**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended MARCH 31, 2008**

 

**OR**

** **

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                        to                        **

 

**Commission File Number: 0-24920**

 

**ERPOPERATING LIMITED PARTNERSHIP**

(Exact Name of Registrant as Specified in itsCharter)

 

| **Illinois**                                                    | ** ** | **36-3894853**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  Other Jurisdiction of Incorporation or Organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **Two North Riverside Plaza, Chicago,  Illinois**               | ** ** | **60606**                             |
| (Address of Principal Executive Offices)                        |       | (Zip Code)                            |

 

| **(312) 474-1300**                                         |
|------------------------------------------------------------|
| (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) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x    No o

 

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

 

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

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

 

----

** **

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | **March 31,** | ** **     | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------|----------------|-----------------------|------------|
| ** **                                                | ** ** | **2008**           | ** **     | **2007**              | ** ** |
| **ASSETS**                                                |       |               |           |                  |       |
| Investment in  real estate                                |       |               |           |                  |       |
| Land                                                      |       | $                  | 3,613,965      |                  | $          | 3,607,305 |   |
| Depreciable  property                                     |       | 13,541,364         |           | 13,556,681            |       |
| Projects under  development                               |       | 811,616            |           | 812,339               |       |
| Land held for  development                                |       | 368,525            |           | 357,025               |       |
| Investment in  real estate                                |       | 18,335,470         |           | 18,333,350            |       |
| Accumulated  depreciation                                 |       | (3,245,919         | )              | (3,170,125            | )          |
| Investment in  real estate, net                           |       | 15,089,551         |           | 15,163,225            |       |
|                                                      |       |               |           |                  |       |
| Cash and cash  equivalents                                |       | 502,649            |           | 50,831                |       |
| Investments in  unconsolidated entities                   |       | 3,429              |           | 3,547                 |       |
| Deposits –  restricted                               |       | 216,213            |           | 253,276               |       |
| Escrow deposits –  mortgage                          |       | 19,912             |           | 20,174                |       |
| Deferred  financing costs, net                            |       | 57,325             |           | 56,271                |       |
| Other assets                                              |       | 121,866            |           | 142,453               |       |
| **Total  assets**                                         | ** ** | **$**              | **16,010,945** | ** **            | **$**      | **15,689,777** | ** ** |
|                                                      |       |               |           |                  |       |
| **LIABILITIES  AND PARTNERS’ CAPITAL**               |       |               |           |                  |       |
| Liabilities:                                              |       |               |           |                  |       |
| Mortgage notes  payable                                   |       | $                  | 4,096,357      |                  | $          | 3,605,971 |   |
| Notes, net                                                |       | 5,767,075          |           | 5,763,762             |       |
| Lines of credit                                           |       | —             |           | 139,000               |       |
| Accounts payable  and accrued expenses                    |       | 154,323            |           | 109,385               |       |
| Accrued interest  payable                                 |       | 78,697             |           | 124,717               |       |
| Other  liabilities                                        |       | 288,234            |           | 322,975               |       |
| Security  deposits                                        |       | 63,186             |           | 62,159                |       |
| Distributions  payable                                    |       | 141,379            |           | 141,244               |       |
| **Total  liabilities**                                    | ** ** | **10,589,251**     | ** **     | **10,269,213**        | ** ** |
| ** **                                                | ** ** | ** **         | ** **     | ** **            | ** ** |
| *Commitments  and contingencies*                          |       |               |           |                  |       |
| **Minority  Interests – Partially Owned Properties** | ** ** | **24,917**         | ** **     | **26,236**            | ** ** |
|                                                      |       |               |           |                  |       |
| Partners’  capital:                                  |       |               |           |                  |       |
| Preference Units                                          |       | 209,524            |           | 209,662               |       |
| Preference  Interests and Junior Preference Units         |       | 184                |           | 184                   |       |
| General Partner                                           |       | 4,888,337          |           | 4,868,738             |       |
| Limited Partners                                          |       | 323,645            |           | 331,626               |       |
| Accumulated  other comprehensive loss                     |       | (24,913            | )              | (15,882               | )          |
| **Total  partners’ capital**                         | ** ** | **5,396,777**      | ** **     | **5,394,328**         | ** ** |
| **Total  liabilities and partners’ capital**         | ** ** | **$**              | **16,010,945** | ** **            | **$**      | **15,689,777** | ** ** |

 

**See accompanying notes**

 

2

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Amounts in thousands except perOP Unit data)**

**(Unaudited)**

 
| ** **                                                                                                                                             | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **REVENUES**                                                                                                                                           |       |                                       |       |   |   |
| Rental income                                                                                                                                          |       | $                                          | 520,518    |   | $ | 473,582 |   |
| Fee and asset  management                                                                                                                              |       | 2,294                                      |       | 2,267 |   |
| Total revenues                                                                                                                                         |       | 522,812                                    |       | 475,849 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| **EXPENSES**                                                                                                                                           |       |                                       |       |   |   |
| Property and  maintenance                                                                                                                              |       | 137,491                                    |       | 126,781 |   |
| Real estate  taxes and insurance                                                                                                                       |       | 55,925                                     |       | 52,420 |   |
| Property  management                                                                                                                                   |       | 21,168                                     |       | 24,842 |   |
| Fee and asset  management                                                                                                                              |       | 2,183                                      |       | 2,341 |   |
| Depreciation                                                                                                                                           |       | 146,598                                    |       | 138,932 |   |
| General and  administrative                                                                                                                            |       | 12,481                                     |       | 9,369 |   |
| Impairment                                                                                                                                             |       | 119                                        |       | 236 |   |
| Total expenses                                                                                                                                         |       | 375,965                                    |       | 354,921 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| Operating income                                                                                                                                       |       | 146,847                                    |       | 120,928 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| Interest and  other income                                                                                                                             |       | 3,368                                      |       | 2,438 |   |
| Interest:                                                                                                                                              |       |                                       |       |   |   |
| Expense  incurred, net                                                                                                                                 |       | (117,247                                   | )          | (110,656 | ) |
| Amortization of  deferred financing costs                                                                                                              |       | (2,161                                     | )          | (2,221 | ) |
|                                                                                                                                                   |       |                                       |       |   |   |
| Income before  income and other taxes, allocation to Minority Interests, loss from  investments in unconsolidated entities and discontinued operations |       | 30,807                                     |       | 10,489 |   |
| Income and other  tax (expense) benefit                                                                                                                |       | (2,898                                     | )          | (597 | ) |
| Allocation to Minority  Interests – Partially Owned Properties                                                                                    |       | (268                                       | )          | (592 | ) |
| Loss from  investments in unconsolidated entities                                                                                                      |       | (95                                        | )          | (229 | ) |
| Income from  continuing operations                                                                                                                     |       | 27,546                                     |       | 9,071 |   |
| Discontinued  operations, net                                                                                                                          |       | 122,232                                    |       | 125,275 |   |
| Net income                                                                                                                                             |       | $                                          | 149,778    |   | $ | 134,346 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| **ALLOCATION  OF NET INCOME:**                                                                                                                         |       |                                       |       |   |   |
| Preference Units                                                                                                                                       |       | $                                          | 3,633      |   | $ | 7,424 |   |
| Preference  Interests and Junior Preference Units                                                                                                      |       | $                                          | 4          |   | $ | 223 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| General Partner                                                                                                                                        |       | $                                          | 136,849    |   | $ | 118,813 |   |
| Limited Partners                                                                                                                                       |       | 9,292                                      |       | 7,886 |   |
| Net income  available to OP Units                                                                                                                      |       | $                                          | 146,141    |   | $ | 126,699 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| **Earnings  per OP Unit – basic:**                                                                                                                |       |                                       |       |   |   |
| Income from  continuing operations available to OP Units                                                                                               |       | $                                          | 0.08       |   | $ | 0.01 |   |
| Net income  available to OP Units                                                                                                                      |       | $                                          | 0.51       |   | $ | 0.41 |   |
| Weighted average  OP Units outstanding                                                                                                                 |       | 287,079                                    |       | 311,697 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| **Earnings  per OP Unit – diluted:**                                                                                                              |       |                                       |       |   |   |
| Income from  continuing operations available to OP Units                                                                                               |       | $                                          | 0.08       |   | $ | 0.01 |   |
| Net income  available to OP Units                                                                                                                      |       | $                                          | 0.51       |   | $ | 0.40 |   |
| Weighted average  OP Units outstanding                                                                                                                 |       | 289,317                                    |       | 316,265 |   |
|                                                                                                                                                   |       |                                       |       |   |   |
| Distributions  declared per OP Unit outstanding                                                                                                        |       | $                                          | 0.4825     |   | $ | 0.4625 |   |

 

**See accompanying notes**

 

3

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OFOPERATIONS (Continued)**

**(Amounts in thousands except perOP Unit data)**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                                                        |       |                                       |       |   |   |
| Comprehensive  income:                                                      |       |                                       |       |   |   |
|                                                                        |       |                                       |       |   |   |
| Net income                                                                  |       | $                                          | 149,778    |   | $ | 134,346 |   |
| Other  comprehensive income (loss) – derivative and other instruments: |       |                                       |       |   |   |
| Unrealized  holding losses arising during the year                          |       | (9,544                                     | )          | (121 | ) |
| Losses  reclassified into earnings from other comprehensive income          |       | 513                                        |       | 563 |   |
| Comprehensive  income                                                       |       | $                                          | 140,747    |   | $ | 134,788 |   |

 

**See accompanying notes**

 

4

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                           | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                           |       |                                       |       |   |   |
| Net income                                                                           |       | $                                          | 149,778    |   | $ | 134,346 |   |
| *Adjustments  to reconcile net income to net cash provided by operating activities:* |       |                                       |       |   |   |
| Allocation to  Minority Interests – Partially Owned Properties                  |       | 268                                        |       | 592 |   |
| Depreciation                                                                         |       | 147,580                                    |       | 154,674 |   |
| Amortization of  deferred financing costs                                            |       | 2,161                                      |       | 2,564 |   |
| Amortization of  discounts and premiums on debt                                      |       | (1,168                                     | )          | (1,396 | ) |
| Amortization of  deferred settlements on derivative instruments                      |       | 168                                        |       | 218 |   |
| Impairment                                                                           |       | 175                                        |       | 236 |   |
| Loss from  investments in unconsolidated entities                                    |       | 95                                         |       | 229 |   |
| Distributions  from unconsolidated entities – return on capital                 |       | 23                                         |       | 23 |   |
| Net (gain) on  sales of discontinued operations                                      |       | (122,517                                   | )          | (111,946 | ) |
| Loss on debt  extinguishments                                                        |       | —                                     |       | 141 |   |
| Compensation  paid with Company Common Shares                                        |       | 5,995                                      |       | 4,902 |   |
|                                                                                 |       |                                       |       |   |   |
| *Changes  in assets and liabilities:*                                                |       |                                       |       |   |   |
| (Increase) in  deposits – restricted                                            |       | (656                                       | )          | (746 | ) |
| Decrease in  other assets                                                            |       | 12,268                                     |       | 5,381 |   |
| Increase in  accounts payable and accrued expenses                                   |       | 40,778                                     |       | 16,496 |   |
| (Decrease) in  accrued interest payable                                              |       | (46,020                                    | )          | (20,869 | ) |
| (Decrease) in  other liabilities                                                     |       | (23,480                                    | )          | (20,147 | ) |
| Increase in  security deposits                                                       |       | 1,027                                      |       | 2,402 |   |
| Net cash  provided by operating activities                                           |       | 166,475                                    |       | 167,100 |   |
|                                                                                 |       |                                       |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                           |       |                                       |       |   |   |
| Investment in  real estate – acquisitions                                       |       | (41,907                                    | )          | (677,058 | ) |
| Investment in  real estate – development/other                                  |       | (125,875                                   | )          | (79,926 | ) |
| Improvements to  real estate                                                         |       | (40,744                                    | )          | (57,354 | ) |
| Additions to  non-real estate property                                               |       | (1,026                                     | )          | (1,738 | ) |
| Interest  capitalized for real estate under development                              |       | (14,714                                    | )          | (7,866 | ) |
| Proceeds from  disposition of real estate, net                                       |       | 284,289                                    |       | 280,592 |   |
| Proceeds from  disposition of unconsolidated entities                                |       | 2,629                                      |       | — |   |
| Decrease in  deposits on real estate acquisitions, net                               |       | 32,145                                     |       | 218,224 |   |
| Decrease in  mortgage deposits                                                       |       | 262                                        |       | 2,102 |   |
| Acquisition of  Minority Interests – Partially Owned Properties                 |       | (20                                        | )          | — |   |
| Net cash  provided by (used for) investing activities                                |       | 95,039                                     |       | (323,024 | ) |
|                                                                                      |            |                                            |            |  |  |  |  |

 

**See accompanying notes**

 

5

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**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (Continued)**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                 | ** ** | **Quarter Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                 |       |                                       |       |   |   |
| Loan and bond  acquisition costs                                           |       | $                                          | (3,686     | ) | $ | (5,691 | ) |
| *Mortgage  notes payable:*                                                 |       |                                       |       |   |   |
| Proceeds                                                                   |       | 563,101                                    |       | 33,559 |   |
| Restricted cash                                                            |       | 5,574                                      |       | (14,611 | ) |
| Lump sum payoffs                                                           |       | (68,318                                    | )          | (135,611 | ) |
| Scheduled  principal repayments                                            |       | (6,213                                     | )          | (6,046 | ) |
| Prepayment  premiums/fees                                                  |       | —                                     |       | (141 | ) |
| *Lines  of credit:*                                                        |       |                                       |       |   |   |
| Proceeds                                                                   |       | 841,000                                    |       | 4,052,000 |   |
| Repayments                                                                 |       | (980,000                                   | )          | (3,564,500 | ) |
| (Payments on)  settlement of derivative instruments                        |       | (13,256                                    | )          | (29 | ) |
| Proceeds from  sale of OP Units                                            |       | 2,718                                      |       | 3,347 |   |
| Proceeds from  exercise of EQR options                                     |       | 3,034                                      |       | 7,041 |   |
| OP Units repurchased  and retired                                          |       | (10,935                                    | )          | (142,754 | ) |
| Payment of  offering costs                                                 |       | (8                                         | )          | (64 | ) |
| Contributions –  Minority Interests – Partially Owned Properties |       | 323                                        |       | 1,337 |   |
| *Distributions:*                                                           |       |                                       |       |   |   |
| OP Units –  General Partner                                           |       | (130,113                                   | )          | (135,829 | ) |
| Preference Units                                                           |       | (3,635                                     | )          | (7,431 | ) |
| Preference  Interests and Junior Preference Units                          |       | (4                                         | )          | (223 | ) |
| OP Units –  Limited Partners                                          |       | (8,888                                     | )          | (9,217 | ) |
| Minority  Interests – Partially Owned Properties                      |       | (390                                       | )          | (7,748 | ) |
| Net cash  provided by financing activities                                 |       | 190,304                                    |       | 67,389 |   |
| Net increase  (decrease) in cash and cash equivalents                      |       | 451,818                                    |       | (88,535 | ) |
| Cash and cash  equivalents, beginning of period                            |       | 50,831                                     |       | 260,277 |   |
| Cash and cash  equivalents, end of period                                  |       | $                                          | 502,649    |   | $ | 171,742 |   |

 

**See accompanying notes**

 

6

----

 

**ERP OPERATING LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (Continued)**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                         | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **SUPPLEMENTAL  INFORMATION:**                                     |       |                                       |       |   |   |
| Cash paid for  interest, net of amounts capitalized                |       | $                                          | 164,289    |   | $ | 134,013 |   |
|                                                               |       |                                       |       |   |   |
| Net cash  (received) paid for income and other taxes               |       | $                                          | (526       | ) | $ | 77 |   |
|                                                               |       |                                       |       |   |   |
| *Real  estate acquisitions/dispositions/other:*                    |       |                                       |       |   |   |
| Mortgage loans  assumed                                            |       | $                                          | —     |   | $ | 40,672 |   |
|                                                               |       |                                       |       |   |   |
| Mortgage loans  (assumed) by purchaser                             |       | $                                          | —     |   | $ | (4,845 | ) |
|                                                               |       |                                       |       |   |   |
| *Amortization  of deferred financing costs:*                       |       |                                       |       |   |   |
| Investment in  real estate, net                                    |       | $                                          | (471       | ) | $ | (77 | ) |
|                                                               |       |                                       |       |   |   |
| Deferred  financing costs, net                                     |       | $                                          | 2,632      |   | $ | 2,641 |   |
|                                                               |       |                                       |       |   |   |
| *Amortization  of discounts and premiums on debt:*                 |       |                                       |       |   |   |
| Mortgage notes  payable                                            |       | $                                          | (1,574     | ) | $ | (1,563 | ) |
|                                                               |       |                                       |       |   |   |
| Notes, net                                                         |       | $                                          | 406        |   | $ | 167 |   |
|                                                               |       |                                       |       |   |   |
| *Amortization  of deferred settlements on derivative instruments:* |       |                                       |       |   |   |
| Other  liabilities                                                 |       | $                                          | (345       | ) | $ | (345 | ) |
|                                                               |       |                                       |       |   |   |
| Accumulated  other comprehensive loss                              |       | $                                          | 513        |   | $ | 563 |   |
|                                                               |       |                                       |       |   |   |
| *Unrealized  (gain) loss on derivative instruments:*               |       |                                       |       |   |   |
| Other assets                                                       |       | $                                          | (4,935     | ) | $ | 67 |   |
|                                                               |       |                                       |       |   |   |
| Mortgage notes  payable                                            |       | $                                          | 3,390      |   | $ | 1,550 |   |
|                                                               |       |                                       |       |   |   |
| Notes, net                                                         |       | $                                          | 2,907      |   | $ | 867 |   |
|                                                               |       |                                       |       |   |   |
| Other  liabilities                                                 |       | $                                          | 7,786      |   | $ | (2,310 | ) |
|                                                               |       |                                       |       |   |   |
| Accumulated  other comprehensive loss                              |       | $                                          | (9,148     | ) | $ | (174 | ) |
|                                                               |       |                                       |       |   |   |
| *(Payments  on) settlement of derivative instruments:*             |       |                                       |       |   |   |
| Other assets                                                       |       | $                                          | (39        | ) | $ | (29 | ) |
|                                                               |       |                                       |       |   |   |
| Other  liabilities                                                 |       | $                                          | (13,217    | ) | $ | — |   |

 

**See accompanying notes**

 

7

----

** **

**ERP OPERATING LIMITED PARTNERSHIP**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.****                                      Business**

 

ERP Operating Limited Partnership (“ERPOP”), an Illinois limitedpartnership, was formed in May 1993 to conduct the multifamily residentialproperty business of Equity Residential (“EQR”).  EQR, a Maryland real estate investment trust(“REIT”) formed in March 1993, is an S&P 500 company focused on theacquisition, development and management of high quality apartment properties intop United States growth markets.  EQRhas elected to be taxed as a REIT.

 

EQR is the general partner of, and as of March 31,2008 owned an approximate 93.8% ownership interest in ERPOP.  EQR is structured as an umbrella partnershipREIT (“UPREIT”), under which all property ownership and business operations areconducted through ERPOP and its subsidiaries. References to the “Operating Partnership” include ERPOP and thoseentities owned or controlled by it.  Referencesto the “Company” mean EQR and the Operating Partnership.

 

As of March 31, 2008, the Operating Partnership, directly orindirectly through investments in title holding entities, owned all or aportion of 565****properties in 24 states and theDistrict of Columbia consisting of 149,769 units.  The ownership breakdown includes (table doesnot include various uncompleted development properties):

 
| ** **                      | ** ** | **Properties** | ** ** | **Units** | ** ** |
|---------------------------------|------------|----------------|------------|-----------|------------|
| Wholly Owned  Properties        |       | 493            |       | 130,161   |       |
| Partially Owned  Properties:    |       |           |       |      |       |
| Consolidated                    |       | 27             |       | 5,431     |       |
| Unconsolidated                  |       | 44             |       | 10,446    |       |
| Military Housing  (Fee Managed) |       | 1              |       | 3,731     |       |
|                            |       | 565            |       | 149,769   |       |

 

**2.**                                      **Summary of Significant Accounting Policies**

** **

*Basis of Presentation*

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) andcertain reclassifications considered necessary for a fair presentation havebeen included.  Certain reclassificationshave been made to the prior period financial statements in order to conform tothe current year presentation.  Operatingresults for the quarter ended March 31, 2008 are not necessarilyindicative of the results that may be expected for the year ending December 31,2008.

 

In preparation of the OperatingPartnership’s financial statements in conformity with accounting principlesgenerally accepted in the United States, management makes estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements as well as the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from these estimates.

 

The balance sheet at December 31,2007 has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

8

----

 

For further information,including definitions of capitalized terms not defined herein, refer to theconsolidated financial statements and footnotes thereto included in the OperatingPartnership’s annual report on Form 10-K for the year ended December 31,2007.

 

*Income and Other Taxes*

 

The Operating Partnershipgenerally is not liable for federal income taxes as the partners recognizetheir proportionate share of the Operating Partnership’s income or loss intheir tax returns; therefore no provision for federal income taxes has beenmade at the ERPOP level.  Historically,the Operating Partnership has generally only incurred certain state and localincome, excise and franchise taxes.  TheOperating Partnership has elected Taxable REIT Subsidiary (“TRS”) status forcertain of its corporate subsidiaries, primarily those entities engaged incondominium conversion and corporate housing activities and as a result, theseentities will incur both federal and state income taxes on any taxable incomeof such entities.

 

Deferred tax assets andliabilities are recognized for future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates forwhich the temporary differences are expected to be recovered or settled.  The effect of deferred tax assets andliabilities are recognized in earnings in the period enacted.  The Operating Partnership’s deferred taxassets are generally the result of tax affected amortization of goodwill,differing depreciable lives on capitalized assets and the timing of expenserecognition for certain accrued liabilities. As of March 31, 2008, the Operating Partnership has recorded adeferred tax asset of approximately $12.5 million, which was fully offset by avaluation allowance due to the uncertainty in forecasting future TRS taxableincome.

 

*Other*

 

The Company adopted SFAS No. 123(R),*Share-Based Payment*, as requiredeffective January 1, 2006.  SFAS No. 123(R) requiresall companies to expense share-based compensation (such as share options), aswell as making other revisions to SFAS No. 123.  As the Company began expensing all share-basedcompensation effective January 1, 2003, the adoption of SFAS No. 123(R) didnot have a material effect on its consolidated statements of operations orfinancial position.

 

Any EQR common share ofbeneficial interest, $0.01 par value per share (the “Common Shares”) issuedpursuant to EQR’s incentive equity compensation and employee share purchaseplans will result in the Operating Partnership issuing units of limitedpartnership interest (“OP Units”) to EQR on a one-for-one basis, with theOperating Partnership receiving the net cash proceeds of such issuances.

 

The Operating Partnership adopted the disclosureprovisions of SFAS No. 150 and FSP No. FAS 150-3, *Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity,* effective December 31, 2003.  SFAS No. 150 and FSP No. FAS 150-3require the Operating Partnership to make certain disclosures regardingnoncontrolling interests that are classified as equity in the financialstatements of a subsidiary but would be classified as a liability in the parent’sfinancial statements under SFAS No. 150 (e.g., minority interests inconsolidated limited-life subsidiaries). The Operating Partnership is presently the controlling partner invarious consolidated partnerships consisting of 27 properties and 5,431 units andvarious uncompleted development properties having a minority interest bookvalue of $24.9 million at March 31, 2008. Some of these partnerships contain provisions that require the partnershipsto be liquidated through the sale of its assets upon reaching a date specifiedin each respective partnership agreement. The Operating Partnership, as controlling partner, has an obligation tocause the property owning partnerships to distribute proceeds of liquidation tothe Minority Interests in these Partially Owned Properties only to the extentthat the net proceeds received by the partnerships from the sale of its assetswarrant a distribution based on the partnership agreements.  As of March 31, 2008, the OperatingPartnership estimates

 

9

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the value of Minority Interest distributions would have beenapproximately $114.4 million (“Settlement Value”) had the partnerships beenliquidated.  This Settlement Value isbased on estimated third party consideration realized by the partnerships upondisposition of the Partially Owned Properties and is net of all other assetsand liabilities, including yield maintenance on the mortgages encumbering theproperties, that would have been due on March 31, 2008 had those mortgagesbeen prepaid.  Due to, among otherthings, the inherent uncertainty in the sale of real estate assets, the amountof any potential distribution to the Minority Interests in the Operating Partnership’sPartially Owned Properties is subject to change.  To the extent that the partnerships’underlying assets are worth less than the underlying liabilities, the OperatingPartnership has no obligation to remit any consideration to the Minority Interestsin Partially Owned Properties.

 

In July 2006, the FASB ratified the consensus in FINNo. 48, *Accounting for Uncertainty in Income Taxes*.  FIN No. 48 creates a single model toaddress uncertainty in income tax positions and prescribes a minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements.  It also providesguidance on derecognition, measurement, classification, interest and penalties,accounting in interim periods, disclosure and transition and clearly scopesincome taxes out of SFAS No. 5, *Accounting forContingencies*.  The OperatingPartnership adopted FIN No. 48 as required effective January 1, 2007. The adoption of FIN No. 48 did nothave a material effect on the consolidated results of operations or financialposition.

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*.  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with accountingprinciples generally accepted in the United States and expands disclosure aboutfair value measurements.  The OperatingPartnership adopted SFAS No. 157 as required effective January 1,2008.  The adoption of SFAS No. 157did not have a material effect on the consolidated results of operations orfinancial position.  See Note 11 in theNotes to Consolidated Financial Statements for further discussion.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities*.  SFAS No. 159provides a “Fair Value Option” under which a company may irrevocably elect fairvalue as the initial and subsequent measurement attribute for certain financialinstruments.  The Fair Value Option willbe available on a contract-by-contract basis with changes in fair valuerecognized in earnings as those changes occur. SFAS No. 159 is effective beginning January 1, 2008, but the OperatingPartnership has decided not to adopt this optional standard.

 

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations*.  SFAS No. 141(R) will significantlychange the accounting for business combinations.  Under SFAS No. 141(R), an acquiringentity will be required to recognize all the assets acquired and liabilitiesassumed in a transaction at the acquisition-date fair value with limitedexceptions.  SFAS No. 141(R) willchange the accounting treatment for certain specific acquisition related itemsincluding: (1) expensing acquisition related costs as incurred; (2) valuingnoncontrolling interests at fair value at the acquisition date; and (3) expensingrestructuring costs associated with an acquired business.  SFAS No. 141(R) also includes asubstantial number of new disclosure requirements.  SFAS No. 141(R) is to be appliedprospectively to business combinations for which the acquisition date is on orafter January 1, 2009.  We expectSFAS No. 141(R) will have an impact on our accounting for futurebusiness combinations once adopted, but we are currently assessing the impactit will have on the consolidated results of operations and financial position.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements*.  SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interestin a subsidiary (minority interest) is an ownership interest in theconsolidated entity that should be reported as equity in the ConsolidatedFinancial Statements and separate from the parent company’s equity.  Among other requirements, this statementrequires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest. Italso requires disclosure, on the face of the Consolidated Statements ofOperations, of the amounts of consolidated

 

10

----

 

net income attributable to the parent and to the noncontrollinginterest.  This statement is effectivefor the Operating Partnership on January 1, 2009.  The Operating Partnership is currentlyevaluating the impact SFAS No. 160 will have on its consolidated resultsof operations and financial position.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities – an amendment of FASB Statement No. 133*.  SFAS No. 161 is intended to improvefinancial standards for derivative instruments and hedging activities byrequiring enhanced disclosures to enable investors to better understand theireffects on an entity’s financial position, financial performance, and cashflows.  Among other requirements, entitiesare required to provide enhanced disclosures about: (1) how and why anentity uses derivative instruments; (2) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133 and its relatedinterpretations; and (3) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance and cashflows.  SFAS No. 161 is effectivefor the Operating Partnership on January 1, 2009.  The Operating Partnership is currentlyevaluating the impact SFAS No. 161 will have on its consolidated financialstatements.

 

**3.****                                      Partners’ Capital**

## *** ***

## ***The following tables present thechanges in all of the Operating Partnership’s issued and outstanding OP Units,and the changes in limited partners’ OP Units for the quarter ended March 31,2008:***

 
| ** **                                                              | ** **   | **2008**        | ** **   |
|-------------------------------------------------------------------------|--------------|-----------------|--------------|
| **General  and Limited Partner OP Units**                               | *** *** | *** ***    | *** *** |
| General and  Limited Partner OP Units outstanding at January 1,    |         | 287,974,981     |         |
|                                                                    |         |            |         |
| Issued to  General Partner:                                             |         |            |         |
| Conversion of  Series E Preference Units                           |         | 5,007           |         |
| Conversion of  Series H Preference Units                           |         | 1,448           |         |
| Exercise of EQR  options                                                |         | 113,758         |         |
| Employee Share  Purchase Plan                                           |         | 83,911          |         |
| Restricted EQR  share grants, net                                       |         | 495,328         |         |
|                                                                    |         |            |         |
| OP Units Other:                                                         |         |            |         |
| Repurchased and  retired                                                |         | (171,161        | )            |
| **General  and Limited Partner OP Units outstanding at March 31,** | ** **   | **288,503,272** | ** **   |
| ** **                                                              | ** **   | ** **      | ** **   |
| **Limited  Partner OP Units**                                           | *** *** | *** ***    | *** *** |
| Limited Partner  OP Units outstanding at January 1,                |         | 18,420,320      |         |
| Conversion of  Limited Partner OP Units to EQR Common Shares            |         | (419,297        | )            |
| **Limited  Partner OP Units outstanding at March 31,**             | ** **   | **18,001,023**  | ** **   |
| Limited Partner  OP Units Ownership Interest in Operating Partnership   |         | 6.2             | %            |

 

**Duringthe quarter ended March 31, 2008, the Company repurchased 171,161 of itsCommon Shares at an average price of $36.78 per share for total considerationof $6.3 million.  These shares wereretired subsequent to the repurchases. Concurrent with these transactions, theOperating Partnership repurchased and retired 171,161 OP Units previouslyissued to EQR. Of the total shares repurchased, 71,161 shares were repurchased fromemployees at an average price of $38.25 per share (the average of the then currentmarket prices) to cover the minimum statutory tax withholding obligationsrelated to the vesting of employees’ restricted shares.  The remaining 100,000 shares were repurchasedin the open market at an average price of $35.74 per share.  The Company also funded $4.6 million in January 2008for the settlement of 125,000 Common Shares that were repurchased in December 2007and recorded as other liabilities at December 31, 2007.  EQR has authorization to repurchase anadditional $469.3 million of its shares as of March 31, 2008.**

** **

**The Limited Partners of the Operating Partnership as of March 31,2008 include various individuals and entities that contributed their propertiesto the Operating Partnership in exchange for OP Units.  Subject to**

** **

**11**

----

** **

**certainrestrictions, the Limited Partners may exchange their OP Units for EQR CommonShares on a one-for-one basis.**

** **

**EQR contributes all net proceedsfrom its various equity offerings (including proceeds from exercise of optionsfor EQR Common Shares) to the Operating Partnership.  In return for those contributions, EQRreceives a number of OP Units in ERPOP equal to the number of Common Shares ithas issued in the equity offering (or in the case of a preferred equity offering,a number of preference units in ERPOP equal in number and having the same termsas the preferred shares issued in the equity offering).**

** **

The following tablepresents the Operating Partnership’s issued and outstanding “Preference Units”as of March 31, 2008 and December 31, 2007:

 
| ** **                                                                                                                                                                                                       | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **            | ** ** | **Amounts in thousands** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | ** **                 | ** ** | ** **        | ** ** | **Annual**            | ** ** | ** **                         | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **Redemption**             | ** ** | **Conversion**    | ** ** | **Dividend per** | ** ** | **March 31,**                 | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **Date (1) (2)** | ** ** | **Rate (2)** | ** ** | **Unit (3)**     | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| Preference  Units:                                                                                                                                                                                               |       |                       |       |              |       |                  |       |                               |       |   |   |
|                                                                                                                                                                                                             |       |                       |       |              |       |                  |       |                               |       |   |   |
| 7.00%  Series E Cumulative Convertible Preference Units; liquidation value $25  per unit; 357,616 and 362,116 units issued and outstanding at March 31,  2008 and December 31, 2007, respectively |       | 11/1/98                    |       | 1.1128            |       | $                     | 1.75       |                               | $          | 8,940 |   | $ | 9,053 |   |
|                                                                                                                                                                                                             |       |                       |       |              |       |                  |       |                               |       |   |   |
| 7.00% Series H  Cumulative Convertible Preference Units; liquidation value $25 per unit;  23,359 and 24,359 units issued and outstanding at March 31, 2008 and  December 31, 2007, respectively   |       | 6/30/98                    |       | 1.4480            |       | $                     | 1.75       |                               | 584        |   | 609 |   |
|                                                                                                                                                                                                             |       |                       |       |              |       |                  |       |                               |       |   |   |
| 8.29%  Series K Cumulative Redeemable Preference Units; liquidation value $50  per unit; 1,000,000 units issued and outstanding at March 31, 2008 and December 31,  2007                          |       | 12/10/26                   |       | N/A               |       | $                     | 4.145      |                               | 50,000     |   | 50,000 |   |
|                                                                                                                                                                                                             |       |                       |       |              |       |                  |       |                               |       |   |   |
| 6.48%  Series N Cumulative Redeemable Preference Units; liquidation value $250  per unit; 600,000 units issued and outstanding at March 31, 2008 and December 31,  2007 (4)                       |       | 6/19/08                    |       | N/A               |       | $                     | 16.20      |                               | 150,000    |   | 150,000 |   |
|                                                                                                                                                                                                             |       |                       |       |              |       |                  |       | $                                  | 209,524    |   | $ | 209,662 |   |

 

----

(1)        On orafter the redemption date, redeemable preference units (Series K and N)may be redeemed for cash at the option of the Operating Partnership, in wholeor in part, at a redemption price equal to the liquidation price per unit, plusaccrued and unpaid distributions, if any, in conjunction with the concurrentredemption of the corresponding EQR Preferred Shares.

 

(2)        On orafter the redemption date, convertible preference units (Series E &H) may be redeemed under certain circumstances at the option of the OperatingPartnership for cash (in the case of Series E) or OP Units (in the case ofSeries H), in whole or in part, at various redemption prices per unitbased upon the contractual conversion rate, plus accrued and unpaiddistributions, if any, in conjunction with the concurrent redemption/conversionof the corresponding EQR Preferred Shares.

 

(3)        Dividendson all series of Preference Units are payable quarterly at various paydates.  The dividend listed for Series Nis a Preference Unit rate and the equivalent depositary unit annual dividend is$1.62 per unit.

 

(4)        The Series NPreference Units have a corresponding depositary unit that consists of tentimes the number of units and one-tenth the liquidation value and dividend per unit.

 

**Thefollowing table presents the Operating Partnership’s issued and outstandingJunior Convertible Preference Units (the “Junior Preference Units”) as of March 31,2008 and December 31, 2007:**

 

12

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| ** **                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **        | ** ** | ** **                 | ** ** | **Amounts in thousands** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **        | ** ** | **Annual**                 | ** ** | ** **                         | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **Redemption**    | ** ** | **Conversion**    | ** ** | **Dividend**               | ** ** | **March 31,**                 | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **Date (2)** | ** ** | **Rate (2)** | ** ** | **per Unit (1)** | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| Junior  Preference Units:                                                                                                                                                  |       |              |       |              |       |                       |       |                               |       |   |   |
|                                                                                                                                                                       |       |              |       |              |       |                       |       |                               |       |   |   |
| Series B  Junior Convertible Preference Units; liquidation value $25 per unit; 7,367  units issued and outstanding at March 31, 2008 and December 31,  2007 |       | 7/29/09           |       | 1.020408          |       | $                          | 2.00       |                               | $          | 184 |   | $ | 184 |   |
|                                                                                                                                                                       |       |              |       |              |       |                       |       | $                                  | 184        |   | $ | 184 |   |
|                                                                                                                                                                            |            |                   |            |                   |            |                            |            |                                    |            |  |  |  |  |  |

 

----

(1)                                  Dividends on the JuniorPreference Units are payable quarterly at various pay dates.

 

(2)                                  On or after the tenthanniversary of the issuance (the “Redemption Date”), the Series B JuniorPreference Units may be converted into OP Units at the option of the OperatingPartnership based on the contractual conversion rate.  Prior to the Redemption Date, the holders mayelect to convert the Series B Junior Preference Units to OP Units undercertain circumstances based on the contractual conversion rate.  The contractual rate is based upon a ratiodependent upon the closing price of EQR’s Common Shares.

 

**4.**                                      **Real Estate**

** **

**Thefollowing table summarizes the carrying amounts for investment in real estate(at cost) as of March 31, 2008 and December 31, 2007 (amounts inthousands):**

** **

| ** **                         | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land                               |       | $                        | 3,613,965  |                        | $          | 3,607,305 |   |
| Depreciable  property:             |       |                     |       |                        |       |
| Buildings and  improvements        |       | 12,645,555               |       | 12,665,706                  |       |
| Furniture,  fixtures and equipment |       | 895,809                  |       | 890,975                     |       |
| Projects under  development:       |       |                     |       |                        |       |
| Land                               |       | 196,554                  |       | 210,414                     |       |
| Construction-in-progress           |       | 615,062                  |       | 601,925                     |       |
| Land held for  development:        |       |                     |       |                        |       |
| Land                               |       | 313,275                  |       | 311,675                     |       |
| Construction-in-progress           |       | 55,250                   |       | 45,350                      |       |
| Investment in  real estate         |       | 18,335,470               |       | 18,333,350                  |       |
| Accumulated  depreciation          |       | (3,245,919               | )          | (3,170,125                  | )          |
| Investment in  real estate, net    |       | $                        | 15,089,551 |                        | $          | 15,163,225 |   |

** **

**Duringthe quarter ended March 31, 2008, the Operating Partnership acquired the entireequity interest in the following from unaffiliated parties (purchase price inthousands):**

** **
| ** **         | ** ** | ** **     | ** ** | ** ** | ** ** | **Purchase** | ** ** |
|--------------------|------------|----------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **Properties** | ** ** | **Units**  | ** ** | **Price**    | ** ** |
| Rental  Properties |       | 2              |       | 171        |       | $            | 41,863     |   |
|                    |            |                |            |            |            |              |            |  |

** **

**The OperatingPartnership also acquired all of its partners’ interests in one partially ownedproperty containing 144 units for $5.9 million and two partially owned landparcels for $1.6 million.**

** **

During the quarter ended March 31,2008, the Operating Partnership disposed of the following to unaffiliatedparties (sales price in thousands):

 

13

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| ** **                         | ** ** | **Properties** | ** ** | **Units** | ** ** | **Sales Price** | ** ** |
|------------------------------------|------------|----------------|------------|-----------|------------|----------------------|------------|
| Rental Properties                  |       | 15             |       | 3,317     |       | $                    | 271,643    |   |
| Condominium  Conversion Properties |       | 2              |       | 41        |       | 9,445                |       |
|                               |       | 17             |       | 3,358     |       | $                    | 281,088    |   |

** **

**The Operating Partnershiprecognized a net gain on sales of discontinued operations of approximately $122.5million on the above sales.**

** **

**5.****                                      Commitmentsto Acquire/Dispose of Real Estate**

 

**As of May 1, 2008, the OperatingPartnership had entered into separate agreements to acquire the following(purchase price in thousands):**

** **

| ** **            | ** ** | **Properties/  Parcels** | ** ** | **Units** | ** ** | **Purchase  Price** | ** ** |
|-----------------------|------------|--------------------------|------------|-----------|------------|---------------------|------------|
| Operating  Properties |       | 1                        |       | 304       |       | $                   | 43,779     |   |
| Land Parcels          |       | 5                        |       | —    |       | 153,122             |       |
| Total                 |       | 6                        |       | 304       |       | $                   | 196,901    |   |

 

**As of May 1, 2008, in addition to the property thatwas subsequently disposed of as discussed in Note 16, the Operating Partnershiphad entered into separate agreements to dispose of the following (sales pricein thousands):**

 

| ** **            | ** ** | **Properties/** | ** ** | ** ** | ** ** | ** **           | ** ** |
|-----------------------|------------|-----------------|------------|------------|------------|----------------------|------------|
| ** **            | ** ** | **Parcels**     | ** ** | **Units**  | ** ** | **Sales Price** | ** ** |
| Operating  Properties |       | 16              |       | 4,999      |       | $                    | 486,086    |   |
| Land Parcels          |       | 1               |       | —     |       | 3,300                |       |
| Total                 |       | 17              |       | 4,999      |       | $                    | 489,386    |   |

 

The closings of these pending transactions aresubject to certain conditions and restrictions, therefore, there can be noassurance that these transactions will be consummated or that the final termswill not differ in material respects from those summarized in the precedingparagraphs.

 

**6.****                                      Investments in Partially Owned Entities**

 

TheOperating Partnership has co-invested in various properties with unrelatedthird parties which are either consolidated or accounted for under the equitymethod of accounting (unconsolidated). The following table summarizes the Operating Partnership’s investmentsin partially owned entities as of March 31, 2008 (amounts in thousandsexcept for project and unit amounts):

 
| ** **                | ** ** | **Consolidated**              | ** ** | **Unconsolidated**      | ** ** |
|---------------------------|------------|-------------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **Development Projects** | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Held for**             | ** ** | **Completed,**          | ** ** | **Completed** | ** ** | ** ** | ** ** | ** ** | ** ** | **Institutional** | ** ** |
| ** **                | ** ** | **and/or Under**         | ** ** | **Not**                 | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** | **Joint** | ** ** |
| ** **                | ** ** | **Development**               | ** ** | **Stabilized (4)** | ** ** | **Stabilized** | ** ** | **Other** | ** ** | **Total** | ** ** | **Ventures** | ** ** |
|                      |       |                          |       |                    |       |   |   |   |   |   |   |   |   |
| Total projects  (1)       |       | —                        |       | 1                       |       | 5 |   | 21 |   | 27 |   | 44 |   |
|                      |       |                          |       |                    |       |   |   |   |   |   |   |   |   |
| Total units (1)           |       | —                        |       | 132                     |       | 1,405 |   | 3,894 |   | 5,431 |   | 10,446 |   |
|                      |       |                          |       |                    |       |   |   |   |   |   |   |   |   |
| Debt – Secured  (2): |       |                          |       |                    |       |   |   |   |   |   |   |   |   |
| EQR Ownership  (3)        |       | $                             | 421,755    |                    | $          | 28,260 |   | $ | 141,206 |   | $ | 289,135 |   | $ | 880,356 |   | $ | 121,200 |   |
| Minority  Ownership       |       | —                        |       | —                  |       | — |   | 13,321 |   | 13,321 |   | 363,600 |   |
| Total (at 100%)           |       | $                             | 421,755    |                    | $          | 28,260 |   | $ | 141,206 |   | $ | 302,456 |   | $ | 893,677 |   | $ | 484,800 |   |

 

14

----

 

----

(1)          Project and unit counts exclude all uncompleteddevelopment projects until those projects are substantially completed.

 

(2)          All debt is non-recourse to the OperatingPartnership with the exception of $68.7 million in mortgage bonds on variousdevelopment projects.

 

(3)          Represents the Operating Partnership’s currenteconomic ownership interest.

 

(4)          Projects included here are substantiallycomplete.  However, they may stillrequire additional exterior and interior work for all units to be available forleasing.

 

**7.****                                      Deposits – Restricted**

 

Thefollowing table presents the restricted deposits as of March 31, 2008 and December 31,2007 (amounts in thousands):

 
| ** **                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                        |       |               |       |                  |       |
| Tax–deferred  (1031) exchange proceeds |       | $                  | 30,200     |                  | $          | 63,795 |   |
| Earnest money on  pending acquisitions      |       | 4,500              |       | 3,050                 |       |
| Restricted  deposits on debt (1)            |       | 127,917            |       | 133,491               |       |
| Resident  security and utility deposits     |       | 39,595             |       | 39,889                |       |
| Other                                       |       | 14,001             |       | 13,051                |       |
|                                        |       |               |       |                  |       |
| Totals                                      |       | $                  | 216,213    |                  | $          | 253,276 |   |

 

----

(1)          Primarily representsamounts held in escrow by the lender and released as draw requests are made onfully funded development mortgage loans.

 

**8.****                                      Mortgage Notes Payable**

 

As of March 31, 2008, the OperatingPartnership had outstanding mortgage debt of approximately $4.1 billion.

 

Duringthe quarter ended March 31, 2008, the Operating Partnership:

 

·             Repaid $74.5 million of mortgage loans;

·             Obtained $500.0 million of mortgage loan proceedsthrough the issuance of an 11.5 year cross-collateralized loan with a fixed statedinterest rate for 10.5 years at 5.19% secured by 13 properties; and

·             Obtained an additional $63.1 million of new mortgageloans on certain other properties.

 

As of March 31, 2008, scheduledmaturities for the Operating Partnership’s outstanding mortgage indebtednesswere at various dates through September 1, 2045.  At March 31, 2008, the interest raterange on the Operating Partnership’s mortgage debt was 1.40% to 12.465%.  During the quarter ended March 31, 2008,the weighted average interest rate on the Operating Partnership’s mortgage debtwas 5.23%.

 

**9.****                                      Notes**

 

As of March 31, 2008, the Operating Partnership hadoutstanding unsecured notes of approximately $5.8 billion.  There were no significant transactions duringthe quarter ended March 31, 2008.

 

As of March 31, 2008, scheduled maturities for the OperatingPartnership’s outstanding notes were at various dates through 2029.  At March 31, 2008, the interest raterange on the Operating Partnership’s notes was 3.85% to 7.57%.  During the quarter ended March 31, 2008,the weighted average interest rate on the Operating Partnership’s notes was 5.60%.

 

15

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**10.****                               Lines of Credit**

 

TheOperating Partnership has an unsecured revolving credit facility with potentialborrowings of up to $1.5 billion maturing on February 28, 2012, with theability to increase available borrowings by an additional $500.0 million byadding additional banks to the facility or obtaining the agreement of existingbanks to increase their commitments.  Advancesunder the credit facility bear interest at variable rates based upon LIBOR atvarious interest periods plus a spread dependent upon the Operating Partnership’scredit rating or based on bids received from the lending group.  EQR has guaranteed the Operating Partnership’scredit facility up to the maximum amount and for the full term of the facility.

 

Asof March 31, 2008, no amounts were outstanding and $77.5 million wasrestricted (dedicated to support letters of credit and not available forborrowing) on the credit facility. During the quarter ended March 31, 2008, the weighted averageinterest rate under the credit facility was 4.29%.

 

**11.****                               Derivative and Other Fair Value Instruments**

 

The following table summarizes the consolidatedderivative instruments at March 31, 2008 (dollar amounts are in thousands):

 
| ** **                              | ** ** | ** **          | ** ** | **Forward**        | ** ** | **Development**     | ** ** |
|-----------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                              | ** ** | **Fair Value** | ** ** | **Starting**       | ** ** | **Cash Flow**  | ** ** |
| ** **                              | ** ** | **Hedges (1)** | ** ** | **Swaps (2)** | ** ** | **Hedges (3)** | ** ** |
|                                    |       |                |       |               |       |                |       |
| Current Notional  Balance               |       | $                   | 370,000    |               | $          | 100,000             |       | $ | 143,707 |   |
| Lowest Possible  Notional               |       | $                   | 370,000    |               | $          | 100,000             |       | $ | 45,106 |   |
| Highest Possible  Notional              |       | $                   | 370,000    |               | $          | 100,000             |       | $ | 283,664 |   |
| Lowest Interest  Rate                   |       | 3.245               | %          | 4.573              | %          | 4.928               | %          |
| Highest Interest  Rate                  |       | 3.787               | %          | 4.716              | %          | 6.000               | %          |
| Earliest  Maturity Date                 |       | 2009                |       | 2019               |       | 2009                |       |
| Latest Maturity  Date                   |       | 2009                |       | 2019               |       | 2010                |       |
| Estimated Asset  (Liability) Fair Value |       | $                   | 4,982      |               | $          | (1,696              | )          | $ | (3,484 | ) |

 

----

(1)               Fair Value Hedges – Converts outstanding fixedrate debt to a floating interest rate.

 

(2)               Forward Starting Swaps – Designed to partiallyfix the interest rate in advance of a planned future debt issuance.

 

(3)               Development Cash Flow Hedges – Convertsoutstanding floating rate debt to a fixed interest rate.

 

**On March **31, 2008, the net derivative instruments were reportedat their fair value as other liabilities of approximately $5.2 million andother assets of $5.0 million.  As of March 31, 2008, there were approximately $25.1 million in deferred losses, net,included in accumulated other comprehensive loss.  Based on the estimated fair values of the netderivative instruments at March 31, 2008, the OperatingPartnership may recognize an estimated $5.7 million of accumulated othercomprehensive loss as additional interest expense during the twelve monthsending March 31, 2009.

** **

**In February 2008, the OperatingPartnership paid approximately $13.2 million to terminate three forwardstarting swaps in conjunction with the issuance of a $500.0 million 11.5 year mortgageloan.  The entire amount has beendeferred as a component of accumulated other comprehensive loss and will berecognized as an increase to interest expense over the first ten years of themortgage loan.**

** **

**SFAS No. 157 establishes athree-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon thetransparency of inputs to the valuation of an asset or liability as of themeasurement date.  A financial instrument’scategorization within the valuation hierarchy is based upon the lowest level ofinput that is significant to the fair value measurement.  The three levels are defined as follows:**

** **
| · |   | Level 1 – Inputs to the  valuation methodology are quoted prices (unadjusted) for identical assets or  liabilities in active markets. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

16

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·                  Level 2 – Inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument.

 

·                  Level 3 – Inputs to the valuation methodology areunobservable and significant to the fair value measurement.

 

**The Operating Partnership’s derivative positions arevalued using models developed by the respective counterparty as well as modelsdeveloped internally by the Operating Partnership that use as their basisreadily observable market parameters (such as forward yield curves and creditdefault swap data) and are classified within Level 2 of the valuationhierarchy.  In addition, employeeholdings other than EQR Common Shares within the supplemental executiveretirement plan (the “SERP”) have a fair value of $54.7 million as of March 31,2008 and are included in other assets and other liabilities on the consolidatedbalance sheet.  These SERP investments arevalued using quoted market prices for identical assets and are classifiedwithin Level 1 of the valuation hierarchy.**

** **

**12.**                               EarningsPer OP Unit

** **

The following tables set forththe computation of net income OP Unit – basic and net income per OP Unit –diluted (amounts in thousands except per OP Unit amounts):

 
| ** **                                                                                                    | ** ** | **Quarter Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **Numerator  for net income per OP Unit – basic and diluted:**                                           |       |                                       |       |   |   |
| Income from  continuing operations                                                                            |       | $                                          | 27,546     |   | $ | 9,071 |   |
| Allocation to  Preference Units                                                                               |       | (3,633                                     | )          | (7,424 | ) |
| Allocation to  Preference Interests and Junior Preference Units                                               |       | (4                                         | )          | (223 | ) |
|                                                                                                          |       |                                       |       |   |   |
| Income from  continuing operations available to OP Units                                                      |       | 23,909                                     |       | 1,424 |   |
| Discontinued  operations, net                                                                                 |       | 122,232                                    |       | 125,275 |   |
|                                                                                                          |       |                                       |       |   |   |
| Numerator for  net income per OP Unit – basic and diluted                                                |       | $                                          | 146,141    |   | $ | 126,699 |   |
|                                                                                                          |       |                                       |       |   |   |
| **Denominator  for net income per OP Unit – basic and diluted:**                                         |       |                                       |       |   |   |
| Denominator for  net income per OP Unit – basic                                                          |       | 287,079                                    |       | 311,697 |   |
| Effect of  dilutive securities:                                                                               |       |                                       |       |   |   |
| Dilution for OP  Units issuable upon assumed exercise/vesting of EQR’s   share options/restricted shares |       | 2,238                                      |       | 4,568 |   |
|                                                                                                          |       |                                       |       |   |   |
| Denominator for  net income per share – diluted                                                          |       | 289,317                                    |       | 316,265 |   |
|                                                                                                          |       |                                       |       |   |   |
| Net income per  share – basic                                                                            |       | $                                          | 0.51       |   | $ | 0.41 |   |
|                                                                                                          |       |                                       |       |   |   |
| Net income per  share – diluted                                                                          |       | $                                          | 0.51       |   | $ | 0.40 |   |
|                                                                                                          |       |                                       |       |   |   |
| **Net  income per OP Unit – basic:**                                                                     |       |                                       |       |   |   |
| Income from  continuing operations available to OP Units                                                      |       | $                                          | 0.083      |   | $ | 0.005 |   |
| Discontinued  operations, net                                                                                 |       | 0.426                                      |       | 0.402 |   |
|                                                                                                          |       |                                       |       |   |   |
| Net income per  OP Unit – basic                                                                          |       | $                                          | 0.509      |   | $ | 0.407 |   |
|                                                                                                          |       |                                       |       |   |   |
| **Net  income per OP Unit – diluted:**                                                                   |       |                                       |       |   |   |
| Income from  continuing operations available to OP Units                                                      |       | $                                          | 0.083      |   | $ | 0.005 |   |
| Discontinued  operations, net                                                                                 |       | 0.422                                      |       | 0.396 |   |
|                                                                                                          |       |                                       |       |   |   |
| Net income per  OP Unit – diluted                                                                        |       | $                                          | 0.505      |   | $ | 0.401 |   |

 

17

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* *

*Convertible preference interests/units that could beconverted into 444,474 and 853,151 weighted average Common Shares (which wouldbe contributed to the Operating Partnership in exchange for OP Units) for the quartersended March 31, 2008 and 2007, respectively, were outstanding but were notincluded in the computation of diluted earnings per OP Unit because the effectswould be anti-dilutive.  In addition, theeffect of the Common Shares/OP Units that could ultimately be issued upon theconversion/exchange of the Operating Partnership’s $650.0 million exchangeablesenior notes was not included in the computation of diluted earnings per OPUnit because the effects would be anti-dilutive.*

 

**13.**                               DiscontinuedOperations

 

The Operating Partnership has presented separately asdiscontinued operations in all periods the results of operations for allconsolidated assets disposed of on or after January 1, 2002 (the date ofadoption of SFAS No. 144), all operations related to condominiumconversion properties effective upon their respective transfer into a TRS andall properties held for sale, if any.

 

Thecomponents of discontinued operations are outlined below and include theresults of operations for the respective periods that the Operating Partnershipowned such assets during the quarters ended March 31, 2008 and 2007 (amountsin thousands).

 
| ** **                                    | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **REVENUES**                                  |       |                                       |       |   |   |
| Rental income                                 |       | $                                          | 5,330      |   | $ | 58,065 |   |
| Total revenues                                |       | 5,330                                      |       | 58,065 |   |
|                                          |       |                                       |       |   |   |
| **EXPENSES  (1)**                             |       |                                       |       |   |   |
| Property and  maintenance                     |       | 4,124                                      |       | 19,284 |   |
| Real estate  taxes and insurance              |       | 637                                        |       | 7,766 |   |
| Property  management                          |       | (26                                        | )          | 203 |   |
| Depreciation                                  |       | 982                                        |       | 15,742 |   |
| General and administrative                    |       | 3                                          |       | 2 |   |
| Impairment                                    |       | 56                                         |       | — |   |
| Total expenses                                |       | 5,776                                      |       | 42,997 |   |
|                                          |       |                                       |       |   |   |
| Discontinued  operating (loss) income         |       | (446                                       | )          | 15,068 |   |
|                                          |       |                                       |       |   |   |
| Interest and  other income                    |       | (17                                        | )          | 93 |   |
| Interest (2):                                 |       |                                       |       |   |   |
| Expense  incurred, net                        |       | (22                                        | )          | (1,310 | ) |
| Amortization of  deferred financing costs     |       | —                                     |       | (343 | ) |
| Income and other  tax benefit (expense)       |       | 200                                        |       | (179 | ) |
|                                          |       |                                       |       |   |   |
| Discontinued  operations                      |       | (285                                       | )          | 13,329 |   |
| Net gain on  sales of discontinued operations |       | 122,517                                    |       | 111,946 |   |
|                                          |       |                                       |       |   |   |
| Discontinued  operations, net                 |       | $                                          | 122,232    |   | $ | 125,275 |   |

 

----

*(1)**       Includes expenses paid in the current period for properties sold or heldfor sale in prior periods related to the Operating Partnership’s period ofownership.*

 

*(2)**       Includes only interest expense specific to secured mortgage notes payablefor properties sold and/or held for sale.*

 

Forthe properties sold during the quarter ended March 31, 2008 (excludingcondominium conversion properties), the investment in real estate, net ofaccumulated depreciation balance at December 31, 2007 was $147.9 million.

 

Thenet real estate basis of the Operating Partnership’s condominium conversionproperties owned by the TRS and included in discontinued operations (excludes oneof the Operating Partnership’s halted conversions as it is now held for use),which were included in investment in real estate, net in the consolidatedbalance sheets, was $108.0 million and $87.2 million at March 31, 2008 andDecember 31, 2007, respectively.

 

18

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**14.**                               Commitmentsand Contingencies

 

The Operating Partnership, as an owner of realestate, is subject to various Federal, state and local environmental laws.  Compliance by the Operating Partnership withexisting laws has not had a material adverse effect on the OperatingPartnership.  However, the OperatingPartnership cannot predict the impact of new or changed laws or regulations onits current properties or on properties that it may acquire in the future.

 

The Operating Partnership is party to a housing discriminationlawsuit brought by a non-profit civil rights organization in April 2006 inthe U.S. District Court for the District of Maryland.  The suit alleges that the OperatingPartnership designed and built approximately 300 of its properties in violationof the accessibility requirements of the Fair Housing Act and Americans with DisabilitiesAct.  The suit seeks actual and punitivedamages, injunctive relief (including modification of non-compliantproperties), costs and attorneys’ fees.  TheOperating Partnership believes it has a number of viable defenses, includingthat a majority of the named properties were completed before the operativedates of the statutes in question and/or were not designed or built by the OperatingPartnership.  Accordingly, the OperatingPartnership is defending the suit vigorously. Due to the pendency of the Operating Partnership’s defenses and theuncertainty of many other critical factual and legal issues, it is not possibleto determine or predict the outcome of the suit and as a result, no amountshave been accrued at March 31, 2008. While no assurances can be given, the Operating Partnership does notbelieve that the suit, if adversely determined, would have a material adverseeffect on the Operating Partnership.

 

The Operating Partnership does not believe thereis any other litigation pending or threatened against it that, individually orin the aggregate, reasonably may be expected to have a material adverse effecton the Operating Partnership.

 

During the years ended December 31, 2005 and 2004, the OperatingPartnership established a reserve and recorded a corresponding expense, net ofinsurance receivables, for estimated uninsured property damage at certain ofits properties caused by various hurricanes in each respective year.  During the quarter ended March 31, 2008,the Operating Partnership received the remaining accrued receivable of $1.8 million.  As of March 31, 2008, the remainingreserve balance is $0.7 million and is included in other liabilities on theconsolidated balance sheets.

 

**As of March 31,2008, the Operating Partnership has 13 projects totaling 4,484 units in variousstages of development with estimated completion dates ranging through June 30,2011.  Some of the projects are developedsolely by the Operating Partnership, while others are co-developed with variousthird party development partners. The development venture agreements withpartners are primarily deal-specific, with differing terms regardingprofit-sharing, equity contributions, returns on investment, buy-sellagreements and other customary provisions. The partner is most often the “general”or “managing” partner of the development venture.  The typical buy-sell arrangements containappraisal rights and provisions that provide the right, but not the obligation,for the Operating Partnership to acquire the partner’s interest in the projectat fair market value upon the expiration of a negotiated time period (typicallytwo to five years after substantial completion of the project).  However, the buy-sell provisions with onepartner covering three projects does require the Operating Partnership topurchase the partner’s interest in the projects at fair market value five yearsfollowing the receipt of the final certificate of occupancy on the lastdeveloped property (in Q1 2009).**

** **

**15.**                               ReportableSegments

 

Operating segments aredefined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by senior management.  Senior management decides how resources areallocated and assesses performance on a monthly basis.

 

19

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The Operating Partnership’s primary business is owning, managing, andoperating multifamily residential properties, which include the generation ofrental and other related income through the leasing of apartment units to residents.  Senior management evaluates the performanceof each of our apartment communities individually and geographically, and bothon a same store and non-same store basis; however, each of our apartmentcommunities generally has similar economic characteristics, residents, productsand services.  The Operating Partnership’soperating segments have been aggregated by geography in a manner identical tothat which is provided to its chief operating decision maker.

 

The OperatingPartnership’s fee and asset management, development (including FIN No. 46partially owned properties), condominium conversion and corporate housing(Equity Corporate Housing or “ECH”) activities are immaterial and do notindividually meet the threshold requirements of a reportable segment asprovided for in SFAS No. 131 and as such, have been aggregated in thetables presented below.

 

All revenues are fromexternal customers and there is no customer who contributed 10% or more of the OperatingPartnership’s total revenues during the quarters ended March 31, 2008 and2007, respectively.

 

Theprimary financial measure for the Operating Partnership’s rental real estatesegment is net operating income (“NOI”), which represents rental income less:1) property and maintenance expense; 2) real estate taxes and insuranceexpense; and 3) property management expense (all as reflected in theaccompanying consolidated statements of operations).  The Operating Partnership believes that NOIis helpful to investors as a supplemental measure of the operating performanceof a real estate company because it is a direct measure of the actual operatingresults of the Operating Partnership’s apartment communities.  Current year NOI is compared to prior yearNOI and current year budgeted NOI as a measure of financial performance.  The following table presents NOI for each segmentfrom our rental real estate specific to continuing operations for the quartersended March 31, 2008 and 2007, respectively, as well as total assets forthe quarter ended March 31, 2008 (amounts in thousands):

 
| ** **                         | ** ** | **Quarter Ended March 31, 2008** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **Northeast**                                        | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **Southwest** | ** ** | **Other (3)** | ** ** | **Total** | ** ** |
| Rental income:                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Same store (1)                     |       | $                                                    | 128,955    |   | $ | 95,320 |   | $ | 97,753 |   | $ | 126,484 |   | $ | — |   | $ | 448,512 |   |
| Non-same  store/other (2) (3) |       | 16,764                                               |       | 7,684 |   | 14,238 |   | 7,659 |   | 25,661 |   | 72,006 |   |
| Total rental  income               |       | 145,719                                              |       | 103,004 |   | 111,991 |   | 134,143 |   | 25,661 |   | 520,518 |   |
|                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Same store (1)                     |       | 50,017                                               |       | 33,616 |   | 40,118 |   | 44,140 |   | — |   | 167,891 |   |
| Non-same  store/other (2) (3) |       | 7,369                                                |       | 3,571 |   | 6,140 |   | 3,589 |   | 26,024 |   | 46,693 |   |
| Total operating  expenses          |       | 57,386                                               |       | 37,187 |   | 46,258 |   | 47,729 |   | 26,024 |   | 214,584 |   |
|                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| NOI:                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Same store (1)                     |       | 78,938                                               |       | 61,704 |   | 57,635 |   | 82,344 |   | — |   | 280,621 |   |
| Non-same  store/other (2) (3) |       | 9,395                                                |       | 4,113 |   | 8,098 |   | 4,070 |   | (363 | ) | 25,313 |   |
| Total NOI                          |       | $                                                    | 88,333     |   | $ | 65,817 |   | $ | 65,733 |   | $ | 86,414 |   | $ | (363 | ) | $ | 305,934 |   |
|                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                       |       | $                                                    | 4,581,924  |   | $ | 2,748,192 |   | $ | 3,015,852 |   | $ | 3,185,010 |   | $ | 2,479,967 |   | $ | 16,010,945 |   |

 

----

(1)               Same store includesproperties owned for all of both periods ending March 31, 2008 and March 31,2007 which represented 121,826 units.

 

(2)               Non-same store includesproperties acquired after January 1, 2007.

 

(3)               Other includes ECH,development, condominium conversion overhead of $0.7 million and othercorporate operations.  Also reflects a$3.2 million elimination of rental income recorded in Northeast, Northwest,Southeast and Southwest operating segments related to ECH.

 

20

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| ** **                         | ** ** | **Quarter Ended March 31, 2007** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **Northeast**                                        | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **Southwest** | ** ** | **Other (3)** | ** ** | **Total** | ** ** |
| Rental income:                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Same store (1)                     |       | $                                                    | 124,047    |   | $ | 89,030 |   | $ | 97,699 |   | $ | 122,575 |   | $ | — |   | $ | 433,351 |   |
| Non-same  store/other (2) (3) |       | 6,702                                                |       | 874 |   | 9,565 |   | 3,280 |   | 19,810 |   | 40,231 |   |
| Total rental  income               |       | 130,749                                              |       | 89,904 |   | 107,264 |   | 125,855 |   | 19,810 |   | 473,582 |   |
|                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses:               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Same store (1)                     |       | 47,741                                               |       | 33,580 |   | 39,714 |   | 44,184 |   | — |   | 165,219 |   |
| Non-same  store/other (2) (3) |       | 4,279                                                |       | 405 |   | 3,307 |   | 1,920 |   | 28,913 |   | 38,824 |   |
| Total operating  expenses          |       | 52,020                                               |       | 33,985 |   | 43,021 |   | 46,104 |   | 28,913 |   | 204,043 |   |
|                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| NOI:                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Same store (1)                     |       | 76,306                                               |       | 55,450 |   | 57,985 |   | 78,391 |   | — |   | 268,132 |   |
| Non-same  store/other (2) (3) |       | 2,423                                                |       | 469 |   | 6,258 |   | 1,360 |   | (9,103 | ) | 1,407 |   |
| Total NOI                          |       | $                                                    | 78,729     |   | $ | 55,919 |   | $ | 64,243 |   | $ | 79,751 |   | $ | (9,103 | ) | $ | 269,539 |   |

 

----

(1)               Same store includesproperties owned for all of both periods ending March 31, 2008 and March 31,2007 which represented 121,826 units.

 

(2)               Non-same store includesproperties acquired after January 1, 2007.

 

(3)               Other includes ECH,development, condominium conversion overhead of $1.2 million and othercorporate operations.  Also reflects a$4.2 million elimination of rental income recorded in Northeast, Northwest,Southeast and Southwest operating segments related to ECH.

 

Note:  Marketsincluded in the above geographic segments are as follows:

 

(a)                                  Northeast – New England (excluding Boston),Boston, New York Metro, DC Northern Virginia and Suburban Maryland.

(b)                                 Northwest – Central Valley, Denver, Portland,San Francisco Bay Area and Seattle/Tacoma.

(c)                                  Southeast – Atlanta, Jacksonville, Orlando, Raleigh/Durham,South Florida and Tampa/Ft. Myers.

(d)                                 Southwest – Albuquerque, Austin, Dallas/Ft.Worth, Inland Empire, Los Angeles, Minneapolis/St. Paul, Orange County, Phoenix,San Diego and Tulsa.

 

The following table presents a reconciliation of NOIfrom our rental real estate specific to continuing operations for the quartersended March 31, 2008 and 2007,respectively (amounts in thousands):

 

| ** **                               | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Rental income                            |       | $                                          | 520,518    |   | $ | 473,582 |   |
| Property and  maintenance expense        |       | (137,491                                   | )          | (126,781 | ) |
| Real estate  taxes and insurance expense |       | (55,925                                    | )          | (52,420 | ) |
| Property  management expense             |       | (21,168                                    | )          | (24,842 | ) |
| Total operating  expenses                |       | (214,584                                   | )          | (204,043 | ) |
| Net operating  income                    |       | $                                          | 305,934    |   | $ | 269,539 |   |

 

**16.****                               Subsequent Events/Other**

 

*Subsequent Events*

 

Subsequentto March 31, 2008 and through May 1, 2008, the Operating Partnership sold one apartmentproperty consisting of 115 units for $12.3 million (excluding condominiumunits).

 

*Other*

 

The Operating Partnershipincurred impairment losses of approximately $0.2 million (includingdiscontinued operations) for both the quarters ended March 31, 2008 and2007 related to the write-off of

 

21

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various pursuit and out-of-pocket costs for terminated acquisition,disposition (including halted condominium conversions) and developmenttransactions.

 

During the quarter ended March 31,2008, the Operating Partnership received $0.4 million for the settlement of insurancelitigation claims from 2000 through 2002 and $0.2 million for a breach ofcontract claim against the former owner of a property, both of which wererecorded as interest and other income. In addition, the Operating Partnership recognized $0.3 million offorfeited deposits for various terminated transactions, which are included ininterest and other income.

 

During the quarter ended March 31,2008, the Operating Partnership recorded approximately $0.2 million and $1.7million of additional property management expense and general andadministrative expense, respectively, related to cash severance for variousemployees.

 

22

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**Item 2.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

** **

For further information including definitions for capitalized terms notdefined herein, refer to the consolidated financial statements and footnotesthereto included in the Operating Partnership’s annual report on Form 10-Kfor the year ended December31, 2007.

 

**Forward-looking Statements**

 

Forward-looking statements in this report are intended to be madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  These statements arebased on current expectations, estimates, projections and assumptions made bymanagement.  While the OperatingPartnership’s management believes the assumptions underlying itsforward-looking statements are reasonable, such information is inherentlysubject to uncertainties and may involve certain risks, which could causeactual results, performance, or achievements of the Operating Partnership todiffer materially from anticipated future results, performance or achievementsexpressed or implied by such forward-looking statements.  Many of these uncertainties and risks aredifficult to predict and beyond management’s control.  Forward-looking statements are not guaranteesof future performance, results or events. The Operating Partnership assumes no obligation to update or supplementforward-looking statements because of subsequent events.   Factors that might cause such differencesinclude, but are not limited to the following:

 

·                  We intend toactively acquire and develop multifamily properties for rental operationsand/or conversion into condominiums, as well as upgrade and sell existingproperties as individual condominiums. We may underestimate the costs necessary to bring an acquired or developmentproperty up to standards established for its intended market position.  Additionally, we expect that other major realestate investors with significant capital will compete with us for attractiveinvestment opportunities or may also develop properties in markets where wefocus our development efforts.  Thiscompetition may increase prices for multifamily properties or decrease theprice at which we expect to sell individual properties.  We may not be in a position or have theopportunity in the future to make suitable property acquisitions on favorableterms.  We also plan to develop moreproperties ourselves in addition to co-investing with our development partnersfor either the rental or condominium market, depending on opportunities in eachsubmarket.  This may increase the overalllevel of risk associated with our developments. The total number of development units, cost of development and estimatedcompletion dates are subject to uncertainties arising from changing economicconditions (such as the cost of labor and construction materials), competitionand local government regulation;

 

·                  Sources ofcapital to the Operating Partnership or labor and materials required formaintenance, repair, capital expenditure or development are more expensive thananticipated;

 

·                  Occupancy levelsand market rents may be adversely affected by national and local economic andmarket conditions including, without limitation, new construction ofmultifamily housing, slow employment growth, availability of low interestmortgages for single-family home buyers and the potential for geopoliticalinstability, all of which are beyond the Operating Partnership’s control; and

 

·                  Additionalfactors as discussed in Part I of the Annual Report on Form 10-K,particularly those under “Risk Factors”.

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  The Operating Partnership undertakes noobligation to publicly release any revisions to these forward-lookingstatements, which may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  Forward-looking statements and relateduncertainties are also included in Notes 5 and 11 in the Notes to ConsolidatedFinancial Statements in this report.

 

23

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**Overview**

 

ERP Operating Limited Partnership (“ERPOP”), an Illinois limitedpartnership, was formed in May 1993 to conduct the multifamily residentialproperty business of Equity Residential (“EQR”).  EQR, a Maryland real estate investment trust (“REIT”)formed in March 1993, is an S&P 500 company focused on theacquisition, development and management of high quality apartment properties intop United States growth markets.  EQRhas elected to be taxed as a REIT.

 

EQR is one of the largest publicly traded real estate companies and isthe largest publicly traded owner of multifamily properties (based on theaggregate market value of its outstanding Common Shares, the number ofapartment units wholly owned and total revenues earned).  The Operating Partnership’s corporateheadquarters are located in Chicago, Illinois and the Operating Partnershipalso operates approximately 35 property management offices throughout theUnited States.  The Operating Partnershiphas approximately 4,700 employees who provide real estate operations, leasing,legal, financial, accounting, acquisition, disposition, development and othersupport functions.

 

***BusinessObjectives and Operating Strategies***

** **

The OperatingPartnership seeks to maximize current income, capital appreciation of eachproperty and the total return for its shareholders.  The Operating Partnership’s strategy foraccomplishing these objectives includes:

 

·                  Leveraging our size andscale in four critical ways:

 

·                  Investing in apartmentcommunities located in strategically targeted markets, to maximize our totalreturn on an enterprise level;

·                  Meeting the needs ofour residents by offering a wide array of product choices and a commitment toservice;

·                  Engaging, retaining,and attracting the best employees by providing them with the education,resources and opportunities to succeed; and

·                  Sharing resources,customers and best practices in property management and across the enterprise.

 

·                  Owning a highlydiversified portfolio by investing in target markets defined by a combinationof the following criteria:

 

·                  High barrier-to-entry(low supply);

·                  Strong economicpredictors (high demand); and

·                  Attractive quality oflife (high demand and retention).

 

·                  Giving residentsreasons to stay with the Operating Partnership by providing a range of productoptions available in our diversified portfolio and by enhancing theirexperience through our employees and our services.

 

·                  Being open and responsive to market realitiesto take advantage of investment opportunities that align with our long-termvision.

 

***Acquisition, Development andDisposition Strategies***

 

The OperatingPartnership anticipates that future property acquisitions, developments anddispositions will occur within the United States.  Acquisitions and developments may be financedfrom various sources of capital, which may include retained cash flow, issuanceof additional equity and debt securities, sales of properties, joint ventureagreements and collateralized and uncollateralized borrowings. In addition, the

 

24

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Operating Partnership may acquire properties in transactions thatinclude the issuance of limited partnership interests in the OperatingPartnership (“OP Units”) as consideration for the acquired properties. Suchtransactions may, in certain circumstances, enable the sellers to defer, inwhole or in part, the recognition of taxable income or gain that mightotherwise result from the sales.  Inaddition, ERPOP may acquire or develop multifamily properties specifically toconvert directly into condominiums as well as upgrade and sell existingproperties as individual condominiums. ERPOP may also acquire land parcels to hold and/or sell based on marketopportunities.

 

Whenevaluating potential acquisitions, developments and dispositions, the OperatingPartnership generally considers the following factors:

 

·                  strategically targetedmarkets;

·                  income levels and employment growth trends inthe relevant market;

·                  employment and household growth and netmigration of the relevant market’spopulation;

·                  barriers to entry that would limitcompetition (zoning laws, building permit availability, supply of undevelopedor developable real estate, local building costs and construction costs, amongother factors);

·                  the location,construction quality, condition and design of the property;

·                  the current andprojected cash flow of the property and the ability to increase cash flow;

·                  the potential forcapital appreciation of the property;

·                  the terms of residentleases, including the potential for rent increases;

·                  the potential foreconomic growth and the tax and regulatory environment of the community in whichthe property is located;

·                  the occupancy anddemand by residents for properties of a similar type in the vicinity (theoverall market and submarket);

·                  the prospects forliquidity through sale, financing or refinancing of the property;

·                  the benefits ofintegration into existing operations;

·                  purchase prices and yields of availableexisting stabilized properties, if any;

·                  competition fromexisting multifamily properties, residential properties under development andthe potential for the construction of new multifamily properties in the area;and

·                  opportunistic sellingbased on demand and price of high quality assets, including condominiumconversions.

 

**The Operating Partnership generally reinvests the proceedsreceived from property dispositions primarily to achieve its acquisition anddevelopment strategies and at times to fund its share repurchaseactivities.  In addition, when feasible,the Operating Partnership may structure these transactions as tax-deferredexchanges.**

** **

**Results of Operations**

 

In conjunctionwith our business objectives and operating strategy, the Operating Partnershiphas continued to invest or recycle its capital investment in apartmentcommunities located in strategically targeted markets during the quarter ended March 31, 2008.  In summary, we:

 

·                  Acquired $41.9 million of properties consisting of 2 properties and 171 units,both of which we deem to be in our strategic targeted markets; and

·                  Sold $271.6 million of properties consisting of 15 properties and 3,317units, as well as 41 condominium units for $9.4 million.

 

The Operating Partnership’sprimary financial measure for evaluating each of its apartment communities isnet operating income (“NOI”).  NOIrepresents rental income less property and maintenance expense, real estate taxand insurance expense and property management expense.  The Operating

 

25

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Partnership believes thatNOI is helpful to investors as a supplemental measure of the operatingperformance of a real estate company because it is a direct measure of theactual operating results of the Operating Partnership’s apartment communities.

 

Properties that the OperatingPartnership owned for all of both of the quarters ended March 31, 2008 and2007 (the “First Quarter 2008 Same Store Properties”), which represented 121,826units, impacted the Operating Partnership’s results of operations.  The First Quarter 2008 Same Store Propertiesare discussed in the following paragraphs.

 

The Operating Partnership’s acquisition, dispositionand completed development activities also impacted overall results ofoperations for the quarters ended March 31, 2008 and 2007.  The impacts of these activities are discussedin greater detail in the following paragraphs.

 

***Comparison ofthe quarter ended March 31, 2008 to the quarter ended March 31, 2007***

 

Forthe quarter ended March 31, 2008,income from continuing operations increased by approximately $18.5 million whencompared to the quarter ended March 31, 2007.  The increase incontinuing operations is discussed below.

 

Revenuesfrom the First Quarter 2008 Same Store Properties increased $15.2 millionprimarily as a result of higher rental rates charged to residents.  Expenses from the First Quarter 2008 Same StoreProperties increased $2.7 million primarily due to higher utilities, payrolland real estate taxes.  The followingtables provide comparative same store results and statistics for the First Quarter2008 Same Store Properties:

** **

**FirstQuarter 2008 vs. First Quarter 2007**

**Quarterover Quarter Same Store Results/Statistics**

**$in Thousands (except for Average Rental Rate) – 121,826 Same Store Units**

 
| ** **      | ** ** | **Results**  | ** ** | **Statistics** | ** ** |
|-----------------|------------|--------------|------------|----------------|------------|
| **Description** | ** ** | **Revenues** | ** ** | **Expenses**   | ** ** | **NOI** | ** ** | **Average  Rental  Rate (1)** | ** ** | **Occupancy** | ** ** | **Turnover** | ** ** |
| Q1 2008         |       | $            | 448,512    |           | $          | 167,891 |   | $ | 280,621 |   | $ | 1,302 |   | 94.4 | % | 13.7 | % |
| Q1 2007         |       | $            | 433,351    |           | $          | 165,219 |   | $ | 268,132 |   | $ | 1,253 |   | 94.8 | % | 13.5 | % |
| Change          |       | $            | 15,161     |           | $          | 2,672 |   | $ | 12,489 |   | $ | 49 |   | (0.4 | )% | 0.2 | % |
| Change          |       | 3.5          | %          | 1.6            | %          | 4.7 | % | 3.9 | % |   |   |   |   |

** **

----

(1)  Averagerental rate is defined as total rental revenues divided by the weighted averageoccupied units for the period.

 

The following table presents a reconciliation of operatingincome per the consolidated statements of operations to NOI for the FirstQuarter 2008 Same Store Properties:

 

| ** **                        | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **                        | ** ** | **(Amounts in thousands)**                 | ** ** |
| ** **                        | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Operating income                  |       | $                                          | 146,847    |   | $ | 120,928 |   |
| Adjustments:                      |       |                                       |       |   |   |
| Non-same store  operating results |       | (25,313                                    | )          | (1,407 | ) |
| Fee and asset  management revenue |       | (2,294                                     | )          | (2,267 | ) |
| Fee and asset  management expense |       | 2,183                                      |       | 2,341 |   |
| Depreciation                      |       | 146,598                                    |       | 138,932 |   |
| General and  administrative       |       | 12,481                                     |       | 9,369 |   |
| Impairment                        |       | 119                                        |       | 236 |   |
|                              |       |                                       |       |   |   |
| Same store NOI                    |       | $                                          | 280,621    |   | $ | 268,132 |   |

 

26

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For properties that the Operating Partnershipacquired prior to January 1, 2007 and expects to continue to own through December 31,2008, the Operating Partnership anticipates the following same store resultsfor the full year ending December 31, 2008:

 

| **2008 Same Store Assumptions** |
|------------------------------------------------|
| Physical occupancy                             | ** ** | 94.5% |
| Revenue change                                 | ** ** | 3.00% to 4.00% |
| Expense change                                 | ** ** | 2.50% to 3.25% |
| NOI change                                     | ** ** | 3.00% to 4.75% |

 

These 2008 assumptions are based on currentexpectations and are forward-looking.

 

Non-same store operating results increased $23.9 millionand consist primarily of properties acquired in calendar years 2008 and 2007 aswell as operations from completed development properties and our corporatehousing business.

 

See also Note 15 in the Notes to ConsolidatedFinancial Statements for additional discussion regarding the OperatingPartnership’s segment disclosures.

 

Fee and asset management revenues, net of fee and assetmanagement expenses, increased $0.2 million primarily due to an increase in revenueearned on the management of our military housing venture at Fort Lewis as wellas a decrease in asset management expenses from managing fewer properties forthird parties and unconsolidated entities. As of March 31, 2008 and 2007, the Operating Partnership managed 14,472and 15,025 units, respectively, primarily for unconsolidated entities and ourmilitary housing venture at Fort Lewis.

 

Propertymanagement expenses from continuing operations include off-site expensesassociated with the self-management of the Operating Partnership’s propertiesas well as management fees paid to any third party management companies.  These expenses decreased by approximately $3.7million or 14.8%.  This decrease isprimarily attributable to lower overall payroll-related costs as a result of adecrease in the number of properties in the Operating Partnership’s portfolio,as well as a decrease in third party management fees.

 

Depreciation expense from continuing operations,which includes depreciation on non-real estate assets, increased $7.7 millionprimarily as a result of additional depreciation expense on properties acquiredin 2007 and capital expenditures for all properties owned.

 

General and administrativeexpenses from continuing operations, which include corporate operatingexpenses, increased $3.1 million primarily as a result of a $1.7 millionincrease in severance related costs in 2008 (see Note 16) as well as a $1.6million expense recovery recorded for the quarter ended March 31, 2007 relatedto a certain lawsuit in Florida.  The Operating Partnership anticipates thatgeneral and administrative expenses will approximate $48.0 million to $50.0million for the year ending December 31, 2008.  The above assumption is based on currentexpectations and is forward-looking.

 

Impairment from continuingoperations decreased $0.1 million primarily as a result of the write-off of variouspursuit and out-of-pocket costs for a terminated development transaction duringthe quarter ended March 31, 2007, partially offset by the write-off ofvarious deferred sales costs on halted condominium conversions during thequarter ended March 31, 2008

 

Interestand other income from continuing operations increased $0.9 million primarily asa result of an increase in forfeited deposits and litigation settlementproceeds, partially offset by a decrease in interest on cash and restricteddeposits.  The Operating Partnershipanticipates that interest and other income will approximate $5.0 million to $10.0million for the year ending December 31, 2008.  The above assumption is based on currentexpectations and is forward-looking.

 

27

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Interestexpense from continuing operations, including amortization of deferredfinancing costs, increased approximately $6.5****million primarily as a result of higher overall debt levelsoutstanding due to the Company’s 2007 share repurchase activity and itspre-funding of its 2008 debt maturities, partially offset by lower overalleffective interest rates.  During the quarterended March 31, 2008, the OperatingPartnership capitalized interest costs of approximately $14.7 million ascompared to $7.9 million for the quarter ended March 31, 2007. Thiscapitalization of interest primarily relates to consolidated projects underdevelopment.  The effective interest coston all indebtedness for the quarter ended March 31, 2008 was 5.61% as compared to 5.93% for the quarterended March 31, 2007.  The Operating Partnership anticipates thatinterest expense (including discontinued operations) will approximate $470.0million to $490.0 million for the year ending December 31, 2008.  The above assumption is based on currentexpectations and is forward-looking.

 

Incomeand other tax expense from continuing operations increased $2.3 millionprimarily due to a change in the estimate for Texas state taxes.  The Operating Partnership anticipates thatincome and other tax expense will approximate $5.0 million to $6.0 million forthe year ending December 31, 2008.  Theabove assumption is based on current expectations and is forward-looking.

 

Loss from investments in unconsolidated entities decreased$0.1 million as compared to the quarter ended March 31, 2007 due to improvedoperating performance at the Operating Partnership’s partially ownedunconsolidated entities.

 

Discontinued operations, net decreased approximately $3.0million between the periods under comparison. This decrease is primarily due to the mix of those properties sold duringthe quarter ended March 31, 2008 as compared to the same period in 2007and the operations of those properties. See Note 13 in the Notes to Consolidated Financial Statements forfurther discussion.

 

**Liquidity and Capital Resources**

 

As of January 1, 2008, the OperatingPartnership had approximately $50.8 million of cash and cash equivalents and $1.3billion available under its revolving credit facility (net of $80.8 millionwhich was restricted/dedicated to support letters of credit and not availablefor borrowing).  After taking into effectthe various transactions discussed in the following paragraphs and the net cashprovided by operating activities, the Operating Partnership’s cash and cashequivalents balance at March 31, 2008 was approximately $502.6 millionand the amount available on the Operating Partnership’s revolving creditfacility was $1.4 billion (net of $77.5 million which was restricted/dedicatedto support letters of credit and not available for borrowing).  The significant increase in the OperatingPartnership’s cash and cash equivalents balance since December 31, 2007 isa direct result of its decision to pre-fund its 2008 debt maturities with theclosing of a $500.0 million secured mortgage pool in March 2008.  See Note 10 inthe Notes to Consolidated Financial Statements for further discussion.

 

During the quarter ended March 31, 2008, the Operating Partnershipgenerated proceeds from various transactions, which included the following:

 

·                  Disposed of 17 properties and various individualcondominium units, receiving net proceeds of approximately $284.3 million;

·                  Obtained $563.1 million in new mortgage financing andterminated three forward starting swaps designated to hedge the first $150.0million of one of the loan issuances, making payments of $13.2 million; and

·                  Issued approximately 0.2 million OP Units and receivednet proceeds of $5.8 million.

 

During the quarterended March 31, 2008,the above proceeds were primarily utilized to:

 

·                  Invest $125.9 million primarily indevelopment projects;

·                  Acquire two properties, utilizing cash of$41.9 million;

·                  Repurchase 0.2 million OP Units andsettle 0.1 million OP Units, utilizing cash of $10.9 million (see Note 3); and

 

28

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·                  Repay $74.5 million of mortgage loans.

 

Depending on its analysisof market prices, economic conditions, and other opportunities for theinvestment of available capital, the Company may repurchase its Common Sharespursuant to its existing share repurchase program authorized by the Board ofTrustees.  EQR repurchased $6.3 million (171,161shares at an average price per share of $36.78) of its Common Shares during thequarter ended March 31, 2008.  Concurrent with these transactions, theOperating Partnership repurchased and retired 171,161 OP Units previouslyissued to EQR. As of March 31, 2008, EQR had authorization to repurchasean additional $469.3 million of its shares. See Note 3 in the Notes to Consolidated Financial Statements for furtherdiscussion.

 

The OperatingPartnership’s total debt summary and debt maturity schedules as of March 31, 2008 are as follows:

 

**Debt Summary as of March 31, 2008**

**(Amountsin thousands)**

 
| ** **                                  | ** ** | **Amounts (1)** | ** ** | **% of Total** | ** ** | **Weighted**

**Average**

**Rates (1)** | ** ** | **Weighted**

**Average**

**Maturities**

**(years)** | ** ** |
|---------------------------------------------|------------|-----------------|------------|----------------|------------|------------------------------------------|------------|--------------------------------------------------------|------------|
| Secured                                     |       | $               | 4,096,357  |           | 41.5       | %                                        | 5.23       | %                                                      | 7.9        |   |
| Unsecured                                   |       | 5,767,075       |       | 58.5           | %          | 5.59                                     | %          | 6.0                                                    |       |
| Total                                       |       | $               | 9,863,432  |           | 100.0      | %                                        | 5.45       | %                                                      | 6.8        |   |
|                                        |       |            |       |           |       |                                     |       |                                                   |       |
| Fixed Rate Debt:                            |       |            |       |           |       |                                     |       |                                                   |       |
| Secured –  Conventional                |       | $               | 2,935,779  |           | 29.7       | %                                        | 6.06       | %                                                      | 5.8        |   |
| Unsecured –  Public/Private            |       | 5,003,070       |       | 50.7           | %          | 5.68                                     | %          | 6.2                                                    |       |
| Unsecured – Tax  Exempt                |       | 111,390         |       | 1.2            | %          | 5.06                                     | %          | 21.1                                                   |       |
| Fixed Rate Debt                             |       | 8,050,239       |       | 81.6           | %          | 5.80                                     | %          | 6.3                                                    |       |
|                                        |       |            |       |           |       |                                     |       |                                                   |       |
| Floating Rate  Debt:                        |       |            |       |           |       |                                     |       |                                                   |       |
| Secured – Conventional                 |       | 533,665         |       | 5.4            | %          | 4.01                                     | %          | 5.0                                                    |       |
| Secured – Tax  Exempt                  |       | 626,913         |       | 6.4            | %          | 2.86                                     | %          | 20.8                                                   |       |
| Unsecured –  Public/Private            |       | 652,615         |       | 6.6            | %          | 5.10                                     | %          | 2.2                                                    |       |
| Unsecured –  Revolving Credit Facility |       | —          |       | —         |       | 4.29                                     | %          | 3.9                                                    |       |
| Floating Rate  Debt                         |       | 1,813,193       |       | 18.4           | %          | 4.01                                     | %          | 9.2                                                    |       |
|                                        |       |            |       |           |       |                                     |       |                                                   |       |
| Total                                       |       | $               | 9,863,432  |           | 100.0      | %                                        | 5.45       | %                                                      | 6.8        |   |

 

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(1)  Net of the effect of any derivative instruments.  Weighted average rates are for the quarterended March 31, 2008.

 

Note: The Operating Partnership capitalized interest of approximately $14.7million and $7.9 million for the quarters ended March 31, 2008 and 2007,respectively.

 

29

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**Debt Maturity Schedule as of March 31, 2008**

**(Amounts in thousands)**

 
| **Year**      | ** ** | **Fixed  Rate (1)** | ** ** | **Floating  Rate (1)** | ** ** | **Total** | ** ** | **% of Total** | ** ** | **Weighted Average   Rates on Fixed  Rate Debt (1)** | ** ** | **Weighted Average  Rates on  Total Debt (1)** |   |
|---------------|------------|---------------------|------------|------------------------|------------|-----------|------------|----------------|------------|------------------------------------------------------|------------|------------------------------------------------|--------|
| 2008          |       | $                   | 399,695    |                   | $          | 67,392    |       | $              | 467,087    |                                                 | 4.7        | %                                              | 6.62   | % | 6.32 | % |
| 2009          |       | 458,419             |       | 476,246                |       | 934,665   |       | 9.5            | %          | 6.35                                                 | %          | 5.28                                           | %      |
| 2010 (2) |       | 282,829             |       | 580,960                |       | 863,789   |       | 8.8            | %          | 7.02                                                 | %          | 5.21                                           | %      |
| 2011 (3) |       | 1,519,782           |       | 41,537                 |       | 1,561,319 |       | 15.8           | %          | 5.57                                                 | %          | 5.50                                           | %      |
| 2012          |       | 907,993             |       | —                 |       | 907,993   |       | 9.2            | %          | 6.08                                                 | %          | 6.08                                           | %      |
| 2013          |       | 566,295             |       | —                 |       | 566,295   |       | 5.7            | %          | 5.93                                                 | %          | 5.93                                           | %      |
| 2014          |       | 517,454             |       | —                 |       | 517,454   |       | 5.3            | %          | 5.28                                                 | %          | 5.28                                           | %      |
| 2015          |       | 355,622             |       | —                 |       | 355,622   |       | 3.6            | %          | 6.41                                                 | %          | 6.41                                           | %      |
| 2016          |       | 1,089,323           |       | —                 |       | 1,089,323 |       | 11.0           | %          | 5.32                                                 | %          | 5.32                                           | %      |
| 2017          |       | 803,653             |       | 456                    |       | 804,109   |       | 8.2            | %          | 6.01                                                 | %          | 6.01                                           | %      |
| 2018+         |       | 1,149,174           |       | 646,602                |       | 1,795,776 |       | 18.2           | %          | 5.76                                                 | %          | 5.10                                           | %      |
| Total         |       | $                   | 8,050,239  |                   | $          | 1,813,193 |       | $              | 9,863,432  |                                                 | 100.0      | %                                              | 5.86   | % | 5.54 | % |

 

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(1)   Net of the effect of any derivative instruments.  Weighted average rates are as of March 31,2008.

 

(2)   Includes the Operating Partnership’s $500.0 millionfloating rate term loan facility, which matures on October 5, 2010,subject to two one-year extension options exercisable by the OperatingPartnership.

 

(3)   Includes $650.0 million of 3.85% convertible unsecureddebt with a final maturity of 2026.  Thenotes are callable by the Operating Partnership on or after August 18,2011.  The notes are putable by theholders on August 18, 2011, August 15, 2016 and August 15, 2021.

 

The following table provides a summary of the Operating Partnership’sunsecured debt as of March 31, 2008:

 

30

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**Unsecured Debt Summary as of March 31, 2008**

**(Amounts in thousands)**

 
| ** **                        | ** ** | **Coupon  Rate** | ** ** | **Due  Date** | ** ** | **Face  Amount** | ** ** | **Unamortized  Premium/  (Discount)** | ** ** | **Net  Balance** | ** ** |
|-----------------------------------|------------|------------------|------------|---------------|------------|------------------|------------|---------------------------------------|------------|------------------|------------|
| **Fixed  Rate Notes:**            |       |             |       |          |       |             |       |                                  |       |             |       |
|                              |       | 7.500%           |       | 08/15/08      | (1)        | $                | 130,000    |                                  | $          | —           |       | $ | 130,000 |   |
|                              |       | 4.750%           |       | 06/15/09      | (2)        | 300,000          |       | (331                                  | )          | 299,669          |       |
|                              |       | 6.950%           |       | 03/02/11      |       | 300,000          |       | 2,665                                 |       | 302,665          |       |
|                              |       | 6.625%           |       | 03/15/12      |       | 400,000          |       | (1,162                                | )          | 398,838          |       |
|                              |       | 5.500%           |       | 10/01/12      |       | 350,000          |       | (1,553                                | )          | 348,447          |       |
|                              |       | 5.200%           |       | 04/01/13      |       | 400,000          |       | (592                                  | )          | 399,408          |       |
|                              |       | 5.250%           |       | 09/15/14      |       | 500,000          |       | (397                                  | )          | 499,603          |       |
|                              |       | 6.584%           |       | 04/13/15      |       | 300,000          |       | (782                                  | )          | 299,218          |       |
|                              |       | 5.125%           |       | 03/15/16      |       | 500,000          |       | (426                                  | )          | 499,574          |       |
|                              |       | 5.375%           |       | 08/01/16      |       | 400,000          |       | (1,546                                | )          | 398,454          |       |
|                              |       | 5.750%           |       | 06/15/17      |       | 650,000          |       | (4,705                                | )          | 645,295          |       |
|                              |       | 7.125%           |       | 10/15/17      |       | 150,000          |       | (619                                  | )          | 149,381          |       |
|                              |       | 7.570%           |       | 08/15/26      |       | 140,000          |       | —                                |       | 140,000          |       |
|                              |       | 3.850%           |       | 08/15/26      | (3)        | 650,000          |       | (7,482                                | )          | 642,518          |       |
| Floating Rate  Adjustments        |       |             |       |          | (2)        | (150,000         | )          | —                                |       | (150,000         | )          |
|                              |       |             |       |          |       | 5,020,000        |       | (16,930                               | )          | 5,003,070        |       |
|                              |       |             |       |          |       |             |       |                                  |       |             |       |
| **Fixed  Rate Tax Exempt Notes:** |       |             |       |          |       |             |       |                                  |       |             |       |
|                              |       | 4.750%           |       | 12/15/28      | (1)        | 35,600           |       | —                                |       | 35,600           |       |
|                              |       | 5.200%           |       | 06/15/29      | (1)        | 75,790           |       | —                                |       | 75,790           |       |
|                              |       |             |       |          |       | 111,390          |       | —                                |       | 111,390          |       |
|                              |       |             |       |          |       |             |       |                                  |       |             |       |
| **Floating  Rate Notes:**         |       |             |       |          |       |             |       |                                  |       |             |       |
|                              |       |             |       | 06/15/09      | (2)        | 150,000          |       | —                                |       | 150,000          |       |
| FAS 133  Adjustments – net   |       |             |       |          | (2)        | 2,615            |       | —                                |       | 2,615            |       |
| Term Loan  Facility               |       |             |       | 10/05/10      | (4)        | 500,000          |       | —                                |       | 500,000          |       |
|                              |       |             |       |          |       | 652,615          |       | —                                |       | 652,615          |       |
|                              |       |             |       |          |       |             |       |                                  |       |             |       |
| **Revolving  Credit Facility:**   |       |             |       | 02/28/12      | (5)        | —           |       | —                                |       | —           |       |
|                              |       |             |       |          |       |             |       |                                  |       |             |       |
| **Total  Unsecured Debt**         |       |             |       |          |       | $                | 5,784,005  |                                  | $          | (16,930          | )          | $ | 5,767,075 |   |

 

----

(1)  Notes areprivate.  All other unsecured debt ispublic.

 

(2)  $150.0 million in fair value interest rate swaps converts50% of the 4.750% Notes due June 15, 2009 to a floating interest rate.

 

(3)  Convertible notes mature on August 15, 2026.  The notes are callable by the OperatingPartnership on or after August 18, 2011. The notes are putable by the holders on August 18, 2011, August 15,2016 and August 15, 2021.

 

(4)  Represents the Operating Partnership’s $500.0 millionterm loan facility, which matures on October 5, 2010, subject to twoone-year extension options exercisable by the Operating Partnership.

 

(5)  As of March 31, 2008, there was no amountoutstanding on the Operating Partnership’s $1.5 billion unsecured revolvingcredit facility which matures on February 28, 2012.

 

As of May 1, 2008, anunlimited amount of debt securities remains available for issuance by theOperating Partnership under a registration statement that became automaticallyeffective upon filing with the SEC in June 2006 (under SEC regulationsenacted in 2005, the registration statement automatically expires on June 29,2009 and does not contain a maximum issuance amount).  As of May 1, 2008, $956.5 million inequity securities remains available for issuance by EQR under a registrationstatement the SEC declared effective in February 1998.  Per the terms of ERPOP’s partnershipagreement, EQR contributes the net proceeds of all equity offerings to thecapital of the Operating Partnership in exchange for additional OP Units (on aone-for-one Common Share per OP Unit basis) or preference units (on aone-for-one preferred share per preference unit basis).

 

31

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The Operating Partnership’s “ConsolidatedDebt-to-Total Market Capitalization Ratio” as of March 31,2008 is presented in the following table. The Operating Partnership calculates the equity component of its marketcapitalization as the sum of (i) the total outstanding OP Units at theequivalent market value of the closing price of EQR’s Common Shares on the NewYork Stock Exchange; (ii) the “OP Unit Equivalent” of all convertible preferenceunits; and (iii) the liquidation value of all perpetual preference unitsoutstanding.

 

**Capital Structure as of March 31, 2008**

**(Amounts in thousands except for unit and per unit amounts)**

 
| Secured Debt                                  |       |        | ** **  | $              |  4,096,357      |       | 41.5       | %          |       |   |
|-----------------------------------------------|------------|-------------|-------------|----------------|----------------------|------------|------------|------------|------------|--------|
| Unsecured Debt                                |       |        | ** **  | 5,767,075      |                 | 58.5       | %          | ** ** | ** ** |
| **Total  Debt**                               | ** ** | ** **  | ** **  | **9,863,432**  | ** **           | **100.0**  | **%**      | **44.7**   | **%**      |
|                                          |       |        |        |           |                 |       |       |       |       |
| OP Units                                      | ** ** | 288,503,272 |        |           |                 |       |       |       |       |
| OP Unit  Equivalents (see below)              | ** ** | 439,296     |        |           |                 |       |       |       |       |
| Total  outstanding at quarter-end             | ** ** | 288,942,568 |        |           |                 |       |       |       |       |
| EQR Common Share Price at March 31, 2008 | ** ** | $           |  41.49 |           |                 |       |       |       |       |   |
|                                          |       |        | ** **  | 11,988,227     |                 | 98.4       | %          | ** ** | ** ** |
| Perpetual  Preference Units (see below)  |       |        | ** **  | 200,000        |                 | 1.6        | %          | ** ** | ** ** |
| **Total  Equity**                             | ** ** | ** **  | ** **  | **12,188,227** | ** **           | **100.0**  | **%**      | **55.3**   | **%**      |
|                                          |       |        |        |           |                 |       |       |       |       |
| **Total  Market Capitalization**              | ** ** | ** **  | ** **  | **$**          | ** 22,051,659** | ** ** | ** ** | ** ** | **100.0**  | **%**  |
|                                               |            |             |             |                |                      |            |            |            |            |        |  |

 

**Convertible Preference Units as of March 31, 2008**

**(Amounts in thousands except for unit and per unit amounts)**

 
| **Series**                          | ** ** | **Redemption  Date** | ** ** | **Outstanding**

**Units** | ** ** | **Liquidation  Value** | ** ** | **Annual  Dividend Per  Unit** | ** ** | **Annual  Dividend  Amount** | ** ** | **Weighted  Average  Rate** | ** ** | **Conversion  Ratio** | ** ** | **OP Unit  Equivalents** | ** ** |
|-------------------------------------|------------|----------------------|------------|----------------------------|------------|------------------------|------------|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------|------------|--------------------------|------------|
| Preference Units                    |       |                 |       |                       |       |                   |       |                           |       |                         |       |                        |       |                  |       |                     |       |
| 7.00% Series E                      |       | 11/1/98              |       | 357,616                    |       | $                      | 8,940      |                           | $          |  1.75                   |       | $                           | 626        |                  |       |                     | 1.1128     |   | 397,955 |   |
| 7.00% Series H                      |       | 6/30/98              |       | 23,359                     |       | 584                    |       | 1.75                           |       | 41                           |       |                        |       | 1.4480                |       | 33,824                   |       |
| Junior  Preference Units:           |       |                 |       |                       |       |                   |       |                           |       |                         |       |                        |       |                  |       |                     |       |
| 8.00% Series B                      |       | 7/29/09              |       | 7,367                      |       | 184                    |       | 2.00                           |       | 15                           |       |                        |       | 1.020408              |       | 7,517                    |       |
| Total  Convertible Preference Units |       |                 |       | 388,342                    |       | $                      | 9,708      |                           |       |                         | $          | 682                         |       | 7.03                  | %          |                     |       | 439,296 |   |
|                                     |            |                      |            |                            |            |                        |            |                                |            |                              |            |                             |            |                       |            |                          |            |  |  |  |

 

**Perpetual Preference Units as of March 31, 2008**

**(Amounts in thousands except for unit and per unitamounts)**

 
| **Series**                        | ** ** | **Redemption  Date** | ** ** | **Outstanding  Units** | ** ** | **Liquidation Value** | ** ** | **Annual Dividend  Per Unit** | ** ** | **Annual Dividend Amount** | ** ** | **Weighted  Average  Rate** | ** ** |
|-----------------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|-------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Preference  Units:                | ** ** | ** **           | ** ** | ** **             | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| 8.29% Series K                    |       | 12/10/26             |       | 1,000,000              |       | $                     | 50,000     |                          | $          | 4.145                      |       | $                           | 4,145      |   |   |   |
| 6.48% Series N                    |       | 6/19/08              |       | 600,000                |       | 150,000               |       | 16.20                         |       | 9,720                      |       |                        |       |
| Total Perpetual  Preference Units |       |                 |       | 1,600,000              |       | $                     | 200,000    |                          |       |                       | $          | 13,865                      |       | 6.93 | % |
|                                   |            |                      |            |                        |            |                       |            |                               |            |                            |            |                             |            |  |  |  |

 

The Operating Partnership expects to meet itsshort-term liquidity requirements, including capital expenditures related tomaintaining its existing properties and certain scheduled unsecured note andmortgage note repayments, generally through its working capital, net cashprovided by operating activities and borrowings under its revolving creditfacility.  The Operating Partnershipconsiders its cash provided by operating activities to be adequate to meetoperating requirements and payments of distributions.  The Operating Partnership also expects tomeet its long-term liquidity requirements, such as scheduled unsecured note andmortgage debt maturities, property acquisitions, financing of construction anddevelopment activities and capital improvements through the issuance ofunsecured notes and equity securities, including 

 

32

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additional OP Units, and proceeds received from the disposition ofcertain properties as well as joint ventures. In addition, the Operating Partnership has significant unencumberedproperties available to secure additional mortgage borrowings in the event thatthe public capital markets are unavailable or the cost of alternative sourcesof capital is too high.  The fair valueof and cash flow from these unencumbered properties are in excess of therequirements the Operating Partnership must maintain in order to comply withcovenants under its unsecured notes and line of credit.  Of the $18.3 billion in investment in realestate on the Operating Partnership’s balance sheet at March 31, 2008, $11.3billion or 61.5%, was unencumbered.

 

As of May 1, 2008, the Operating Partnership’ssenior debt credit ratings from Standard & Poors (“S&P”), Moody’sand Fitch are BBB+, Baa1 and A-, respectively. As of May 1, 2008, EQR’spreferred equity ratings from S&P, Moody’s and Fitch are BBB, Baa2 and BBB+,respectively.

 

The Operating Partnership has a long-term revolvingcredit facility with potential borrowings of up to $1.5 billion which maturesin February 2012.  This facilitymay, among other potential uses, be used to fund property acquisitions, costsfor certain properties under development and short term liquidityrequirements.  As of May 1, 2008, noamounts were outstanding under this facility.

 

See Note 16 in the Notes to Consolidated FinancialStatements for discussion of the events which occurred subsequent to March 31,2008.

 

***Capitalization of Fixed Assetsand Improvements to Real Estate***

 

Our policy with respect to capital expenditures isgenerally to capitalize expenditures that improve the value of the property orextend the useful life of the component asset of the property.  We track improvements to real estate in twomajor categories and several subcategories:

 

·                  Replacements*(inside the unit)*.  Theseinclude:

·                  flooring such as carpets, hardwood, vinyl,linoleum or tile;

·                  appliances;

·                  mechanical equipment such as individualfurnace/air units, hot water heaters, etc;

·                  furniture and fixtures such as kitchen/bathcabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors,countertops, etc; and

·                  blinds/shades.

 

All replacements are depreciated over a five-year estimated usefullife.  We expense as incurred allmake-ready maintenance and turnover costs such as cleaning, interior paintingof individual units and the repair of any replacement item noted above.

 

·                  Building improvements (*outside the unit*).  These include:

·                  roof replacement and major repairs;

·                  paving or major resurfacing of parking lots,curbs and sidewalks;

·                  amenities and common areas such as pools,exterior sports and playground equipment, lobbies, clubhouses, laundry rooms,alarm and security systems and offices;

·                  major building mechanical equipment systems;

·                  interior and exterior structural repair andexterior painting and siding;

·                  major landscaping and grounds improvement;and

·                  vehicles and office and maintenanceequipment.

 

All building improvements are depreciated over a five to ten-yearestimated useful life.  We capitalizebuilding improvements and upgrades only if the item: (i) exceeds $2,500(selected projects must exceed $10,000); (ii) extends the useful life ofthe asset; and (iii) improves the value of the asset.

 

33

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For the quarter ended March 31, 2008, our actual improvements to real estate totaled approximately $40.7million.  This includes the following (amountsin thousands except for unit and per unit amounts):

** **

**Capitalized Improvements to Real Estate**

**For the Quarter Ended March 31, 2008**

 
| ** **                      | ** ** | **Total  Units (1)** | ** ** | **Replacements** | ** ** | **Avg.  Per Unit** | ** ** | **Building  Improvements** | ** ** | **Avg.  Per Unit** | ** ** | **Total** | ** ** | **Avg.  Per Unit** | ** ** |
|---------------------------------|------------|---------------------------|------------|------------------|------------|-------------------------|------------|----------------------------|------------|-------------------------|------------|-----------|------------|-------------------------|------------|
|                            |       |                      |       |             |       |                    |       |                       |       |                    |       |      |       |                    |       |
| Established  Properties (2)     |       | 111,463                   |       | $                | 8,925      |                    | $          | 80                         |       | $                       | 13,214     |      | $          | 119                     |       | $ | 22,139 |   | $ | 199 |   |
|                            |       |                      |       |             |       |                    |       |                       |       |                    |       |      |       |                    |       |
| New Acquisition  Properties (3) |       | 17,879                    |       | 1,154            |       | 65                      |       | 5,096                      |       | 285                     |       | 6,250     |       | 350                     |       |
|                            |       |                      |       |             |       |                    |       |                       |       |                    |       |      |       |                    |       |
| Other (4)                       |       | 6,250                     |       | 9,391            |       |                    |       | 2,964                      |       |                    |       | 12,355    |       |                    |       |
|                            |       |                      |       |             |       |                    |       |                       |       |                    |       |      |       |                    |       |
| Total                           |       | 135,592                   |       | $                | 19,470     |                    |       |                       | $          | 21,274                  |       |      |       | $                       | 40,744     |   |   |   |
|                                 |            |                           |            |                  |            |                         |            |                            |            |                         |            |           |            |                         |            |  |  |  |  |  |  |

 

----

(1)  Total units – Excludes 10,446 unconsolidated units and 3,731military housing (fee managed) units, for which capitalized improvements toreal estate are self-funded and do not consolidate into the OperatingPartnership’s results.

 

(2)  Established Properties – Wholly Owned Properties acquiredprior to January 1, 2006.

 

(3)  New Acquisition Properties – Wholly Owned Propertiesacquired during 2006, 2007 and 2008.

 

(4)  Other – Includes properties either partially owned orsold during the period, commercial space, corporate housing and condominiumconversions.  Also includes $7.5 millionincluded in replacements spent on various assets related to major renovationsand repositioning of these assets.

 

For 2008, the Operating Partnership estimates an annual stabilized runrate of approximately $1,100 per unit of capital expenditures for its establishedproperties.  The above assumption isbased on current expectations and is forward-looking.

 

During the quarter ended March 31, 2008, the Operating Partnership’s total non-real estate capitaladditions, such as computer software, computer equipment, and furniture andfixtures and leasehold improvements to the Operating Partnership’s propertymanagement offices and its corporate offices, were approximately $1.0 million. The Operating Partnership expects to fund approximately $2.7 million intotal additions to non-real estate property for the remainder of 2008.  The above assumption is based on currentexpectations and is forward-looking.

 

Improvements to real estate and additions to non-real estate property aregenerally funded from net cash provided by operating activities.

 

***Derivative Instruments***

 

In the normal course ofbusiness, the Operating Partnership is exposed to the effect of interest ratechanges.  The Operating Partnershiplimits these risks by following established risk management policies andprocedures including the use of derivatives to hedge interest rate risk on debtinstruments.

 

The Operating Partnershiphas a policy of only entering into contracts with major financial institutionsbased upon their credit ratings and other factors.  When viewed in conjunction with theunderlying and offsetting exposure that the derivatives are designed to hedge,the Operating Partnership has not sustained a material loss from thoseinstruments nor does it anticipate any material adverse effect on its netincome or financial position in the future from the use of derivatives.

 

See Note 11 in the Notes to ConsolidatedFinancial Statements for additional discussion of derivative instruments at March 31, 2008.

 

34

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***Other***

** **

**Total distributions paid in April 2008amounted to $141.8 million (excluding distributions on Partially OwnedProperties), which included certain distributions declared during the first quarterended March **31, 2008.

** **

**Off-Balance Sheet Arrangements andContractual Obligations**

 

**The Operating Partnership hasco-invested in various properties that are unconsolidated and accounted forunder the equity method of accounting. Management does not believe theseinvestments have a materially different impact upon the Operating Partnership’sliquidity, cash flows, capital resources, credit or market risk than itsproperty management and ownership activities.**During 2000 and 2001, theOperating Partnership entered into institutional ventures with an unaffiliated partner.At the respective closing dates, the Operating Partnership sold and/orcontributed 45 properties containing 10,846 units to these ventures andretained a 25% ownership interest in the ventures. The Operating Partnership’sjoint venture partner contributed cash equal to 75% of the agreed-upon equityvalue of the properties comprising the ventures, which was then distributed tothe Operating Partnership. The Operating Partnership’s strategy with respect tothese ventures was to reduce its concentration of properties in a variety ofmarkets. The Operating Partnership sold one property consisting of 400 unitsduring the year ended December 31, 2007.

** **

**As of March **31, 2008, the Operating Partnership has 13 projectstotaling 4,484 units in various stages of development with estimated completiondates ranging through June 30, 2011. The development agreements currentlyin place are discussed in detail in Note 14 of the Operating Partnership’s ConsolidatedFinancial Statements.

** **

**See also Notes 2 and 6 in the Notesto Consolidated Financial Statements for additional discussion regarding the OperatingPartnership’s investments in partially owned entities.**

** **

**The Operating Partnership’s contractual obligations for thenext five years and thereafter have not changed materially from the amounts anddisclosures included in its annual report on Form 10-K, other than as itrelates to scheduled debt maturities. See the updated debt maturity scheduleincluded in Liquidity and Capital Resources for further discussion.**

** **

**Critical Accounting Policies and Estimates**

** **

**The Operating Partnership has identified six significantaccounting policies as critical accounting policies. These critical accountingpolicies are those that have the most impact on the reporting of our financialcondition and those requiring significant judgments and estimates. With respectto these critical accounting policies, management believes that the applicationof judgments and estimates is consistently applied and produces financialinformation that fairly presents the results of operations for all periodspresented. The six critical accounting policies are:**

** **

*Impairment of Long-Lived Assets, Including Goodwill*

 

TheOperating Partnership periodically evaluates its long-lived assets, includingits investments in real estate and goodwill, for indicators of permanentimpairment. The judgments regarding the existence of impairment indicators arebased on factors such as operational performance, market conditions, expectedholding period of each asset and legal and environmental concerns. Futureevents could occur which would cause the Operating Partnership to conclude thatimpairment indicators exist and an impairment loss is warranted.

 

35

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* *

*Depreciation of Investment in Real Estate*

 

TheOperating Partnership depreciates the building component of its investment inreal estate over a 30-year estimated useful life, building improvements over a5-year to 10-year estimated useful life and both the furniture, fixtures andequipment and replacements components over a 5-year estimated useful life, allof which are judgmental determinations.

 

*Cost Capitalization*

 

Seethe *Capitalization of Fixed Assets andImprovements to Real Estate* section for discussion of the policywith respect to capitalization vs. expensing of fixed asset/repair andmaintenance costs. In addition, the Operating Partnership capitalizes thepayroll and associated costs of employees directly responsible for and whospend all of their time on the supervision of major capital and/or renovationprojects. These costs are reflected on the balance sheet as an increase todepreciable property.

 

TheOperating Partnership follows the guidance in SFAS No. 67, *Accounting for Costs and Initial Rental Operations ofReal Estate Projects*, for all development projects and uses itsprofessional judgment in determining whether such costs meet the criteria forcapitalization or must be expensed as incurred. The Operating Partnershipcapitalizes interest, real estate taxes and insurance and payroll andassociated costs for those individuals directly responsible for and who spendall of their time on development activities, with capitalization ceasing nolater than 90 days following issuance of the certificate of occupancy. Thesecosts are reflected on the balance sheet as construction-in-progress for eachspecific property. The Operating Partnership expenses as incurred all payrollcosts of on-site employees working directly at our properties, except as notedabove on our development properties prior to certificate of occupancy issuanceand on specific major renovation at selected properties when additionalincremental employees are hired.

 

*Fair Value of Financial Instruments, Including DerivativeInstruments*

 

The Operating Partnership follows the guidanceunder SFAS No. 157 when valuing its financial instruments. The valuation of financial instruments underSFAS No. 107 and SFAS No. 133, as amended, requires the OperatingPartnership to make estimates and judgments that affect the fair value of theinstruments. The Operating Partnership, where possible, bases the fair valuesof its financial instruments, including its derivative instruments, on listedmarket prices and third party quotes. Where these are not available, the OperatingPartnership bases its estimates on current instruments with similar terms andmaturities or on other factors relevant to the financial statements.

 

*Revenue Recognition*

 

Rentalincome attributable to leases is recorded when due from residents and is recognizedmonthly as it is earned, which is not materially different than on astraight-line basis. Leases entered into between a resident and a property forthe rental of an apartment unit are generally year-to-year, renewable uponconsent of both parties on an annual or monthly basis. Fee and asset managementrevenue and interest income are recorded on an accrual basis.

 

*Share-Based Compensation*

 

TheCompany accounts for its share-based compensation in accordance with SFAS No. 123(R),*Share-Based Payment*, effective January 1,2006, which results in compensation expense being recorded based on the fairvalue of the share compensation granted.

 

36

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Any EQR Common Shares issuedpursuant to EQR’s incentive equity compensation and employee share purchaseplans will result in the Operating Partnership issuing OP Units to EQR on aone-for-one basis, with the Operating Partnership receiving the net cashproceeds of such issuances.

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. This model is only one method of valuing options and the Company’suse of this model should not be interpreted as an endorsement of its accuracy. Becausethe Company’s share options have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in management’s opinion,the existing models do not necessarily provide a reliable single measure of thefair value of its share options and the actual value of the options may besignificantly different.

 

**Funds From Operations**

 

**For the quarter ended March 31,2008, Funds From Operations (“FFO”) available to OP Units decreased by $2.5million or 1.4%, as compared to the quarter ended March 31, 2007.**

** **

The following is areconciliation of net income to FFO available to OP Units for the quarters endedMarch 31, 2008 and 2007:

 

**FundsFrom Operations**

***(Amounts in thousands)***

***(Unaudited)***

 
| ** **                                                         | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Net income                                                         |       | $                                          | 149,778    |   | $ | 134,346 |   |
| Adjustments:                                                       |       |                                       |       |   |   |
| Depreciation                                                       |       | 146,598                                    |       | 138,932 |   |
| Depreciation –  Non-real estate additions                     |       | (2,051                                     | )          | (2,035 | ) |
| Depreciation –  Partially Owned and Unconsolidated Properties |       | 1,034                                      |       | 943 |   |
| Discontinued  operations:                                          |       |                                       |       |   |   |
| Depreciation                                                       |       | 982                                        |       | 15,742 |   |
| Net (gain) on  sales of discontinued operations                    |       | (122,517                                   | )          | (111,946 | ) |
| Net incremental  gain on sales of condominium units                |       | 366                                        |       | 4,684 |   |
|                                                               |       |                                       |       |   |   |
| FFO (1) (2)                                                   |       | 174,190                                    |       | 180,666 |   |
| Preferred  distributions                                           |       | (3,637                                     | )          | (7,647 | ) |
|                                                               |       |                                       |       |   |   |
| FFO available to  OP Units (1) (2)                            |       | $                                          | 170,553    |   | $ | 173,019 |   |

** **

----

***(1) ******The National Association of Real Estate Investment Trusts (“NAREIT”)defines funds from operations (“FFO”) (April 2002 White Paper) as netincome (computed in accordance with accounting principles generally accepted inthe United States (“GAAP”)), excluding gains (or losses) from sales ofdepreciable property, plus depreciation and amortization, and after adjustmentsfor unconsolidated partnerships and joint ventures. Adjustments forunconsolidated partnerships and joint ventures will be calculated to reflectfunds from operations on the same basis. The April 2002 White Paper statesthat gain or loss on sales of property is excluded from FFO for previouslydepreciated operating properties only. Once the Operating Partnership commencesthe conversion of units to condominiums, it simultaneously discontinuesdepreciation of such property. FFO available to OP Units is calculated on abasis consistent with net income available to OP Units and reflects adjustmentsto net income for preferred distributions and premiums on redemption ofpreference units/interests in accordance with accounting principles generallyaccepted in the United States.*

** **

***(2)****      **The Operating Partnership believes that FFO and FFOavailable to OP Units are helpful to investors as supplemental measures of theoperating performance of a real estate company, because they are recognizedmeasures of performance by the real estate industry and by excluding gains orlosses related to dispositions of depreciable property and excluding realestate depreciation (which can vary among owners of identical assets in similarcondition based on historical cost accounting and useful life estimates), FFOand FFO available to OP Units can help compare the operating performance of acompany’s real estate between periods or as compared to different companies. FFOand FFO available to OP Units do not represent net income, net income available*

 

37

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***toOP Units or net cash flows from operating activities in accordance with GAAP. Therefore,FFO and FFO available to OP Units should not be exclusively considered asalternatives to net income, net income available to OP Units or net cash flowsfrom operating activities as determined by GAAP or as measures of liquidity. TheOperating Partnership’s calculation of FFO and FFO available to OP Units maydiffer from other real estate companies due to, among other items, variationsin cost capitalization policies for capital expenditures and, accordingly, maynot be comparable to such other real estate companies.***

** **

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

** **

**The Operating Partnership’smarket risk has not changed materially from the amounts and informationreported in Item 7A, *Quantitative andQualitative Disclosures About Market Risk*, to the OperatingPartnership’s Form 10-K for the year ended December 31, 2007. Seealso Note 11 in the Notes to Consolidated Financial Statements for additionaldiscussion of derivative instruments.**

** **

**Item4. Controls and Procedures**

** **

**(a)**          Evaluation of DisclosureControls and Procedures:

**Effective as of March 31, 2008, the OperatingPartnership carried out an evaluation, under the supervision and with theparticipation of the Operating Partnership’s management, including the ChiefExecutive Officer and Chief Financial Officer of EQR, of the effectiveness ofthe Operating Partnership’s disclosure controls and procedures pursuant toExchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by the Operating Partnership in its Exchange Act filings is recorded,processed, summarized and reported within the periods specified in the SEC’s rules andforms.**

** **

**(b)  Changes in InternalControl over Financial Reporting:**

**During the first quarter of 2008, the OperatingPartnership completed the implementation of a new general ledger and accountspayable system designed to integrate its financial and operating platforms.  The Operating Partnership believes thisimplementation constitutes an improvement to its internal control overfinancial reporting.**

** **

**Except for the preceding change, therewere no changes to the internal control over financial reporting of the OperatingPartnership identified in connection with the Operating Partnership’sevaluation referred to above that occurred during the first quarter of 2008that have materially affected, or are reasonably likely to materially affect,the Operating Partnership’s internal control over financial reporting.**

 

38

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** **

**PART II.                OTHER INFORMATION**

** **

**Item 1.Legal Proceedings**

** **

The Operating Partnershipis party to a housing discrimination lawsuit brought by a non-profit civilrights organization in April 2006 in the U.S. District Court for theDistrict of Maryland. The suit alleges that the Operating Partnership designedand built approximately 300 of its properties in violation of the accessibilityrequirements of the Fair Housing Act and Americans with Disabilities Act. Thesuit seeks actual and punitive damages, injunctive relief (includingmodification of non-compliant properties), costs and attorneys’ fees. The OperatingPartnership believes it has a number of viable defenses, including that amajority of the named properties were completed before the operative dates ofthe statutes in question and/or were not designed or built by the OperatingPartnership. Accordingly, the Operating Partnership is defending the suitvigorously. Due to the pendency of the Operating Partnership’s defenses and theuncertainty of many other critical factual and legal issues, it is not possibleto determine or predict the outcome of the suit and as a result, no amountshave been accrued at March 31, 2008. While no assurances can be given, theOperating Partnership does not believe that the suit, if adversely determined,will have a material adverse effect on the Operating Partnership.

 

The Operating Partnershipdoes not believe there is any other litigation pending or threatened against itthat, individually or in the aggregate, reasonably may be expected to have amaterial adverse effect on the Operating Partnership.

 

**Item1A. Risk Factors**

** **

**There have been no material changesrelated to the risk factors that were discussed in Part I, Item 1A of the OperatingPartnership’s Form 10-K for the year ended December 31, 2007.**

** **

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

** **

(c) *OP Units Repurchased in the Quarter Ended March 31,2008*

 

TheOperating Partnership repurchased the following OP Units during the quarterended March 31, 2008:

 
| ** **          | ** ** | ** **                | ** ** | ** **             | ** ** | ** **                                 | ** ** | **Dollar Value of OP** | ** ** |
|---------------------|------------|---------------------------|------------|------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | ** **                | ** ** | ** **             | ** ** | **Total Number of OP**      | ** ** | **Units that May**          | ** ** |
| ** **          | ** ** | **Total Number**     | ** ** | **Average Price** | ** ** | **Units Purchased as Part** | ** ** | **Yet Be Purchased**        | ** ** |
| ** **          | ** ** | **of OP Units** | ** ** | **Paid Per**      | ** ** | **of Publicly Announced**        | ** ** | **Under the Plans**         | ** ** |
| **Period**          | ** ** | **Purchased (1)**    | ** ** | **Unit (1)**      | ** ** | **Plans or Programs (1)**   | ** ** | **or Programs (1)**         | ** ** |
|                |       |                      |       |                   |       |                                       |       |                                  |       |
| January 2008   |       | 100,000                   |       | $                      | 35.74      |                                       | 100,000    |                                  | $          | 471,995,345 |   |
| February 2008  |       | 71,161                    |       | $                      | 38.25      |                                       | 71,161     |                                  | $          | 469,273,467 |   |
| March 2008     |       | —                    |       | $                      | —     |                                       | —     |                                  | $          | 469,273,467 |   |
| First Quarter  2008 |       | 171,161                   |       | $                      | 36.78      |                                       | 171,161    |                                  |       |   |

 

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**(1) The OPUnits repurchased during the quarter ended March 31, 2008 represent OPUnits redeemed in response to repurchases of Common Shares under the Company’spublicly announced share repurchase program approved by its Board of Trustees. Ofthe total shares repurchased, 71,161 shares were repurchased from employees atan average price of $38.25 per share (the average of the then current marketprices) to cover the minimum statutory tax withholding obligations related tothe vesting of employees’ restricted shares. The remaining 100,000 shares wererepurchased in the open market at an average price of $35.74 per share. EQR hasauthorization to repurchase an additional $469.3 million of its shares as of March 31,2008.**

** **

**Item6.    Exhibits –**See the Exhibit Index

 

39

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** **

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |        |   | ERP OPERATING LIMITED PARTNERSHIP |
|--------|-------------|--------|-----------------------------------|
|   |        |   | BY: EQUITY RESIDENTIAL            |
|   |        |   | ITS GENERAL PARTNER               |
|   |        |   |                              |   |
|   |        |   |                              |   |
| Date:  | May 8, 2008 |   | By: /s/                           | Mark J. Parrell |
|   |        |   |                              | Mark J. Parrell |
|   |        |   |                              | Executive Vice President and |
|   |        |   |                              | Chief Financial Officer |
|   |        |   |                              |   |
|   |        |   |                              |   |
| Date:  | May 8, 2008 |   | By: /s/                           | Ian S. Kaufman |
|   |        |   |                              | Ian S. Kaufman |
|   |        |   |                              | First Vice President and |
|   |        |   |                              | Chief Accounting Officer |

 

40

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**EXHIBIT INDEX**

 

The exhibits listed beloware filed as part of this report. References to exhibits or other filings underthe caption “Location” indicate that the exhibit or other filing has beenfiled, that the indexed exhibit and the exhibit referred to are the same andthat the exhibit referred to is incorporated by reference. The Commission filenumber for our Exchange Act filings referenced below is 0-24920.

 
| Exhibit |   | Description                                                                                                                                                                                                                |   | Location                                                                                                        |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|
| 10.1    |   | The Equity Residential Supplemental Executive  Retirement Plan as Amended and Restated Effective January 1, 2008.                                                                                                     |   | Included as Exhibit 10.1 to EQR’s  Form 10-Q for the quarterly period ended March 31, 2008. |
|    |   |                                                                                                                                                                                                                       |   |                                                                                                            |
| 10.2    |   | The Equity Residential Grandfathered Supplemental  Executive Retirement Plan as Amended and Restated Effective January 1,  2005.                                                                                      |   | Included as Exhibit 10.2 to EQR’s  Form 10-Q for the quarterly period ended March 31, 2008. |
|    |   |                                                                                                                                                                                                                       |   |                                                                                                            |
| 31.1    |   | Certification of David J. Neithercut, Chief  Executive Officer of Registrant’s General Partner.                                                                                                                       |   | Attached herein.                                                                                                |
|    |   |                                                                                                                                                                                                                       |   |                                                                                                            |
| 31.2    |   | Certification of Mark J. Parrell, Chief Financial  Officer of Registrant’s General Partner.                                                                                                                           |   | Attached herein.                                                                                                |
|    |   |                                                                                                                                                                                                                       |   |                                                                                                            |
| 32.1    |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Executive Officer  of Registrant’s General Partner. |   | Attached herein.                                                                                                |
|    |   |                                                                                                                                                                                                                       |   |                                                                                                            |
| 32.2    |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Mark J. Parrell, Chief Financial Officer of  Registrant’s General Partner.     |   | Attached herein.                                                                                                |

 

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