Virginia metropolitan market area.  Construction in progress related to thisdevelopment was $6.2 million at March 31, 2010 and includes capitalizedinterest costs on funds used in construction and real estate taxes andinsurance.  Capitalized interest costs for the three months ended March 31,2010 was $81,000.

**ConstructionActivity**

 Our subsidiary, Merit Enterprises, Inc., is engaged as a generalcontractor and construction manager that also acts as our in-house constructiondivision and provides general contracting and construction management servicesto third parties.  Merit intends to concentrate its efforts on rehabilitationand ground-up construction projects.  We account for construction contractsusing the percentage-of-completion method.  We compute the percentage ofcompletion for each project as the ratio of costs incurred (excluding coststhat do not represent progress as of the end of the reporting period, such ascertain material purchases) to total estimated costs based on the most recentinformation.  This percentage is applied to the revenue expected to be receivedby project.  Any changes in estimates are recognized in the period in whichthey are known on a prospective basis.  We recognized $1.1 million in revenue and$1.0 million in expense under this method during the three months ended March31, 2010.  The total costs incurred in excess of amounts recognized as expense areincluded in "Other assets, net," and totaled $69,000 and $72,000 atMarch 31, 2010 and December 31, 2009, respectively.  Funds received onuncompleted contracts in excess of revenue recognized, if any, are included in"Accounts payable, accrued expenses and other liabilities," and wereimmaterial at March 31, 2010 and December 31, 2009.  The remaining costsincluded in construction and other services expenses include overhead costs,such as payroll and other fixed costs related to Merit Enterprises, Inc.

**DispositionActivity**

 We report the results of operations and gain/loss related to the sale ofreal estate assets as discontinued operations.  Real estate assets that areclassified as held for sale are also reported as discontinued operations.  Weclassify properties as held for sale when all significant contingenciessurrounding the closing have been resolved.  In most transactions, thesecontingencies are not satisfied until the actual closing of the transaction. Interest expense included in discontinued operations is limited to interest onmortgage debt specifically associated with properties sold or classified asheld for sale.    

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"Income from discontinued operations" in the accompanyingConsolidated Statements of Operations for the three months ended March 31, 2010and 2009, includes the operating results for the properties sold in 2009, aswell as the gains recognized on properties sold during each reporting period. The following table summarizes "Income from discontinued operations:"
|                                     | Three Months Ended |
|------------------------------------------|--------------------|
|                                     | March 31,          |
| *(In thousands)*                         | 2010               |   | 2009 |
| **REVENUE**                              |               |   |   |
| Property revenue                         |  $            | -  |   |  $ | 1,096  |
|                                     |               |   |   |
| **EXPENSES**                             |               |   |   |
| Property operating and  maintenance      | -             |   | 505  |
| Depreciation and  amortization           | -             |   | 259  |
| Total  expenses                          | -             |   | 764  |
| Operating income                         | -             |   | 332  |
| Interest expense                         | -             |   | (30) |
| Gain on disposition of  properties       | -             |   | 2,278  |
| **Income from discontinued  operations** |  $            | -  |   |  $ | 2,580  |

            

**3.         DEBT**

 The following table identifies ourtotal debt outstanding and weighted average interest rates:
|                                 | March 31, 2010 |          | December 31, 2009 |
|--------------------------------------|----------------|---------------|-------------------|
|                                 | Balance        |          | Weighted Average  |   | Balance |   | Weighted Average |
| *(Dollar amounts in  thousands)*     | Outstanding    |          | Interest Rate     |   | Outstanding |   | Interest Rate |
| * *                             |           |          |              |   |   |   |   |
| **FIXED RATE DEBT**                  |           |          |              |   |   |   |   |
| Mortgages payable - CMBS             |  $        | 99,656   |              | 7.7% |   |  $ | 115,464  |   | 7.7% |
| Mortgages payable - other (1)        | 295,092   |          | 5.8%              |   | 337,241  |   | 5.8% |
| Unsecured borrowings                 | 25,780    |          | 7.9%              |   | 25,780  |   | 7.9% |
| **Total  fixed rate debt**           | 420,528   |          | 6.4%              |   | 478,485  |   | 6.4% |
| ** **                           |           |          |              |   |   |   |   |
| **VARIABLE RATE DEBT**               |           |          |              |   |   |   |   |
| Mortgages payable                    | 34,711    |          | 4.7%              |   | 34,851  |   | 4.7% |
| Unsecured revolving credit  facility | 20,400    |          | 2.4%              |   | 12,500  |   | 2.6% |
| **Total  variable rate debt**        | 55,111    |          | 3.8%              |   | 47,351  |   | 4.1% |
| **Total  debt**                      |  $        | 475,639  |              | 6.1% |   |  $ | 525,836  |   | 6.2% |

 

 
| (1)    | Includes $21.0 million and  $63.0 million of variable rate debt swapped to fixed as of March 31, 2010 and  December 31, 2009, |
|--------|-------------------------------------------------------------------------------------------------------------------------------|
|   | respectively.                                                                                                                 |

** **

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**Mortgage Notes Payable**

 The following table provides information on loans repaid during 2010:

  
| *(Dollar amounts in  thousands)* |   | Loans Repaid |
|----------------------------------|--------|--------------|
| Property                         |   | Amount       |   | Rate |
|                             |   |         |   |   |
| Idlewylde                        |   |  $      | 42,000  |   | 5.9% |
| Sterling Park                    |   | 2,910   |   | 7.9% |
| Kensington Grove                 |   | 3,172   |   | 7.9% |
| Spring Brook                     |   | 4,351   |   | 7.9% |
| Western Reserve                  |   | 4,835   |   | 7.9% |
| Total / weighted average  rate   |   |  $      | 57,268  |   | 6.4% |

 

 During 2008, 2007and 2006, we defeased 21 CMBS loans.  These loans were defeased pursuant to theterms of the underlying loan documents.  In accordance with GAAP, we removedthose financial assets and the mortgage loans from our financial records.  Allrisk of loss associated with these defeasances have been transferred from us tothe successor borrower and any ongoing relationship between the successorborrower and us was deemed inconsequential at the time of completion of the respectivetransfers.  However, we subsequently learned that for certain defeasancetransactions completed prior to June 2007, the successor borrower may be ableto prepay the loans thus enabling us to receive a refund of a portion of thecosts incurred in connection with the transaction.  We received refunds of $554,000and $563,000 for the three months ended March 31, 2010 and 2009, respectively, whichwere included as a reduction to interest expense.  It is possible that we mayreceive additional refunds in the future, however such amounts cannot beestimated due to the uncertainty of future payments, and we believe that anyamounts we may receive would not be material to our consolidated financialposition, cash flow or results of operations.

Cash paid forinterest, excluding capitalized interest, was $7.8 million and $8.1 million forthe three months ended March 31, 2010 and 2009, respectively.  Included in cashpaid for interest are the refunds received of $554,000 and $563,000 for thethree months ended March 31, 2010 and 2009, respectively, as discussed above.  

**4.         GOODWILLAND OTHER INTANGIBLE ASSETS**

**Goodwill**

 In June 1998, we recorded goodwill in connection with the MIG RealtyAdvisors, Inc. merger.   We have a policy of completing our annual review ofgoodwill during the first quarter of each year and more frequently if events orchanges in circumstances indicate that the carrying value may not berecoverable.  The review that was completed during the three months ended March31, 2010 determined that goodwill was not impaired and as such there were nochanges to the carrying value of goodwill as of March 31, 2010.  In performingthis analysis, we use a multiple of revenues to the range of potentialalternatives and assign a probability of the various alternatives underconsideration by management.  Should the estimates used to determinealternatives or the probabilities of the occurrence thereof change, impairmentmay result which could materially impact our results of operations for theperiod in which it is recorded**.**

**IntangibleAssets**

 We allocate aportion of the total purchase price of a property acquisition to any intangibleassets identified, such as existing leases and tenant relationships.  Theintangible assets are amortized over the remaining lease terms or estimatedlife of the tenant relationship, which is approximately 12 to 16 months.  Dueto the short term nature of residential leases, we believe that existing leaserates approximate market rates; therefore, no allocation is made forabove/below market leases.

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**5.         SHAREHOLDERS' EQUITY**

 The following table provides a reconciliation of activity in Shareholders'equity accounts:
|                                                  |   | Three Months Ended March 31, 2010 |
|-------------------------------------------------------|--------|-----------------------------------|
|                                                  |   |                              |   | ** ** | ** ** |  Accumulated |   |   |   |   |
|                                                  |   |  Common                      |   |   | ** ** |  Distributions |   |  Accumulated |   |   |
|                                                  |   |  Shares                      |   |   | ** ** |  In Excess of |   |  Other |   |  Treasury |
|                                                  |   |  (at $.10                    |   |  Paid-In | ** ** |  Accumulated |   |  Comprehensive |   |  Shares |
| *(In thousands)*                                      |   |  stated value)               |   |  Capital |   |  Net Income |   |  Income |   |   (at Cost) |
| Balance, December 31, 2009                            |   |  $                           | 2,300  |   |  $ | 283,090  |   |  $ | (168,822) |   |  $ | (1,420) |   |  $ | (63,971) |
| Total comprehensive (loss)  income                    |   | -                            |   | -  |   | (2,906) |   | 917  |   | -  |
| Share-based compensation                              |   | -                            |   | 299  |   | 2  |   | -  |   | 1,071  |
| Reclassification of deferred  directors' compensation |   | -                            |   | 2,255  |   | -  |   | -  |   | -  |
| Purchase of common shares                             |   | -                            |   | -  |   | -  |   | -  |   | (594) |
| Issuance of common shares                             |   | 517                          |   | 54,284  |   |   |   |   |   |   |
| Common share dividends  declared                      |   | -                            |   | -  |   | (4,730) |   | -  |   | -  |
| Preferred share dividends  declared                   |   | -                            |   | -  |   | (1,050) |   | -  |   | -  |
| Balance, March 31, 2010                               |   |  $                           | 2,817  |   |  $ | 339,928  |   |  $ | (177,506) |   |  $ | (503) |   |  $ | (63,494) |

 

            Thefollowing table identifies total comprehensive (loss) income:
| ** **                                                      | Three Months Ended |
|-----------------------------------------------------------------|--------------------|
| ** **                                                      | March 31,          |
| *(In thousands)*                                                | 2010               |   | 2009 |
| Comprehensive (loss) income:                                    |               |   |   |
| Net (loss) income  attributable to AERC                         |  $            | (2,906) |   |  $ | 113  |
| Other comprehensive income:                                     |               |   |   |
| Change  in fair value and reclassification of hedge instruments | 917           |   | 690  |
| Total comprehensive (loss)  income                              |  $            | (1,989) |   |  $ | 803  |

 

**6.         EARNINGS PER SHARE**

There were 1.4million options to purchase common shares outstanding at March 31, 2010 and 2009. The dilutive effect of these options were not included in the calculation ofdiluted earnings per share for the periods presented as their inclusion wouldbe antidilutive to the net loss applicable to common shares from continuingoperations.

 The exchange of operating partnership noncontrolling interests intocommon shares was also not included in the computation of diluted EPS becausewe intend to settle these OP units in cash.

|  13 |
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The following table presents a reconciliation of basic and dilutedearnings per common share:
| ** **                                                              | Three Months Ended |
|-------------------------------------------------------------------------|--------------------|
| ** **                                                              | March 31,          |
| *(In thousands)*                                                        | 2010               |   | 2009 |
| **Numerator - basic and  diluted:**                                     |               |   |   |
| (Loss) income from  continuing operations                               |  $            | (2,893) |   |  $ | (2,453) |
| Net  income attributable to noncontrolling redeemable interest          | (13)               |   | (14) |
| Preferred  share dividends                                              | (1,050)            |   | (1,049) |
| (Loss) income from  continuing operations applicable to common shares   |  $            | (3,956) |   |  $ | (3,516) |
|                                                                    |               |   |   |
| Income from discontinued  operations applicable to common shares        |  $            | -  |   |  $ | 2,580  |
|                                                                    |               |   |   |
|                                                                    |               |   |   |
| **Denominator - basic and  diluted:**                                   | 21,199        |   | 16,434  |
|                                                                    |               |   |   |
| **Net (loss) income  applicable to common shares - basic and diluted:** |               |   |   |
| (Loss) income from  continuing operations applicable to common shares   |  $            | (0.19) |   |  $ | (0.21) |
| Income from discontinued  operations                                    | -             |   | 0.15  |
| Net (loss) income applicable  to common shares - basic and diluted      |  $            | (0.19) |   |  $ | (0.06) |

 

**7.         FAIR VALUE**

Fair value determined   in accordance with GAAP should be based on theassumptions that market participants would use when pricing certain assets orliabilities.  Inputs used in determining fair value should be from the highestlevel available in the following hierarchy:
| • | Level 1 inputs utilize quoted  prices (unadjusted) in active markets for identical assets or liabilities  that we have the ability to access;                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | Level 2 inputs may include  quoted prices for similar assets and liabilities in active markets, as well  as interest rates and yield curves that are observable at commonly quoted  intervals; and |
| • | Level 3 inputs are unobservable  inputs for the asset or liability that are typically based on an entity’s own  assumptions as there is little, if any, related market activity.              |

 

 In instances where the determination of the fair value measurement isbased on inputs from different levels of the fair value hierarchy, the fairvalue measurement will fall within the lowest level input that is significantto the fair value measurement in its entirety.

 The following table presents the financial liabilities that we measuredat fair value on a recurring basis as of March 31, 2010:
| *(In thousands)*    |   | Level 1 |                | Level 2 |   | Level 3   |   | Total  |
|---------------------|--------|---------|---------------------|---------|--------|-----------|--------|--------|
| * *            |   |    |                |    |   |      |   |   |
| Interest rate swaps |   | $       | -    |    | $      | 819  |   | $      | -    |   | $ | 819  |

We incorporatecredit valuation adjustments to appropriately reflect both our ownnonperformance risk and that of the respective counterparty in the fair valuemeasurements.  The credit valuation adjustments utilize Level 3 inputs, such asestimates of current credit spreads, to evaluate the likelihood of default by eitherthe respective counterparty or us.  However, we determined that as of March 31,2010, the impact of the credit valuation adjustments were not significant tothe overall valuation of the swaps.  See "Derivative Instruments and HedgingActivities" in Note 1 for additional information regarding the swaps.

| 14 |
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 Rents, accounts and notes receivable, other assets, accounts payable,accrued expenses and other liabilities are carried at amounts that reasonablyapproximate corresponding fair values.

 Mortgage notes payable, revolving debt and other unsecured debt with anaggregate carrying value of $475.6 million and $525.8 million at March 31, 2010,and December 31, 2009, respectively, have an estimated aggregate fair value of $476.5million and $520.1 million, respectively.  Estimated fair value is based oninterest rates available to us as of the dates reported on for issuance of debtwith similar terms and remaining maturities.  Considerable judgment isnecessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts we could realize on disposition of the financial instruments.  Theuse of different market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

**8.         CONTINGENCIES**

**LegalProceedings**

 We are subject to legal proceedings, lawsuits and other claims, includingproceedings by government authorities (collectively "Litigation"). Litigation is subject to uncertainties and outcomes are difficult to predict. Consequently, we are unable to estimate ultimate aggregate monetary liabilityor financial impact with respect to the Litigation matter described in thefollowing paragraph as of March 31, 2010, and no accrual has been made for thismatter.  We believe that other Litigation will not have a material adverseimpact on us after final disposition.  However, because of the uncertainties ofLitigation, one or more lawsuits could ultimately result in a materialobligation.

**Pending Lawsuits**

 On or about April14, 2002, Melanie and Kyle Kopp commenced an action against us in the FranklinCounty, Ohio Court of Common Pleas seeking undetermined damages, injunctiverelief and class action certification.  This case arose out of our Suredepositprogram.  This program allowed cash short prospective residents to purchase abond in lieu of paying a security deposit.  The bond serves as a fund to paythose resident obligations that would otherwise have been funded by thesecurity deposit.  Plaintiffs allege that the nonrefundable premium paid forthe bond is a disguised form of security deposit, which is otherwise required tobe refundable in accordance with Ohio's Landlord-Tenant Act.  Plaintiffsfurther allege that certain pet deposits and other nonrefundable depositsrequired by us are similarly security deposits that must be refundable inaccordance with Ohio's Landlord-Tenant Act.  On or about January 15, 2004, the Plaintiffs filed a motionfor class certification.  We subsequently filed a motion for summary judgment.  Onor about September 3, 2008, the court granted our motion for summary judgmentthereby dismissing all Plaintiff claims against us.  Plaintiff subsequentlyappealed the court’s ruling to the Ohio Court of Appeals for the 10th District,which recently affirmed the trial court’s decision granting summary judgment inour favor.  We will consider this matter to have been successfully concludedunless plaintiff seeks a further appeal to the Ohio Supreme Court. 

**9.         DIRECTORCOMPENSATION**

**Directors' Deferred Compensation Plan**

            Effective January 1,2010, the Directors' Deferred Compensation Plan was modified such that allfuture distributions from the plan will be in the form of our common sharesinstead of cash, except for the scheduled distributions which were to commenceon or before December 31, 2010, which will be made in cash.  As a result,deferred compensation totaling $2.3 million that will be paid in shares wasreclassified from "Accounts payable, accrued expenses and otherliabilities" to "Paid-in Capital" in the Consolidated BalanceSheets during the three months ended March 31, 2010.  Prior to the modificationthe fair value of the directors' deferred compensation was adjusted at the endof each reporting period based on the closing price of our common shares. However, as a result of the modification, no further adjustment to fair valuewill be required.

| 15 |
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**10.        SUBSEQUENTEVENTS**

**Dividends**  

On May 3, 2010, we paid a dividend of $0.17 per common share toshareholders of record on April 15, 2010, which was declared on March 16, 2010. 

**ITEM 2. ****MANAGEMENT'S DISCUSSION ANDANALYSIS****OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 The followingdiscussion should be read in conjunction with the consolidated financialstatements and notes thereto included in Part I, Item 1 of this report on Form10-Q.  This discussion may contain forward-looking statements based on currentjudgments and current knowledge of management, which are subject to certainrisks, trends and uncertainties that could cause actual results to vary fromthose projected, including but not limited to, expectations regarding our 2010performance which are based on certain assumptions.  Accordingly, readers arecautioned not to place undue reliance on forward-looking statements that speakonly as of the date of the document.  These forward-looking statements areintended to be covered by the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995.  The words "expects," "projects,""believes," "plans," "anticipates" and similarexpressions are intended to identify forward-looking statements.  Investors arecautioned that these forward-looking statements involve risks and uncertaintythat could cause actual results to differ from estimates or projectionscontained in these forward-looking statements, including without limitation thefollowing:
| •     | changes in the economic climate  in the markets in which we own and manage properties, including interest  rates, the overall level of economic activity, the availability of consumer  credit and mortgage financing, unemployment rates and other factors; |
|----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •     | our ability to refinance debt  on favorable terms at maturity;                                                                                                                                                                                               |
| •     | risks of a lessening of demand  for the multifamily units that we own or manage;                                                                                                                                                                             |
| •     | competition from other  available multifamily units and changes in market rental rates;                                                                                                                                                                      |
| •     | increases in property and  liability insurance costs;                                                                                                                                                                                                        |
| •     | unanticipated increases in real  estate taxes and other operating expenses;                                                                                                                                                                                  |
| •     | weather conditions that  adversely affect operating expenses;                                                                                                                                                                                                |
| •     | expenditures that cannot be  anticipated such as utility rate and usage increases, unanticipated repairs  and real estate tax valuation reassessments or millage rate increases;                                                                             |
| •     | inability to control operating  expenses or achieve increases in revenue;                                                                                                                                                                                    |
| •     | ownership limitations on our  common and preferred shares that may discourage a takeover otherwise  considered favorably by shareholders;                                                                                                                    |
| •     | the results of litigation filed  or to be filed against us;                                                                                                                                                                                                  |
| •     | changes in tax legislation;                                                                                                                                                                                                                                  |
| •     | risks of personal injury claims  and property damage related to mold claims because of diminished insurance  coverage;                                                                                                                                       |
| •     | catastrophic property damage  losses that are not covered by our insurance;                                                                                                                                                                                  |
| •     | our ability to acquire  properties at prices consistent with our investment criteria;                                                                                                                                                                        |
| •     | risks associated with property  acquisitions such as environmental liabilities, among others;                                                                                                                                                                |
| •     | changes in or termination of  contracts relating to third party management and advisory business;                                                                                                                                                            |
| •     | risks related to the perception  of residents and prospective residents as to the attractiveness, convenience  and safety of our properties or the neighborhoods in which they are located;  and                                                             |
| •     | construction business risks.                                                                                                                                                                                                                                 |

***  ***

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**Overview.**

 We are engagedprimarily in the ownership and operation of multifamily residential units.  Wealso provide asset and property management services to third party owners ofmultifamily residential units for which we are paid fees.  Our primary sourceof cash and revenue from operations is rents from the leasing of ownedapartment units, which represented 96.0% of our consolidated revenue for the threemonths ended March 31, 2010.

 The operating performance of our properties is affected by generaleconomic trends including, but not limited to, factors such as householdformation, job growth, unemployment rates, population growth, immigration, thesupply of new multifamily rental communities and in certain markets the supplyof other housing alternatives, such as condominiums, single and multifamilyrental homes and owner occupied single and multifamily homes.  Additionally,our performance may be affected by access to and cost of debt and equity.

 Rental revenue collections are a combination of rental rates, occupancylevels and rent concessions.  We attempt to adjust these factors to adapt tochanging market conditions, thus allowing us to maximize rental revenue. Indicators that we use in measuring these factors include physical occupancyand net collected rent per unit.  These indicators are more fully described inthe Results of Operations comparison.  Additionally, we consider property NetOperating Income ("NOI")  and Funds from Operations ("FFO")to be important indicators of our overall performance.  Property NOI (propertyoperating revenue less property operating and maintenance expenses) is ameasure of the profitability of our properties and has the largest impact onour financial condition and operating results.  FFO is used in the real estateindustry as a supplemental measure of the operating performance of real estatecompanies because it excludes charges such as real estate depreciation that aregenerally considered not to be reflective of the actual value of real estateassets over time.  Additionally, gains and losses from the sale of most realestate assets and certain other items are also excluded from FFO.

NOI is determinedby deducting property operating and maintenance expenses from property revenue(excluding amounts classified as discontinued operations) for our propertiesand deducting direct property management and service company expenses andconstruction and other services expenses from management and service companyrevenue for the management and service operations.  We consider NOI to be anappropriate supplemental measure of our performance because it reflects theoperating performance of our real estate portfolio and management and servicecompanies at the property and management and service company level and is usedto assess regional property level performance.  NOI should not be considered(i) as an alternative to net income (determined in accordance with GAAP), (ii)as an indicator of financial performance, (iii) as an alternative to cash flowfrom operating activities (determined in accordance with GAAP) or (iv) as ameasure of liquidity; nor is it necessarily indicative of sufficient cash flowto fund all of our needs.  Other real estate companies may define NOI in adifferent manner.  

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A reconciliation ofNOI to total consolidated net (loss) income attributable to AERC is as follows:
|                                                           | Three Months Ended |
|----------------------------------------------------------------|--------------------|
|                                                           | March 31,          |
| *(In thousands)*                                               | 2010               |   | 2009 |
|                                                           |               |   |   |
| Property NOI                                                   |  $            | 17,722  |   |  $ | 18,070  |
| Service company NOI                                            | 75            |   | 109  |
| Construction and other  services NOI                           | (313)              |   | (117) |
| Depreciation and  amortization                                 | (8,620)            |   | (9,207) |
| General and administrative  expense                            | (3,705)            |   | (3,140) |
| Interest income                                                | 9             |   | 15  |
| Interest expense                                               | (8,061)            |   | (8,183) |
| Income from discontinued  operations:                          |               |   |   |
| Operating  income                                              | -             |   | 302  |
| Gain  on disposition of properties                             | -             |   | 2,278  |
| Income from discontinued  operations                           | -             |   | 2,580  |
| Net (loss) income                                              | (2,893)            |   | 127  |
| Net income attributable to  noncontrolling redeemable interest | (13)               |   | (14) |
| Consolidated net (loss)  income attributable to AERC           |  $            | (2,906) |   |  $ | 113  |

 

We calculate Funds from Operations ("FFO") in accordance withthe definition adopted by the Board of Governors of the National Association ofReal Estate Investment Trusts ("NAREIT").  This definition includes alloperating results, both recurring and non-recurring, except those resultsdefined as "extraordinary items" under GAAP, adjusted fordepreciation on real estate assets and amortization of intangible assets, gainson insurance recoveries, and gains and losses from the disposition ofproperties and land.  We calculate FFO per share using the weighted averageshares outstanding amounts used in the calculation of basic and dilutedearnings per share in accordance with GAAP.  FFO does not represent cash generatedfrom operating activities in accordance with GAAP and is not necessarilyindicative of cash available to fund cash needs and should not be considered analternative to net income as an indicator of our operating performance or as analternative to cash flow as a measure of liquidity.  FFO is used in the realestate industry as a supplemental measure of the operating performance of realestate companies because it excludes charges such as real estate depreciationthat are generally considered not to be reflective of the actual value of realestate assets over time.  Other real estate companies may define FFO in adifferent manner.  

We calculate FFO as adjusted as FFO, as defined above, plus the add backof defeasance and/or other prepayment costs/credits of $(554,000) and$(563,000) for the three months ended March 31, 2010 and March 31, 2009,respectively.  In accordance with GAAP, these prepayment costs/credits areincluded as interest expense in the Consolidated Statement of Operations.  Weprovide this calculation as an alternative FFO calculation as we consider it amore appropriate measure of comparing the operating performance of a company'sreal estate between periods or as compared to different REITs.

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A reconciliation of net income attributable to AERC to FFO and FFO asadjusted is as follows:
| * *                                                                | * *   | Three Months Ended |
|-------------------------------------------------------------------------|------------|--------------------|
|                                                                    |       | March 31,          |
| *(In thousands, except per  share amounts)*                             |       | 2010               |   | 2009 |
| ** **                                                              | ** ** |               |   |   |
| Net (loss) income  attributable to AERC                                 |       |  $            | (2,906) |   |  $ | 113  |
| Depreciation - real estate  assets                                      |       | 8,223         |   | 8,255  |
| Amortization of intangible  assets                                      |       | -             |   | 837  |
| Preferred share dividends                                               |       | (1,050)            |   | (1,049) |
| Gain on disposition of  properties                                      |       | -             |   | (2,278) |
| Funds from Operations                                                   |       | 4,267         |   | 5,878  |
|                                                                    |       |               |   |   |
| Refund of defeasance costs  for previously defeased loans               |       | (554)              |   | (563) |
| Funds from Operations as  adjusted                                      |       |  $            | 3,713  |   |  $ | 5,315  |
|                                                                    |       |               |   |   |
| Funds from Operations per  common share - basic and diluted             |       |  $            | 0.20  |   |  $ | 0.36  |
| Funds from Operations as  adjusted per common share - basic and diluted |       |  $            | 0.18  |   |  $ | 0.32  |
|                                                                    |       |               |   |   |
| Weighted average shares  outstanding - basic and diluted                |       | 21,199        |   | 16,434  |

 

**Updated 2010 Expectations.**
| •  ** ** | ***Portfolio performance*****–**Our full-year 2010 guidance reflects Same Community property NOI  decreasing in the range of -4.0% to -2.5% as compared to 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  ** ** | ***Property acquisitions,  sales and development*** – Our updated guidance continues to reflect no  property acquisitions.  However, we are aggressively seeking acquisition  opportunities.  We are not contemplating any property sales during 2010.  We  are currently constructing a 60-unit expansion of our River Forest apartment  community, which is located in the Richmond, Virginia metropolitan area.  The  cost of this expansion project is expected to be approximately $7.0 million.   We incurred approximately $5.0 million in costs related to this development  during 2009, with the remaining $2.0 million to be expended in 2010. |
| •  ** ** | ***Debt repayment*** – We  have already repaid five loans totaling $57.3 million that matured in 2010.  We  have one additional loan maturing in 2010 in the amount of $21.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

** **

**ForecastQualification.**  The uncertainties caused by the current economic conditionsand the unprecedented financial crisis complicate our ability to forecastfuture performance.  We believe that the apartment industry is better situatedto weather the recession than other real estate sectors because people willnormally choose shelter over discretionary spending such as going to the mallor hotel stays and because government sponsored agencies such as Fannie Mae andFreddie Mac continue to provide attractive apartment financing, which may be unavailableto other commercial real estate sectors.  However, our 2010 expectations may beadversely impacted if recessionary forces accelerate or Congress curtailsFannie Mae or Freddie Mac financing support to the apartment industry.

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**LIQUIDITY AND CAPITALRESOURCES**

            Cash Flows andLiquidity.  Significant sources and uses of cash during the three months ended March31, 2010 and 2009 are summarized as follows:
|                                                                 | Three Months Ended |
|----------------------------------------------------------------------|--------------------|
|                                                                 | March 31,          |
| *(In thousands)*                                                     | 2010               |   | 2009 |
| Net cash provided by  operations                                     |  $            | 4,683  |   |  $ | 6,701  |
| Fixed assets:                                                        |               |   |   |
| Acquisitions  and development expenditures, net                      | (2,094)            |   | (58) |
| Net  property disposition proceeds                                   | -             |   | 3,836  |
| Recurring,  revenue enhancing and non-recurring capital expenditures | (1,815)            |   | (2,262) |
| Debt:                                                                |               |   |   |
| Decrease  in mortgage notes                                          | (58,097)           |   | (20,334) |
| Increase  in revolving credit facility borrowings                    | 7,900         |   | 16,800  |
| Common share issuance  proceeds                                      | 54,918        |   | -  |
| Cash dividends and operating  partnership distributions paid         | (4,827)            |   | (3,864) |

 

            Our primary sources ofliquidity are cash flow provided by operations, short-term borrowings on the unsecuredrevolver, our secured credit facility or project specific loans.  We believethat we are well positioned to weather the recent turmoil in the financialmarkets.  Six mortgage loans totaling approximately $78.3 million werescheduled to mature in 2010.  We have already repaid five of those debtobligations totaling $57.3 million and we expect to repay the remaining $21.0million obligation with proceeds from our unsecured revolver or with proceedsfrom a project specific secured loan.

            In December 2009, weentered into a credit facility agreement with Wells Fargo MultifamilyCorporation on behalf of Freddie Mac.  Pursuant to the terms of the facility,we have the potential to borrow up to $100.0 million over a two-year periodwith obligations being secured by nonrecourse, non cross-collateralized fixedor variable rate mortgages having terms of five, seven or ten years.  Our$150.0 million unsecured revolver, which matures March 20, 2011 and had $129.6million available for borrowing as of March 31, 2010, provides us additionalfinancial flexibility.

 Our ability toreenter the capital markets affords us additional liquidity as demonstrated byour successful sale to the public markets of 5,175,000 of our common shares inJanuary 2010, which resulted in net proceeds of approximately $54.9 million. These proceeds were used to prepay a $42.0 million mortgage loan, repayborrowings on our unsecured revolver and for general corporate purposes.

 We anticipatethat cash flow provided by operations for the remainder of the year willcontinue to meet normal business operations and liquidity requirements for theupcoming year.  We believe that if net cash provided by operations is belowprojections, other sources, such as the unsecured revolver, secured andunsecured borrowings are or can be made available and should be sufficient tomeet our normal business operations and liquidity requirements.  We anticipatethat we will continue paying our regular quarterly dividends in cash.  Funds tobe used for the repayment of debt, property acquisitions, development or othercapital expenditures are expected to be provided primarily by proceeds from therefinancing of debt borrowings, our unsecured revolver and possibly the sale ofcommon shares.  

  Cash flowprovided by operations decreased during the first quarter of 2010 compared to thefirst quarter of 2009 primarily due to a $940,000 reduction in property netoperating income in 2010, of which $590,000 was related to properties soldduring 2009 and is included in discontinued operations, and the 2009 receipt offunds that were previously advanced to managed properties and funds related toother receivables.

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During the remainder of 2010, we anticipate incurring approximately $12.5million in capital expenditures.  This includes replacement of worn carpet andappliances, parking lots and similar items in accordance with our currentproperty expenditure plan, as well as commitments for revenue enhancing andnon-recurring expenditures.  These commitments are expected to be funded withcash provided by operating activities and borrowings on our unsecured revolver.

**RESULTS OFOPERATIONS**

***Comparison of the three monthsended March 31, 2010 to the three months ended March 31, 2009:***

****** Our Same Community portfolio represents properties thatwe have owned for all of the comparison periods.  For the three months ended March31, 2010 and 2009, the Same Community portfolio consisted of all 48 ownedproperties containing 12,108 units.  

The net loss from continuing operations increased $440,000 during 2010compared to 2009 primarily as a result of an increase in general andadministrative expenses and a reduction in property NOI.  These changes werepartially offset by a reduction in depreciation and amortization expense.

The following table reflects theamount and percentage change in line items that are relevant to the changes inoverall operating performance:
|                                        |      | Increase (decrease) when   |
|---------------------------------------------|-----------|----------------------------|
|                                        |      | comparing the three months |
|                                        |      | ended March 31, 2010       |
| *(In thousands)*                            |      | to March 31, 2009          |
|                                        |      |                       |   |
| Property revenue                            |      |  $                    | (178) | (0.6)% |
| Property operating and  maintenance expense | 170  | 1.2%                       |
| Depreciation and amortization               |      | (587)                      | (6.4)% |
| General and administrative                  |      | 565                   | 18.0% |
| Income from discontinued  operations        |      | (2,580)                    | (100.0)% |

  

                Property NOI decreased during 2010primarily due to a reduction in property revenue of $178,000 and an increase inproperty expenses of $170,000.

The following table presents property NOI results by region:
|                               |   | Three Months Ended March 31, |
|------------------------------------|--------|------------------------------|
|                               |   | 2010                         |   | 2009 |   |   |
|                               |   | Property                     |   | Property |   | Increase/ |
| *(In thousands)*                   |   | NOI                          |   | NOI |   | (Decrease) |
| Same Community Properties:         |   |                         |   |   |   |   |
| Midwest                            |   |  $                      | 10,090  |   |  $ | 10,293  |   |  $ | (203) |
| Mid-Atlantic                       |   | 3,370                   |   | 3,425  |   | (55) |
| Southeast                          |   | 4,262                   |   | 4,352  |   | (90) |
| Total/Same Community  Property NOI |   |  $                      | 17,722  |   |  $ | 18,070  |   |  $ | (348) |

 

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*Property revenue.*  Property revenue is impacted by a combinationof rental rates, rent concessions and occupancy levels, i.e., net collectedrent per unit.  Physical occupancy at the end of each period and net collectedrent per unit are presented in the following tables:
|                             |   | Physical Occupancy |
|----------------------------------|--------|--------------------|
|                             |   | as of March 31,    |
|                             |   | 2010               |   | 2009 |
| Same Community Properties:       |   |               |   |   |
| Midwest                          |   | 95.7%              |   | 95.7% |
| Mid-Atlantic                     |   | 96.2%              |   | 94.5% |
| Southeast                        |   | 93.9%              |   | 88.8% |
| Total/Same Community  Properties |   | 95.3%              |   | 93.9% |

  
|                             |   | Average Monthly Net Collected |
|----------------------------------|--------|-------------------------------|
|                             |   | Rent Per Unit                 |
|                             |   | For the Three Months          |
|                             |   | Ended March 31,               |
|                             |   | 2010                          |   | 2009 |
| Same Community Properties:       |   |                          |   |   |
| Midwest                          |   |  $                       | 771  |   |  $ | 778  |
| Mid-Atlantic                     |   |  $                       | 1,155  |   |  $ | 1,151  |
| Southeast                        |   |  $                       | 879  |   |  $ | 874  |
| Total/Same Community  Properties |   |  $                       | 844  |   |  $ | 847  |

 

  The following table presents property revenue results:
|                                   |   | Three Months Ended March 31, |
|----------------------------------------|--------|------------------------------|
|                                   |   | 2010                         |   | 2009 |   |   |
|                                   |   | Property                     |   | Property |   | Increase/ |
| *(In thousands)*                       |   | Revenue                      |   | Revenue |   | (Decrease) |
| Same Community Properties:             |   |                         |   |   |   |   |
| Midwest                                |   |  $                      | 18,346  |   |  $ | 18,537  |   |  $ | (191) |
| Mid-Atlantic                           |   | 5,214                   |   | 5,246  |   | (32) |
| Southeast                              |   | 8,086                   |   | 8,041  |   | 45  |
| Total/Same Community  Property Revenue |   |  $                      | 31,646  |   |  $ | 31,824  |   |  $ | (178) |

 

 The decrease in property revenue was primarily due to increases inconcessions resulting in lower net rent across the entire portfolio during thefirst quarter of 2010, which were partially offset by reductions in vacancylosses in 2010, particularly in the Southeast portfolio.  Utilityreimbursements also increased in 2010 compared to 2009.

*Property operating and maintenance expenses.*  Property operatingand maintenance expenses increased in 2010 primarily as a result of increasesin personnel and utility costs.  

*Depreciation and amortization. *Depreciation and amortizationexpense decreased during 2010 primarily due to the completion of the 12 monthto 16 month amortization periods of intangible assets recorded in connectionwith properties acquired in 2008.

|                                                                                                                                              22 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

  

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*General and administrative expense. *General and administrativeexpense increased during 2010 primarily due to a valuation adjustment in thefirst quarter of 2009 that reduced directors' deferred compensation expense. Priorto January 1, 2010, the fair value of the directors' deferred compensation wasadjusted based upon the closing price of our common shares at the end of eachperiod.  Effective January 1, 2010, this plan was modified to provide that alldistributions under the plan will be in the form of our common shares insteadof cash.  As a result, the fair value of the deferred compensation is no longeradjusted based upon the closing price of our common shares.  

*Income from Discontinued Operations.*  Discontinued operationsinclude the operating results of two properties sold in 2009 and the gainrelated to the sale of one property sold during the first quarter of 2009.  Forfurther details on "Income from discontinued operations," see Note 2of the Notes to Consolidated Financial Statements presented in Part I, Item 1of this report on Form 10-Q.

**CriticalAccounting Estimates**

            Thepreparation of the consolidated financial statements in conformity with GAAPrequires us to make estimates and assumptions in certain circumstances thataffect amounts reported in the consolidated financial statements and relatednotes.  In preparing these consolidated financial statements, we have utilizedinformation available including industry practice and our own past history informing estimates and judgments of certain amounts included in the consolidatedfinancial statements, giving due consideration to materiality.  It is possiblethat the ultimate outcome that we anticipated in formulating the estimatesinherent in these consolidated financial statements may not materialize. However, application of the accounting policies below involves the exercise ofjudgment and use of assumptions as to future uncertainties and, as a result,actual results could differ from these estimates.  In addition, other companiesmay utilize different estimates that may impact comparability of our results ofoperations to those of companies in similar businesses.  Our critical accountingestimates are discussed in detail in Part II, Item 7 of our Annual Report onForm 10-K for the year ended December 31, 2009.  In addition to these criticalaccounting estimates, we believe that our contracting and constructionmanagement services required us to make estimates that could have a materialimpact on our results of operations and financial statements.

            Weaccount for general contracting and construction management services that weprovide to third parties using the percentage completion method.  Under thismethod, the amount of revenue and expense to be recognized for each projectthat we are engaged in at the end of each reporting period is estimated basedon the percentage of work completed on that date.  The use of judgment and/orestimates is required in determining the percentage of work completed, theexpected total cost of a project in process, and in certain circumstances thetotal amount of revenue for a project in process.  If we had used differentestimates, different amounts would have been recognized in revenue and expensewhich may have resulted in a material impact to our results of operations.  Ifactual costs or revenue differ from estimates, it may require us to make amaterial adjustment to our results of operations.

**CONTINGENCIES**

 For a discussion of contingencies, see Note 8 of the Notes toConsolidated Financial Statements presented in Part I, Item 1 of this report onForm 10-Q.

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**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 We are exposed tointerest rate changes associated with variable rate debt and the refinancingrisk on our fixed-rate debt.  Based on our variable rate debt outstanding at March31, 2010 and 2009, an interest rate change of 100 basis points would impactinterest expense approximately $551,000 and $735,000 on an annual basis,respectively. We occasionally use derivative instruments to manage our exposureto interest rates.  See Note 1 of the Notes to Consolidated FinancialStatements presented in Part I, Item 1 of this report on Form 10-Q foradditional information regarding derivative instruments and "Item 7AQualitative and Quantitative Disclosures About Market Risk" of our AnnualReport on Form 10-K for the year ended December 31, 2009, for a more completediscussion of interest rate sensitive assets and liabilities.

**ITEM 4.  CONTROLS AND PROCEDURES**

*DisclosureControls and Procedures.*  We have evaluated the design and operations ofour disclosure controls and procedures to determine whether they are effectivein ensuring that the disclosure of required information is timely made inaccordance with the Securities Exchange Act of 1934 ("Exchange Act")and the rules and forms of the Securities and Exchange Commission.  Thisevaluation was made under the supervision and with the participation ofmanagement, including our Chief Executive Officer ("CEO") and ChiefFinancial Officer ("CFO"), as of the end of the period covered bythis report on Form 10-Q.  The CEO and CFO have concluded, based on theirreview, that our disclosure controls and procedures, as defined in Exchange ActRules 13a-15(e) and 15d-15(e), are effective to ensure that informationrequired to be disclosed in reports that we file under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and (ii) accumulated andcommunicated to management, including the principal executive and principalfinancial officers, as appropriate, to allow timely decisions regardingdisclosure.

*Changes in Internal Control over Financial Reporting.*  There wereno changes in our internal control over financial reporting during the first quarterof 2010 that materially affected, or are reasonably likely to materiallyaffect, internal control over financial reporting.

 We believe thatbecause of its inherent limitations, internal control over financial reportingmay not always prevent or detect misstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

**PART II.     OTHER INFORMATION**

**ITEM 1.       LEGAL PROCEEDINGS**

For informationrelated to legal proceedings, see Note 8 of the Notes to Consolidated FinancialStatements presented in Part I, Item 1 of this report on Form 10-Q.

**ITEM 1A.    RISKFACTORS**

See "RiskFactors" in Part I, Item 1A of our Annual Report on Form 10-K for the yearended December 31, 2009.

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**ITEM 2.       UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**
| Issuer Purchases of Equity Securities for the Three  Months Ended March 31, 2010 |
|----------------------------------------------------------------------------------|
|                                                                             |   |   |   |   |   |   |   |   |
|                                                                             |   |   |   |   |   |   |   | Approximate Dollar |
|                                                                             |   |   |   |   |   | Total Number of |   | Value of Shares |
|                                                                             |   |   |   |   |   | Shares Purchased |   | That May Yet Be |
|                                                                             |   | Total Number |   | Average |   | As Part of |   | Purchased Under the |
|                                                                             |   | of Shares |   | Price Paid |   | Publicly Announced |   | Plans or Programs |
| Period                                                                           |   | Purchased |   | Per Share |   | Plans or Programs |   | (in thousands) |
| January 1 through                                                                |   |   |   |   |   |   |   |   |
| January  31                                                                      |   | -    |   |  $ | -    |   | -    |   |  $ | 26,288  |
| February 1 through                                                               |   |   |   |   |   |   |   |   |
| February  28                                                                     |   | 42,688  |   | 12.07  |   | -    |   | 26,288  |
| March 1 through                                                                  |   |   |   |   |   |   |   |   |
| March  31                                                                        |   | 6,104  |   | 12.84  |   | -    |   | 26,288  |
| Total                                                                            |   | 48,792  |   |  $ | 12.17  |   | -    |   |   |

 

There is a total of $26.3 million remaining on our Board of Directorauthorizations to repurchase our common and/or preferred shares.  Additionally,we have a policy which allows employees to pay their portion of the incometaxes related to restricted share vesting by surrendering a number of shares tous equal in value on the day of vesting to the amount of taxes due up to theminimum statutory withholding amount.  

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**ITEM 6.     EXHIBITS**

** **
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **Filed herewith or**                               |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **incorporated herein**                             |
| **Number** | **                                                       Title                                                          ** | **by reference**                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                |
| 3.1        | Amendment to Second Amended  and Restated Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Exhibit 3.1 to Form 8-K  filed December 8, 2004.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 3.2        | Second Amended and Restated  Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 3.2 to Form 10-Q  filed July 31, 2007.      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 3.3        | Amended and Restated Code of  Regulations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 3.3 to Form 10-Q  filed August 1, 2006.     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.1        | Specimen Common Share  Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 4.1 to Form 10-Q  filed November 3, 2009.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                |
| 4.1a       | Amended and Restated Shareholders  Rights Agreement dated December 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Exhibit 4.1 to Form 8-K  filed December 30, 2008.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.2        | Specimen 8.70% Class B  Series II Cumulative Redeemable Preferred Shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 4.2 to Form 10-Q  filed November 3, 2009.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.2a       | Specimen Depositary Share  representing 1/10 of one share of 8.70% Class B Series II Cumulative  Redeemable Preferred Shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 4.2a to Form 10-Q  filed November 3, 2009.  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.3        | Deposit Agreement by and  among Associated Estates Realty Corporation and National City Bank and  Depositary Receipts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 4.5 to Form 8-A  filed December 8, 2004.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.5        | Form  of Promissory Note and Form of Mortgage and Security Agreement dated May 10,  1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Exhibit 4.5 to Form 10-Q  filed August 13, 1999.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.5a       | Form  of Promissory Note and Form of Mortgage and Security Agreement dated  September 10, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Exhibit 4.5a to Form 10-Q  filed November 12, 1999. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                |
| 4.5b       | Form  of Promissory Note and Form of Mortgage and Security Agreement dated November  18, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Exhibit 4.5b to Form 10-K  filed March 15, 2000.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                |
| 4.13       | Credit  Agreement Dated April 24, 2007 among Associated Estates Realty Corporation,  as Borrower and National City Bank as Administrative Agent, Lead Arranger,  and Book Manager and The Several Lenders From Time To Time Parties Hereto, as  Lenders.                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Exhibit 4.13 to Form 10-Q  filed July 31, 2007.     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                |
| 4.14a      | Amended  and Restated Shareholder Rights Agreement dated December 30, 2008 between  Associated Estates Realty Corporation, an Ohio corporation (the  "Company") and National City Bank, a national banking association  (the "Rights Agent").                                                                                                                                                                                                                                                                                                                                                                                                                                          | Exhibit 4.1 to Form 8-K  filed December 30, 2008.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                |
| 4.15       | First  Amendment to Credit Agreement dated March 20, 2008, by and among Associated  Estates Realty Corporation (the Borrower), National City Bank and other banks  and financial institutions (the Lenders) and National City Bank (the  Administrative Agent).                                                                                                                                                                                                                                                                                                                                                                                                                                            | Exhibit 4.15 to Form 10-Q  filed May 6, 2008.       |

 

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| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **Filed herewith or**                                                              |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **incorporated herein**                                                            |
| **Number** | **                                                       Title                                                          ** | **by reference**                                                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                               |
| 4.16       | Joinder  to Subsidiary Guaranty dated March 20, 2008, for the benefit of National City  Bank, as Agent for itself and certain other lenders, with respect to a loan  from the Lenders to Associated Estates Realty Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Exhibit 4.16 to Form 10-Q filed  May 6, 2008.                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                               |
| 4.17       | Agreement  regarding Master Financing Agreement dated December 22, 2009 by and between  Wells Fargo Bank, National Association and Associated Estates Realty  Corporation and Master Financing Agreement dated December 22, 2009 by and  between Wells Fargo Bank, National Association and Federal Home Loan Mortgage  Corporation.                                                                                                                                                                                                                                                                                                                                                                       | Exhibit 4.17 to Form 10-Q  filed herewith.                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                               |
|       | Certain  of the Registrant's assets are subject to mortgage obligations each of which  individually relates to indebtedness totaling less than 10.0% of the total  assets of the Registrant.  The Registrant hereby agrees to furnish a copy of  such agreements to the Commission upon its request.                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                               |
|       | The  Registrant issued unsecured debt in the form of Trust Preferred Securities on  March 15, 2005 in a private placement in an amount less than 10.0% of the  total assets of the Registrant.  The Registrant hereby agrees to furnish a  copy of the Purchase Agreement dated March 15, 2005 between Associated  Estates Realty Corporation, AERC Delaware Trust and Taberna Preferred Funding  1, Ltd. and a specimen Preferred Securities Certificate to the Commission  upon its request.                                                                                                                                                                                                        |                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                               |
| 10         | Associated  Estates Realty Corporation Directors' Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10 to Form 10-K  filed February 25, 2010.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                               |
| 10.1       | Stock  Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 10.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended). |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                               |
| 10.2       | Amended  and Restated Employment Agreement between the Company and Jeffrey I.  Friedman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Exhibit 10.1 to Form 10-Q  filed May 13, 1996.                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                               |
| 10.3       | Equity-Based  Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Exhibit 10.4 to Form 10-K  filed March 29, 1995.                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                               |
| 10.4       | Form  of Restricted Stock Agreement dated by and among the Company and its  Non-Management Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Exhibit 10.9 to Form 10-K  filed March 28, 1996.                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                               |
| 10.5       | Form  of Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 4.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended).  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                               |
| 10.6       | Amended  2008 Equity-Based Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 10.1 to Form 8-K  filed May 13, 2008.                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                               |
| 10.7       | Amendment  to Associated Estates Realty Corporation 2008 Equity-Based Award                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Exhibit 10.7 to Form 10-K                                                          |
|       | Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                               |
| 10.7a      | Amendment  to Associated Estates Realty Corporation Amended and Restated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Exhibit 10.7a to Form 10-K                                                         |
|       | Equity-Based  Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                               |
| 10.7b      | Associated  Estates Realty Corporation Supplemental Executive Retirement Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10.7b to Form 10-K                                                         |
|       | (Restated).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                               |
| 10.8       | Form  of Share Option Agreement by and among the Company and its Non-Management  Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Exhibit 10.14 to Form 10-K  filed March 30, 1993.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                               |
| 10.10      | Associated  Estates Realty Corporation Amended and Restated 2001 Equity-Based Plan (as  amended on May 4, 2005).  Incorporated by reference to Appendix 1 to the  Definitive Proxy Statement filed March 28, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 99.01 to Form S-8  filed May 26, 2005.                                     |

 

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|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **Filed herewith or**                               |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **incorporated herein**                             |
| **Number** | **                                                       Title                                                       ** | **by reference**                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                |
| 10.11      | Form  of Equity Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Exhibit 10.11 to Form 10-Q  filed August 2, 2005.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                |
| 10.12      | Long Term Incentive  Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 10.12 to Form 10-Q  filed November 1, 2005. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                |
| 10.13      | Associated Estates Realty  Corporation Elective Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10.13 to Form 10-Q  filed July 31, 2007.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                |
| 31         | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 31 to Form 10-Q  filed herewith.            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                |
| 31.1       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 31.1 to Form 10-Q  filed herewith.          |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                |
| 32         | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Exhibit 32 to Form 10-Q  filed herewith.            |

 

 

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**SIGNATURES**

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                                                                                             |   | ASSOCIATED ESTATES REALTY  CORPORATION                                   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|
|                  |   |                        |
|                                      |   |              |
| May 4, 2010                                                                                      |   | /s/ Lou Fatica                                                           |
| (Date)                                                                                           |   | Lou Fatica, Vice President                                               |
|                                                                                             |   | Chief Financial Officer and  Treasurer                                   |

 

 

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