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| UNITED STATES  SECURITIES AND EXCHANGE COMMISSION                                                                                                                                                                                                                                                                                                                                                                                 |
| Washington, D.C.  20549                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                |
| **Form 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **                           **                                                                                                                                                                                                                                                            |
| [x] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                            |
| **For the fiscal  year ended December 31, 2009**                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                      |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                 |
| [ ] TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                              |
| For the transition  period from       to       Commission File Number 1-12486                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                         |
| **Associated  Estates Realty Corporation**                                                                                                                                                                                                                                                                                                                                                                                        |
| *(Exact name of registrant as specified in its  charter)*                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                 |
| **OHIO**                                                                                                                                                                                                                                                                                                                                                                                                                          |     | **34-1747603** |
| *(State or other jurisdiction of incorporation or  organization)*                                                                                                                                                                                                                                                                                                                                                                 |           | *(I.R.S. Employer Identification Number)* |
|                                                                                                                                                                                                                                                                                                                                              |
| **1 AEC Parkway,  Richmond Heights, Ohio  44143-1467**                                                                                                                                                                                                                                                                                                                                                                       |
| *(Address of principal executive offices)*                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                      |
| Registrant's telephone number, including area code (216)  261-5000                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                      |
| Securities registered pursuant to Section 12(b) of  the Act:                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                   |
| **TITLE OF EACH CLASS**                                                                                                                                                                                                                                                                                                                                                                                                           | **          ** | **NAME OF EACH EXCHANGE ON WHICH REGISTERED** |
| Common Shares, without par value                                                                                                                                                                                                                                                                                                                                                                                                  | **         ** | New York Stock Exchange, Inc. |
|                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | Nasdaq Global Market |
| **                                       **                                                                                                                                                                                    | **         ** |                 |
| Depositary Shares, each representing 1/10 of a Share  of 8.70% Class B                                                                                                                                                                                                                                                                                                                                                            | **        ** | New York Stock Exchange, Inc. |
| Series II Cumulative Redeemable Preferred Shares,  without par value                                                                                                                                                                                                                                                                                                                                                              | **            ** | Nasdaq Global Market |
|                                                                                                                                                                                                                                                    |
| Securities registered pursuant to Section 12(g) of  the Act:  None                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                       |
| Indicate by check mark if  the registrant is a well-known seasoned issuer, as defined in Rule 405 of the  Securities Act. Yes [  ]  No [ x ]                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                              |
| Indicate by check mark if  the registrant is not required to file reports pursuant to Section 13 or  Section 15(d) of the Act.  Yes [   ]   No [ x ]                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                        |
| Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during  the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.  Yes [ x ]  No [ ]                                        |
|                                                                                                                                                                                   |
| Indicate  by check mark whether the registrant has submitted electronically and posted  on its corporate Web site, if any, every Interactive Data File required to be  submitted and posted pursuant to Rule 405 of Regulation S-T (subsection  232.405 of this chapter) during the preceding 12 months (or for such shorter  period that the registrant was required to submit and post such files).  Yes  [ ]  No [ ] |
|                                                                                                                                                                                   |
| Indicate  by check mark if disclosure of delinquent filers pursuant to Item 405 of  Regulation S-K is not contained herein, and will not be contained, to the  best of registrant's knowledge, in definitive proxy or information statements  incorporated by reference in Part III of this Form 10-K or any amendment to  this Form 10-K.  [ x ]                                                                            |
|                                                                                                                                 |
| Indicate by check mark  whether the registrant is a large accelerated filer, an accelerated filer, a  non-accelerated filer, or a smaller reporting company. See the definitions of  "large accelerated filer", "accelerated filer" and "smaller  reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):                                                                          |
|                                                                                                        |
| Large accelerated filer [  ]  Accelerated filer [ x ] Non-accelerated filer [  ]  (Do not check if a  smaller reporting company) Smaller reporting company [  ]                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                  |
| Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]  No  [ x ]                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                              |
| The aggregate market value of the voting stock held  by non-affiliates of the Registrant was $84.6 million as of June 30, 2009.                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                              |
| The number of Common Shares outstanding as of  February 11, 2010 was 22,384,070.                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                        |
| DOCUMENTS INCORPORATED BY REFERENCE (To the Extent  Indicated Herein).                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                        |
| Notice of Annual Meeting and Proxy Statement for the  Annual Meeting of Shareholders to be held on May 5, 2010 (in Part III).                                                                                                                                                                                                                                                                                                     |
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**ASSOCIATEDESTATES REALTY CORPORATIONTABLE OF CONTENTSFORM 10-K ANNUAL REPORTFOR THE YEAR ENDED DECEMBER 31, 2009**
| Item         |                                                                                                                                         | Page   |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART I       |
|         |                                                                                                                                                                                                          |   |
| 1.           | Business                                                                                                                                                                                                                                                                                                     | 3      |
|         |     General Development of Business                                                                                                                                                                                                                                                           | 3      |
|         |     Business Segments                                                                                                                                                                                                                                                                         | 3      |
|         |      Operating Strategy and Business Objectives                                                                                                                                                                                                                                          | 3      |
|         |          Acquisition/Disposition                                                                                                                                                                                                                                     | 3      |
|         |          Property Operations                                                                                                                                                                                                                                         | 4      |
|         |            Financing and Capital                                                                                                                                                                                                                                     | 4      |
|         |          General Contractor/Construction                                                                                                                                                                                                                             | 4      |
|         |     Income Taxes                                                                                                                                                                                                                                                                              | 4      |
|    |     Competitive Conditions                                                                                                                                                                                                                                                                    | 5      |
|         |     Customers                                                                                                                                                                                                                                                                                 | 5      |
|         |     Employees                                                                                                                                                                                                                                                                                 | 5      |
|         |     Available Information                                                                                                                                                                                                                                                                     | 5      |
|         |     Reports to Security Holders                                                                                                                                                                                                                                                               | 5      |
| 1A.          | Risk Factors                                                                                                                                                                                                                                                                                                 | 5      |
| 1B.          | Unresolved Staff Comments                                                                                                                                                                                                                                                                                    | 10     |
| 2.           | Properties                                                                                                                                                                                                                                                                                                   | 11     |
|         |     Our Portfolio                                                                                                                                                                                                                                                                             | 11     |
|         |     Indebtedness Encumbering the Properties                                                                                                                                                                                                                                                   | 13     |
| 3.           | Legal Proceedings                                                                                                                                                                                                                                                                                            | 14     |
| 4.           | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                          | 14     |
|         |     Executive Officers of the Registrant and Other Key  Employees                                                                                                                                                                                                                             | 14     |
|         |                                                                                                                |   |
| PART II      |
|         |                                                    |   |
| 5.           | Market for Registrant's Common Equity, Related Stockholder  Matters                                                                                                                                                                                                                                          |   |
|         |     and Issuer Purchases of Equity Securities                                                                                                                                                                                                                                                 | 16     |
| 6.           | Selected Financial Data                                                                                                                                                                                                                                                                                      | 17     |
| 7.           | Management's Discussion and Analysis of Financial                                                                                                                                                                                                                                                            |   |
|         |     Condition and Results of Operations                                                                                                                                                                                                                                                       | 20     |
| 7A.          | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                   | 31     |
| 8.           | Consolidated Financial Statements and Supplementary Data                                                                                                                                                                                                                                                     | 31     |
| 9.           | Changes in and Disagreements with Accountants                                                                                                                                                                                                                                                                |   |
|         |     on Accounting and Financial Disclosure                                                                                                                                                                                                                                                    | 31     |
| 9A.          | Controls and Procedures                                                                                                                                                                                                                                                                                      | 31     |
| 9B.          | Other Information                                                                                                                                                                                                                                                                                            | 31     |
|         |                                                                                                      |   |
| PART III     |
|         |                                                                                  |   |
| 10.          | Directors, Executive Officers and Corporate Governance                                                                                                                                                                                                                                                       | 32     |
| 11.          | Executive Compensation                                                                                                                                                                                                                                                                                       | 32     |
| 12.          | Security Ownership of Certain Beneficial Owners and  Management                                                                                                                                                                                                                                              | 32     |
|         |     and Related Shareholder Matters                                                                                                                                                                                                                                                           |   |
| 13.          | Certain Relationships and Related Transactions and  Director Independence                                                                                                                                                                                                                                    | 33     |
| 14.          | Principal Accountant Fees and Services                                                                                                                                                                                                                                                                       | 33     |
|         |                                                                                                                |   |
| PART IV      |
|         |                                                                                                                                                                       |   |
| 15.          | Exhibits and Financial Statement Schedules                                                                                                                                                                                                                                                                   | 34     |

 

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**PART I**

  Except as the context otherwise requires, all references to "we,""our," "us" and the "Company" in this reportcollectively refer to Associated Estates Realty Corporation ("AERC")and its consolidated subsidiaries.

**Item 1.  Business**

**GENERALDEVELOPMENT OF BUSINESS**

 We are a self-administered and self-managed equity real estateinvestment trust ("REIT").  We are publicly traded on the New YorkStock Exchange ("NYSE") and the Nasdaq Global Market("NASDAQ") under the ticker symbol "AEC."  Our headquartersis located at 1 AEC Parkway in Richmond Heights, Ohio.  The headquarters iscomprised of one office building of approximately 42,000 square feet and twoadjacent parcels of land containing approximately 1.1 and 3.0 acres,respectively, all of which are suitable for further development or expansionand all of which we own under a long-term lease.

****We are a fully integrated multifamily real estate company engagedin property acquisition, advisory, development, construction, management,disposition, operation and ownership activities.  We own two taxable REITsubsidiaries that provide management and other services to us and to thirdparties (collectively the "Service Companies").  As of December 31,2009, our owned and non-owned property portfolio consisted of: (i) 48 ownedapartment communities containing 12,108 units in seven states, (ii) oneapartment community that we manage for a third party owner consisting of 258units; and (iii) a 186-unit apartment community and a commercial propertycontaining approximately 145,000 square feet that we asset manage.  See Item 2for a state-by-state listing of our portfolio.  Our consolidated financialstatements include the accounts of all subsidiaries and qualified REITsubsidiaries, the Service Companies, each of which is taxed as a Taxable REITSubsidiary ("TRS") under the REIT Modernization Act ("RMA")implemented in 1999, and an Operating Partnership structured as a DownREIT, ofwhich we own 97.4%.

**BUSINESSSEGMENTS**

 All of our properties are multifamily communities that have similareconomic characteristics.  Management evaluates the performance of ourproperties on an individual basis.  Our multifamily properties providedapproximately 98.1% of our consolidated revenue for 2009.  Consequently, wehave only one reportable segment, which is multifamily properties.

**OPERATINGSTRATEGY AND BUSINESS OBJECTIVES**

 See Part II, Item 7, "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" of this report on Form 10-Kfor additional discussion of our 2010 outlook and strategy.

***Acquisition/Disposition.*** Our acquisition/disposition strategy has been to buyproperties outside of the Midwest and sell older, low margin “legacy”properties located in the Midwest.  While most of our property sales have beencomprised of Midwest and single property locations, we continually monitor theprofitability of all of our properties and we will consider opportunistic salesof properties in any market, including our targeted growth markets, if wedetermine that the proceeds from such sales would provide a greater return onequity and increased cash flow when invested in other properties or used toreduce debt.

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Since 2005, we have sold 31 properties containing atotal of 6,923 units including our 12 Affordable Housing properties, 14 Ohio non-coreproperties and one property in Florida that we sold at the height of the condoconversion boom.  In addition, we exited markets in Arizona, Pennsylvania,Texas and North Carolina, where we had owned a single property in each of thosestates.  Consistent with our strategy to diversify outside the Midwest, since2005 we acquired six properties consisting of 2,131 units in Florida, Georgiaand Virginia.

***Property Operations***.  We operate in many different markets andsubmarkets.  Each of these markets may have economic characteristics thatdiffer from other markets, and, as a result, the degree to which we canincrease rents varies between markets.  However, our goal is to maximizeproperty net operating income in all of our markets through a combination ofincreasing net collected rents and by continual efforts to contain controllableoperating expenses.  Strategies to increase rents include constant monitoringof our markets, providing superior resident service and desirable communitiesin which to live, leveraging the power of the internet through enhancedproperty websites, resident portals and the implementation of programs such asutility and refuse reimbursements.  Our AEC Academy for Career Developmentprovides training and support for our employees, which helps us to providebetter trained, quality personnel at our communities as well as minimizing orreducing employee turnover.  We attempt to control operating expenses throughstrategies such as utilizing centralized purchasing contracts benefitingmultiple properties and through diligent upkeep and regular maintenance at ourapartment communities.

***Financing and Capital***.  Proceeds received from new debt, debt refinancing,property sales or equity issuances are invested based upon the expected returnand the impact on our balance sheet.  Reducing overall interest costs andincreasing the number of unencumbered assets have been two of our principalobjectives.  During 2007, 2008, and 2009, we continued to focus on lowering ourcost of debt by financing, refinancing and defeasing/prepaying debt.  Ourweighted average interest rate on our total debt declined 100 basis points from7.2% at the end of 2006 to 6.2% at December 31, 2009.  Our interest coverageratio and fixed charge coverage ratio were 1.72:1 and 1.53:1, respectively, at December31, 2009, up from 1.54:1 and 1.38:1, respectively, at December 31, 2006.

During 2008, we increased our $100.0 millionunsecured revolving credit facility, or revolver, to $150.0 million.  Thisfacility provides financial flexibility and the opportunity to capitalize onstrategic acquisitions without the delays associated with financingcontingencies.  As of December 31, 2009, we had $137.5 million of availabilityunder our unsecured revolving credit facility.  In addition, in December 2009we entered into a credit facility agreement with Wells Fargo MultifamilyCapital, on behalf of the Federal Home Loan Mortgage Corporation, or FreddieMac.  Pursuant to the terms of the facility, we have the potential to borrow upto $100.0 million over a two-year period with obligations being secured by projectspecific, nonrecourse, non cross-collateralized fixed or variable ratemortgages having terms of five, seven or ten years.

            InJanuary 2010, we sold 5,175,000 of our common shares in a public offering at aprice of $11.10 per share, which resulted in total net proceeds of approximately$54.7 million.  These proceeds were used to repay the $12.5 million borrowingson our unsecured revolver and to prepay a $42.0 million mortgage loan that wasto mature in June 2010.

 General Contractor/Construction***.***  Oursubsidiary, Merit Enterprises, Inc., is a general contractor and constructionmanager that will act as our in-house construction division as well as providegeneral contracting and construction management services to third parties.  Meritintends to concentrate its efforts on rehabilitation and ground-up constructionprojects.

**INCOMETAXES**

 See Note 1 of the Notes to the Consolidated Financial Statementspresented in Part II, Item 8 of this report on Form 10-K.

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**COMPETITIVECONDITIONS**

****See Part II, Item 7, "Management's Discussion and Analysisof Financial Condition and Results of Operations" of this report on Form10-K.

**CUSTOMERS**

 Our business, taken as a whole, is not dependent upon any single customeror a few customers.

**EMPLOYEES**

 On February 11, 2010, we employed approximately 360 people. Satisfactory relations have generally prevailed between our employees and us.

**AVAILABLEINFORMATION**

 Shareholders may obtain, free of charge from our Internet site athttp://www.AssociatedEstates.com, a copy of our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act of 1934, as amended, as soon as reasonably practicable after wefile such material electronically with, or furnish it to, the Securities andExchange Commission ("SEC").

**REPORTS TO SECURITY HOLDERS**

 We issue annual reports to our security holders that contain financialstatements.

**Item 1A. Risk Factors**

 We are subject to certain risks and uncertainties as described below. These risks and uncertainties are not the only ones we face and there may beadditional risks that we do not presently know of or that we currently considerimmaterial.  All of these risks could adversely affect our business, financialcondition, results of operations and cash flows.  Our ability to pay dividendson, and the market price of, our equity securities may be adversely affected ifany of such risks are realized.

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            **Weare subject to risks inherent in the real estate business and operation of aREIT.**  We own and manage multifamily apartment communities that are subjectto varying degrees of risk generally incident to the ownership of real estate. Our financial condition, the value of our properties and our ability to makedistributions to our shareholders will be dependent upon our continued accessto the debt and equity markets and our ability to operate our properties in amanner sufficient to generate income in excess of operating expenses and debtservice charges, which may be affected by the following risks, some of whichare discussed in more detail below:
| •    | changes in the economic climate  in the markets in which we own and manage properties, including interest  rates, the overall level of economic activity, the availability of consumer  credit and mortgage financing, unemployment rates and other factors; |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •    | our ability to refinance debt  on favorable terms at maturity;                                                                                                                                                                                               |
| •    | risks of a lessening of demand  for the multifamily units that we own or manage;                                                                                                                                                                             |
| •    | competition from other  available multifamily units and changes in market rental rates;                                                                                                                                                                      |
| •    | increases in property and  liability insurance costs;                                                                                                                                                                                                        |
| •    | unanticipated increases in real  estate taxes and other operating expenses;                                                                                                                                                                                  |
| •    | weather conditions that  adversely affect operating expenses;                                                                                                                                                                                                |
| •    | expenditures that cannot be  anticipated such as utility rate and usage increases, unanticipated repairs  and real estate tax valuation reassessments or millage rate increases;                                                                             |
| •    | inability to control operating  expenses or achieve increases in revenue;                                                                                                                                                                                    |
| •    | ownership limitations on our  common and preferred shares that may discourage a takeover otherwise  considered favorably by shareholders;                                                                                                                    |
| •    | the results of litigation filed  or to be filed against us;                                                                                                                                                                                                  |
| •    | changes in tax legislation;                                                                                                                                                                                                                                  |
| •    | risks of personal injury claims  and property damage related to mold claims because of diminished insurance  coverage;                                                                                                                                       |
| •    | catastrophic property damage  losses that are not covered by our insurance;                                                                                                                                                                                  |
| •    | our ability to acquire  properties at prices consistent with our investment criteria;                                                                                                                                                                        |
| •    | risks associated with property  acquisitions such as environmental liabilities, among others;                                                                                                                                                                |
| •    | changes in or termination of  contracts relating to third party management and advisory business;                                                                                                                                                            |
| •    | risks related to the perception  of residents and prospective residents as to the attractiveness, convenience  and safety of our properties or the neighborhoods in which they are located; and                                                              |
| •    | construction business risks.                                                                                                                                                                                                                                 |

**We aredependent on rental income from our multifamily apartment communities. **Ifwe are unable to attract and retain residents or if our residents are unable topay their rental obligations, our financial condition and funds available fordistribution to our shareholders may be adversely affected.

**Our multifamily apartment communities are subject to competition.** Our apartment communities are located in developed areas that include otherapartment communities and compete with other housing alternatives, such ascondominiums, single and multifamily rental homes and owner occupied single andmultifamily homes.  In certain markets, such as Florida, failed condominiumconversions or properties originally developed as condominiums are reverting toapartment rentals, creating increasing competition in those markets.  Moreover,rentals resulting from bank foreclosures may create additional competition incertain of our markets.  Such competition may affect our ability to attract andretain residents and to increase or maintain rental rates.

**The properties we own are concentrated in Ohio, Michigan, Georgia,Florida, Indiana, Virginia and Maryland.**  As of December 31, 2009, approximately32%, 24%, 14%, 10%, 7%, 7% and 6% of the units in properties we own were locatedin Ohio, Michigan, Georgia, Florida, Indiana, Virginia and Maryland,respectively.  Our performance, therefore, is linked to economic conditions andthe market for available rental housing in the sub-markets in which weoperate.  Deteriorating economic conditions such as continued high unemploymentand competition from unsold or foreclosed homes or condominiums in the varioussub-markets in Ohio and Michigan, where 56% of our units are located, or to alesser extent the sub-markets in the other states, may adversely affect ourfinancial condition, results of operations and ability to make distributions toour shareholders.

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**Our insurance may not be adequate to cover certain risks. **Thereare certain types of risks, generally of a catastrophic nature, such asearthquakes, floods, windstorms, acts of war and terrorist attacks that may beuninsurable, are not economically insurable, or are not fully covered byinsurance.  Moreover, certain risks, such as mold and environmental exposures,generally are not covered by our insurance.  Other risks are subject to variouslimits, sublimits, deductibles and self insurance retentions, which help tocontrol insurance costs, but which may result in increased exposures touninsured loss.  Any such uninsured loss could have a material adverse effecton our business, financial condition and results of operations.

**Secured debt financing could adversely affect our performance.**  AtDecember 31, 2009, thirty-one of our 48 properties were encumbered by projectspecific, non-recourse, and except for five properties,non-cross-collateralized mortgage debt.  There is a risk that these propertiesmay not have sufficient cash flow from operations to pay required principal andinterest.  We may not be able to refinance these loans at an amount equal tothe loan balance and the terms of any refinancing may not be as favorable asthe terms of existing indebtedness.  If we are unable to make required paymentson indebtedness that is secured by a mortgage, the property securing the mortgagemay be foreclosed with a consequent loss of income and value to us.  AlthoughFannie Mae and Freddie Mac continue to provide needed financing to qualifiedborrowers, such as ourselves, there is no assurance that those alternatives willremain available.

**Real estate investments are generally illiquid, and we may not beable to sell our properties when it is economically or strategicallyadvantageous to do so.**  Real estate investments generally cannot be soldquickly, and our ability to sell properties may be affected by marketconditions.  We may not be able to further diversify or vary our portfolio inaccordance with our strategies or in response to economic or other conditions. In addition, provisions of the Internal Revenue Code of 1986, as amended (the"Code"), limit the ability of a REIT to sell its properties in somesituations when it may be economically advantageous to do so, therebypotentially adversely affecting our ability to make distributions to ourshareholders.

**Our access to corporate public bond markets is limited.** Substantially all of our current debt either is secured property specificmortgages or bank debt under our unsecured revolving credit facility.  In orderto access the corporate public bond markets we would need major modificationsto the shelf registration debt covenants contained in the indenture currentlyin place.

**Litigation may result in unfavorable outcomes.**  Like many realestate operators, we are frequently involved in lawsuits involving premisesliability claims, housing discrimination claims and alleged violations oflandlord-tenant laws, which may give rise to class action litigation orgovernmental investigations.  Any material litigation not covered by insurance,such as a class action, could result in substantial costs being incurred.

**The costs of complying with laws and regulations could adverselyaffect our cash flow. **Our properties must comply with Title III of theAmericans with Disabilities Act (the "ADA") to the extent that theyare "public accommodations" or "commercial facilities" asdefined in the ADA.  The ADA does not consider apartment communities to bepublic accommodations or commercial facilities, except for portions of suchcommunities that are open to the public.  In addition, the Fair Housing AmendmentsAct of 1988 (the "FHAA") requires apartment communities firstoccupied after March 13, 1990 to be accessible to the handicapped.  Other lawsalso require apartment communities to be handicap accessible.  Noncompliancewith these laws could result in the imposition of fines or an award of damagesto private litigants.  We have been subject to lawsuits alleging violations ofhandicap design laws in connection with certain of our developments.

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Under various federal, state and local laws, an owner or operator of realestate may be liable for the costs of removal or remediation of certainhazardous or toxic substances on, under or in the property.  This liability maybe imposed without regard to whether the owner or operator knew of, or wasresponsible for, the presence of the substances.  Other laws impose on ownersand operators certain requirements regarding conditions and activities that mayaffect human health or the environment.  Failure to comply with applicablerequirements could complicate our ability to lease or sell an affected propertyand could subject us to monetary penalties, costs required to achievecompliance and potential liability to third parties.  We are not aware of anymaterial noncompliance, liability or claim relating to hazardous or toxicsubstances or other environmental matters in connection with any of ourproperties.  Nonetheless, it is possible that material environmentalcontamination or conditions exist, or could arise in the future in theapartment communities or on the land upon which they are located.

**We are subject to risks associated with development, acquisition andexpansion of multifamily apartment communities.**  Development projects,acquisitions and expansions of apartment communities are subject to a number ofrisks, including:
| •   | availability of acceptable financing;                                                                          |
|---------------|----------------------------------------------------------------------------------------------------------------|
| •   | competition  with other entities for investment opportunities;                                                 |
| •   | failure by our  properties to achieve anticipated operating results;                                           |
| •   | construction  costs of a property exceeding original estimates;                                                |
| •   | delays in  construction; and                                                                                   |
| •   | expenditure of  funds on, and the devotion of management time to, transactions that may not  come to fruition. |

**            We impose stockownership limitations that may discourage a takeover otherwise consideredfavorable by shareholders. **With certain limited exceptions, our SecondAmended and Restated Articles of Incorporation, as amended and supplemented todate, prohibit the ownership of more than 4.0% of our outstanding common sharesand more than 9.8% of the shares of any series of any class of our preferredshares by any person, unless we grant a waiver.  Absent such a waiver, anyshares owned in excess of such ownership limit are subject to repurchase by usand to other consequences as set forth in our Second Amended and Restated Articlesof Incorporation.  All shares of stock issued by our company are subject to thefollowing restrictions, whether such shares are in certificated or uncertificatedform:

"The Common Shares represented by this certificate are subject torestrictions on transfer for the purpose of preserving the Corporation’s statusas a Real Estate Investment Trust under the Internal Revenue Code of 1986, asamended.  Subject to certain provisions of the Corporation’s Amended andRestated Articles of Incorporation, no Person may Beneficially Own CommonShares in excess of 4.0% of the outstanding Common Shares of the Corporation(unless such Person is an Existing Holder) and no Person (other than anExisting Holder who Constructively Owns in excess of 9.8% of the Common Sharesimmediately following the consummation of the Initial Public Offering) mayConstructively Own Common Shares in excess of 9.8% of the outstanding CommonShares of the Corporation.  Any Person who attempts to Beneficially Own orConstructively Own Common Shares in excess of the above limitations mustimmediately notify the Corporation.  All capitalized terms in this legend havethe meanings defined in the Corporation’s Second Amended and Restated Articlesof Incorporation, a copy of which, including the restrictions of transfer, willbe sent without charge to each shareholder who so requests.  If therestrictions on transfer are violated, certain of the Common Shares representedmay be subject to repurchase by the Corporation on the terms and conditions setforth in the Corporation’s Second Amended and Restated Articles ofIncorporation."

| 8 |
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**We have a shareholders rights plan which would delay or prevent achange in control.**   We also have a shareholders rights plan, which may betriggered if any person or group becomes the beneficial owner of, or announcesan offer to acquire 15.0% or more of our common shares.  We are domiciled inthe State of Ohio, where various state statutes place certain restrictions ontakeover activity.  Our shareholders rights plan and these restrictions arelikely to have the effect of precluding acquisition of control of us withoutour consent even if a change in control is in the interests of shareholders.All shares of stock issued by our company include the following reference tosuch shareholders rights agreement whether such shares are in certificated oruncertificated form:

            "Thiscertificate also evidences and entitles the holder hereof to certain Rights asset forth in a Second Amended and Restated Shareholder Rights Agreement betweenAssociated Estates Realty Corporation, an Ohio corporation (the "Company"),and Wells Fargo Shareowner Services, a division of Wells Fargo Bank, N.A. asrights agent (the "Rights Agent"), dated as of December 30, 2008 (asamended, supplemented or otherwise modified from time to time, the "RightsAgreement"), the terms of which are incorporated by reference herein and acopy of which is on file at the principal offices of the Company and the stocktransfer administration office of the Rights Agent.  The Company will mail acopy of the Rights Agreement without charge to the holder of this certificatewithin five days after the receipt of a written request therefore.  Undercertain circumstances, as set forth in the Rights Agreement, the Rights will beevidenced by separate certificates and will no longer be evidenced by thiscertificate.  The Company may redeem the Rights at a redemption price of $0.01per Right, subject to adjustment, under the terms of the Rights Agreement. Under certain circumstances, Rights issued to or held by Acquiring Persons orby any Affiliates or Associates thereof (as defined in the Rights Agreement),and any subsequent holder of such Rights, may become null and void.  The Rightsare not exercisable, and are void so long as held, by a holder in anyjurisdiction where the requisite qualification to the issuance to such holder,or the exercise by such holder, of the Rights in such jurisdiction has not beenobtained."

            **Wemay fail to qualify as a REIT and our shareholders may incur tax liability as aresult.**  Commencing with our taxable year ending December 31, 1993, we haveoperated in a manner so as to permit us to qualify as a REIT under the Code,and we intend to continue to operate in such a manner.  Although we believe thatwe will continue to operate as a REIT, no assurance can be given that we willremain qualified as a REIT.  If we were to fail to qualify as a REIT in anytaxable year, we would not be allowed a deduction for distributions to ourshareholders in computing our taxable income and would be subject to federalincome tax (including any applicable alternative minimum tax) on our taxableincome at regular corporate rates.  Unless we are entitled to relief undercertain Code provisions, we also would be disqualified from treatment as a REITfor the four taxable years following the year during which REIT qualificationwas lost.  As a result, the cash available for distribution to our shareholderscould be reduced or eliminated for each of the years involved.

            **Weare subject to control by our directors and officers. **Our directors andexecutive officers and some members of their respective families ownedapproximately 15.0% of our outstanding common shares as of December 31, 2009. Accordingly, those persons have substantial influence over us and the outcomeof matters submitted to our shareholders for approval.

            **Wedepend on our key personnel.**  Our success depends to a significant degreeupon the continued contribution of key members of our management team, who maybe difficult to replace.  The loss of services of these executives could have amaterial adverse effect on us.  There can be no assurance that the services ofsuch personnel will continue to be available to us.  Our Chairman of the Board,President and Chief Executive Officer, Mr. Jeffrey I. Friedman, is a party toan employment agreement with us.  Other than Mr. Friedman, we do not haveemployment agreements with key personnel.  We do not hold key-man lifeinsurance on any of our key personnel.

| 9 |
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            **Wemay be exposed to construction business risk.**  Our subsidiary, MeritEnterprises, Inc., is engaged in the construction business as a generalcontractor.  Inherent risks of those operations include the following:
| •   | Fixed price contracts can be adversely affected by a  number of factors that cause actual results to exceed the cost estimates at  the time of original bid, resulting in increased project costs and possible  losses; |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | penalties for  late completion;                                                                                                                                                                                         |
| •   | adverse  weather conditions;                                                                                                                                                                                            |
| •   | continuing  difficulties in the development and construction industries;                                                                                                                                                |
| •   | continuing  difficulties in obtaining financing for development and construction;                                                                                                                                       |
| •   | failure of  subcontractors to perform as anticipated; and                                                                                                                                                               |
| •   | bonding  indemnification obligations for which the parent company is responsible.                                                                                                                                       |

 

**Item1B.  Unresolved Staff Comments**

            None.

 

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**Item2.  Properties**

            ***OurPortfolio.***  The following table represents our portfolio as of December31, 2009, which consists of properties we owned, directly or indirectly, andproperties we manage.
|                                        |   | **Total Number**  | ** ** | **Total Number**  |
|---------------------------------------------|--------|-------------------|------------|-------------------|
|                                        |   | **of Properties** | ** ** | **of Units**      |
|                                        |   |              |       |              |
| **Wholly Owned Properties:**                |   |              |       |              |
| Baltimore/Washington                        |   | 3                 |       | 667               |
| Florida                                     |   | 4                 |       | 1,272             |
| Georgia                                     |   | 4                 |       | 1,717             |
| Indiana                                     |   | 3                 |       | 836               |
| Michigan                                    |   | 11                |       | 2,888             |
| Ohio                                        |   | 20                |       | 3,924             |
| Virginia                                    |   | 3                 |       | 804               |
|                                        |   |              |       |              |
| Total wholly owned properties               |   | 48                |       | 12,108            |
|                                        |   |              |       |              |
| **Managed for Pension Fund Clients:**       |   |              |       |              |
| Colorado                                    |   | 1                 |       | 258               |
|                                        |   |              |       |              |
| **Total Portfolio**                         |   | 49                |       | 12,366            |
|                                        |   |              |       |              |
|                                        |   |              |       |              |
| **Other Properties:**                       |   |              |       | **Units/Sq. Ft.** |
| **Asset Managed for Pension Fund Clients:** |   |              |       |
| Multifamily:                                |   |              |       |              |
| Texas                                       |   | 1                 |       | 186               |
| Commercial:                                 |   |              |       |              |
| California                                  |   | 1                 |       | 145,000           |
|                                        |   | 2                 |       |              |
|                                        |   |              |       |              |

 

* *

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|                         |   | **Total Number** | ** ** | **Age of Owned**  |
|------------------------------|--------|------------------|------------|-------------------|
|                         |   | **of Units**     | ** ** | **Properties(1)** |
| **Wholly Owned Properties:** |   |             |       |              |
| **Baltimore/Washington**     |   |             |       |              |
| Annen Woods                  |   | 131              |       | 22                |
| Hampton Point                |   | 352              |       | 23                |
| Reflections                  |   | 184              |       | 24                |
|                         |   | 667              |       |              |
| **Florida**                  |   |             |       |              |
| Courtney Chase               |   | 288              |       | 6                 |
| Cypress Shores               |   | 300              |       | 18                |
| Vista Lago                   |   | 316              |       | 6                 |
| Windsor Pines                |   | 368              |       | 11                |
|                         |   | 1,272            |       |              |
| **Georgia**                  |   |             |       |              |
| Cambridge at Buckhead        |   | 168              |       | 14                |
| The Falls                    |   | 520              |       | 23                |
| Idlewylde                    |   | 843              |       | 8                 |
| Morgan Place                 |   | 186              |       | 20                |
|                         |   | 1,717            |       |              |
| **Indiana**                  |   |             |       |              |
| Residence at White River     |   | 228              |       | 18                |
| Steeplechase                 |   | 264              |       | 11                |
| Waterstone Apartments        |   | 344              |       | 12                |
|                         |   | 836              |       |              |
| **Michigan**                 |   |             |       |              |
| Arbor Landings               |   | 328              |       | 10                |
| Aspen Lakes Apartments       |   | 144              |       | 28                |
| Central Park Place           |   | 216              |       | 21                |
| Country Place Apartments     |   | 144              |       | 20                |
| Clinton Place Apartments     |   | 202              |       | 21                |
| Georgetown Park Apartments   |   | 480              |       | 10                |
| Oaks at Hampton              |   | 544              |       | 21                |
| The Landings at the Preserve |   | 190              |       | 18                |
| Spring Brook Apartments      |   | 168              |       | 21                |
| Spring Valley Apartments     |   | 224              |       | 22                |
| Summer Ridge                 |   | 248              |       | 18                |
|                         |   | 2,888            |       |              |
| **Ohio**                     |   |             |       |              |
| St. Andrews at Little Turtle |   | 102              |       | 22                |
| Barrington                   |   | 288              |       | 10                |
| Bedford Commons              |   | 112              |       | 22                |
| Bradford at Easton           |   | 324              |       | 13                |
| Heathermoor                  |   | 280              |       | 20                |
| Kensington Grove             |   | 76               |       | 14                |
| Lake Forest                  |   | 192              |       | 15                |

 
| (1) | Age  of property is determined by subtracting from 2009 the year construction of the  property was completed or, if applicable, the year the property was substantially  rehabilitated. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|                               |   | **Total Number** | ** ** | **Age of Owned**  |       |            |
|------------------------------------|--------|------------------|------------|-------------------|------------|-----------------|
|                               |   | **of Units**     | ** ** | **Properties(1)** |       |            |
| **Ohio (Continued)**               |   |             |       |              |       |            |
| Mallard's Crossing                 |   | 192              |       | 19                |       |            |
| Muirwood Village at Bennell        |   | 164              |       | 21                |       |            |
| Perimeter Lakes                    |   | 189              |       | 17                |       |            |
| Remington Place                    |   | 234              |       | 19                |       |            |
| Residence at Christopher Wren      |   | 264              |       | 16                |       |            |
| Residence at Turnberry             |   | 216              |       | 18                |       |            |
| Saw Mill Village                   |   | 340              |       | 22                |       |            |
| Sterling Park                      |   | 128              |       | 15                |       |            |
| Village at Avon                    |   | 312              |       | 8                 |       |            |
| Westchester Townhomes              |   | 136              |       | 20                |       |            |
| Western Reserve                    |   | 108              |       | 11                |       |            |
| Westlake Townhomes                 |   | 7                |       | 24                |       |            |
| Williamsburg Townhomes             |   | 260              |       | 19                |       |            |
|                               |   | 3,924            |       |              |       |            |
| **Virginia**                       |   |             |       |              |       |            |
| The Alexander at Ghent             |   | 268              |       | 3                 |       |            |
| The Belvedere                      |   | 296              |       | 4                 |       |            |
| River Forest                       |   | 240              |       | 3                 |       |            |
|                               |   | 804              |       |              |       |            |
|                               |   |             |       |              |       |            |
| **Total wholly owned  properties** |   | 12,108           |       | 15                |       |            |
|                               |   |             |       |              |       |            |
|                               |   |             |       |              |       |            |
|                               |   |             |       |              |       | **Anticipated** |
|                               |   | **Location**     | ** ** | **Acres**         | ** ** | **Completion**  |
|                               |   | ** **       | ** ** | ** **        | ** ** | ** **      |
| **Undeveloped Land Parcels:**      |   |             |       | ** **        | ** ** |            |
| Aspen Lakes                        |   | Grand Rapids, MI |       | 19.5              |       | On Hold         |
| Landings at the Preserve           |   | Battle Creek, MI |       | 4.3               |       | On Hold         |
| River Forest                       |   | Richmond, VA     |       | 5.9               |       | 2010            |
| Westlake                           |   | Westlake, OH     |       | 39.0              |       | On Hold         |
| Wyndemere                          |   | Franklin, OH     |       | 10.0              |       | On Hold         |
| Total undeveloped land parcels     |   |             |       | 78.7              |       |            |
|                               |   |             |       |              |       |            |

 
| (1) | Age  of property is determined by subtracting from 2009 the year construction of the  property was completed or, if applicable, the year the property was substantially  rehabilitated. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Indebtedness Encumbering theProperties.***  We have financed, and in many cases refinanced, theacquisition, development and rehabilitation of our properties with a variety ofsources of mortgage indebtedness.  At December 31, 2009, 17 of the 48 whollyowned properties were unencumbered, 24 properties were encumbered byconventional mortgages, five properties were encumbered bycross-collateralized, cross-defaulted mortgage loans, and two properties wereencumbered by federally insured mortgages.

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**Item 3.  Legal Proceedings**

            For information concerning current legalproceedings, see Note 8 of the Notes to Consolidated Financial Statementspresented in Part II, Item 8 of this report on Form 10-K.

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

            No matter was submitted to a vote ofsecurity holders during the fourth quarter of the fiscal year covered by thisreport.

**Executive Officers of the Registrant and OtherKey Employees**

            The following information regarding our executiveofficers is provided pursuant to Instruction 3 to Item 401(b) of RegulationS-K.
| Name                                                                                                                                 |   | Age    |   | Position with  the Company                                    |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------|
| Jeffrey I. Friedman                                                                                                                  |   | 58     |   | Chairman of the Board, President and Chief Executive  Officer |
|                                                 |   |   |   |                                                          |
| Lou Fatica                                                                                                                           |   | 43     |   | Vice President, Treasurer and Chief Financial Officer         |
|                                  |   |   |   |                                                          |
| Martin A. Fishman                                                                                                                    |   | 68     |   | Vice President, General Counsel and Secretary                 |
|                        |   |   |   |                                                          |
| John T. Shannon                                                                                                                      |   | 48     |   | Senior Vice President, Operations                             |

             Jeffrey I. Friedman has served as ourChairman of the Board and Chief Executive Officer since the Company wasorganized in 1993 and served as our President from the Company's organizationuntil February 24, 2000.  In August 2002, Mr. Friedman reassumed the role ofPresident.  Mr. Friedman joined the Company's predecessor, Associated EstatesGroup, ("AEG"), in 1974 and later became Chief Executive Officer andPresident of Associated Estates Corporation, a company in the AEG group.

            Lou Fatica joined the Company in 1999 asController, and was promoted to Vice President-Controller during 2000.  OnMarch 15, 2001, Mr. Fatica became Vice President, Treasurer and Chief FinancialOfficer of the Company.  Mr. Fatica is a Certified Public Accountant (CPA), amember of the American Institute of Certified Public Accountants (AICPA) andthe Ohio Society of CPA's.

            Martin A. Fishman has been our VicePresident, General Counsel and Secretary since the Company's organization.  Mr.Fishman joined AEG in 1986 as Vice President - General Counsel of AssociatedEstates Corporation, a position he held until the formation of the Company.

| John T. Shannon joined the Company in 2004 as Senior Vice President,  Operations.  Mr. Shannon had previously held the position of Vice  President of Operations at The Shelter Group.  He has a degree in  Business Administration with concentration in real estate finance and  construction management from the University of Denver.  Mr. Shannon has  20 years of property management experience. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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            Inaddition to the officers named in the table above, the following persons havebeen appointed as officers of the Company and hold positions in seniormanagement as indicated:

            MichelleB. Creger joined the Company in 2009 as Vice President, Associate GeneralCounsel.  Ms. Creger was previously the Vice President of Human Resources atU-Store-It Trust, and has also worked for American Greetings Corporation andMcDonald Hopkins, a major Cleveland law firm.  She earned her law degree fromCase Western Reserve University School of Law and a Bachelor's degree inEconomics from Creighton University.  Ms. Creger has over 27 years of legalexperience and is 54 years old.

            Patrick Duffy joined the Company in 2005 as Vice President of Strategic Marketing.  Mr. Duffyplays a key role in our diversification plan by assisting in identifyingmarkets for asset acquisitions and dispositions.  In addition, he isresponsible for developing property-specific marketing plans and strategies toassist in maximizing top line revenue growth for our properties, while alsoassisting with pricing and positioning strategies.  Mr. Duffy previously heldthe position of Senior Vice President of Marketing at The Shelter Group.  Hegraduated from Loyola College and holds a Master's Degree in AdministrativeSciences from Johns Hopkins University.  Mr. Duffy has over 23 years ofexperience in the real estate industry and is 48 years old.

            JasonA. Friedman joined the Company in 2009 as Vice President, Construction andDevelopment and as President of Merit Enterprises, Inc.  He previously was thePresident of JAS Construction, Inc., a general contractor specializing inmultifamily renovations.  During his tenure at JAS, he was involved inapproximately $100 million of multifamily renovation projects in variousstates.  Mr. Friedman has also worked for PricewaterhouseCoopers where heprovided valuation and advisory services to real estate clients.  He graduatedfrom Auburn University with a major in Communications and Business.  Mr.Friedman is a member of the Urban Land Institute.  Mr. Friedman has over 10years of real estate experience and is 35 years old.

            DanielE. Gold joined the Company in 2009 as Vice President of Human Resources.  Mr.Gold previously served as the Director of Corporate Human Resources for FalconTransport and has also worked for Rockwell Automation, Cap Gemini and BaileyControls.  Mr. Gold is responsible for the oversight of all Human Resourcefunctions, including employee development, compensation, benefits, recruitingand payroll.  Mr. Gold has a Bachelor's of Science degree in Communicationsfrom Ohio University, and is a member of both the Ohio Human Resource PlanningSociety and the Society for Human Resource Management.  Mr. Gold has over 16years of Human Resources experience and is 41 years old.

             MiriaC. Rabideau joined the Company in 1994 as a Property Manager, and was promotedto Regional Manager in 2003.  During 2006, she was promoted to Regional VicePresident and during 2009 she was promoted to Vice President of Operations. Ms. Rabideau is responsible for properties in Colorado, Indiana, Michigan andNortheast Ohio.  Ms. Rabideau has 17 years of asset and property managementexperience. She has a Bachelor's degree from Michigan State University and is 40years old.

            BethL. Stoll joined the Company in 2004 as a Regional Vice President, and waspromoted to Vice President of Operations during 2006.  She is responsible forproperties in Georgia, Maryland, Florida, Virginia and Central Ohio.  Ms. Stollis also responsible for the AEC Academy for Career Development, which providestraining and support for our employees.  Ms. Stoll previously held the positionof Regional Vice President at The Shelter Group.  Ms. Stoll has over 22 yearsof property management experience and is 54 years old.

 

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**PART II**

**Item 5. Market for Registrant's CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

            Ourcommon shares are traded on the NYSE and NASDAQ under the trading symbol"AEC."  The following table sets forth for the periods indicated thehigh and low closing sale prices per common share as reported on the NYSE(composite tape) and the dividends declared per common share.
|           |   |        |       |       |    |        |   |        |        | Dividends Declared |
|----------------|--------|-------------|------------|------------|---------|-------------|--------|-------------|-------------|--------------------|
|           |   | Price Range |       | Per Share  |
|           |   | 2009        |       | 2008       |    | 2009        |   | 2008        |
|           |   | High        |       | Low        |    | High        |   | Low         |        |               |   |   |
| First Quarter  |   |  $     | 8.75  |       |  $ | 4.87   |   |  $     | 12.16  |               |  $ | 8.30  |   |  $ | 0.17  |   |  $ | 0.17  |
| Second Quarter |   | 6.71   |       | 5.08  |    | 13.47  |   | 10.71  |        | 0.17          |   | 0.17  |
| Third Quarter  |   | 10.21  |       | 5.16  |    | 14.88  |   | 10.97  |        | 0.17          |   | 0.17  |
| Fourth Quarter |   | 11.27  |       | 8.98  |    | 13.06  |   | 6.35   |        | 0.17          |   | 0.17  |
|           |   |        |       |       |    |        |   |        |        |  $            | 0.68  |   |  $ | 0.68  |
|                |        |             |            |            |         |             |        |             |             |                    |  |  |  |  |  |  |  |  |

            During the year endedDecember 31, 2009, net income attributable to AERC was less than the totaldividends declared on our common shares.  However, cash flow from operationswas sufficient to pay cash dividends.  For a discussion of liquidity andcapital resources, see Part II, Item 7 of this report on Form 10-K.

            On February 11, 2010,there were approximately 800 holders of record and approximately 7,610 beneficialowners of our common shares.   For information concerning security ownership ofcertain beneficial owners and management and related shareholder matters, seePart III, Item 12 of this report on Form 10-K.

            Wemaintain a dividend reinvestment plan under which shareholders may elect to reinvesttheir dividends automatically in our common shares.  Under the plan, theadministrator of the plan will purchase shares directly from us (eithertreasury shares or newly-issued common shares), in the open market, or inprivately negotiated transactions with third parties on behalf of participatingshareholders.

            Thereis a total of $26.3 million remaining on our Board of Director authorizationsto repurchase our common and/or preferred shares.  Additionally, we have apolicy which allows employees to pay their portion of the income taxes relatedto restricted share vesting by surrendering a number of shares to us equal invalue on the day of vesting to the amount of taxes due up to the minimumstatutory withholding amount.  The following table sets forth our repurchaseactivities for the fourth quarter of 2009. 
| Issuer Purchases of Equity Securities for the Three  Months Ended December 31, 2009 |
|-------------------------------------------------------------------------------------|
|                                                                                |   |   |   |   |   |   |   |   |
|                                                                                |   |   |   |   |   |   |   | Approximate Dollar |
|                                                                                |   |   |   |   |   | Total Number of |   | Value of Shares |
|                                                                                |   |   |   |   |   | Shares Purchased |   | That May Yet Be |
|                                                                                |   | Total Number |   | Average |   | As Part of |   | Purchased Under the |
|                                                                                |   | of Shares |   | Price Paid |   | Publicly Announced |   | Plans or Programs |
| Period                                                                              |   | Purchased |   | Per Share |   | Plans or Programs |   | (in thousands) |
| October 1 through                                                                   |   |   |   |   |   |   |   |   |
| October  31                                                                         |   | -    |   |  $ | -    |   | -     |   |  $ | 26,288  |
| November 1 through                                                                  |   |   |   |   |   |   |   |   |
| November  30                                                                        |   | 113  |   | 9.72  |   | -    |   | 26,288  |
| December 1 through                                                                  |   |   |   |   |   |   |   |   |
| December  31                                                                        |   | -  |   | -  |   | -    |   | 26,288  |
| Total                                                                               |   | 113  |   |  $ | 9.72  |   | -    |   |   |

 

| 16 |
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            InJanuary 2010, we sold 5,175,000 of our common shares in a public offering at aprice of $11.10 per share, which resulted in total net proceeds of approximately$54.7 million.

**Item6.  Selected Financial Data**

            Thefollowing tables set forth selected financial and other data for us on aconsolidated basis.  The historical financial information contained in thetables has been derived from and should be read in conjunction with (i) ourConsolidated Financial Statements and Notes thereto and (ii) Management'sDiscussion and Analysis of Financial Condition and Results of Operations bothincluded elsewhere herein.
| *(In thousands, except per  share, unit count and net collected rent amounts)* |   | Year Ended December 31, |
|--------------------------------------------------------------------------------|--------|-------------------------|
| * *                                                                       |   | 2009                    |   | 2008 |   | 2007 |   | 2006 |   | 2005 |
| **Operating Data:**                                                            |   |                    |   |   |   |   |   |   |   |   |
| Revenue                                                                        |   |                    |   |   |   |   |   |   |   |   |
| Property  revenue                                                              |   |  $                 | 127,972  |   |  $ | 127,848  |   |  $ | 113,772  |   |  $ | 102,771  |   |  $ | 95,245  |
| Management  and service operations:                                            |   |                    |   |   |   |   |   |   |   |   |
| Fees,  reimbursements and other                                                |   | 1,287              |   | 1,784  |   | 10,990  |   | 11,689  |   | 11,723  |
| Construction  and other services                                               |   | 1,160              |   | 1,010  |   | 2,218  |   | 1,078  |   | 1,094  |
| Total  revenue                                                                 |   | 130,419            |   | 130,642  |   | 126,980  |   | 115,538  |   | 108,062  |
|                                                                           |   |                    |   |   |   |   |   |   |   |   |
| Total expenses                                                                 |   | (106,615)               |   | (106,705) |   | (104,562) |   | (96,068) |   | (90,158) |
|                                                                           |   |                    |   |   |   |   |   |   |   |   |
| Interest  income                                                               |   | 46                 |   | 132  |   | 429  |   | 650  |   | 627  |
| Interest  expense                                                              |   | (34,220)                |   | (35,660) |   | (38,798) |   | (45,660) |   | (34,111) |
|                                                                           |   |                    |   |   |   |   |   |   |   |   |
| (Loss) income before gain on  disposition of investment, gain on               |   |                    |   |   |   |   |   |   |   |   |
| insurance  recoveries, equity in net income (loss) of joint ventures,          |   |                    |   |   |   |   |   |   |   |   |
| and  income from discontinued operations                                       |   | (10,370)                |   | (11,591) |   | (15,951) |   | (25,540) |   | (15,580) |
| Gain on disposition of  investment                                             |   | -                  |   | -  |   | -  |   | -  |   | 150  |
| Gain on insurance recoveries                                                   |   | 665                |   | -  |   | -  |   | -  |   | -  |
| Equity in net income (loss)  of joint ventures                                 |   | -                  |   | 1,502  |   | (258) |   | (462) |   | (644) |
| **(Loss) income from  continuing operations**                                  |   | (9,705)                 |   | (10,089) |   | (16,209) |   | (26,002) |   | (16,074) |
| Income from discontinued  operations:                                          |   |                    |   |   |   |   |   |   |   |   |
| Operating  income (loss)                                                       |   | 568                |   | (433) |   | 5,563  |   | (1,009) |   | 3,807  |
| Gain  on disposition of properties                                             |   | 15,400             |   | 45,202  |   | 20,864  |   | 54,093  |   | 48,536  |
| Income from discontinued  operations                                           |   | 15,968             |   | 44,769  |   | 26,427  |   | 53,084  |   | 52,343  |
| **Net income**                                                                 |   | 6,263              |   | 34,680  |   | 10,218  |   | 27,082  |   | 36,269  |
| Net income attributable to  noncontrolling redeemable interest                 |   | (53)                    |   | (53) |   | (53) |   | (61) |   | (63) |
| **Net income attributable  to AERC**                                           |   | 6,210              |   | 34,627  |   | 10,165  |   | 27,021  |   | 36,206  |
| Preferred share dividends                                                      |   | (4,199)                 |   | (4,655) |   | (4,924) |   | (5,046) |   | (5,130) |
| Preferred share repurchase  costs                                              |   | -                  |   | (143) |   | (58) |   | -  |   | (2,163) |
| Discount/(premium) on  preferred share repurchase                              |   | -                  |   | 2,289  |   | (114) |   | -  |   | -  |
| Allocation to participating  securities                                        |   | (423)                   |   | (730) |   | (338) |   | (770) |   | (623) |
| **Net income applicable to  common shares**                                    |   |  $                 | 1,588  |   |  $ | 31,388  |   |  $ | 4,731  |   |  $ | 21,205  |   |  $ | 28,290  |
| ** **                                                                     |   |                    |   |   |   |   |   |   |   |   |
| **Earnings per common share  - Basic and Diluted:**                            |   |                    |   |   |   |   |   |   |   |   |
| (Loss)  income from continuing operations                                      |   |                    |   |   |   |   |   |   |   |   |
| applicable  to common shares                                                   |   |  $                 | (0.85) |   |  $ | (0.78) |   |  $ | (1.27) |   |  $ | (1.83) |   |  $ | (1.22) |
| Income  from discontinued operations                                           |   | 0.95               |   | 2.71  |   | 1.55  |   | 3.07  |   | 2.70  |
| Net  income applicable to common shares                                        |   |  $                 | 0.10  |   |  $ | 1.93  |   |  $ | 0.28  |   |  $ | 1.24  |   |  $ | 1.48  |
|                                                                           |   |                    |   |   |   |   |   |   |   |   |
| Weighted  average number of common shares outstanding                          |   | 16,516             |   | 16,262  |   | 16,871  |   | 17,023  |   | 19,162  |
|                                                                           |   |                    |   |   |   |   |   |   |   |   |
| **Dividends declared per  common share**                                       |   |  $                 | 0.68  |   |  $ | 0.68  |   |  $ | 0.68  |   |  $ | 0.68  |   |  $ | 0.68  |

            

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|                                                                  |   | 2009          |          | 2008          |    | 2007          |   | 2006          |          | 2005          |
|-----------------------------------------------------------------------|--------|---------------|---------------|---------------|---------|---------------|--------|---------------|---------------|---------------|
| **Cash flow data:**                                                   |   |          |          |          |    |          |   |          |          |          |
| Cash flow provided by  operations                                     |   |  $       | 31,300   |          |  $ | 24,665   |   |  $       | 28,962   |          |  $ | 17,912  |   |  $ | 24,376  |
| Cash flow provided by (used  for) investing activity                  |   | 16,450   |          | 41,051   |    | (38,610)      |   | 73,935   |          | 4,421    |
| Cash flow used for financing  activity                                |   | (47,701)      |          | (63,714)      |    | (18,813)      |   | (101,570)     |          | (50,798)      |
|                                                                  |   |          |          |          |    |          |   |          |          |          |
| **Balance Sheet Data at  December 31:**                               |   |          |          |          |    |          |   |          |          |          |
| Real estate assets, net                                               |   |  $       | 638,535  |          |  $ | 673,848  |   |  $       | 659,586  |          |  $ | 591,520  |   |  $ | 645,937  |
| Total assets                                                          |   | 662,505  |          | 699,896  |    | 686,796  |   | 648,829  |          | 719,242  |
| Total debt                                                            |   | 525,836  |          | 557,481  |    | 556,695  |   | 498,634  |          | 573,570  |
| Total shareholders' equity                                            |   | 99,440   |          | 105,621  |    | 89,786   |   | 112,051  |          | 108,980  |
|                                                                  |   |          |          |          |    |          |   |          |          |          |
| **Other Data:**                                                       |   |          |          |          |    |          |   |          |          |          |
| Net operating income (1)  (5)                                         |   |  $       | 72,765   |          |  $ | 73,619   |   |  $       | 62,033   |          |  $ | 55,321  |   |  $ | 51,831  |
| Funds from operations (2)  (6)                                        |   |  $       | 19,836   |          |  $ | 21,893   |   |  $       | 17,659   |          |  $ | 930  |   |  $ | 15,217  |
| Funds from operations as  adjusted (3) (6)                            |   |  $       | 19,273   |          |  $ | 21,706   |   |  $       | 22,055   |          |  $ | 16,453  |   |  $ | 17,380  |
| Total properties (at end of  period) - includes joint ventures        |   | 48       |          | 50       |    | 64       |   | 66       |          | 74       |
| Total multifamily units (at  end of period) - includes joint ventures |   | 12,108   |          | 12,672   |    | 14,450   |   | 15,355   |          | 17,395   |
| Average monthly net  collected rent per unit                          |   |  $       | 852      |          |  $ | 858      |   |  $       | 815      |          |  $ | 750  |   |  $ | 689  |
| Physical occupancy (4)                                                |   | 93.9%         |          | 93.0%         |    | 94.1%         |   | 94.5%         |          | 92.9%         |

 
| (1)   | We consider net operating income ("NOI") to  be an important indicator of our overall performance because it reflects the  operating performance of our real estate portfolio and management and service  companies at the property and management and service company level and is  used to assess regional property and management and service company level  performance.  NOI is determined by deducting property operating and  maintenance expenses, direct property management and service company expenses  and construction and other services expense from total revenue.  NOI should  not be considered (i) as an alternative to net income determined in  accordance with accounting principles generally accepted in the United States  ("GAAP"), (ii) as an indicator of financial performance, (iii) as  cash flow from operating activities (determined in accordance with GAAP) or  (iv) as a measure of liquidity; nor is it necessarily indicative of  sufficient cash flow to fund all of our needs.  Other real estate companies  may define NOI in a different manner.                                                                                                                                                                                                                                                                                                                                                                |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   | We calculate funds from operations ("FFO")  in accordance with the definition adopted by the Board of Governors of the  National Association of Real Estate Investment Trusts ("NAREIT").   This definition includes all operating results, both recurring and  non-recurring, except those results defined as "extraordinary  items" under GAAP, adjusted for depreciation on real estate assets and  amortization of intangible assets, gains on insurance recoveries, and gains  and losses from the disposition of properties and land.  We calculate FFO per  share using the weighted average shares outstanding amounts used in the  calculation of basic and diluted earnings per share in accordance with GAAP.   FFO does not represent cash generated from operating activities in accordance  with GAAP and is not necessarily indicative of cash available to fund cash  needs and should not be considered an alternative to net income as an  indicator of our operating performance or as an alternative to cash flow as a  measure of liquidity.  FFO is used in the real estate industry as a  supplemental measure of the operating performance of real estate companies  because it excludes charges such as real estate depreciation that are  generally considered not to be reflective of the actual value of real estate  assets over time.  Other real estate companies may define FFO in a different  manner. |
| (3)   | Funds from operations ("FFO") as adjusted  is FFO, as defined above, adjusted for certain corporate transactions to  provide an amount that is more representative of the operations of our real  estate portfolio.  We consider FFO as adjusted to be a more appropriate  measure of comparing the operating performance of our real estate portfolio  between periods as well as to that of other real estate companies.  Other  real estate companies may define FFO as adjusted in a different manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (4)   | Physical occupancy represents the actual number of  units leased divided by the total number of units available at the end of the  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

 

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| (5)   | Reconciliation of NOI to net income attributable to  AERC: |
|------------|------------------------------------------------------------|

 
|                                                           |   | Year Ended December 31, |
|----------------------------------------------------------------|--------|-------------------------|
| *(In thousands)*                                               |   | 2009                    |   | 2008 |   | 2007 |   | 2006 |   | 2005 |
|                                                           |   |                    |   |   |   |   |   |   |   |   |
| Net operating income                                           |   |  $                 | 72,765  |   |  $ | 73,619  |   |  $ | 62,033  |   |  $ | 55,321  |   |  $ | 51,831  |
| Depreciation and  amortization                                 |   | (34,937)                |   | (35,913) |   | (29,288) |   | (26,011) |   | (25,928) |
| General and administrative  expense                            |   | (14,024)                |   | (13,769) |   | (10,327) |   | (9,840) |   | (7,999) |
| Interest income                                                |   | 46                 |   | 132  |   | 429  |   | 650  |   | 627  |
| Interest expense                                               |   | (34,220)                |   | (35,660) |   | (38,798) |   | (45,660) |   | (34,111) |
| Gain on disposition of  investment                             |   | -                  |   | -  |   | -  |   | -  |   | 150  |
| Gain on insurance recoveries                                   |   | 665                |   | -  |   | -  |   | -  |   | -  |
| Equity in net income (loss)  of joint ventures                 |   | -                  |   | 1,502  |   | (258) |   | (462) |   | (644) |
| Income from discontinued  operations:                          |   |                    |   |   |   |   |   |   |   |   |
| Operating  income (loss)                                       |   | 568                |   | (433) |   | 5,563  |   | (1,009) |   | 3,807  |
| Gain  on disposition of properties                             |   | 15,400             |   | 45,202  |   | 20,864  |   | 54,093  |   | 48,536  |
| Income from discontinued  operations                           |   | 15,968             |   | 44,769  |   | 26,427  |   | 53,084  |   | 52,343  |
| Net income                                                     |   | 6,263              |   | 34,680  |   | 10,218  |   | 27,082  |   | 36,269  |
| Net income attributable to  noncontrolling redeemable interest |   | (53)                    |   | (53) |   | (53) |   | (61) |   | (63) |
| Net income attributable to  AERC                               |   |  $                 | 6,210  |   |  $ | 34,627  |   |  $ | 10,165  |   |  $ | 27,021  |   |  $ | 36,206  |

 
| (6)   | Reconciliation of NOI to net income attributable to  AERC: to FFO and FFO as adjusted: |
|------------|----------------------------------------------------------------------------------------|

 
|                                                                    |   | Year Ended December 31, |
|-------------------------------------------------------------------------|--------|-------------------------|
| *(In thousands, except per  share amounts)*                             |   | 2009                    |   | 2008 |   | 2007 |   | 2006 |   | 2005 |
|                                                                    |   |                    |   |   |   |   |   |   |   |   |
| Net income attributable to  AERC                                        |   |  $                 | 6,210  |   |  $ | 34,627  |   |  $ | 10,165  |   |  $ | 27,021  |   |  $ | 36,206  |
| Depreciation - real estate  assets                                      |   | 32,822             |   | 32,560  |   | 31,363  |   | 31,205  |   | 32,355  |
| Depreciation - real estate  assets - joint ventures                     |   | -                  |   | 91  |   | 529  |   | 962  |   | 959  |
| Amortization of joint  venture deferred costs                           |   | -                  |   | -  |   | 17  |   | 34  |   | 34  |
| Amortization of intangible  assets                                      |   | 1,068              |   | 3,929  |   | 1,545  |   | 847  |   | 1,492  |
| Preferred share dividends                                               |   | (4,199)                 |   | (4,655) |   | (4,924) |   | (5,046) |   | (5,130) |
| Preferred share repurchase  costs                                       |   | -                  |   | (143) |   | (58) |   | -  |   | (2,163) |
| Preferred share repurchase  discount/(premium)                          |   | -                  |   | 2,289  |   | (114) |   | -  |   | -  |
| Gain on disposition of joint  venture property                          |   | -                  |   | (1,603) |   | -  |   | -  |   | -  |
| Gain on disposition of  properties/gain on insurance recoveries         |   | (16,065)                |   | (45,202) |   | (20,864) |   | (54,093) |   | (48,536) |
| Funds from operations                                                   |   | 19,836             |   | 21,893  |   | 17,659  |   | 930  |   | 15,217  |
|                                                                    |   |                    |   |   |   |   |   |   |   |   |
| Defeasance and other  prepayment costs                                  |   | -                  |   | 1,959  |   | 4,224  |   | 15,523  |   | -  |
| Preferred stock repurchase  costs                                       |   | -                  |   | 143  |   | 58  |   | -  |   | 2,163  |
| Preferred stock repurchase  discount                                    |   | -                  |   | (2,289) |   | 114  |   | -  |   | -  |
| Refund of defeasance costs  for previously defeased loans               |   | (563)                   |   | -  |   | -  |   | -  |   | -  |
| Funds from operations as  adjusted                                      |   |  $                 | 19,273  |   |  $ | 21,706  |   |  $ | 22,055  |   |  $ | 16,453  |   |  $ | 17,380  |
|                                                                    |   |                    |   |   |   |   |   |   |   |   |
| Funds from operations per  common share - basic and diluted             |   |  $                 | 1.20  |   |  $ | 1.35  |   |  $ | 1.05  |   |  $ | 0.06  |   |  $ | 0.79  |
| Funds from operations as  adjusted per common share - basic and diluted |   |  $                 | 1.17  |   |  $ | 1.33  |   |  $ | 1.31  |   |  $ | 0.97  |   |  $ | 0.91  |
|                                                                    |   |                    |   |   |   |   |   |   |   |   |
| Weighted average shares  outstanding - basic and diluted                |   | 16,516             |   | 16,262  |   | 16,871  |   | 17,023  |   | 19,162  |

 

 

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**Item 7. Management's Discussion and Analysis of Financial Condition and Results ofOperations**

            Thefollowing discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto included in Part II, Item 8 of thisreport on Form 10-K.  This discussion may contain forward-looking statementsbased on current judgments and current knowledge of management, which aresubject to certain risks, trends and uncertainties that could cause actualresults to vary from those projected, including but not limited to,expectations regarding our 2010 performance that are based on certainassumptions.  Accordingly, readers are cautioned not to place undue reliance onforward-looking statements which speak only as of the date of the document. These forward-looking statements are intended to be covered by the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  The words"expects," "projects," "believes," "plans,""anticipates" and similar expressions are intended to identify forward-lookingstatements.  Investors are cautioned that these forward-looking statementsinvolve risks and uncertainty that could cause actual results to differ fromestimates or projections contained in these forward-looking statements.  For adiscussion of these risks and uncertainties, see "Risk Factors" inItem 1A of this report on Form 10-K.

            ***Overview.*** We are engaged primarily in the ownership and operation of multifamilyresidential units.  We also provide asset and property management services to thirdparty owners of multifamily residential units for which we are paid fees.  Ourprimary source of cash and revenue from operations is rents from the leasing ofowned apartment units, which represented 98.1% of our consolidated revenue forthe year ended December 31, 2009.

            Theoperating performance of our properties is affected by general economic trendsincluding, but not limited to, factors such as household formation, job growth,unemployment rates, population growth, immigration, the supply of new multifamilyrental communities and in certain markets the supply of other housingalternatives, such as condominiums, single and multifamily rental homes andowner occupied single and multifamily homes.  Additionally, our performance maybe affected by the access to and cost of debt and equity.

            Rentalrevenue collections are a combination of rental rates, occupancy levels andrent concessions.  We attempt to adjust these factors to adapt to changingmarket conditions, thus allowing us to maximize rental revenue.  Indicatorsthat we use in measuring these factors include physical occupancy and net collectedrent per unit.  These indicators are more fully described in the Results ofOperations comparison.  Additionally, we consider property NOI and FFO to be importantindicators of our overall performance.  Property NOI (property operatingrevenue less property operating and maintenance expenses) is a measure of theprofitability of our properties and has the largest impact on our financialcondition and operating results.  FFO is used in the real estate industry as a supplementalmeasure of the operating performance of real estate companies because itexcludes charges such as real estate depreciation that are generally considerednot to be reflective of the actual value of real estate assets over time.  Additionally,gains and losses from the sale of most real estate assets and certain otheritems are also excluded from FFO.  See Selected Financial Data presented inPart II, Item 6 of this report on Form 10-K for reconciliations of NOI and FFO toconsolidated net income attributable to AERC in accordance with accountingprinciples generally accepted in the United States ("GAAP").

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            OurSame Community portfolio for the years 2008 and 2009 consists of 46 propertiescontaining 11,572 units and accounted for 93.1% of total revenue in 2009 and 94.0%of our property NOI.  Same Community NOI decreased 2.4% in 2009 compared to2008 primarily as a result of a $2.7 million or 13.6% reduction in NOI from ourSoutheast portfolio.  Our Midwest portfolio, however, increased NOI $931,000 or2.3% while our Mid-Atlantic portfolio remained relatively flat in 2009.  Thefollowing table presents NOI results for 2009 and 2008:
|                                 |   | Year Ended December 31, |
|--------------------------------------|--------|-------------------------|
|                                 |   | 2009                    |   | 2008 |
| *(In thousands)*                     |   | NOI                     |   | NOI |
| Same Community Properties:           |   |                    |   |   |
| Midwest                              |   |  $                 | 41,901  |   |  $ | 40,970  |
| Mid-Atlantic                         |   | 9,563              |   | 9,498  |
| Southeast                            |   | 17,302             |   | 20,020  |
| Total Same Community                 |   | 68,766             |   | 70,488  |
| Acquired Properties                  |   | 4,404              |   | 3,299  |
| Total Property NOI                   |   |  $                 | 73,170  |   |  $ | 73,787  |
| Service Company NOI                  |   | 180                |   | 160  |
| Construction and Other  Services NOI |   | (585)                   |   | (328) |
| Total NOI                            |   |  $                 | 72,765  |   |  $ | 73,619  |

 

            Our2010 earnings guidance does not include any acquisitions or dispositions.  However,we intend to continue to evaluate potential property acquisitions when ourinvestment criteria warrant an acquisition.  Moreover, we will consider land developmentopportunities now that we again have the in-house construction expertiseavailable through Merit Enterprises, our wholly owned subsidiary.   We also maysell properties where market conditions are such that the reinvestment of cashproceeds derived from a sale are expected to provide over time a significantlygreater return on equity, an increase in cash flow or further enhance ourstrategic objectives.

            Weare also focused on reducing the ratio of our total debt to gross real estateassets and the overall interest charges on our borrowings, which at December31, 2009, had a weighted average rate of 6.2%.  In January 2010, we raisedapproximately $54.7 million in a public offering of 5.2 million common shares. These proceeds were used to repay the $12.5 million borrowings on our revolverand to prepay a $42.0 million mortgage loan that was to mature in June 2010.

              In order to maximizeproperty NOI, we plan to continue to focus our efforts on improving revenue,controlling costs and realizing operational efficiencies at the property level,both regionally and portfolio-wide.  In 2010, at the midpoint of our guidance,we expect Same Community NOI to decrease 3.25% and we expect property revenueto decrease 0.5% while property operating expenses increase 3.25% compared to2009.  However, the uncertainties caused by current economic conditions and theunprecedented financial crisis complicate our ability to forecast futureperformance.  We believe that the apartment industry is better situated toweather the recession than other real estate sectors because people willnormally choose shelter over discretionary spending such as going to the mallor hotel stays and because government sponsored agencies such as Fannie Mae andFreddie Mac continue to provide attractive apartment financing, which may be unavailableto other commercial real estate sectors. However, our 2010 expectations may beadversely impacted if recessionary forces accelerate or Congress curtailsFannie Mae or Freddie Mac financing support to the apartment industry.

***           ******Federal Income Taxes.***  We have elected to betaxed as a Real Estate Investment Trust ("REIT") under Sections 856through 860 of the Internal Revenue Code of 1986, as amended, commencing withour taxable year ending December 31, 1993.  REITs are subject to a number oforganizational and operational requirements including a requirement that 90.0%of the income that would otherwise be considered as taxable income bedistributed to shareholders.  Providing we continue to qualify as a REIT, wewill generally not be subject to federal income tax on net income.  However,our Service Companies are subject to federal income tax.

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            AREIT is precluded from owning more than 10.0% of the outstanding votingsecurities of any one issuer, other than a wholly owned subsidiary or anotherREIT, and more than 10.0% of the value of all securities of any one issuer.  Asan exception to this prohibition, a REIT is allowed to own up to 100% of thesecurities of a TRS that can provide non-customary services to REIT tenants andothers without disqualifying the rents that a REIT receives from its tenants. However, no more than 25.0% of the value of a REIT's total assets can berepresented by securities of one or more TRS's.  The amount of intercompanyinterest and other expenses between a TRS and a REIT are subject to arms lengthallocations.  We have elected TRS status for all of our Service Companies.

***LIQUIDITYAND CAPITAL RESOURCES***

            ***CashFlows and Liquidity.***  Significant sources and uses of cash in the pastthree years are summarized as follows:

            ***SignificantCash Sources (Uses):***
|                                                                 | Year Ended December 31, |
|----------------------------------------------------------------------|-------------------------|
| *(In thousands)*                                                     | 2009                    |   | 2008 |   | 2007 |
| * *                                                             |                    |   |   |   |   |
| Net cash provided by  operations                                     |  $                 | 31,300  |   |  $ | 24,665  |   |  $ | 28,962  |
| Fixed assets:                                                        |                    |   |   |   |   |
| Property/land  acquisitions and development expenditures, net        | (4,526)                 |   | (34,604) |   | (70,547) |
| Net  property/land disposition proceeds                              | 32,746             |   | 88,347  |   | 46,478  |
| Recurring,  revenue enhancing and non-recurring capital expenditures | (12,629)                |   | (12,692) |   | (12,300) |
| Debt:                                                                |                    |   |   |   |   |
| Decrease  in mortgage notes                                          | (22,645)                |   | (45,716) |   | (3,939) |
| (Decrease)  increase in revolving credit facility borrowings         | (9,000)                 |   | 1,500  |   | 20,000  |
| Cash dividends and operating  partnership distributions paid         | (15,529)                |   | (15,813) |   | (16,554) |
| Purchase of preferred and/or  treasury shares                        | (179)                   |   | (4,882) |   | (16,861) |
|                                                                      |                         |  |  |  |  |  |  |  |

 

*           *Our primarysources of liquidity are cash flow provided by operations, short-termborrowings on the unsecured revolver, our secured credit facility or projectspecific loans.  We believe that we are well positioned to weather the recentturmoil in the financial markets.  Our debt repayment obligations arerelatively modest.  Six mortgage loans totaling approximately $78.3 million werescheduled to mature in 2010.  We have already repaid $42.0 million of thosedebt obligations and we expect to repay the $36.3 million balance with proceedsfrom our unsecured revolver or with proceeds from other secured loans.

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

            Ourability to reenter the capital markets affords us additional liquidity asdemonstrated by our recent successful sale to the public markets of 5,175,000of our common shares resulting in net proceeds of approximately $54.7 million.

            Cashflow provided by operations increased during 2009 compared to 2008 primarilydue to changes in accounts payable and accrued expenses.  These changes wereprimarily the result of an increase in the fair value of deferred compensation,the payment of real estate taxes in 2008 related to the sale of 15 propertiesand the payment of other liabilities in 2008 related to funds held for managedproperties and our exit from the affordable housing management business.

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            Cashflow provided by operations decreased in 2008 compared to 2007 primarily due tothe payment of real estate taxes in 2008 related to the sale of 15 propertiesand the payment of other liabilities in 2008 related to funds held for managedproperties and our exit from the affordable housing management business.  Thisdecrease was partially offset by increased cash flow from property operationsin 2008 when compared to 2007.

            ***ShelfAvailability.***  We have a shelf registration statement that becameeffective in May 2009.  This registration statement relates to possibleofferings, from time to time, of debt securities, preferred shares, depositaryshares, common shares and common share warrants.  This registration statement willexpire in May 2012.  In January 2010, we issued $57.4 million of new commonshares under this registration statement.  Securities offerings up to $157.2million are available under this shelf registration statement, after givingeffect to the January 2010 common share offering.  However, before any debtsecurities could be issued under this shelf registration, major modificationsto the debt covenants contained in the indenture currently in place would benecessary.

            ***Liquidity:* *Normal Business Operations.**** *We anticipate that we willmeet our normal business operations and liquidity requirements for the upcomingyear generally through net cash provided by operations.  We believe that if netcash provided by operations is below projections, other sources, such as the unsecuredrevolver, secured and unsecured borrowings are or can be made available andshould be sufficient to meet our normal business operations and liquidityrequirements.

            ***Liquidity: Non-Operational Activities.***  Sources of cash available for repayment ofdebt, completing our 60-unit expansion project at our River Forest property,any property acquisitions and funding other capital expenditures are expectedto be provided primarily by proceeds from the refinancing of debt borrowings,our unsecured revolver and possibly the sale of common shares.

***Long-TermContractual Obligations.***  The following table summarizes our long-termcontractual obligations at December 31, 2009, as defined by Item 303(a) 5 ofRegulation S-K of the Securities and Exchange Act of 1934.
| * *                 |   | Payments Due In |
|--------------------------|--------|-----------------|
| *(In thousands)*         |   |            |   |   |   |   |   |   |   | 2015 and |
| Contractual Obligations  |   | Total           |   | 2010 |   | 2011-2012 |   | 2013-2014 |   | Later Years |
|                     |   |            |   |   |   |   |   |   |   |   |
| Debt payable - principal |   |  $         | 525,836  |   |  $ | 81,374  |   |  $ | 149,142  |   |  $ | 179,454  |   |  $ | 115,866  |
| Debt payable - interest  |   | 191,068    |   | 30,317  |   | 45,604  |   | 23,975  |   | 91,172  |
| Operating leases         |   | 303        |   | 157  |   | 119  |   | 13  |   | 14  |
| Purchase obligations     |   | 15,713     |   | 13,844  |   | 1,831  |   | 38  |   | -  |
| Total                    |   |  $         | 732,920  |   |  $ | 125,692  |   |  $ | 196,696  |   |  $ | 203,480  |   |  $ | 207,052  |

 

***DebtPayable - Principal.***  Debt payable - principal includes principal paymentson all property specific mortgages, the unsecured revolving credit facility andunsecured debt based on amounts and terms of debt in existence at December 31,2009.  For detailed information about our debt, see Note 5 of the Notes toConsolidated Financial Statements presented in Part II, Item 8 of this reporton Form 10-K.

***Debt Payable -Interest. *** Debt payable - interest includes accrued interest atDecember 31, 2009 and interest payments as required based upon the terms of thedebt in existence at December 31, 2009.  Interest related to floating rate debtis calculated based on applicable rates as of December 31, 2009.

             ***OperatingLeases.***  We lease certain equipment and facilities under operatingleases.  For detailed information about our lease obligations, see Note 8 ofthe Notes to Consolidated Financial Statements presented in Part II, Item 8 ofthis report on Form 10-K.

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             ***PurchaseObligations.***  Purchase obligations represent agreements to purchasegoods or services and contracts for the acquisition of properties that arelegally binding and enforceable and that specify all significant terms of theagreement.  Our purchase obligations include, but******are not limitedto, obligations under construction contracts for labor and materials as well asvendor contracts for property operations entered into in the normal course ofoperations, such as for landscaping, snow removal, elevator maintenance,security, trash removal and electronically generated services. Obligationsincluded in the above table represent agreements dated December 31, 2009, orearlier.

             ***Dividends.*** On December 9, 2009, we declared a dividend of $0.17 per common share, whichwas paid on February 1, 2010, to shareholders of record on January 15, 2010. We anticipate that we will continue paying quarterly regular dividends in cash. Additionally, on January 28, 2010, we declared a quarterly dividend of $0.54375per Depositary Share on our Class B Cumulative Redeemable Preferred Shares,which will be paid on March 15, 2010, to shareholders of record on February 26,2010.

***CapitalExpenditures.***  We anticipate incurring approximately $15.9 million incapital expendi-tures for 2010.  This includes replacement of worn carpet andappliances, parking lots and similar items in accordance with our currentproperty expenditure plan, as well as commitments for investment/revenueenhancing and non-recurring expenditures.  These commitments are expected to befunded with cash provided by operating activities and borrowings on our unsecuredrevolver.

***            Financingand Other Commitments.***  The following table identifies our total debtoutstanding as of December 31, 2009 (dollar amounts in thousands):
|                                 | Balance           |          | Percentage |   | Weighted      |
|--------------------------------------|-------------------|---------------|------------|--------|---------------|
|                                 | Outstanding       |          | of         |   | Average       |
| ** **                           | December 31, 2009 |          | Total Debt |   | Interest Rate |
| **FIXED RATE DEBT**                  |              |          |       |   |          |
| Mortgages payable - CMBS             |  $           | 115,464  |       | 22.0%  |          | 7.7% |
| Mortgages payable - other (1)        | 337,241      |          | 64.1%      |   | 5.8%          |
| Unsecured debt                       | 25,780       |          | 4.9%       |   | 7.9%          |
| **Total  fixed rate debt**           | 478,485      |          | 91.0%      |   | 6.4%          |
| ** **                           |              |          |       |   |          |
| **VARIABLE RATE DEBT**               |              |          |       |   |          |
| Mortgages payable                    | 34,851       |          | 6.6%       |   | 4.7%          |
| Unsecured revolving credit  facility | 12,500       |          | 2.4%       |   | 2.6%          |
| **Total  variable rate debt**        | 47,351       |          | 9.0%       |   | 4.1%          |
| **TOTAL  DEBT**                      |  $           | 525,836  |       | 100.0% |          | 6.2% |

 
| (1) | Includes  $63.0 million of variable rate debt swapped to fixed. |
|-----|-----------------------------------------------------------------|

 

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             The following table providesinformation on loans repaid at par as well as loans obtained during 2009:
| *(Dollar amounts in  thousands)* |   | Loans Repaid |         |   | Loans Obtained |
|----------------------------------|--------|--------------|--------------|--------|----------------|
| Property                         |   | Amount       |         | Rate   |           |   | Amount |   | Rate |   | Maturity |
|                             |   |         |         |   |           |   |   |   |   |   |   |
| Saw Mill Village                 |   |  $      | 11,119  |   | 7.5%           |   |   |  $ | 17,220  |   | 6.0% |   | April 2016 |
| Georgetown Park                  |   | 16,000  |         | 1.6%   | (1)            |   | -  |   | N/A |   | N/A |
| Chestnut Ridge                   |   | 19,000  |         | 1.4%   | (1)            |   | -  |   | N/A |   | N/A |
| Oaks at Hampton                  |   | 25,977  |         | 7.5%   |           |   | -  |   | N/A |   | N/A |
| Steeplechase                     |   | -       |         | N/A    |           |   | 13,790  |   | 4.7% | (1) | March 2016 |
| Courtney Chase                   |   | -       |         | N/A    |           |   | 21,440  |   | 4.7% | (1) | March 2016 |
|                             |   |  $      | 72,096  |   | 4.6%           | (2) |   |  $ | 52,450  |   | 5.1% | (2) |   |

 
| (1) | Denotes  variable rate loans.  Rates shown on loans obtained are as of December 31,  2009. |
|-----|-------------------------------------------------------------------------------------------------|
| (2) | Represents  weighted average interest rate for the loans listed.                                |

 

            At December 31, 2009, we had 17unencumbered properties.  These properties had net income of $7.8 million for theyear ended December 31, 2009, and a net book value of $151.8 million atDecember 31, 2009.

             Welease certain equipment and facilities under operating leases.  Future minimumlease payments under all noncancellable-operating leases in which we are thelessee, are included in the previous table of contractual obligations.

               ***OperatingPartnership.***  As provided in the AERC HP Investors Limited PartnershipAgreement ("DownREIT Partnership"), we, as general partner, haveguaranteed the obligation of the DownREIT Partnership to redeem OP units heldby the limited partners.  The DownREIT Partnership was formed in 1998.  Underthe terms of the DownREIT Partnership Agreement, the DownREIT Partnership isobligated to redeem OP units for our common shares or cash, at our discretion,at a price per OP unit equal to the 20 day trailing price of our common sharesfor the immediate 20 day period preceding a limited partner's redemptionnotice.  As of December 31, 2009 there were 78,335 OP units remaining having acarrying value of $1.8 million, and 443,697 of the original 522,032 OP unitshad been redeemed.  These transactions had the effect of increasing ourinterest in the DownREIT Partnership from 85.0% to 97.4%.  For additionalinformation regarding the OP units, see Note 1 of the Notes to the ConsolidatedFinancial Statements presented in Part II, Item 8 of this report on Form 10-K.

            ***Acquisitions and Development.***  On April 21, 2008, weacquired two apartment communities located in the Richmond, Virginiametropolitan area totaling 536 units for a purchase price of $75.0 million andadditional closing costs of $540,000.  The acquisition also included a 5.9 acreland parcel adjacent to one of the properties on which we are constructing anadditional 60 units.  We expect to complete this construction during 2010.

             Weintend to continue to evaluate land and property acquisitions.  Any futureacquisitions or developments would be financed with the most appropriatesources of capital, which may include the assumption of mortgage indebtedness,bank and other institutional borrowings, the exchange of properties,undistributed earnings, secured or unsecured debt financings, or the issuanceof shares or units exchangeable into common shares.

            ***Dispositions.*** During 2009, we sold two properties for net cash proceeds of $32.7 million.  Theoperating results of these properties, along with the gains of $15.4 millionthat we recognized, are included in "Income from discontinued operations."

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             ***Managementand Service Operations.***  Revenues from our management and serviceoperations were significantly reduced in 2008 and 2009 as a result of our exit fromthe Affordable Housing business at the end of 2007.  As of December 31, 2009 wemanaged one property and asset managed one residential property and onecommercial property for third party owners.  

General Contractor/Construction.  Our subsidiary, Merit Enterprises, Inc., is engagedas a general contractor and construction manager that will act as our in-houseconstruction division as well as provide general contracting and constructionmanagement services to third parties.  Merit intends to concentrate its effortson rehabilitation and ground-up construction projects.

***RESULTS OF OPERATIONS FOR 2009 COMPARED WITH 2008AND 2008 COMPARED WITH 2007***

            Inthe following discussion of the comparison of the year ended December 31, 2009to the year ended December 31, 2008 and the year ended December 31, 2008 to theyear ended December 31, 2007, Same Community properties represent 44 whollyowned properties that were owned during all of 2007, 2008 and 2009.  Acquiredproperties represent two properties acquired in April 2008 and two propertiesacquired in June 2007.

            Thenet loss from continuing operations decreased $384,000 during 2009 compared to2008 primarily as a result of a decrease of $1.4 million in interest expenseand a gain on insurance recoveries of $665,000 during 2009.  Offsetting these itemswas the fact that 2008 included net income from joint ventures of $1.5 milliondue to the sale of our last joint venture property.  The net loss fromcontinuing operations decreased $6.1 million in 2008 compared to 2007 primarilyas a result of a $3.1 million decrease in interest expense, which was primarilydue to decreased debt defeasance/prepayment costs, and an increase in equity innet income (loss) of joint ventures of $1.8 million primarily resulting fromthe above referenced sale of our last joint venture property in 2008.  

            Thefollowing chart is intended to reflect the amount and percentage change in lineitems that are relevant to the changes in overall operating performance:
|                                                     |   | Increase (decrease) when comparing |
|----------------------------------------------------------|--------|------------------------------------|
|                                                     |   |  the years ended December 31, |
| *(In thousands)*                                         |   | 2009 to 2008                       |   | 2008 to 2007 |
|                                                     |   |                               |   |   |   |   |
| Property revenue                                         |   |  $                            | 124  | 0.1% |   |  $ | 14,076  | 12.4% |
| Fees, reimbursements and  other                          |   | (497)                              | (27.9)% |   | (9,206) | (83.8)% |
| Property operating and  maintenance expense items:       |   |                               |   |   |   |   |
| Personnel                                                |   | 284                           | 1.9% |   | 1,326  | 10.0% |
| Real  estate taxes and insurance                         |   | 351                           | 2.0% |   | 1,052  | 6.4% |
| Utilities                                                |   | 313                           | 4.6% |   | 992  | 17.1% |
| Depreciation and  amortization                           |   | (976)                              | (2.7)% |   | 6,625  | 22.6% |
| Direct property management  and service company expenses |   | (517)                              | (31.8)% |   | (11,239) | (87.4)% |
| General and administrative                               |   | 255                           | 1.9% |   | 3,442  | 33.3% |
| Interest expense                                         |   | (1,440)                            | (4.0)% |   | (3,138) | (8.1)% |
| Gain on insurance recoveries                             |   | 665                           | N/A |   | -  | N/A |
| Equity in net income (loss)  of joint ventures           |   | (1,502)                            | (100.0)% |   | 1,760  | N/A |
| (Loss) income from continuing  operations                |   | (384)                              | 3.8% |   | (6,120) | 37.8% |
| Income from discontinued  operations                     |   | (28,801)                           | (64.3)% |   | 18,342  | 69.4% |
|                                                          |        |                                    |  |  |  |  |  |  |

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            ***PropertyRevenue. ***Property revenue is impacted by a combination of rentalrates, rent concessions and occupancy levels, i.e., net collected rent per unit. Physical occupancy at the end of each period and net collected rent per unitare presented in the following tables:
|                       |   | Physical Occupancy              |
|----------------------------|--------|---------------------------------|
|                       |   | For the year ended December 31, |
|                       |   | 2009                            |   | 2008 |   | 2007 |
| Same Community Properties: |   |                            |   |   |   |   |
| Midwest                    |   | 94.9%                           |   | 94.8% |   | 94.9% |
| Mid-Atlantic               |   | 95.2%                           |   | 92.2% |   | 95.1% |
| Southeast                  |   | 91.8%                           |   | 88.8% |   | 93.4% |
| Total Same Community       |   | 94.3%                           |   | 93.4% |   | 94.6% |
| Acquired Properties        |   | 91.6%                           |   | 90.5% |   | 90.5% |

 
|                       |   | Average Monthly Net Collected   |
|----------------------------|--------|---------------------------------|
|                       |   | Rent Per Unit                   |
|                       |   | For the year ended December 31, |
|                       |   | 2009                            |   | 2008 |   | 2007 |
| Same Community Properties: |   |                            |   |   |   |   |
| Midwest                    |   |  $                         | 783  |   |  $ | 778  |   |  $ | 744  |
| Mid-Atlantic               |   |  $                         | 1,241  |   |  $ | 1,222  |   |  $ | 1,185  |
| Southeast                  |   |  $                         | 952  |   |  $ | 1,001  |   |  $ | 1,019  |
| Total Same Community       |   |  $                         | 847  |   |  $ | 852  |   |  $ | 828  |
| Acquired Properties        |   |  $                         | 884  |   |  $ | 939  |   |  $ | 899  |

 

            Propertyrevenue increased in 2009 compared to 2008 primarily as a result of an increaseof $730,000 contributed by the acquired properties.  Property revenue for theSame Community properties decreased $610,000 primarily due to reductions in netrent (potential rent less concessions) and increases in the amount of vacancylosses in the Southeast portfolio.  Property revenues increased in 2008 comparedto 2007 primarily as a result of $10.9 million contributed by the acquired propertiesand an increase of $3.2 million in the Same Community properties which wasprimarily due to stable occupancy throughout the majority of 2008 combined withrental rate increases and an overall reduction in concessions.

            ***Fees,Reimbursements and Other.**** *The management and service operationssaw a decrease of $120,000 in fee revenue in 2009 compared to 2008 and areduction of $1.9 million in fee revenue in 2008 compared to 2007 primarily as a result of the lossof management fee revenue associated with our exit from the Affordable Housingfee management business at the end of 2007 and the resulting reduction inmanagement fee revenue from properties formerly managed for third partyowners.  Reimbursement of expense from managed properties decreased $400,000 in2009 compared to 2008 and $7.3 million in 2008 compared to 2007 also as aresult of the reduction of the number of properties managed.  This reductionhad no impact to the net loss from continuing operations as these reimbursementsare also included in "Direct property management expenses."

            ***PropertyOperating and Maintenance Expenses.***  Property operating and maintenanceexpenses remained flat for the Same Community properties in 2009 compared to2008 as well as in 2008 compared to 2007.  However, total property operatingand maintenance expenses for the entire portfolio increased during bothcomparison periods because of the additional expenses related to the acquiredproperties.

            ***Depreciationand Amortization.***  Depreciation and amortization expenses decreased in2009 compared to 2008 and increased in 2008 compared to 2007 primarily as aresult of the 12 month to 16 month amortization periods of intangible assetsrecorded in connection with the acquired properties.

 

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            ***DirectProperty Management and Service Company Expenses******.**** *Directproperty management and service company expenses decreased in 2009 compared to2008 and in 2008 compared to 2007 as a result of the reduction in the number ofproperties managed for third party owners.  The reimbursement of expenses fromthe managed properties decreased in both comparison periods as previously noted. However, this reduction had no impact to the net loss from continuingoperations as these reimbursements are also included in "Fees, reimbursementsand other" revenue.  Additionally, service company expenses, whichrepresent the portion of general and administrative expense that relates to themanagement of third party owned properties, decreased $4.0 million in 2008compared to 2007 due to the reduction in the number of properties managed.

            ***Generaland Administrative Expenses.***  General and administrative expenseincreased in 2009 primarily as a result an increase in directors' deferred compensationin 2009 compared to 2008.  This was primarily a result of valuation adjustmentsof the directors deferred compensation based upon the closing price of ourcommon shares at the end of each period.  This increase was partially offset bya reduction to payroll expenses in 2009 compared to 2008.  General andadministrative expense decreased in 2008 compared to 2007 primarily as a resultof the reduction in costs allocated to "Direct property management andservice company expenses," as noted above, an increase in 2008 of $560,000related to pre-acquisition and other project costs, and an increase in deferreddirectors' compensation expense in 2008 of $470,000.  These increases werepartially offset by decreases in payroll related costs in 2008 of $600,000primarily as a result of our exit from the Affordable Housing fee managementbusiness in 2008.  The director's deferred compensation plan was modifiedeffective January 1, 2010, to provide that all distributions under the planwill be in the form of our common shares instead of cash.  As a result, the valueof the deferred compensation will no longer be adjusted based upon the closingprice of our common shares.  Distributions with a commencement date of December31, 2010 or earlier will continue to be made in cash, however the value ofthese units was fixed as of December 31, 2009, in accordance with the originalterms of the plan.

            ***InterestExpense.***  Interest expense decreased in 2009 compared to 2008 primarilydue to the receipt in the first quarter of 2009 of refunds totaling $563,000 ofdefeasance costs in connection with certain previously defeased loans anddecreased interest expense of $310,000 for borrowings on our revolver.  Interestexpense decreased in 2008 compared to 2007 primarily due to a reduction of $4.2million in defeasance/prepayment costs that were included in income fromcontinuing operations.  Interest expense, including defeasance/prepayment coststhat are associated with discontinued operations are included in "Incomefrom discontinued operations," as discussed below.

            ***Gainon Insurance Recoveries.***  During 2009, we settled a wind storm damageinsurance claim involving 13 of our central Ohio properties for the aggregatesum of $906,000, net of our deductible.  Also included in this category was asettlement of $271,000, net of our deductible in connection with a clubhouse fireat one of our Ohio properties. The gain on insurance recoveries recorded during2009 represents insurance proceeds to be received net of the carrying value ofthe assets written off and costs incurred to make repairs.

            ***Equityin Net Income (Loss) of Joint Ventures.***  On December 31, 2008, thejoint venture in which we were a 50.0% partner sold the Affordable Housingproperty that it owned.  Our proportionate share of the gain recognized in 2008was $1.6 million.

 

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            ***Incomefrom Discontinued Operations.***  Included in discontinued operations forthe years ended December 31, 2009, 2008 and 2007, are the operating results andthe gains related to two wholly owned properties that were sold in 2009, 15wholly owned properties that were sold in 2008, and three wholly ownedproperties that were sold in 2007.  The operating loss from discontinuedoperations in 2008 was primarily due to costs incurred to defease loans thatwere secured by properties that were sold.  For further details on "Incomefrom discontinued operations," see Note 2 of the Notes to the ConsolidatedFinancial Statements presented in Part II, Item 8 of this report on Form 10-K.

            ***Discount/(Premium)on Preferred Share Repurchase.***  In 2008 and 2007, we repurchased 278,000and 111,500, respectively, of our preferred depositary shares, which eachrepresent 1/10th of a share of our 8.70% Class B Series II CumulativeRedeemable Preferred Shares.  The depositary shares have a recorded value of$25.00 per share.  The average price that we paid per share for the 2008repurchases was $16.77, and we therefore recognized a total discount of $2.3million.  The average price that we paid per share for the 2007 repurchases was$26.02, and we therefore recognized a premium of $114,000.

            ***Inflation.*** We believe that the effects of inflation only minimally impacts our operationalperformance because our leases are mostly for 12 month terms, which allows usthe opportunity to increase our new lease and lease renewal rents to accountfor inflationary price increases.

**CriticalAccounting Estimates**

            Ourconsolidated financial statements include accounts of all subsidiaries, theService Companies and the Operating Partnership structured as a DownREIT.  Thepreparation of the consolidated financial statements in conformity with GAAPrequires us to make estimates and assumptions in certain circumstances thataffect amounts reported in the consolidated financial statements and relatednotes.  In preparing these consolidated financial statements, we have utilizedinformation available including industry practice and our own past history informing estimates and judgments of certain amounts included in the consolidatedfinancial statements, giving due consideration to materiality.  It is possiblethat the ultimate outcome that we anticipated in formulating the estimatesinherent in these consolidated financial statements may not materialize. However, application of the accounting policies below involves the exercise ofjudgment and use of assumptions as to future uncertainties and, as a result,actual results could differ from these estimates.  In addition, other companiesmay utilize different estimates that may impact comparability of our results ofoperations to those of companies in similar businesses.

            Weassess the recoverability of the carrying value of long-lived assets when anevent of impairment has occurred.  In performing this analysis, we estimateholding periods of the assets, changes in fair market value of the assets andcash flows related to the operations of the assets to determine the range ofpotential alternatives and assign a probability to the various alternativesunder consideration by management.  Should the estimates used to determinealternatives or the probabilities of the occurrence thereof change, impairmentmay result which could materially impact our results of operations.

            Wereview goodwill annually and whenever there is an impairment indicator.  Inperforming this analysis, we use a multiple of revenues to the range ofpotential alternatives and assign a probability to the various alternatives weconsider.  Should estimates used to determine the alternatives considered orthe probabilities of the occurrence thereof change, impairment may result whichcould materially impact our results of operations.

 

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            Weestimate the fair value of share-based compensation awarded.  We use theBlack-Scholes option-pricing model to estimate the fair value of the stockoptions, and the Monte Carlo method to estimate the fair value of restrictedshare awards in which the number of shares that will ultimately vest aresubject to market conditions.  The use of judgment and/or estimates is requiredin determining certain of the assumptions used by these valuation models.  Ifwe had used different judgment and/or estimates, different valuations wouldhave been produced that may have resulted in a material change to our resultsof operations.  We also estimate future performance results related to certainshare-based awards.  If the results vary from our estimate, it may require usto make a material adjustment to our results of operations.

            Weestimate the amount of real estate taxes for which we will be liable based uponassumptions relating to possible changes in millage rates and property valuereassessments.  In most circumstances, the actual millage rates or reassessmentvalues are not available until the following reporting period and consequently theserates or values could differ from assumptions and require material adjustmentsto the liabilities recorded.

**Quantitativeand Qualitative Disclosures About Market Risk**

            ***InterestRate Risk.***  Based on our variable rate debt outstanding at December 31,2009 and 2008, an interest rate change of 100 basis points would impactinterest expense by approximately $475,000 and $565,000 on an annual basis,respectively.  Additionally, we have interest rate risk associated with fixedrate debt at maturity.  We have, and will continue to manage, interest raterisk as follows:  (i) maintain what we believe to be a conservative ratio offixed rate, long-term debt to total debt such that variable rate exposure iskept at an acceptable level; (ii) consider hedges for certain long termvariable and/or fixed rate debt through the use of interest rate swaps or interestrate caps; and (iii) consider the use of treasury locks where appropriate tohedge rates on anticipated debt transactions.  We use various financial modelsand advisors to assist us in analyzing opportunities to achieve thoseobjectives.  For additional information related to interest rate hedgeagreements, see "Derivative Instruments and Hedging Activities" inNote 1 of the Notes to Consolidated Financial Statements presented in Part II,Item 8 of this report on Form 10-K.  The table below provides information aboutour financial instruments that are sensitive to change in interest rates.  Fordebt obligations, the table below presents principal cash flows and relatedweighted average interest rates based on expected maturity dates.

|                                       | December 31, 2009 |         | December 31, 2008 |
|--------------------------------------------|-------------------|--------------|-------------------|
| *(Dollar amounts in  thousands)*           |              |         |              |   |   |   |   |   |   |   |   |   |   |   | Fair Market |   |   |   | Fair Market |
| **Long term debt**                         | 2010              |         | 2011              |   | 2012 |   | 2013 |   | 2014 |   | Thereafter |   | Total |   | Value |   | Total |   | Value |
| **Fixed:**                                 |              |         |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate mortgage debt                   |  $           | 78,310  |              |  $ | 54,570  |   |  $ | 81,584  |   |  $ | 132,209  |   |  $ | 44,538  |   |  $ | 87,274  |   |  $ | 478,485  |   |  $ | 470,393  |   |  $ | 500,981  |   |  $ | 492,525  |
| Weighted average interest  rate            | 6.0%              |         | 7.6%              |   | 7.0% |   | 6.1% |   | 5.6% |   | 6.4% |   | 6.4% |   |   |   |   |   |   |
| **Variable:**                              |              |         |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable rate mortgage debt                | -            |         | -            |   | -  |   | -  |   | -  |   | 34,851  |   | 34,851  |   | 37,360  |   | 35,000  |   | 34,813  |
| Weighted average interest  rate            | -            |         | -            |   | -  |   | -  |   | -  |   | 4.7% |   | 4.7% |   |   |   |   |   |   |
| LIBOR based revolving credit  facility (1) | -            |         | 12,500       |   | -  |   | -  |   | -  |   | -  |   | 12,500  |   | 12,309  |   | 21,500  |   | 21,552  |
| Total variable rate debt                   | -            |         | 12,500       |   | -  |   | -  |   | -  |   | 34,851  |   | 47,351  |   | 49,669  |   | 56,500  |   | 56,365  |
| Total long term debt                       |  $           | 78,310  |              |  $ | 67,070  |   |  $ | 81,584  |   |  $ | 132,209  |   |  $ | 44,538  |   |  $ | 122,125  |   |  $ | 525,836  |   |  $ | 520,062  |   |  $ | 557,481  |   |  $ | 548,890  |
|                                       |              |         |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

| (1) | Our  unsecured revolving credit facility matures in March 2011 and had a weighted  average interest rate of 2.6% at December 31, 2009. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------|

**CONTINGENCIES**

            ***Environmental.*** We have reviewed tangible long-lived assets and other agreements for associatedasset retirement obligations ("AROs") and have determined that we donot have any material AROs that would require recognition as a liability ordisclosure in our financial statements at December 31, 2009.  Phase Ienvironmental audits were obtained at the time of the IPO, property acquisitionor property refinancing, as the case may be, on all of our wholly ownedproperties.

 

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            Futureclaims for environmental liabilities are not measurable given the uncertaintiessurrounding whether there exists a basis for any such claims to be assertedand, if so, whether any claims will, in fact, be asserted.

            ***PendingLitigation.***  For a discussion of pending litigation, see Note 8 of theNotes to Consolidated Financial Statements presented in Part II, Item 8 of thisreport on Form 10-K.

**Item7A.  Quantitative and Qualitative Disclosures About Market Risk**

            Fora discussion of the Quantitative and Qualitative Disclosures about Market Risk,see "Quantitative and Qualitative Disclosures about Market Risk" inItem 7.

**Item8.  Consolidated Financial Statements and Supplementary Data**

**           **Theresponse to this item is included in Item 15 of this report.

**Item9.  Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

            None.

**Item9A.  Controls and Procedures**

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

            ***Management'sReport on Internal Control Over Financial Reporting.***  We areresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the Exchange Act.  Weassessed the effectiveness of our internal control over financial reportingusing the criteria set forth by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO) in "Internal Control - Integrated Framework." Based on that assessment and those criteria, we concluded that our internalcontrol over financial reporting is effective as of December 31, 2009.  Ourindependent registered public accounting firm, PricewaterhouseCoopers LLP, hasissued an audit report on the effectiveness of our internal control overfinancial reporting, which is included in the "Report of IndependentRegistered Public Accounting Firm" in Part II, Item 8 of this annualreport on Form 10-K.

            ***Changesin Internal Control over Financial Reporting.***  There were no changes inour internal control over financial reporting during the fourth quarter of 2009that materially affected or are reasonably likely to materially affect ourinternal control over financial reporting.

            Webelieve that because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

**Item9B.  Other Information**

            None.

 

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**PARTIII**

**Item10.  Directors, Executive Officers and Corporate Governance**

            Theinformation regarding our Directors, including information regarding the auditcommittee's financial expert, contained in the Notice of Annual Meeting andProxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2010,is incorporated by reference in this report on Form 10-K.  Such informationwill be filed with the SEC no later than 120 days after the year covered bythis report.

            Theinformation regarding executive officers and other key employees is set forthin Part I of this report on Form 10-K under the heading "ExecutiveOfficers of the Registrant and Other Key Employees."

            Weadopted a formal Code of Ethics that applies to our Chief Executive Officer,Chief Financial Officer and Director of Financial Reporting.  The Code ofEthics is posted on our website, www.AssociatedEstates.com.  Any futureamendments to, or waivers from, the Code of Ethics that apply to theseindividuals will be posted on the website also.

**Item11.  Executive Compensation**

            Theinformation on Executive Compensation contained in the Notice of Annual Meetingand Proxy Statement for the Annual Meeting of Shareholders to be held on May 5,2010, is incorporated by reference in this report on Form 10-K.  Suchinformation will be filed with the SEC no later than 120 days after the yearcovered by this report.

**Item12.  Security Ownership of Certain Beneficial Owners and Management and RelatedShareholder Matters**

            Wehave two compensation plans under which grants of options to employees anddirectors can be made and both of these plans were approved by our shareholders. The 2008 Equity Based Award Plan was approved by our shareholders on May 7, 2008,and the Amended and Restated 2001 Equity-Based Award Plan was approved by ourshareholders on May 4, 2005.  For more information regarding all of our plans,see Note 15 of the Notes to Consolidated Financial Statements presented in PartII, Item 8 of this report on Form 10-K.

            The following tablesummarizes information about our common shares that may be issued upon exerciseof options outstanding and the total number of securities available for futureissuance under all of the existing compensation plans as of December 31, 2009:
|                           |   |                   |   |                |                | Number of Securities Remaining |
|--------------------------------|--------|------------------------|--------|---------------------|---------------------|--------------------------------|
|                           |   | Number of              |   |                |                | Available for Future Issuance  |
|                           |   | Securities to be       |   | Weighted Average    |                | Under Equity Compensation      |
|                           |   | Issued Upon Exercise   |   | Exercise Price of   |                | Plans (Excluding Securities    |
| Plan Category                  |   | of Outstanding Options |   | Outstanding Options |                | Reflected in the First Column) |
|                           |   |                   |   |                |                |                           |
| Equity compensation plans      |   |                   |   |                |                |                           |
| approved  by security holders  |   | 1,365,364         |   |  $             | 9.37           |                           | 880,052  |
| Equity compensation plans  not |   |                   |   |                |                |                           |
| approved  by security holders  |   | -                 |   |  $             | -    |                           | -  |
|                           |   | 1,365,364         |   |                |                | 880,052                   |

 

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            Additionally,the information on Security Ownership of Certain Beneficial Owners andManagement contained in the Notice of Annual Meeting and Proxy Statement forthe Annual Meeting of Shareholders to be held on May 5, 2010, is incorporatedby reference in this report on Form 10-K.  Such information will be filed withthe SEC no later than 120 days after the year covered by this report.

**Item13.  Certain Relationships and Related Transactions and Director Independence**

            Theinformation on Certain Relationships and Related Transactions contained in theNotice of Annual Meeting and Proxy Statement for the Annual Meeting ofShareholders to be held on May 5, 2010, is incorporated by reference in thisreport on Form 10-K.  Such information will be filed with the SEC no later than120 days after the year covered by this report.

**Item14. Principal Accountant Fees and Services**

            Theinformation on Principal Accountant Fees and Services contained in the Noticeof Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders tobe held on May 5, 2010, is incorporated by reference in this report on Form10-K.  Such information will be filed with the SEC no later than 120 days afterthe year covered by this report.

 

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**PART IV**

** **

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

** **

**           **The following documents are filed as partof this Report.

 
| 1.     | Consolidated Financial Statements:                                                                                                                                                                                                                                                    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                              |
|   | Report of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                              |
|   |                                                                                                                                                     |
|   | Consolidated Balance Sheets at December 31, 2009 and 2008.                                                                                                                                                                                                                            |
|   |                                                                                                                                                                    |
|   | Consolidated Statements of Operations for the years ended  December 31, 2009, 2008 and 2007.                                                                                                                                                                                          |
|   |                                                                                                                                                                         |
|   | Consolidated Statements of Shareholders’ Equity for the  years ended December 31, 2009, 2008 and 2007.                                                                                                                                                                           |
|   |                                                                                                                                                                         |
|   | Consolidated Statements of Cash Flows for the years ended  December 31, 2009, 2008 and 2007.                                                                                                                                                                                          |
|   |                                                                                                                                                                         |
|   | Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                    |
| 2.     | Financial Statement  Schedules:  The following financial statement schedules of Associated  Estates Realty Corporation are filed as part of this Report and should be  read in conjunction with the Consolidated Financial Statements of Associated  Estates Realty Corporation. |
|   |                                                                                                                                                          |
|   | Schedules                                                                                                                                                                                                                                                                             | Page |
|   |                                                                                                                                                                                                                                                                                  | II | Valuation and Qualifying Accounts | F-37 |
|   |                                                                                                                                                                                                                                                                                  | III | Real Estate and Accumulated Depreciation | F-38 |
|   |                                                                                                                                                                                                                                                                                  |   |                           |   |
|   | Schedules not listed above have been omitted because they  are not applicable or not required or the information required to be set  forth therein is included in the Consolidated Financial Statements or Notes  thereto.                                                            |
|   |                                                                                                                                      |
| 3.     | Exhibits:  The Exhibits listed on the accompanying  Index to Exhibits are filed as part of, or incorporated by reference into,  this Report.                                                                                                                                     |

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**SIGNATURES**

            Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 25th day of February, 2010.
| **ASSOCIATED ESTATES REALTY  CORPORATION**                                                     |
|------------------------------------------------------------------------------------------------|
| **               ** |
| By: /s/ Jeffrey I. Friedman                                                                    |
| Jeffrey I. Friedman, Chairman  of the Board and Chief                                          |
|   Executive Officer                                                                  |

            Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities indicatedon the 25th day of February, 2010.
|               Signature              |                                    Title                                  |             Date           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                |
| /s/ Jeffrey I. Friedman                                                                                                   | Chairman of the Board and Chief  Executive                                                                                                                                                                                                                                                                                                                                                                               | February 25, 2010                                                                                                         |
| Jeffrey I. Friedman                                                                                                                                                    | Officer (Principal Executive  Officer)                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                            |                                                                                                                                |
| /s/ Lou Fatica                                                | Chief Financial Officer  (Principal Financial                                                                                                                                                                                                                                                                                                                                                                            | February 25, 2010                                                                                                         |
| Lou Fatica                                                                                                                                                             | Officer and Principal  Accounting Officer)                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                |
| /s/ Albert T. Adams                                                                                        | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 25, 2010                                                                                                         |
| Albert T. Adams                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ James M. Delaney                                                                                                      | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 25, 2010                                                                                                         |
| James M. Delaney                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
| /s/ Michael E. Gibbons                                                                                                              | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 25, 2010                                                                                                         |
| Michael E. Gibbons                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ Mark L. Milstein                                                                                  | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 25, 2010                                                                                                         |
| Mark L. Milstein                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ James A. Schoff                                                                                        | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 25, 2010                                                                                                         |
| James A. Schoff                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ Richard T. Schwarz                                                                                                         | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 25, 2010                                                                                                         |
| Richard T. Schwarz                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |

 

 

 

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**INDEX TO EXHIBITS**

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

 

 

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

 

 

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|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **Filed herewith or**                               |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **incorporated herein**                             |
| **Number** | **                                                       Title                                                       ** | **by reference**                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                |
| 10.11      | Form  of Equity Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Exhibit 10.11 to Form 10-Q  filed August 2, 2005.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                |
| 10.12      | Long Term Incentive  Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 10.12 to Form 10-Q  filed November 1, 2005. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                |
| 10.13      | Associated Estates Realty  Corporation Elective Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10.13 to Form 10-Q  filed July 31, 2007.    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                |
| 10.14      | Agreement of Purchase and  Sale dated August 31, 2007 between River Forest Properties, LLC and  Associated Estates Realty Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Exhibit 10.14 to Form 10-Q  filed August 5, 2008.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                |
| 10.15      | Agreement of Purchase and  Sale dated August 31, 2007 between Belvedere Properties, LLC and Associated  Estates Realty Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Exhibit 10.15 to Form 10-Q  filed August 5, 2008.   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                |
| 21.1       | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 21.1 to Form 10-K                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | filed herewith.                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                |
| 23.1       | Consent of Independent  Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 23.1 to Form10-K  filed herewith.           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                |
| 31         | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 31 to Form 10-K  filed herewith.            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                |
| 31.1       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 31.1 to Form 10-K  filed herewith.          |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                |
| 32         | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Exhibit 32 to Form 10-K  filed herewith.            |

 

| 38 |
|----|

 

----

 

 

 

 

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTSASSOCIATED ESTATES REALTY CORPORATION**

** **
| Consolidated Financial Statements:                                                                                                                                                                                                                                                         |         Page        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|
|                                                                                                                                                | ** **                                                                                |
|    Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                       | F-2                                                                                       |
|                                                                                                             |                                                                                      |
|    Consolidated Balance Sheets at December 31, 2009 and  2008                                                                                                                                                                                                                    | F-3                                                                                       |
|                                                      |                                                                                      |
|    Consolidated Statements of Operations for the                                                                                                                                                                                                                                 |                                                                                      |
|       years ended December 31, 2009, 2008 and 2007                                                                                                                                                                                                                | F-4                                                                                       |
|                                                                                    |                                                                                      |
|    Consolidated Statements of Shareholders' Equity for the                                                                                                                                                                                                                       |                                                                                      |
|       years ended December 31, 2009, 2008 and 2007                                                                                                                                                                                                                | F-5                                                                                       |
|                                                 |                                                                                      |
|    Consolidated Statements of Cash Flows for the                                                                                                                                                                                                                                 |                                                                                      |
|       years ended December 31, 2009, 2008 and 2007                                                                                                                                                                                                                | F-6                                                                                       |
|                                                                                              |                                                                                      |
|    Notes to Consolidated Financial Statements                                                                                                                                                                                                                                    | F-7                                                                                       |
|                                                                                                             |                                                                                      |
|    Financial Statement Schedules:                                                                                                                                                                                                                                                |                                                                                      |
|                                                                |                                                                                      |
|       II - Valuation and Qualifying Accounts                                                                                                                                                                                                                      | F-37                                                                                      |
|                                                                                                        |                                                                                      |
|       III - Real Estate and Accumulated Depreciation at  December 31, 2009                                                                                                                                                                                        | F-38                                                                                      |

****            All other schedules are omitted because they are not applicableor the required information is shown in the consolidated financial statementsor notes thereto.

| F-1 |
|-----|

 

----

 

 

 

 

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Boardof Directors and Shareholders of Associated Estates Realty Corporation:

In ouropinion, the consolidated financial statements listed in the accompanying indexappearing under Item 15 (1) present fairly, in all material respects, thefinancial position of Associated Estates Realty Corporation and itssubsidiaries (the “Company”) at December 31, 2009 and December 31, 2008, andthe results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2009 in conformity with accountingprinciples generally accepted in the United States of America.  In addition, inour opinion, the financial statement schedules listed in the accompanying indexunder Item 15 (2) present fairly, in all material respects, the information setforth therein when read in conjunction with the related consolidated financialstatements.  Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December31, 2009, based on criteria established in *Internal Control - IntegratedFramework* issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  The Company's management is responsible for these financialstatements and financial statement schedules for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in Management’s Report onInternal Controls Over Financial Reporting included in the accompanying Item9A.  Our responsibility is to express opinions on these financial statements,on the financial statement schedules, and on the Company's internal controlover financial reporting based on our integrated audits.  We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects.  Ouraudits of the financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances.  We believe that our audits provide areasonable basis for our opinions.

As discussedin Note 13 to the consolidated financial statements, the Company changed themanner in which it computes earnings per share effective January 1, 2009.

A company's internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  A company's internal control overfinancial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements.

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

 

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 25,2010

** **

| F-2 |
|-----|

 

----

 

 

 

 

 

**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED BALANCE SHEETS**
| *(In thousands, except  share amounts)*                                                  | December 31,  |          | December 31,  |
|------------------------------------------------------------------------------------------|---------------|---------------|---------------|
| **ASSETS**                                                                               | 2009          |          | 2008          |
| Real estate assets                                                                       |          |          |          |
| Land                                                                                     |  $       | 107,815  |          |  $ | 110,220  |
| Buildings  and improvements                                                              | 798,321  |          | 812,443  |
| Furniture  and fixtures                                                                  | 29,710   |          | 29,315   |
|                                                                                     | 935,846  |          | 951,978  |
| Less:   accumulated depreciation                                                    | (302,108)     |          | (280,541)     |
|                                                                                     | 633,738  |          | 671,437  |
| Construction  in progress                                                                | 4,797    |          | 745      |
| Real  estate held for sale, net                                                          | -        |          | 1,666    |
| Real  estate, net                                                                        | 638,535  |          | 673,848  |
| Cash and cash equivalents                                                                | 3,600    |          | 3,551    |
| Restricted cash                                                                          | 7,093    |          | 6,873    |
| Accounts and notes  receivable, net                                                      |          |          |          |
| Rents                                                                                    | 1,115    |          | 1,320    |
| Affiliates                                                                               | 135      |          | 606      |
| Other                                                                                    | 1,910    |          | 1,842    |
| Goodwill                                                                                 | 1,725    |          | 1,725    |
| Other assets, net                                                                        | 8,392    |          | 10,131   |
| **Total  assets**                                                                        |  $       | 662,505  |          |  $ | 699,896  |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                 |          |          |          |
| Mortgage notes payable                                                                   |  $       | 487,556  |          |  $ | 510,201  |
| Unsecured revolving credit  facility                                                     | 12,500   |          | 21,500   |
| Unsecured debt                                                                           | 25,780   |          | 25,780   |
| Total  debt                                                                              | 525,836  |          | 557,481  |
| Accounts payable, accrued  expenses and other liabilities                                | 27,307   |          | 26,217   |
| Dividends payable                                                                        | 2,849    |          | 2,920    |
| Resident security deposits                                                               | 2,956    |          | 3,360    |
| Accrued interest                                                                         | 2,288    |          | 2,468    |
| **Total  liabilities**                                                                   | 561,236  |          | 592,446  |
| Noncontrolling redeemable  interest                                                      | 1,829    |          | 1,829    |
| Shareholders' equity                                                                     |          |          |          |
| Preferred  shares, without par value; 9,000,000 shares authorized;                       |          |          |          |
| 8.70%  Class B Series II cumulative redeemable, $250 per share                           |          |          |          |
| liquidation  preference, 232,000 issued and 193,050 outstanding                          |          |          |          |
| at  December 31, 2009 and December 31, 2008, respectively                                | 48,263   |          | 48,263   |
| Common  shares, without par value, $.10 stated value; 41,000,000                         |          |          |          |
| authorized;  22,995,763 issued and 16,675,826 and 16,556,221                             |          |          |          |
| outstanding  at December 31, 2009 and December 31, 2008, respectively                    | 2,300    |          | 2,300    |
| Paid-in  capital                                                                         | 283,090  |          | 282,501  |
| Accumulated  distributions in excess of accumulated net income                           | (168,822)     |          | (159,595)     |
| Accumulated  other comprehensive loss                                                    | (1,420)       |          | (2,899)       |
| Less:   Treasury shares, at cost, 6,319,937 and 6,439,542 shares                    |          |          |          |
| at  December 31, 2009 and December 31, 2008, respectively                                | (63,971)      |          | (64,949)      |
| **Total  shareholders' equity**                                                          | 99,440   |          | 105,621  |
| **Total  liabilities and shareholders' equity**                                          |  $       | 662,505  |          |  $ | 699,896  |
|                                                                                     |          |          |          |
| The accompanying notes are an integral part of these  consolidated financial statements. |

** **

* *

| F-3 |
|-----|

 

----

 

 

 

 

 

**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

****
|                                                                                     |   | Year Ended December 31, |
|------------------------------------------------------------------------------------------|--------|-------------------------|
| *(In thousands, except per  share amounts)*                                              |   | 2009                    |   | 2008 |   | 2007 |
| **REVENUE**                                                                              |   |                    |   |   |   |   |
| Property revenue                                                                         |   |  $                 | 127,972  |   |  $ | 127,848  |   |  $ | 113,772  |
| Management and service company  revenue:                                                 |   |                    |   |   |   |   |
| Fees,  reimbursements and other                                                          |   | 1,287              |   | 1,784  |   | 10,990  |
| Construction  and other services                                                         |   | 1,160              |   | 1,010  |   | 2,218  |
| Total  revenue                                                                           |   | 130,419            |   | 130,642  |   | 126,980  |
| **EXPENSES**                                                                             |   |                    |   |   |   |   |
| Property operating and  maintenance                                                      |   | 54,802             |   | 54,061  |   | 49,920  |
| Depreciation and  amortization                                                           |   | 34,937             |   | 35,913  |   | 29,288  |
| Direct property management  and service company expense                                  |   | 1,107              |   | 1,624  |   | 12,863  |
| Construction and other  services                                                         |   | 1,745              |   | 1,338  |   | 2,164  |
| General and administrative                                                               |   | 14,024             |   | 13,769  |   | 10,327  |
| Total  expenses                                                                          |   | 106,615            |   | 106,705  |   | 104,562  |
| Operating income                                                                         |   | 23,804             |   | 23,937  |   | 22,418  |
| Interest income                                                                          |   | 46                 |   | 132  |   | 429  |
| Interest expense                                                                         |   | (34,220)                |   | (35,660) |   | (38,798) |
| (Loss) income before gain on  insurance recoveries,                                      |   |                    |   |   |   |   |
| equity  in income (loss) of joint ventures, and income                                   |   |                    |   |   |   |   |
| from  discontinued operations                                                            |   | (10,370)                |   | (11,591) |   | (15,951) |
| Gain on insurance recoveries                                                             |   | 665                |   | -  |   | -  |
| Equity in net income (loss)  of joint ventures                                           |   | -                  |   | 1,502  |   | (258) |
| (Loss) income from  continuing operations                                                |   | (9,705)                 |   | (10,089) |   | (16,209) |
| Income from discontinued  operations:                                                    |   |                    |   |   |   |   |
| Operating  income (loss)                                                                 |   | 568                |   | (433) |   | 5,563  |
| Gain  on disposition of properties                                                       |   | 15,400             |   | 45,202  |   | 20,864  |
| Income from discontinued  operations                                                     |   | 15,968             |   | 44,769  |   | 26,427  |
| **Net income**                                                                           |   | 6,263              |   | 34,680  |   | 10,218  |
| Net  income attributable to noncontrolling redeemable interest                           |   | (53)                    |   | (53) |   | (53) |
| **Net income attributable  to AERC**                                                     |   | 6,210              |   | 34,627  |   | 10,165  |
| Preferred share dividends                                                                |   | (4,199)                 |   | (4,655) |   | (4,924) |
| Preferred share repurchase  costs                                                        |   | -                  |   | (143) |   | (58) |
| Discount/(premium) on  preferred share repurchase                                        |   | -                  |   | 2,289  |   | (114) |
| Allocation to participating  securities                                                  |   | (423)                   |   | (730) |   | (338) |
| **Net income applicable to  common shares**                                              |   |  $                 | 1,588  |   |  $ | 31,388  |   |  $ | 4,731  |
|                                                                                     |   |                    |   |   |   |   |
| **Earnings per common share  - basic and diluted:**                                      |   |                    |   |   |   |   |
| (Loss) income from  continuing operations                                                |   |                    |   |   |   |   |
| applicable  to common shares                                                             |   |  $                 | (0.85) |   |  $ | (0.78) |   |  $ | (1.27) |
| Income from discontinued  operations                                           |   | 0.95               |   | 2.71  |   | 1.55  |
| Net income applicable to  common shares                                             |   |  $                 | 0.10  |   |  $ | 1.93  |   |  $ | 0.28  |
|                                                                                     |   |                    |   |   |   |   |
| Weighted average shares  outstanding - basic and diluted                                 |   | 16,516             |   | 16,262  |   | 16,871  |
|                                                                                     |   |                    |   |   |   |   |
| The accompanying notes are an integral part of these  consolidated financial statements. |

** **

****

| F-4 |
|-----|

 

----

 

****

 

 

 

**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**

 
|                                                                                     | Year Ended December 31, |
|------------------------------------------------------------------------------------------|-------------------------|
| *(In thousands, except  share data)*                                                     | 2009                    |   | 2008 |   | 2007 |
| **Common shares outstanding**                                                            |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              | 16,556,221         |   | 16,353,700  |   | 17,261,224  |
| Shares purchased                                                                         | (33,515)                |   | (21,003) |   | (1,045,346) |
| Shares issued from treasury  for stock option exercises                                  | 47,500             |   | 180,021  |   | 22,479  |
| Restricted share activity,  net                                                          | 105,620            |   | 43,503  |   | 115,343  |
| Balance outstanding at end  of period                                                    | 16,675,826         |   | 16,556,221  |   | 16,353,700  |
|                                                                                     |                    |   |   |   |   |
| **Preferred shares  outstanding**                                                        |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              | 193,050            |   | 220,850  |   | 232,000  |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares               | -                  |   | (27,800) |   | (11,150) |
| Balance outstanding at end  of period                                                    | 193,050            |   | 193,050  |   | 220,850  |
|                                                                                     |                    |   |   |   |   |
| **Noncontrolling redeemable  interest**                                                  |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              |  $                 | 1,829  |   |  $ | 1,829  |   |  $ | 1,829  |
| Balance outstanding at end  of period                                                    |  $                 | 1,829  |   |  $ | 1,829  |   |  $ | 1,829  |
|                                                                                     |                    |   |   |   |   |
| **Preferred shares**                                                                     |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              |  $                 | 48,263  |   |  $ | 55,213  |   |  $ | 58,000  |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares               | -                  |   | (6,950) |   | (2,787) |
| Balance outstanding at end  of period                                                    | 48,263             |   | 48,263  |   | 55,213  |
|                                                                                     |                    |   |   |   |   |
| **Common shares (at $.10  stated value)**                                                |                    |   |   |   |   |
| Balance outstanding at  beginning and end of period                                      | 2,300              |   | 2,300  |   | 2,300  |
|                                                                                     |                    |   |   |   |   |
| **Paid-in capital**                                                                      |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              | 282,501            |   | 281,152  |   | 280,369  |
| Share based compensation                                                                 | 538                |   | 1,294  |   | 786  |
| Shares issued from treasury  for stock option exercises                                  | 51                 |   | (88) |   | (60) |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares               | -                  |   | 143  |   | 57  |
| Balance outstanding at end  of period                                                    | 283,090            |   | 282,501  |   | 281,152  |
|                                                                                     |                    |   |   |   |   |
| **Accumulated distributions  in excess of accumulated net income**                       |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              | (159,595)               |   | (180,436) |   | (173,962) |
| Net income                                                                               | 6,263              |   | 34,680  |   | 10,218  |
| Net income attributable to  noncontrolling redeemable interest                           | (53)                    |   | (53) |   | (53) |
| Share based compensation                                                                 | 6                  |   | 8  |   | 10  |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares               | -                  |   | 2,146  |   | (172) |
| Common share dividends  declared                                                         | (11,244)                |   | (11,285) |   | (11,553) |
| Preferred share dividends  declared                                                      | (4,199)                 |   | (4,655) |   | (4,924) |
| Balance outstanding at end  of period                                                    | (168,822)               |   | (159,595) |   | (180,436) |
|                                                                                     |                    |   |   |   |   |
| **Accumulated other  comprehensive loss**                                                |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              | (2,899)                 |   | (1,050) |   | (71) |
| Change in fair value of  hedge instruments                                               | 1,479              |   | (1,849) |   | (979) |
| Balance outstanding at end  of period                                                    | (1,420)                 |   | (2,899) |   | (1,050) |
|                                                                                     |                    |   |   |   |   |
| **Treasury shares (at cost)**                                                            |                    |   |   |   |   |
| Balance outstanding at  beginning of period                                              | (64,949)                |   | (67,393) |   | (54,585) |
| Purchase of common shares                                                                | (179)                   |   | (221) |   | (13,959) |
| Share based compensation                                                                 | 807                |   | 734  |   | 890  |
| Shares issued from treasury  for stock option exercises                                  | 350                |   | 1,931  |   | 261  |
| Balance outstanding at end  of period                                                    | (63,971)                |   | (64,949) |   | (67,393) |
| **Total shareholders'  equity**                                                          |  $                 | 99,440  |   |  $ | 105,621  |   |  $ | 89,786  |
|                                                                                     |                    |   |   |   |   |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 

** **

| F-5 |
|-----|

----

 

 

 

 

 

**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**
|                                                                                     | Year Ended December 31, |
|------------------------------------------------------------------------------------------|-------------------------|
| *(In thousands)*                                                                         | 2009                    |   | 2008 |   | 2007 |
| **Cash flow from operating  activities:**                                                |                    |   |   |   |   |
| Net  income                                                                              |  $                 | 6,263  |   |  $ | 34,680  |   |  $ | 10,218  |
| Adjustments  to reconcile net income to net cash provided by operating activities:       |                    |   |   |   |   |
| Depreciation  and amortization (including discontinued operations)                       | 35,412             |   | 37,867  |   | 34,164  |
| Loss  on fixed asset replacements write-off                                              | 60                 |   | 288  |   | 108  |
| Gain  on disposition of properties                                                       | (15,400)                |   | (45,202) |   | (20,864) |
| Gain  on insurance recoveries                                                            | (665)                   |   | -  |   | -  |
| Amortization  of deferred financing costs and other, net                                 | 1,225              |   | 1,295  |   | 1,273  |
| Share-based  compensation                                                                | 1,952              |   | 1,893  |   | 1,590  |
| Equity  in net (income) loss of joint ventures                                           | -                  |   | (1,502) |   | 258  |
| Distribution  from joint ventures                                                        | -                  |   | -  |   | 780  |
| Net  change in assets and liabilities:                                                   |                    |   |   |   |   |
| Accounts  and notes receivable                                                           | 613                |   | 210  |   | 787  |
| Accounts  payable and accrued expenses                                                   | 2,292              |   | (3,982) |   | 102  |
| Other  operating assets and liabilities                                                  | (232)                   |   | (739) |   | (3) |
| Restricted  cash                                                                         | (220)                   |   | (143) |   | 549  |
| Total  adjustments                                                                       | 25,037             |   | (10,015) |   | 18,744  |
| Net  cash flow provided by operations                                                    | 31,300             |   | 24,665  |   | 28,962  |
| **Cash flow from investing  activities:**                                                |                    |   |   |   |   |
| Recurring  fixed asset additions                                                         | (7,807)                 |   | (8,873) |   | (10,420) |
| Revenue  enhancing/non-recurring fixed asset additions                                   | (4,822)                 |   | (3,819) |   | (1,880) |
| Net  proceeds from disposition of operating properties                                   | 32,746             |   | 88,347  |   | 46,478  |
| Acquisition  fixed asset additions                                                       | (4,526)                 |   | (34,604) |   | (70,547) |
| Other  investing activity                                                                | 859                |   | -  |   | (2,241) |
| Net  cash flow provided by (used for) investing activities                               | 16,450             |   | 41,051  |   | (38,610) |
| **Cash flow from financing  activities:**                                                |                    |   |   |   |   |
| Principal  payments on mortgage notes payable                                            | (2,999)                 |   | (2,865) |   | (3,316) |
| Repayments  of mortgage notes payable                                                    | (72,096)                |   | (42,851) |   | (116,161) |
| Payment  of debt procurement costs                                                       | (751)                   |   | (646) |   | (1,660) |
| Proceeds  from mortgage notes obtained                                                   | 52,450             |   | -  |   | 115,538  |
| Revolver  borrowings                                                                     | 141,350            |   | 149,175  |   | 155,260  |
| Revolver  repayments                                                                     | (150,350)               |   | (147,675) |   | (135,260) |
| Common  share dividends paid                                                             | (11,277)                |   | (11,105) |   | (11,577) |
| Preferred  share dividends paid                                                          | (4,199)                 |   | (4,655) |   | (4,924) |
| Operating  partnership distributions paid                                                | (53)                    |   | (53) |   | (53) |
| Exercise  of stock options                                                               | 403                |   | 1,843  |   | 201  |
| Purchase  of preferred and/or treasury shares                                            | (179)                   |   | (4,882) |   | (16,861) |
| Net  cash flow used for financing activities                                             | (47,701)                |   | (63,714) |   | (18,813) |
| Increase (decrease) in cash  and cash equivalents                                        | 49                 |   | 2,002  |   | (28,461) |
| Cash and cash equivalents,  beginning of period                                          | 3,551              |   | 1,549  |   | 30,010  |
| **Cash and cash  equivalents, end of period**                                            |  $                 | 3,600  |   |  $ | 3,551  |   |  $ | 1,549  |
|                                                                                     |                    |   |   |   |   |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 

** **

| F-6 |
|-----|

 

----

 

 

 

 

 

**ASSOCIATEDESTATES REALTY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.           BASIS OFPRESENTATION AND ACCOUNTING POLICIES**

**Business**

            Weare a self-administered and self-managed equity real estate investment trust("REIT") specializing in multifamily property management, advisory,development, construction, acquisition, disposition, operation and ownershipactivities.  In addition to rental revenue, we receive certain property andasset management fees, acquisition, disposition, incentive and consultationfees.  Our MIG subsidiary is a registered investment advisor and serves as areal estate advisor to pension funds. We own two taxable REIT subsidiaries (the"Service Companies") that provide management and other services to usand to third parties.

             Asof December 31, 2009, our owned and non-owned property portfolio consisted of:(i) 48 owned apartment communities containing 12,108 units in seven states, (ii)one apartment community that we manage for third party owners consisting of 258units; and (iii) a 186-unit apartment community and a commercial propertycontaining approximately 145,000 square feet that we asset manage.

**Principlesof Consolidation**

            Theaccompanying consolidated financial statements include the accounts of allsubsidiaries and qualified REIT subsidiaries, the Service Companies (which aretaxed as Taxable REIT Subsidiaries ("TRS") under the REITModernization Act ("RMA") implemented in 1999) and an OperatingPartnership structured as a DownREIT in which we own an aggregate 97.4% as ofDecember 31, 2009 and 2008.  We have evaluated all subsequent events throughFebruary 25, 2010, which is the date the financial statements were issued.

             Limited partnership interestsheld by others in the real estate partnership controlled by us are reflected as"Noncontrolling redeemable interest" in the Consolidated BalanceSheets.  Capital contributions, distributions and profits and losses areallocated to noncontrolling interests in accordance with the terms of theOperating Partnership agreement.  The DownREIT structure enabled us to acquiremultifamily real estate assets in an operating partnership entity that isseparate from other properties that we own.  In the DownREIT structure, thelimited partners originally contributed two real estate assets to the operatingpartnership and, in return, received partnership units entitling them to ashare of the profits, based on the number of operating partnership units.  Oneof the properties was sold in October 2005.  The operating partnership unitsentitle the holder to exchange their partnership units at some future time forcommon shares or to redeem partnership units for cash (at our option).  We arethe DownREIT general partner.  All significant intercompany balances andtransactions have been eliminated in consolidation.

            We own 100% of thecommon stock of all REIT subsidiaries included in our consolidated financialstatements.

 

| F-7 |
|-----|

 

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**SegmentReporting**

All of our properties are multifamily communities that have similareconomic characteristics.  Management evaluates the performance of ourproperties on an individual basis.  Our multifamily properties provided 98.1%of our consolidated revenue for 2009.  Consequently, we have only onereportable segment, which is multifamily properties.

**Use ofEstimates**

            Thepreparation of the consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America("GAAP") requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of contingentassets and liabilities at the date of the consolidated financial statements andreported amounts of revenues and expenses during the reporting periods.  Actualresults could differ from these estimates.

**CashEquivalents**

            Highlyliquid investments with an original maturity of three months or less whenpurchased are considered to be cash equivalents.

**RealEstate and Depreciation**

            Realestate assets are stated at cost less accumulated depreciation.  Depreciationis provided on a straight-line basis over the estimated useful lives of theassets as follows:
| •   | Buildings and improvements         | 5 - 30 years |
|---------------|------------------------------------|--------------|
| •   | Furniture, fixtures and  equipment | 5 - 10 years |

            We capitalizereplacements and improvements, such as HVAC equipment, structural replacements,windows, appliances, flooring, carpeting and kitchen/bath replacements andrenovations.  Ordinary repairs and maintenance, such as unit cleaning, paintingand appliance repairs are expensed when incurred.

            Wecapitalize interest costs on funds used in construction, real estate taxes andinsurance from the commencement of development activity through the time theproperty is ready for leasing.

            Wediscontinue the depreciation of assets that we have specifically identified asheld for sale.  There were no properties classified as held for sale atDecember 31, 2009, and one property was classified as held for sale at December31, 2008.

**Classificationof Fixed Asset Additions**

            Wedefine recurring fixed asset additions to a property to be capital expendituresmade to replace worn out assets to maintain the property's value.  Revenueenhancing/non-recurring fixed asset additions are defined as capitalexpenditures that increase the value of the property and/or enable us toincrease rents.  Acquisition/development fixed asset additions are defined ascapital expenditures for the purchase or construction of new properties to beadded to our portfolio, or fixed asset additions identified at the time ofpurchase that are not made until subsequent periods.

 

| F-8 |
|-----|

 

----

 

 

 

 

 

**Impairmentof Long-Lived Assets**

            Weevaluate the recoverability of the carrying value of our real estate assets whena triggering event occurs using the methodology prescribed by GAAP.  Factors weconsider in evaluating impairment of existing real estate assets held forinvestment include significant declines in property operating profits,recurring property operating losses and other significant adverse changes ingeneral market conditions that are considered permanent in nature.  Under GAAP,a real estate asset held for investment is not considered impaired if theundiscounted, estimated future cash flows of the asset (both the annualestimated cash flow from future operations and the estimated cash flow from thetheoretical sale of the asset) over its estimated holding period are in excessof the asset's net book value at the balance sheet date.  If any real estateasset held for investment is considered impaired, a loss is recorded to reducethe carrying value of the asset to its fair value.  We periodically classifyreal estate assets as held for sale.  See Note 2 for a discussion of our policyregarding classification of a property as held for sale.  Upon theclassification of a real estate asset as held for sale, the carrying value ofthe asset is reduced to the lower of its net book value or its fair value, lesscosts to sell.  Subsequent to the classification of assets as held for sale, nofurther depreciation expense is recorded.  No impairment was recorded inconnection with our owned real estate assets for the years ended December 31,2009, 2008 and 2007.

**DeferredFinancing Costs**

**           **Costsincurred in obtaining long-term financing are deferred and amortized over thelife of the associated instrument using the effective interest method.

**IntangibleAssets and Goodwill**

            GAAPrequires that intangible assets not subject to amortization and goodwill aretested for impairment annually, or more frequently if events or changes incircumstances indicate that the carrying value may not be recoverable.  SeeNote 4 for additional information related to intangible assets and goodwill.

**Property RevenueRecognition**

            Our residential propertyleases are for terms of generally one year or less.  Rental income isrecognized on the straight-line basis.  

            Rentconcessions, including free rent, incurred in connection with residentialproperty leases, are capitalized and amortized on a straight-line basis overthe terms of the related leases (generally one year) and are charged as areduction of rental revenue.

**PropertyManagement Revenue Recognition**

            Acquisition, management anddisposition fees and other fees are recognized when the related services areperformed and the earnings process is complete.

**           **Weare reimbursed for expenses incurred in connection with the management ofproperties for third parties.  We are the primary obligor for these expenses,which are primarily salaries and benefits relating to employees at theseproperties, and therefore we record these reimbursements as management andservice company revenue (included in "Fees, reimbursements andother") and as expenses (included in "Direct property management andservice company expense").  For the years ended December 31, 2009, 2008and 2007, the reimbursements shown as revenue were equivalent to the expenses,which were $663,000, $1.1 million and $8.3 million, respectively.

** **

| F-9 |
|-----|

 

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**AdvertisingCosts**

            Werecognize advertising costs as expense when incurred.  The total amount chargedto advertising expense for the years ended December 31, 2009, 2008 and 2007, were$1.6 million, $1.7 million and $1.8 million, respectively.  There were noadvertising costs reported as assets for the years ended December 31, 2009 and2008.

**Share-BasedCompensation**

            Weaccount for share based compensation using the fair value method to recognizedcompensation cost.  See Note 15 for information about share-based compensationand our equity based award plans.

**NoncontrollingRedeemable Interest**

            In1998, in conjunction with the acquisition of an operating partnership thatowned two apartment communities, one of which was sold in October 2005, weissued a total of 522,032 operating partnership units ("OP units"). Holders of OP units are entitled to receive cumulative distributions per OPunit equal to the per share distributions on our common shares.  If and whenthe OP units are presented for redemption, we have the option toredeem, in certain circumstances, the OP units for common shares exchangeableon a one-for-one basis, or the cash equivalent amount.  As of December 31, 2009,all units presented for redemption were redeemed for cash.  The differencebetween the cash paid and the recorded value of the units reduced the recordedamount of the underlying real estate.  There were 78,335 OP units remaining asof December 31, 2009.

            Thefollowing table identifies the effect of OP unit redemptions (in thousands,except units redeemed):
|        |   |           |   |            |        |  Recorded |    |  Reduction in |
|-------------|--------|----------------|--------|-----------------|-------------|----------------|---------|--------------------|
|        |   |  Units    |   |            |        |  Value at |    |  Underlying   |
|  Year  |   |  Redeemed |   |  Cash Paid |        |  Issuance |    |  Real Estate  |
|        |   |           |   |            |        |           |    |               |
| 2000 - 2006 |   | 442,755   |   |  $         | 4,032  |           |  $ | 10,086        |   |  $ | 6,054  |
| 2007        |   | 942       |   | 14         |        | 22        |    | 8             |
| 2008        |   | -         |   | -          |        | -         |    | -             |
| 2009        |   | -         |   | -          |        | -         |    | -             |
|        |   | 443,697   |   |  $         | 4,046  |           |  $ | 10,108        |   |  $ | 6,062  |

 

**Income Taxes**

            Wehave elected to be taxed as a REIT under the Internal Revenue Code of 1986 (the"Code"), as amended.  As a REIT, we are entitled to a tax deductionfor dividends paid to shareholders, thereby effectively subjecting thedistributed net income to taxation at the shareholder level only, provided wedistribute at least 90.0% of our taxable income and meet certain otherqualifications.

            TheService Companies have elected to be treated as Taxable REIT Subsidiaries ("TRS")and operate as C-corporations under the Code and have accounted for incometaxes in accordance with GAAP.  Taxes are provided for those Service Companieshaving net profits for both financial statement and income tax purposes.  The2009, 2008 and 2007 net operating loss carry forwards for the ServiceCompanies, in the aggregate, are approximately $9.7 million, $8.9 million and $8.3million, respectively, and expire during the years 2018 to 2029.

 

| F-10 |
|------|

 

----

 

 

 

 

 

            The gross deferredtax assets were $5.4 million, $5.0 million and $4.8 million at December 31, 2009,2008 and 2007, respectively, and relate principally to net operating losses ofthe Service Companies.  Gross deferred tax liabilities of $223,000, $159,000and $155,000 at December 31, 2009, 2008 and 2007, respectively, relateprimarily to tax basis differences in fixed assets and intangibles.  Thedeferred tax valuation allowance was $5.2 million, $4.9 million and $4.7million at December 31, 2009, 2008 and 2007, respectively.  We reserve for netdeferred tax assets when we believe it is more likely than not that they willnot be realized.  The deferred tax assets and the deferred tax valuationallowance are recorded in "Other assets, net" and the deferred taxliabilities are recorded in "Accounts payable, accrued expenses and otherliabilities" in the Consolidated Balance Sheets.

            At December 31, 2009 and2008, our net tax basis of properties exceeds the amount set forth in the ConsolidatedBalance Sheets by $37.9 million and $32.9 million, respectively.

**ReconciliationBetween GAAP Net Income and Taxable Income (Loss)**
|                                                                                       |   | Year Ended December 31, |
|--------------------------------------------------------------------------------------------|--------|-------------------------|
| *(In thousands)*                                                                           |   | 2009                    |   | 2008 |   | 2007 |
| * *                                                                                   |   |                    |   |   |   |   |
| GAAP net income                                                                            |   |  $                 | 6,210  |   |  $ | 34,627  |   |  $ | 10,165  |
| Add:        GAAP net loss of  taxable REIT subsidiaries |   |                    |   |   |   |   |
| and  noncontrolling interest in joint venture, net                                         |   | 802                |   | 2,058  |   | 525  |
| GAAP net income from REIT  operations (1)                                                  |   | 7,012              |   | 36,685  |   | 10,690  |
|                                                                                       |   |                    |   |   |   |   |
| Add:        Book  depreciation and amortization         |   | 36,546             |   | 39,167  |   | 35,808  |
| Less:       Tax depreciation  and amortization               |   | (26,039)                |   | (27,090) |   | (26,267) |
| Book/tax  differences on losses from                                                       |   |                    |   |   |   |   |
| capital  transactions                                                                      |   | (3,695)                 |   | (33,105) |   | (21,076) |
| Other book/tax differences,  net                                                           |   | 1,437              |   | (656) |   | (1,203) |
| Taxable income (loss) before  adjustments                                                  |   | 15,261             |   | 15,001  |   | (2,048) |
| Less:  Capital (gain) loss                                                            |   | (11,653)                |   | (13,722) |   | 216  |
| Taxable income (loss)  subject to dividend requirement                                     |   |  $                 | 3,608  |   |  $ | 1,279  |   |  $ | (1,832) |

            

 
| (1) | All  adjustments to GAAP net income from REIT operations are net of amounts  attributable to taxable REIT subsidiaries and noncontrolling interests. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

**ReconciliationBetween Cash Dividends Paid and Dividends Paid Deduction**

            
|                                                                     |   | Year Ended December 31, |
|--------------------------------------------------------------------------|--------|-------------------------|
| *(In thousands)*                                                         |   | 2009                    |   | 2008 |   | 2007 |
| * *                                                                 |   |                    |   |   |   |   |
| Cash dividends paid                                                      |   |  $                 | 15,476  |   |  $ | 15,760  |   |  $ | 16,501  |
| Less:    Dividends  designated to prior year              |   | -                  |   | -  |   | -  |
| Less:    Portion designated  as capital gain distribution |   | (11,654)                |   | (13,721) |   | -  |
| Less:    Return of capital                                |   | (214)                   |   | (760) |   | (16,501) |
| Dividends paid deduction                                                 |   |  $                 | 3,608  |   |  $ | 1,279  |   |  $ | -  |

 

 

| F-11 |
|------|

 

----

 

 

 

 

 

**DividendsPer Share**

            Totaldividends per common share and the related components for the years endedDecember 31, 2009, 2008 and 2007, as reported for income tax purposes, were asfollows:
| Year Ended December 31, 2009 |
|------------------------------|
|                         |   |   |   |   |   |   |   |   |   |   |
|                         |   |   |   |  Non-Taxable |   |  20% Rate |   |  Unrecaptured |   |   |
|                         |   |  Ordinary |   |  Return of |   |  Capital |   |  Section 1250 |   |   |
|  Date Paid              |   |   Income |   |  Capital |   |  Gain |   |  Gain |   |  Dividends |
| 2/2/2009                     |   |  $ | 0.047816  |   |  $ | -  |   |  $ | 0.122184  |   |  $ | 0.087891  |   |  $ | 0.170000  |
| 5/1/2009                     |   | 0.047816  |   | -  |   | 0.122184  |   | 0.087891  |   | 0.170000  |
| 8/3/2009                     |   | 0.047816  |   | -  |   | 0.122184  |   | 0.087891  |   | 0.170000  |
| 11/2/2009                    |   | 0.047816  |   | -  |   | 0.122184  |   | 0.087891  |   | 0.170000  |
|                         |   |  $ | 0.191264  |   |  $ | -  |   |  $ | 0.488736  |   |  $ | 0.351564  |   |  $ | 0.680000  |

 

 
| Year Ended December 31, 2008 |
|------------------------------|
|                         |   |   |   |   |   |   |   |   |   |   |
|                         |   |   |   |  Non-Taxable |   |  20% Rate |   |  Unrecaptured |   |   |
|                         |   |  Ordinary |   |  Return of |   |  Capital |   |  Section 1250 |   |   |
|  Date Paid              |   |   Income |   |  Capital |   |  Gain |   |  Gain |   |  Dividends |
| 2/1/2008                     |   |  $ | 0.021811  |   |  $ | 0.023652  |   |  $ | 0.124537  |   |  $ | 0.123605  |   |  $ | 0.170000  |
| 5/1/2008                     |   | 0.021811  |   | 0.023652  |   | 0.124537  |   | 0.123605  |   | 0.170000  |
| 8/1/2008                     |   | 0.021811  |   | 0.023652  |   | 0.124537  |   | 0.123605  |   | 0.170000  |
| 11/3/2008                    |   | 0.021811  |   | 0.023652  |   | 0.124537  |   | 0.123605  |   | 0.170000  |
|                         |   |  $ | 0.087244  |   |  $ | 0.094608  |   |  $ | 0.498148  |   |  $ | 0.494420  |   |  $ | 0.680000  |

 

 
| Year Ended December 31, 2007 |
|------------------------------|
|                         |   |   |   |   |   |   |   |   |   |   |
|                         |   |   |   |  Non-Taxable |   |  20% Rate |   |  Unrecaptured |   |   |
|                         |   |  Ordinary |   |  Return of |   |  Capital |   |  Section 1250 |   |   |
|  Date Paid              |   |   Income |   |  Capital |   |  Gain |   |  Gain |   |  Dividends |
| 2/2/2007                     |   |  $ | -  |   |  $ | 0.170000  |   |  $ | -  |   |  $ | -  |   |  $ | 0.170000  |
| 5/1/2007                     |   | -  |   | 0.170000  |   | -  |   | -  |   | 0.170000  |
| 8/1/2007                     |   | -  |   | 0.170000  |   | -  |   | -  |   | 0.170000  |
| 11/1/2007                    |   | -  |   | 0.170000  |   | -  |   | -  |   | 0.170000  |
|                         |   |  $ | -  |   |  $ | 0.680000  |   |  $ | -  |   |  $ | -  |   |  $ | 0.680000  |

 

             Preferreddividends of $4.2 million, $4.7 million and $4.9 million were paid for theyears ended December 31, 2009, 2008 and 2007, respectively, of which $3.0million, $4.0 million, and zero were designated as a capital gain dividend,respectively.

 

| F-12 |
|------|

 

----

 

 

 

 

 

**DerivativeInstruments and Hedging Activities**

 We record allderivatives on the balance sheet at fair value.  The accounting for changes inthe fair value of derivatives depends on the intended use of the derivative andthe resulting designation.  Derivatives used to hedge the exposure to changesin the fair value of an asset, liability or firm commitment attributable to aparticular risk, such as interest rate risk, are considered fair value hedges.  Derivativesused to hedge the exposure to variability in expected future cash flows orother types of forecasted transactions are considered cash flow hedges.

For derivativesdesignated as fair value hedges, changes in the fair value of the derivativeand the hedged item related to the hedged risk are recognized in earnings.  Forderivatives designated as cash flow hedges, the effective portion of changes inthe fair value of the derivative is initially reported in other comprehensiveincome (outside of earnings) and subsequently reclassified to earnings when thehedged transaction affects earnings, and the ineffective portion of changes inthe fair value of the derivative is recognized directly in earnings.  Hedge ineffectivenessis measured by comparing the changes in fair value or cash flows of thederivative hedging instrument with the changes in fair value or cash flows ofthe designated hedged item or transaction.  For derivatives not designated ashedges, changes in fair value are recognized in earnings.  

 We do not usederivatives for trading or speculative purposes.  Further, we have a policy ofonly entering into contracts with major financial institutions based upon theircredit ratings and other factors.  When viewed in conjunction with theunderlying and offsetting exposure that the derivatives are designed to hedge,we have not sustained a material loss from these hedges.

 We have utilizedinterest rate swaps and caps to add stability to interest expense and to manageour exposure to interest rate movements.  Interest rate swaps designated ascash flow hedges involve the receipt of variable-rate amounts in exchange forfixed-rate payments over the life of the agreements without exchange of theunderlying principal amount.  Interest rate caps designated as cash flow hedgesinvolve the receipt of variable-rate amounts if interest rates rise above acertain level in exchange for an up front premium.  

****InterestRate Hedge Activity:  ****During 2007, we executed two interest rate swapsto hedge the cash flows of existing variable rate debt.  No hedgeineffectiveness on these cash flow hedges was recognized during the year endedDecember 31, 2009.  Amounts reported in "Accumulated other comprehensive loss"related to derivatives will be reclassified to "Interest expense" asinterest payments are made on our variable-rate debt.  During the next twelvemonths, we estimate that approximately $1.4 million will be reclassified from "Accumulatedother comprehensive loss" as an increase to "Interest expense." The following table presents the notional amounts of the swaps as of December31, 2009:
| *(Dollar amount in  thousands)* |   | Number of   |   | Notional |
|---------------------------------|--------|-------------|--------|----------|
| Interest Rate Derivative        |   | Instruments |   | Amounts  |
|                            |   |        |   |     |
| Interest rate swaps             |   | 2      |   |  $  | 63,000  |

 

 

| F-13 |
|------|

 

----

 

 

 

 

 

            The following table presents the fair valueof our derivative financial instruments as well as their classification on theConsolidated Balance Sheets (see Note 9 for additional information regardingthe fair value of these derivative instruments):
| Fair Value of Derivative Instruments |
|--------------------------------------|
|                                 |   |   |   |   |   |   |   |   |
|                                 |   | Liability Derivatives |
|                                 |   | As of December 31, 2009 |   | As of December 31, 2008 |
|                                 |   |   |   |   |   |   |   |   |
| *(In thousands)*                     |   | Balance Sheet Location |   | Fair Value |   | Balance Sheet Location |   | Fair Value |
| Derivatives designated as            |   |   |   |   |   |   |   |   |
| hedging instruments:                 |   |   |   |   |   |   |   |   |
|                                 |   |   |   |   |   |   |   |   |
| Interest rate swaps                  |   |  Accounts payable, accrued |   |   |   |  Accounts payable, accrued |   |   |
|                                 |   |  expenses  and other liabilities |   |  $ | 1,420  |   |  expenses  and other liabilities |   |  $ | 2,899  |
|                                      |  |  |  |  |  |  |  |  |  |  |

 

             The following table presents the effect ofour derivative financial instruments on the Consolidated Statements ofOperations (see Note 17 for additional information regarding the effect ofthese derivative instruments on total comprehensive income):
| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                               |   |   |   |   |   |   |
|                                                                               |   |   |   |   |   | Amount of Gain or |
|                                                                               |   | Amount of Gain or |   |   |   | (Loss) Reclassified |
|                                                                               |   | (Loss) Recognized |   |   |   |  from Accumulated |
|                                                                               |   | in OCI on Derivative |   | Location of Gain |   | OCI into Income |
| *(In thousands)*                                                                   |   | (Effective Portion) |   | or (Loss) |   | (Effective Portion) |
|                                                                               |   | Twelve Months |   | Reclassified from |   | Twelve Months |
| Derivatives in Cash                                                                |   | Ended |   | Accumulated OCI |   | Ended |
| Flow Hedging                                                                       |   | December 31, |   | into Income |   | December 31, |
| Relationships                                                                      |   | 2009 |   | (Effective Portion) |   | 2009 |
|                                                                               |   |   |   |   |   |   |
| Interest rate swaps                                                                |   |  $ | (772) |   |  Interest  expense |   |  $ | 2,251  |
|                                                                                    |  |  |  |  |  |  |  |  |

 

We have agreements with each of our derivativecounterparties that contain a provision where if we either default or are capableof being declared in default on any of our indebtedness, then such counterpartycan declare us to be in default on our derivative obligations. 

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

 Asof December 31, 2009, the fair value of derivatives in a net liability position,which includes accrued interest but excludes any adjustment for nonperformancerisk, related to these agreements was $1.7 million.  As of December 31, 2009, wehave not posted any collateral related to these agreements.  If we had breachedany of these provisions at December 31, 2009, we would have been required tosettle our obligations under the agreements at their termination value of $1.7million.

| F-14 |
|------|

 

----

 

 

 

 

 

**TreasuryShares**

            Werecord the purchase of Treasury shares at cost.  From time to time, we mayreissue these shares.  When shares are reissued, we account for the issuancebased on the "First in, first out" method.  For additionalinformation regarding treasury shares, see Note 12.

**Reclassifications**

            Certainreclassifications have been made to the 2008 and 2007 consolidated financial statementsto conform to the 2009 presentation.

**2.         ACQUISITION,DEVELOPMENT, CONSTRUCTION AND DISPOSITION ACTIVITY**

**AcquisitionActivity**

**           **OnApril 21, 2008, we acquired two apartment communities located in the Richmond,Virginia metropolitan area totaling 536 units for a purchase price of $75.0million and additional closing costs of $541,000.  The acquisition alsoincluded a 5.92 acre future development land parcel, adjacent to one of theproperties.  This purchase was funded with the assumption of mortgage loans onthe acquired properties, Section 1031 exchange cash proceeds received from thedisposition of a property that we sold on March 19, 2008, and borrowings on ourrevolving credit facility.

            Thefollowing pro forma financial information is presented as if these acquisitionshad occurred at the beginning of each period presented.  This information ispresented for informational purposes only and is not necessarily indicative ofwhat our actual results of operations would have been had the acquisitionsoccurred at such times:
|                                                | Year Ended December 31, |
|-----------------------------------------------------|-------------------------|
| *(Unaudited; in thousands,  except per share data)* | 2008                    |   | 2007 |
| * *                                            |                    |   |   |
| Pro forma revenue                                   |  $                 | 137,067  |   |  $ | 137,621  |
| Pro forma net income  applicable to common shares   | 31,215             |   | 1,165  |
|                                                |                    |   |   |
| Earnings per common share -  basic and diluted:     |                    |   |   |
| Pro  forma net income applicable to common shares   |  $                 | 1.92  |   |  $ | 0.07  |

 

            Thepurchase price allocation for the two properties and land parcel acquired onApril 21, 2008 was as follows:
| *(In thousands)*                                            | 2008         |
|-------------------------------------------------------------|--------------|
| * *                                                    |         |
| Land                                                        |  $      | 10,698  |
| Buildings and improvements                                  | 55,002  |
| Furniture and fixtures                                      | 6,458   |
| Existing leases and tenant  relationships (Other assets)(1) | 3,383   |
| Total                                                       |  $      | 75,541  |

            
| (1) | See  Note 4 for additional information related to intangible assets identified as  existing leases and tenant relationships. |
|-----|------------------------------------------------------------------------------------------------------------------------------|

 

 

| F-15 |
|------|

 

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            OnJune 29, 2007, we acquired our joint venture partner’s 51.0% interest inIdlewylde Apartments, an 843-unit property located in Atlanta, Georgia.  Wepreviously owned a 49.0% interest in this partnership and had accounted forthis investment under the equity method of accounting.  We paid our partner$21.6 million in cash.  Commencing June 29, 2007, the results of operations,financial condition (including the existing $42.0 million non-recourse mortgageloan), and cash flows of this property are included in our consolidated financialstatements.

            OnJune 8, 2007, we acquired a 268-unit property located in Norfolk, Virginia fora purchase price of $48.3 million.  The purchase was funded primarily by 1031proceeds from the disposition of a property which we sold on May 30, 2007, andwith borrowings from our unsecured revolving credit facility.

**DevelopmentActivity**

            During2009, we commenced construction of a 60-unit expansion of the existing 240-unitRiver Forest apartment community located in the Richmond, Virginia metropolitanmarket area.  Construction in progress related to this development was $4.1 millionat December 31, 2009, and includes capitalized real estate taxes, insurance andinterest costs on funds used in construction.  Capitalized interest was$119,000 for the year ended December 31, 2009.

**ConstructionActivity**

            Oursubsidiary, Merit Enterprises, Inc., is engaged as a general contractor and constructionmanager that will also act as our in-house construction division as well asprovide general contracting and construction management services to third parties. Merit intends to concentrate its efforts on rehabilitation and ground-upconstruction projects.  We account for construction contracts using thepercentage-of-completion method.  Under this method, we recognize revenue inthe ratio of costs incurred to total estimated costs, with any changes inestimates recognized in the period in which they are known on a prospectivebasis. We recognized $393,000 in revenue under this method during the twelvemonths ended December 31, 2009.  The total costs incurred and revenuerecognized on uncompleted contracts in excess of related billings are includedin "Other assets, net," and the total billings on uncompletedcontracts in excess of revenue recognized is included in "Accountspayable, accrued expenses and other liabilities."  Total costs and totalbillings for the twelve months ended December 31, 2009 were $107,000 and$333,000, respectively.

**DispositionActivity**

            Wereport the results of operations and gain/loss related to the sale of realestate assets as discontinued operations.  Real estate assets that areclassified as held for sale are reported as discontinued operations for thecurrent and all prior periods.  We classify properties as held for sale whenall significant contingencies surrounding the closing have been resolved.  In mosttransactions, these contingencies are not satisfied until the actual closing ofthe transaction.  Properties held for sale are measured at the lower of thecarrying amount or the fair value less the cost to sell.  Subsequent toclassification of a property as held for sale, no further depreciation isrecorded.  Interest expense included in discontinued operations is limited tointerest and any defeasance/prepayment costs on mortgage debt specificallyassociated with properties sold or classified as held for sale.

            During2009, we completed the sale of two properties for a total sales price of $33.9million.  One of these properties was located in Ohio and the other inPennsylvania.  We recognized total gains of $15.4 million related to thesesales, which are included in "Income from discontinued operations."  

            During2008, we completed the sale of four properties and our entire wholly ownedAffordable Housing portfolio of 11 properties, for a total sales price of $91.8million.  These 15 properties represented a total of 2,206 units and were alllocated in Ohio.  We recognized total gains of $45.2 million related to thesesales, which are included in "Income from discontinued operations."  

| F-16 |
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            During2007, we completed the sale of three properties containing a total of 1,173units for a total sales price of $49.0 million.  Two of these properties werelocated in Ohio and one was located in Texas.  We recognized total gains of $20.9million related to these sales, which are included in "Income fromdiscontinued operations."

            Thefollowing chart summarizes "Income from discontinued operations" forthe years ended December 31, 2009, 2008 and 2007, respectively:
| *(In thousands)*                            |   | 2009         |         | 2008         |    | 2007         |
|---------------------------------------------|--------|--------------|--------------|--------------|---------|--------------|
|                                        |   |         |         |         |    |         |
| Property revenue(1)                         |   |  $      | 2,021   |         |  $ | 9,147   |   |  $ | 28,353  |
|                                        |   |         |         |         |    |         |
| Property operating and  maintenance expense |   | (948)        |         | (4,427)      |    | (14,919)     |
| Depreciation and  amortization              |   | (475)        |         | (1,954)      |    | (4,876)      |
| Interest income                             |   | 1       |         | 6       |    | 31      |
| Interest expense(2)                         |   | (31)         |         | (3,205)      |    | (3,026)      |
|                                        |   |         |         |         |    |         |
| Operating income (loss)                     |   | 568     |         | (433)        |    | 5,563   |
| Gain on disposition of  properties          |   | 15,400  |         | 45,202  |    | 20,864  |
| **Income from discontinued  operations**    |   |  $      | 15,968  |         |  $ | 44,769  |   |  $ | 26,427  |

 
| (1) | Includes  non-recurring rental revenue of $1.6 million received in 2007 as a result of  a settlement of a lawsuit with HUD relating to past due rents at some of the  Affordable Housing properties that we previously owned. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes  $2.0 million of defeasance/prepayment costs associated with the prepayment of  mortgage loans in 2008.                                                                                                              |

 

**3.         RESTRICTEDCASH**

            Restricted cash, some ofwhich is required by our lenders, includes residents' security deposits,reserve funds for replacements and other escrows held for the future payment ofreal estate taxes and insurance.  The reserve funds for replacements areintended to provide cash to defray future costs that may be incurred tomaintain the associated property.

            Restricted cash iscomprised of the following:
|                                        |   | December 31, |
|---------------------------------------------|--------|--------------|
| *(In thousands)*                            |   | 2009         |   | 2008 |
|                                        |   |         |   |   |
| Resident security deposits                  |   |  $      | 1,038  |   |  $ | 1,258  |
| Other escrows                               |   | 300     |   | 165  |
| Escrows and reserve funds  for replacements |   |         |   |   |
| required  by mortgages                      |   | 5,755   |   | 5,450  |
|                                        |   |  $      | 7,093  |   |  $ | 6,873  |

 

            Restricted resident securitydeposits are held in separate bank accounts in the name of the properties forwhich the funds are being held.  Other escrows represents funds held primarilyfor the payment of operating expenses associated with properties we manage onbehalf of our advisory clients.  These funds are held in short-terminvestments.  Certain reserve funds for replacements are invested in acombination of money market funds and certificates of deposit with maturitiesless than 18 months.

| F-17 |
|------|

 

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**4.         GOODWILLAND OTHER ASSETS**

**Goodwill**

            *MIGRealty Advisors, Inc.*   In June 1998, we recorded goodwill in connectionwith the MIG Realty Advisors, Inc. merger.  We complete our annual review ofgoodwill during the first quarter of each year and more frequently if events orchanges in circumstances indicate that the carrying value may not berecoverable.  The review that was completed during the three months ended March31, 2009 determined that goodwill was not impaired and no other events occurredthat would require a reevaluation of goodwill and as such there were no changesto the carrying value of goodwill as of December 31, 2009.  Should our analysisdetermine that an impairment has resulted, it could materially impact ourresults of operations for the period in which it is recorded.

**OtherAssets, Net**

            Otherassets, net, consist of the following:
|                                  |   | December 31, |
|---------------------------------------|--------|--------------|
| *(In thousands)*                      |   | 2009         |   | 2008 |
|                                  |   |         |   |   |
| Intangible assets                     |   |  $      | 8,478  |   |  $ | 8,478  |
| Deferred financing and  leasing costs |   | 8,699   |   | 8,346  |
| Less:  Accumulated  amortization |   | (13,510)     |   | (11,571) |
|                                  |   | 3,667   |   | 5,253  |
| Prepaid expenses                      |   | 4,153   |   | 4,142  |
| Other assets                          |   | 572     |   | 736  |
|                                  |   |  $      | 8,392  |   |  $ | 10,131  |

 

            *Property Acquisitions. *Weallocate a portion of the total purchase price of a property acquisition to anyintangible assets identified, such as existing leases and tenantrelationships.  The intangible assets are amortized over the remaining leaseterms or estimated life of the tenant relationship, which is approximately 12to 16 months.  Due to the short term nature of residential leases, we believethat existing lease rates approximate market rates; therefore, no allocation ismade for above/below market leases.

            Inconnection with two property acquisitions completed during 2008, as discussedin Note 2, we recorded total intangible assets in the amount of $2.5 millionrelated to existing leases, which were amortized over 12 months, and $890,000related to tenant relationships, which were amortized over 16 months.

| F-18 |
|------|

 

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            Informationrelated to intangible assets at December 31, 2009 is as follows:
|                             |   | In Place |                | Tenant        |
|----------------------------------|--------|----------|---------------------|---------------|
| *(In thousands)*                 |   | Leases   |                | Relationships |
|                             |   |     |                |          |
| Gross carrying amount            |   |  $  | 6,571          |          |  $ | 1,907  |
| Less: Accumulated  amortization  |   | (6,571)  |                | (1,907)       |
| Balance as of December 31,  2009 |   |  $  | -    |          |  $ | -    |

 

            Theaggregate intangible asset amortization expense for the years ended December31, 2009, 2008 and 2007 was $1.2 million, $3.9 million and $1.5 million,respectively.  

**Deferred Financingand Leasing Costs**

            Amortizationexpense for deferred financing and leasing costs, including amortizationclassified in income from discontinued operations, was $1.2 million, $1.3million and $1.1 million for the years ended December 31, 2009, 2008 and 2007,respectively.

**5.         DEBT**

            Thefollowing table identifies our total debt outstanding and weighted averageinterest rates as of December 31, 2009 and 2008:    
|                                 | December 31, 2009 |          | December 31, 2008 |
|--------------------------------------|-------------------|---------------|-------------------|
|                                 | Balance           |          | Weighted Average  |   | Balance |   | Weighted Average |
| *(Dollar amounts in  thousands)*     | Outstanding       |          | Interest Rate     |   | Outstanding |   | Interest Rate |
| * *                             |              |          |              |   |   |   |   |
| **FIXED RATE DEBT**                  |              |          |              |   |   |   |   |
| Mortgages payable - CMBS             |  $           | 115,464  |              | 7.7% |   |  $ | 154,685  |   | 7.7% |
| Mortgages payable - other (1)        | 337,241      |          | 5.8%              |   | 320,516  |   | 5.8% |
| Unsecured borrowings                 | 25,780       |          | 7.9%              |   | 25,780  |   | 7.9% |
| **Total  fixed rate debt**           | 478,485      |          | 6.4%              |   | 500,981  |   | 6.5% |
| ** **                           |              |          |              |   |   |   |   |
| **VARIABLE RATE DEBT**               |              |          |              |   |   |   |   |
| Mortgages payable                    | 34,851       |          | 4.7%              |   | 35,000  |   | 1.6% |
| Unsecured revolving credit  facility | 12,500       |          | 2.6%              |   | 21,500  |   | 3.7% |
| **Total  variable rate debt**        | 47,351       |          | 4.1%              |   | 56,500  |   | 2.4% |
| **Total  debt**                      |  $           | 525,836  |              | 6.2% |   |  $ | 557,481  |   | 6.1% |

 
| (1) | Includes  $63.0 million of variable rate debt swapped to fixed. |
|-----|-----------------------------------------------------------------|

            Real estate assets pledged ascollateral for all debt had a net book value of $475.6 million and $511.5 millionat December 31, 2009 and 2008, respectively.

| F-19 |
|------|

 

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            Asof December 31, 2009, the scheduled debt maturities for each of the next fiveyears and thereafter, are as follows (in thousands): 
| 2010       |   |  $       | 78,310   |
|------------|--------|---------------|---------------|
| 2011       |   | 67,070   |
| 2012       |   | 81,584   |
| 2013       |   | 132,209  |
| 2014       |   | 44,538   |
| Thereafter |   | 122,125  |
|       |   |  $       | 525,836  |

            Cash paid for interestwas $33.8 million, $37.8 million and $41.0 million for the years ended December31, 2009, 2008 and 2007, respectively.  Included in cash paid for interest are $2.0million and $3.8 million of defeasance and other prepayment costs that werepaid during the years ended December 31, 2008 and 2007, respectively.

             During2008, 2007 and 2006, we defeased 21 CMBS loans.  These loans were defeasedpursuant to the terms of the underlying loan documents.  In accordance withGAAP, we removed those financial assets and the mortgage loans from ourfinancial records.  All risk of loss associated with these defeasances havebeen transferred from us to the successor borrower and any ongoing relationshipbetween the successor borrower and us was deemed inconsequential at the time ofcompletion of the respective transfers.  However, we subsequently learned that forcertain defeasance transactions completed prior to June 2007, the successorborrower may be able to prepay the loans thus enabling us to receive a refundof a portion of the costs incurred in connection with the transaction.  During2009, we received refunds of $563,000, which were included as a reduction tointerest expense.  It is possible that we may receive additional refunds in thefuture, however such amounts cannot be estimated due to the uncertainty offuture payments, and we believe that any amounts we may receive would not bematerial to our consolidated financial position, cash flow or results ofoperations.

             Thefollowing table provides information on loans repaid at par as well as loans obtainedduring 2009:
| *(Dollar amounts in  thousands)* |   | Loans Repaid |         |   | Loans Obtained |
|----------------------------------|--------|--------------|--------------|--------|----------------|
| Property                         |   | Amount       |         | Rate   |           |   | Amount |   | Rate |   | Maturity |
|                             |   |         |         |   |           |   |   |   |   |   |   |
| Saw Mill Village                 |   |  $      | 11,119  |   | 7.5%           |   |   |  $ | 17,220  |   | 6.0% |   | April 2016 |
| Georgetown Park                  |   | 16,000  |         | 1.6%   | (1)            |   | -  |   | N/A |   | N/A |
| Chestnut Ridge                   |   | 19,000  |         | 1.4%   | (1)            |   | -  |   | N/A |   | N/A |
| Oaks at Hampton                  |   | 25,977  |         | 7.5%   |           |   | -  |   | N/A |   | N/A |
| Steeplechase                     |   | -       |         | N/A    |           |   | 13,790  |   | 4.7% | (1) | March 2016 |
| Courtney Chase                   |   | -       |         | N/A    |           |   | 21,440  |   | 4.7% | (1) | March 2016 |
|                             |   |  $      | 72,096  |   | 4.6%           | (2) |   |  $ | 52,450  |   | 5.1% | (2) |   |

 
| (1) | Denotes  variable rate loans.  Variable rates on loans obtained are as of December 31,  2009. |
|-----|----------------------------------------------------------------------------------------------------|
| (2) | Represents  weighted average interest rate for the loans listed.                                   |

 

 

| F-20 |
|------|

 

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            In2008, we repaid or prepaid/defeased eight mortgage loans totaling $42.9 million,obtained two mortgage loans totaling $45.0 million and paid $2.0 million in defeasance/prepaymentcosts that are recognized in interest expense.  These costs were included in"Income from discontinued operations."  In 2007, we recognized ininterest expense defeasance/prepayment costs totaling $4.2 million of which$3.8 million was paid during 2007 and $400,000 was deferred financing coststhat were charged to expense.  All of these costs were included in "Incomefrom continuing operations."

**MortgageNotes Payable**

            AtDecember 31, 2009, mortgage notes payable consisted of:
| •    | 24 project specific loans that  are each collateralized by the respective real estate and resident leases;                                                                       |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •    | Five cross-collateralized,  cross-defaulted loans that are secured by the real estate and resident leases  at five properties and include a collateral substitution feature; and |
| •    | two fixed-rate mortgages that  are insured by the Federal Housing Administration ("FHA").                                                                              |

 

            At December 31, 2008,mortgage notes payable consisted of:

 
| •    | 25 project specific loans that  are each collateralized by the respective real estate and resident leases;                                                                       |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •    | Five cross-collateralized,  cross-defaulted loans that are secured by the real estate and resident leases  at five properties and include a collateral substitution feature; and |
| •    | two fixed-rate mortgages that  are insured by the FHA.                                                                                                                           |

 

            Mortgages payable generally requiremonthly installments of principal and/or interest and mature at various datesthrough April 2016, except for the FHA loans which mature in 2046.  Undercertain of the mortgage agreements, we are required to make escrow deposits fortaxes, insurance and replacement of project assets.  The two FHA insured loanswere assumed in connection with the April 2008 acquisition of two properties. Both of these loans require monthly installments of principal and interest andmature in 2046.  Under agreements with the FHA, we are required to make monthlyescrow deposits for taxes, insurance and replacement of project assets.  See Note2 for additional information regarding these acquisitions.

            In December 2009, weentered into a credit facility agreement with Wells Fargo Multifamily Capital,on behalf of the Federal Home Loan Mortgage Corporation, or Freddie Mac. Pursuant to the terms of the facility, we have the potential to borrow up to$100 million over a two-year period with obligations being secured by projectspecific, nonrecourse, non cross-collateralized fixed or variable ratemortgages having terms of five, seven or ten years.

**UnsecuredRevolving Credit Facility**

            Ourunsecured revolving credit facility has a borrowing capacity of $150.0 million andmatures March 20, 2011.  From time to time, we have the option to choose eithera LIBOR-based or Prime-based variable interest rate on this facility.  As ofDecember 31, 2009, the LIBOR-based rate is LIBOR plus 1.6% and the Prime-basedrate is the prime rate plus 0.6%.   There were outstanding borrowings of $12.5million and $21.5 million on this facility at December 31, 2009 and 2008,respectively, with a weighted average interest rate of 2.6% and 3.7%,respectively.  

** **

| F-21 |
|------|

 

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**UnsecuredDebt**

            OnMarch 15, 2005, AERC Delaware Trust (the "Trust"), a wholly ownedsubsidiary, sold trust preferred securities for an aggregate amount of $25.8 million. Associated Estates Realty Corporation ("AERC") owns all of the commonsecurities of the Trust.  The Trust used the proceeds to purchase AERC's juniorsubordinated note due March 30, 2035, which represents all of the Trust'sassets.  The terms of the trust preferred securities are substantially the sameas the terms of the junior subordinated note.  Interest on the juniorsubordinated note is payable at a fixed rate equal to 7.9% per annum throughthe interest rate payment date in March 2015 and thereafter at a variable rateequal to LIBOR plus 3.25% per annum.  AERC may redeem the junior subordinatednote at par at any time on or after March 30, 2010.  To the extent that AERCredeems the junior subordinated note, the Trust is required to redeem a correspondingamount of trust preferred securities.

**6.         INVESTMENTSIN AND ADVANCES TO JOINT VENTURES**

            OnDecember 31, 2008, the joint venture in which we were a 50.0% partner sold theAffordable Housing property that it owned.  We accounted for our investment inthis unconsolidated joint venture under the equity method of accounting as weexercised significant influence, but did not control this entity and were notrequired to consolidate it in accordance with GAAP.  This investment wasinitially recorded at cost as investment in joint ventures and subsequentlyadjusted for equity in earnings, cash contributions and distributions, and thegain recognized upon the sale of the property. The debt associated with thisproperty was assumed by the buyer.

            OnJune 29, 2007, we acquired our joint venture partner’s 51.0% interest inIdlewylde Apartments, an 843-unit property located in Atlanta, Georgia.  Wepreviously owned a 49.0% interest in this partnership and had accounted forthis investment under the equity method of accounting.  See Note 2 foradditional information regarding this acquisition.

             Thefollowing tables represent summarized financial information at 100% for thejoint ventures in which we have been an investor during the years presented.
| * *                                       |   | Year ended December 31, |
|------------------------------------------------|--------|-------------------------|
| *(In thousands)*                               |   | 2008                    |   | 2007 |
| **Operating data**                             |   |                    |   |   |
| Property revenue                               |   |  $                 | -  |   |  $ | 4,029  |
| Operating and maintenance  expenses            |   | -                  |   | (1,761) |
| Depreciation and  amortization                 |   | -                  |   | (1,068) |
| Interest expense                               |   | -                  |   | (1,485) |
| (Loss) income from continuing  operations      |   | -                  |   | (285) |
| Income (loss) from  discontinued operations:   |   |                    |   |   |
| Operating  (loss) income                       |   | (207)                   |   | (222) |
| Gain  on disposition of properties             |   | 3,206              |   | -  |
| Income (loss) from  discontinued operations    |   | 2,999              |   | (222) |
| Net income (loss)                              |   |  $                 | 2,999  |   |  $ | (507) |
|                                           |   |                    |   |   |
| Equity in net income (loss)  of joint ventures |   |  $                 | 1,502  |   |  $ | (258) |

 

             Revenuefrom property and asset management fees charged to joint ventures aggregated zero,$46,000 and $270,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The corresponding expenses are included in the operating and maintenanceexpenses of the joint ventures, as set forth above.

| F-22 |
|------|

 

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**7.         TRANSACTIONSWITH AFFILIATES AND JOINT VENTURES**

            Wepreviously provided management and other services to (and were reimbursed forcertain expenses incurred on behalf of) certain non-owned properties in whichour Chief Executive Officer ("CEO") and/or other related parties hadvarying ownership interests.  The entities which owned these properties, aswell as other related parties, are referred to as "affiliates."  Wealso provided similar services to joint venture properties.  Management feesreceived from affiliates and joint ventures during the years ended December 31,2009, 2008 and 2007, were $38,000, $109,000 and $365,000, respectively.

            MeritEnterprises, Inc. ("Merit"), a subsidiary of ours, has providedservices to JAS Construction, Inc. ("JAS") related to propertyrehabilitation and other work from time to time.  JAS is owned by Jason A.Friedman, a son of our CEO.  In September 2009, Mr. Friedman joined our companyas Vice President, Construction and Development and President of Merit.  Reportedrevenue related to work performed by Merit for JAS was $368,000, $209,000 and $1.4million for the years ended December 31, 2009, 2008 and 2007, respectively. Accounts receivable owing from JAS to Merit at December 31, 2009 and 2008, respectivelywere $51,000 and $157,000.  The $51,000 owing at December 31, 2009 wassubsequently paid in February 2010.

             InApril 2008, we executed a $2.0 million contract with JAS that was approved byour Board of Directors, under which JAS provided general contractor servicesfor the interior rehabilitation of one of our properties.  This project wascompleted and paid for during 2008.

            Meritalso provided services in 2008 to certain non-owned properties in which our CEOand/or other related parties have varying ownership interests.  Reportedrevenue related to the services performed in 2008 was $185,000.

**8.         COMMITMENTSAND CONTINGENCIES**

***Leases***

**           **Wehad no equipment leased under capital leases at December 31, 2009 and 2008.  Welease certain equipment and facilities under operating leases.  Future minimumlease payments under all noncancellable operating leases in which we are thelessee are immaterial.

***LegalProceedings***

            Weare subject to legal proceedings, lawsuits and other claims, includingproceedings by government authorities (collectively "Litigation"). Litigation is subject to uncertainties and outcomes are difficult to predict. Consequently, we are unable to estimate ultimate aggregate monetary liabilityor financial impact with respect to the Litigation matter described in thefollowing paragraph as of December 31, 2009, and no accrual has been made forthis matter.  We believe that other Litigation will not have a material adverseimpact on us after final disposition.  However, because of the uncertainties ofLitigation, one or more lawsuits could ultimately result in a materialobligation.

| F-23 |
|------|

 

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***PendingLawsuits***

            Onor about April 14, 2002, Melanie and Kyle Kopp commenced an action against usin the Franklin County, Ohio Court of Common Pleas seeking undetermineddamages, injunctive relief and class action certification.  This case arose outof our Suredeposit program.  This program allowed cash short prospectiveresidents to purchase a bond in lieu of paying a security deposit.  The bondserves as a fund to pay those resident obligations that would otherwise havebeen funded by the security deposit.  Plaintiffs allege that the nonrefundablepremium paid for the bond is a disguised form of security deposit, which isotherwise required to be refundable in accordance with Ohio's Landlord-TenantAct.  Plaintiffs further allege that certain pet deposits and othernonrefundable deposits required by us are similarly security deposits that mustbe refundable in accordance with Ohio's Landlord-Tenant Act.  On or aboutJanuary 15, 2004, the Plaintiffs filed a motion for class certification.  Wesubsequently filed a motion for summary judgment.  On or about September 3,2008, the court granted our motion for summary judgment thereby dismissing allPlaintiff claims against us.  However, Plaintiff subsequently appealed thecourt’s ruling to the Ohio Court of Appeals for the 10th District, whichdismissed the appeal on technical grounds.  The technical issues have now beenresolved, Plaintiff has refiled its appeal and we are now awaiting the Court ofAppeals decision.

***Guarantees***

 In November 2009, Merit posted a performance andpayment bond in the amount of $2.7 million to guaranty its performance under aconstruction contract.  Merit has certain indemnification obligations owing tothe bonding company that issued the bond and those obligations have beenguaranteed by the Company.  The Company, from time to time, may also guarantyother Merit obligations.

            Weroutinely guaranty mortgage debt of our wholly owned subsidiaries and some subsidiariesthat own unencumbered property guaranty the Company's obligations under the unsecuredrevolver.  In the normal course of business, we may enter into contractualarrangements under which we may agree to indemnify the third party to sucharrangements from any losses incurred relating to the services they perform onbehalf of AERC or for losses arising from certain events as defined within theparticular contract, which may include, for example, litigation or claimsrelating to past performance.  Such indemnification obligations may not besubject to maximum loss clauses.  Historically, payments made related to these indemnificationshave not been material.

**9.         FAIRVALUE**

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

            In instances where thedetermination of the fair value measurement is based on inputs from differentlevels of the fair value hierarchy, the fair value measurement will fall withinthe lowest level input that is significant to the fair value measurement in itsentirety.

|   F-24 |
|-------------|

 

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            Thefollowing table presents the financial liability that we measured at fair valueon a recurring basis as of December 31, 2009:
| *(In thousands)*    |   | Level 1 |                | Level 2 |    | Level 3     |   | Total   |
|---------------------|--------|---------|---------------------|---------|---------|-------------|--------|---------|
| * *            |   |    |                |    |    |        |   |    |
| Interest rate swaps |   |  $ | -    |    |  $ | 1,419  |   |  $ | -    |   |  $ | 1,419  |
|                     |        |         |                     |         |         |             |        |         |  |  |  |  |

 

            We incorporate credit valuationadjustments to appropriately reflect both our own nonperformance risk and thatof the respective counterparty in the fair value measurements.  The creditvaluation adjustments utilize Level 3 inputs, such as estimates of currentcredit spreads, to evaluate the likelihood of default by either the respectivecounterparty or us.  However, we determined that as of December 31, 2009, theimpact of the credit valuation adjustments was not significant to the overallvaluation of the swaps.  See "Derivative Instruments and HedgingActivity" in Note 1 for additional information regarding the swaps.

            Rents,accounts and notes receivable, accounts payable, accrued expenses and otherliabilities are carried at amounts that reasonably approximate correspondingfair values.

            Mortgagenotes payable, revolving debt and other unsecured debt with an aggregatecarrying value of $525.8 million and $557.5 million at December 31, 2009 and2008, respectively, have an estimated aggregate fair value of approximately $520.1million and $548.9 million, respectively.  Estimated fair value is based oninterest rates available to us as of the dates reported on for issuance of debtwith similar terms and remaining maturities.  Considerable judgment isnecessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts we could realize on disposition of the financial instruments.  Theuse of different market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

10.        GAIN ON INSURANCE RECOVERIES

              In June 2009, we settleda wind storm damage insurance claim involving 13 of our central Ohio properties for the aggregate sum of $906,000, net of our deductible.  In accordancewith GAAP, we recorded this settlement as a gain on insurance recoveries.  Theroofs of five of these properties sustained extensive damage and were replaced. In December 2009, we settled a fire damage insurance claim in which theclubhouse of one of our Ohio properties was destroyed by a fire for theaggregate sum of $271,000, net of our deductible.  In accordance with GAAP, werecorded this settlement as a gain on insurance recoveries.  We reported a gainon insurance recoveries of $665,000 in the Consolidated Statements of Incomefor the twelve months ended December 31, 2009, which represents insurance proceedsto be received net of the carrying value of the assets written off and costsincurred to make repairs.

 

| F-25 |
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**11.        SUPPLEMENTALDISCLOSURE OF CASH FLOW INFORMATION**

            Thefollowing table summarizes our non-cash investing and financing activitieswhich are not reflected in the Consolidated Statements of Cash Flows: 
|                                                               |  Year Ended  December 31, |
|--------------------------------------------------------------------|--------------------------------|
| *(In thousands)*                                                   | 2009                           |   | 2008 |   | 2006 |
| * *                                                           |                           |   |   |   |   |
| Dividends declared but not paid                                    |  $                        | 2,849  |   |  $ | 2,920  |   |  $ | 2,848  |
| Assumption of debt in connection with property acquisition         | -               |   | 45,002  |   | 42,000  |
| Reclassification of original issuance costs related to  repurchase |                           |   |   |   |   |
| of preferred shares and related  discount/(premium), net           | -               |   | 2,146  |   | (172) |
| Net change in accounts payable related to recurring fixed          |                           |   |   |   |   |
| asset additions                                                    | (203)                          |   | 558  |   | 599  |
| Fixed asset adjustment for purchase of operating                   |                           |   |   |   |   |
| partnership units                                                  | -               |   | -    |   | 8  |
|                                                                    |                                |  |  |  |  |  |  |  |

** **

**12.        COMMON,TREASURY AND PREFERRED SHARES**

***TreasuryShares***

            OurBoard of Directors has authorized the repurchase of up to $75.0 million of ourcommon and/or preferred shares.    As of December 31, 2009, we had repurchased 3,825,125common shares under this plan at acost of $41.1 million and 389,500 preferred depositary shares at a cost of$7.6 million.

            Duringthe year ended December 31, 2009, a total of 111,148 restricted shares hadvested and were issued from treasury shares.  

***PreferredShares***

            Weare authorized to issue a total of 9,000,000 Preferred Shares, designated asfollows:
| •   | 3,000,000 Class A Cumulative Preferred Shares, of which 225,000 have  been designated as 9.75% Class A Cumulative Redeemable Preferred Shares and were  redeemed in 2005.                                                                                           |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •   | 3,000,000 Class B Cumulative Preferred Shares, of which 400,000 have  been designated as Class B Series I Cumulative Preferred Shares and 232,000 have  been designated as 8.70% Class B Series II Cumulative Redeemable Preferred  Shares and are discussed below. |
| •   | 3,000,000 Noncumulative Preferred Shares.                                                                                                                                                                                                                           |

 

            *8.70%Class B Series II Cumulative Redeemable Preferred Shares. *In December2004, we issued 2,320,000 depositary shares, each representing 1/10th of ashare of our 8.70% Class B Series II Cumulative Redeemable Preferred Shares,for $58.0 million and incurred costs of approximately $1.2 million related tothe issuance.  The liquidation preference for each Class B Preferred Shares is$250.00 (equivalent to $25.00 per depositary share), plus accrued and unpaiddividends.  Dividends on the Class B Preferred Shares are cumulative from thedate of issue and are payable quarterly.  Except in certain circumstancesrelating to the preservation of our status as a REIT, the Class B PreferredShares are not redeemable prior to December 15, 2009.  On or after December 15,2009, the Class B Preferred Shares are redeemable for cash at our option.  Thenet proceeds from this offering were used to redeem the outstanding 9.75% ClassA Cumulative Redeemable Preferred Shares.  During 2008 and 2007, we repurchaseda total of 389,500 depositary shares under our $50.0 million share repurchaseauthorization, leaving 1,930,500 depositary shares outstanding as of December31, 2009.

 

| F-26 |
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**ShareholderRights Plan**

            InJanuary 1999, we adopted a Shareholder Rights Plan.  To implement the Plan, theBoard of Directors declared a distribution of one Right for each of ouroutstanding common shares.  Each Right entitles the holder to purchase from us1/1,000th of a Class B Series I Cumulative Preferred Share (a "PreferredShare") at a purchase price of $40 per Right, subject to adjustment.  Oneone-thousandth of a Preferred Share is intended to be approximately theeconomic equivalent of one common share.

**           **TheRights are not currently exercisable and are traded with our common shares. The Rights will become exercisable if a person or group becomes the beneficialowner of, or announces an offer to acquire, 15.0% or more of the thenoutstanding common shares.

            If a person or groupacquires 15.0% or more of our outstanding common shares, then each Right notowned by the acquiring person or its affiliates will entitle its holder topurchase, at the Right's then-current exercise price, fractional preferredshares that are approximately the economic equivalent of common shares (or, incertain circumstances, common shares, cash, property or other securities)having a market value equal to twice the then-current exercise price.  Inaddition, if, after the rights become exercisable, we are acquired in a mergeror other business combination transaction with an acquiring person or itsaffiliates or sell 50.0% or more of our assets or earning power to an acquiringperson or its affiliates, each Right will entitle its holder to purchase, atthe Right’s then-current exercise price, a number of the acquiring commonshares having a market value of twice the Right’s exercise price.  The Board ofDirectors may redeem the Rights, in whole, but not in part, at a price of $.01per Right.

            Thedistribution was made on January 29, 1999, to shareholders of record on thatdate.  The initial distribution of Rights was not taxable to shareholders.

     On December 30, 2008, we entered into an Amended and RestatedShareholder Rights Agreement that, among other matters, extended the Plan to December30, 2018 and revised the Plan definition of "beneficial ownership" toinclude certain derivative or synthetic arrangements having characteristics ofa long position in the Company’s common shares.

**13.       EARNINGS PER SHARE**

****In June 2008, the FASB issued guidance which clarifies thatnonvested awards containing nonforfeitable dividend rights are participatingsecurities and are therefore required to be included in the computations ofbasic and diluted earnings per share.  This guidance was effective for usJanuary 1, 2009, and requires retrospective application to all periodspresented.

            Therewere 1.4 million, 1.4 million and 1.6 million options to purchase common sharesoutstanding at December 31, 2009, 2008 and 2007, respectively.  The dilutiveeffect of these options were not included in the calculation of dilutedearnings per share for the years presented as their inclusion would be antidilutiveto the net loss applicable to common shares from continuing operations.

            Theexchange of operating partnership noncontrolling redeemable interest intocommon shares was not included in the computation of diluted EPS because weplan to settle these OP units in cash.

 

| F-27 |
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| ** **                                                            | ** ** | Year Ended December 31, |
|-----------------------------------------------------------------------|------------|-------------------------|
| *(In thousands)*                                                      |       | 2009                    |   | 2008 |   | 2007 |
| **Numerator - basic and  diluted:**                                   |       |                    |   |   |   |   |
| (Loss) income from  continuing operations                             |       |  $                 | (9,705) |   |  $ | (10,089) |   |  $ | (16,209) |
| Net  income attributable to noncontrolling redeemable interest        |       | (53)                    |   | (53) |   | (53) |
| Preferred  share dividends                                            |       | (4,199)                 |   | (4,655) |   | (4,924) |
| Preferred  share repurchase costs                                     |       | -                  |   | (143) |   | (58) |
| Discount/(premium)  on preferred share repurchase                     |       | -                  |   | 2,289  |   | (114) |
| (Loss) income from  continuing operations applicable to common shares |       |  $                 | (13,957) |   |  $ | (12,651) |   |  $ | (21,358) |
|                                                                  |       |                    |   |   |   |   |
| Income from discontinued  operations                                  |       |  $                 | 15,968  |   |  $ | 44,769  |   |  $ | 26,427  |
| Allocation  to participating securities                               |       | (423)                   |   | (730) |   | (338) |
| Income from discontinued  operations applicable to common shares      |       |  $                 | 15,545  |   |  $ | 44,039  |   |  $ | 26,089  |
|                                                                  |       |                    |   |   |   |   |
|                                                                  |       |                    |   |   |   |   |
| **Denominator - basic and  diluted:**                                 |       | 16,516             |   | 16,262  |   | 16,871  |
|                                                                  |       |                    |   |   |   |   |
| **Net income applicable to  common shares - basic and diluted:**      |       |                    |   |   |   |   |
| (Loss) income from  continuing operations applicable to common shares |       |  $                 | (0.85) |   |  $ | (0.78) |   |  $ | (1.27) |
| Income from discontinued  operations                                  |       | 0.95               |   | 2.71  |   | 1.55  |
| Net income applicable to  common shares - basic and diluted           |       |  $                 | 0.10  |   |  $ | 1.93  |   |  $ | 0.28  |

 

**14.        EMPLOYEEBENEFIT PLANS**

**           **Weoffer medical, dental, vision and life insurance benefits to those employeeswho have completed their 90-day introductory period.  Employees who havecompleted six months of service are eligible for educational assistance programand to participate in the 401(k) plan and employees who have completed one yearof service are provided with long-term disability coverage.  Additionally, weoffer a variety of supplemental benefits to employees at their own cost.

            Wesponsor a defined contribution plan pursuant to Section 401(k) of the InternalRevenue Code, whereby eligible employees may elect to contribute up to 25.0% oftheir gross wages.  After one year of participation, we match suchcontributions at a rate of 25.0% up to a maximum participant contribution of6.0% of their wages.  We recorded expense in relation to this plan ofapproximately $85,000, $116,000 and $151,000 for the years ended December 31,2009, 2008 and 2007, respectively.

**SupplementalExecutive Retirement Plan**

**           **OurSupplemental Executive Retirement Plan (the "SERP") was adopted bythe Board of Directors on January 1, 1997.  This Plan was implemented toprovide competitive retirement benefits for officers and to act as a retentionincentive.  This non-qualified, unfunded, defined contribution plan extends tocertain named officers nominated by the Chief Executive Officer and approved bythe Executive Compensation Committee of the Board.  The SERP provides for us tomake a contribution to the account of each of the participating officers at theend of each plan year.  The contribution, which is a percentage of eligibleearnings (including base salary and payments under the Annual Incentive Plan),is set by the Committee at the beginning of each SERP year.  Contributions willnot be taxable to the participant (other than social security and federalunemployment taxes once vested) until distribution.  The account balances earninterest each year at a rate determined by the Executive Compensation Committeeof the Board.  In January 2007, the Executive Compensation Committee revisedthe annual contributions such that the accounts of participants not vested asof January 1, 2007, would no longer receive annual contributions, however theiraccounts will continue to receive interest.  The Executive CompensationCommittee approves the interest rate at the beginning of the year.  Thefollowing table summarizes the changes in SERP balances for the years endedDecember 31, 2009, 2008 and 2007:

 

| F-28 |
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|                            |   | Supplemental Executive Retirement Plan Benefit |
|---------------------------------|--------|------------------------------------------------|
|                            |   | for the year ended December 31,                |
| *(In thousands)*                |   | 2009                                           |   | 2008 |   | 2007 |
| * *                        |   |                                           |   |   |   |   |
| Balance at beginning of  period |   |  $                                        | 1,545  |   |  $ | 1,337  |   |  $ | 1,164  |
| Service cost                    |   | 101                                       |   | 97  |   | 76  |
| Interest cost                   |   | 128                                       |   | 111  |   | 97  |
| Balance at end of period        |   |  $                                        | 1,774  |   |  $ | 1,545  |   |  $ | 1,337  |

 

**15.        EQUITY BASED AWARDPLANS**

**2008Equity Based Award Plan**

            OnMay 7, 2008, our shareholders approved the 2008 Equity Based Award Plan (the"Plan") which previously had been adopted by our Board of Directors(the "Board") on March 14, 2008, subject to shareholder approval. Subsequent to receiving shareholder approval on May 7, 2008, the Board adoptedamended language to the Plan consistent with the additional proxy materialsfiled by the Company on May 1, 2008.

            Under thePlan, a total of 750,000 common shares are available for awards.  The Planprovides for the grant to our officers, other employees and directors ofoptions to purchase our common shares, rights to receive the appreciation invalue of common shares, awards of common shares subject to vesting andrestrictions on transfer, awards of common shares issuable in the future uponsatisfaction of certain conditions and other awards based on common shares.  AtDecember 31, 2009, no awards had been issued under this plan.

**Year 2001Equity Incentive Plan**

**           **OurYear 2001 Equity Incentive Plan (the "EIP") was adopted by the Boardon December 8, 2000.  On May 4, 2005, our shareholders approved the Amended andRestated 2001 Equity-Based Award Plan (the "Plan").  The Plan wasamended to (i) allow for the shares reserved for issuance to be listed on theNew York Stock Exchange pursuant to the rules of the exchange, (ii) allow us togrant options that qualify as incentive stock options under the InternalRevenue Code of 1986, as amended, (iii) allow compensation attributable toequity based awards under the Plan to qualify as "performance-basedcompensation," as defined in the Internal Revenue Code, and (iv) increasethe number of common shares available for awards by 750,000 common shares.  ThePlan provides for equity award grants to our officers, employees anddirectors.  Equity awards available under the Plan include stock options, shareappreciation rights, restricted shares, deferred shares and other awards basedon common shares.  The aggregate number of common shares subject to awardsunder the Plan was increased to 2,250,000 from 1,500,000.  At December 31, 2009,we had 130,052 common shares available for awards under this plan.  There were 1,098,364options outstanding under this plan, of which 1,020,364 were exercisable, atDecember 31, 2009.

**Equity-BasedIncentive Compensation Plan**

            TheEquity-Based Incentive Compensation Plan (the "Omnibus Equity Plan")expired February 20, 2005, and therefore no additional shares/awards will begranted under this plan.  At December 31, 2009, there were 262,000 sharesoutstanding and exercisable under this plan.  These awards will remain ineffect according to the original terms and conditions of the plan.  This planprovided key employees equity or equity based incentives under which 1.4million of our common shares had been reserved for awards of share options andrestricted shares.  Options were granted at per share prices not less than fairmarket value at the date of grant and must be exercised within ten yearsthereof.

| F-29 |
|------|

 

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**AERCShare Option Plan**

            TheAERC Share Option Plan expired September 30, 2003, and therefore no additionaloptions will be granted under this plan.  At December 31, 2009, there were 5,000options outstanding and exercisable under this plan.  These options will remainin effect according to the original terms and conditions of the plan.  Under thisplan, 543,093 of our common shares had been reserved for awards of shareoptions to eligible key employees.  Options were granted at per share pricesnot less than fair market value at the date of grant and must be exercisedwithin ten years thereof.

**Share-Based Compensation**

            Ourshare-based compensation awards consist primarily of restricted shares.  Weaward share-based compensation to our officers and employees as a performanceincentive and to align individual goals with those of the Company.  Certain ofour share-based awards require only continued service with the company tovest.  These awards vest either at the end of the specified service period orin equal increments during the service period on each anniversary of the grantdate.  We recognize compensation cost on these awards on a straight-linebasis.  In addition to awards containing only service conditions, we issuecertain awards in which the number of shares that will ultimately vest and thedate at which they will vest is dependant upon the achievement of specifiedperformance goals and/or market conditions.  Compensation cost for awards withperformance conditions is recognized based on our best estimate of the numberof awards that will vest and the period of time in which they will vest. Compensation cost for awards with market conditions is recognized based on theestimated fair market value of the award on the date granted, as describedbelow, and the vesting period.  We estimate the amount of expected forfeitureswhen calculating compensation costs.  The forfeiture rates we use werecalculated based on our historical forfeiture activity, which was adjusted foractivity that we believe is not representative of expected future activity.

            Duringthe year ended December 31, 2009, 2008 and 2007, we recognized totalshare-based compensation cost of $2.0 million, $1.9 million and $1.5 million in"General and administrative expense."

            *StockOptions.*  We use the Black-Scholes option pricing model to estimate thefair value of share-based awards.  There were 58,000, zero and 4,000 optionsgranted in 2009, 2008 and 2007, respectively.  The weighted averageBlack-Scholes assumptions and fair value for 2009 and 2007 were as follows:
|                                 |   | Year Ended December 31, |
|--------------------------------------|--------|-------------------------|
| * *                             |   | 2009                    |   | 2007 |
| * *                             |   |                    |   |   |
| Expected volatility                  |   | 39.1%                   |   | 27.5% |
| Risk-free interest rate              |   | 2.6%                    |   | 4.5% |
| Expected life of options (in  years) |   | 6.4                |   | 7.0  |
| Dividend yield                       |   | 8.4%                    |   | 4.3% |
| Grant-date fair value                |   |  $                 | 1.38  |   |  $ | 3.45  |

 

            Theexpected volatility was based upon the historical volatility of our weeklyshare closing prices over a period equal to the expected life of the optionsgranted.  The risk-free interest rate used was the yield from U.S. Treasuryzero-coupon bonds on the date of grant with a maturity equal to the expectedlife of the options.  For options awarded during 2009, the expected life wasderived using our historical experience for similar awards.  For optionsawarded during 2007, we used the "simplified" method, as allowed atthat time under the provisions of the Securities and Exchange Commission'sStaff Accounting Bulletin No. 107, to derive the expected life of the options. The dividend yield was derived using our annual dividend rate as a percentageof the price of our shares on the date of grant.

|  F-30 |
|------------|

 

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The followingtable represents stock option activity for the year ended December 31, 2009:
|                                |   |            |   |             |        | Weighted-Average |
|-------------------------------------|--------|-----------------|--------|------------------|-------------|------------------|
|                                |   | Number of       |   | Weighted-Average |        | Remaining        |
| * *                            |   | Stock Options   |   | Exercise Price   |        | Contract Life    |
| * *                            |   |            |   |             |        |             |
| Outstanding at beginning of  period |   | 1,378,364  |   |  $          | 9.41   |             |   |
| Granted                             |   | 58,000     |   |  $          | 8.34   |             |   |
| Exercised                           |   | 47,500     |   |  $          | 8.44   |             |   |
| Forfeited                           |   | 23,500     |   |  $          | 11.11  |             |   |
| Outstanding at end of period        |   | 1,365,364  |   |  $          | 9.37   |             |  3.8 years |
| Exercisable at end of period        |   | 1,287,364  |   |  $          | 9.41   |             |  3.5 years |

 

            Theaggregate intrinsic value of stock options outstanding and stock optionsexercisable at December 31, 2009, was $2.6 million and $2.4 million,respectively.  The aggregate intrinsic value of stock options exercised duringthe years ended December 31, 2009, 2008 and 2007 was $79,000, $697,000, and $119,000,respectively.

            *RestrictedShares.*  Restricted shares generally have the same rights as our commonshares, except for transfer restrictions and forfeiture provisions.  Cashdistributions paid during the period of restriction on shares that are expectedto vest are recorded as a charge to "Accumulated distributions in excessof accumulated net income."  Cash distributions paid during the period ofrestriction on shares that are expected to be forfeited are recorded as acharge to expense.

            Thefollowing table represents restricted share activity for the year endedDecember 31, 2009:
|                              |          |   | Weighted   |
|-----------------------------------|---------------|--------|------------|
|                              |          |   | Average    |
|                              | Number of     |   | Grant-Date |
|                              | Shares        |   | Fair Value |
|                              |          |   |       |
| Nonvested at beginning of  period | 189,867  |   |  $    | 11.33  |
| Granted                           | 184,070  |   |  $    | 5.37  |
| Vested                            | 111,148  |   |  $    | 9.24  |
| Forfeited                         | 78,450   |   |  $    | 15.82  |
| Nonvested at end of period        | 184,339  |   |  $    | 7.15  |

** **

**           **DuringJune 2007, we implemented the Associated Estates Realty Corporation ElectiveDeferred Compensation Program.  Under this plan, certain of our officerselected to defer the receipt of a portion of the restricted shares that hadbeen granted during 2009, 2008 and 2007.  See Note 16 for additional informationregarding this program.

            A portion of therestricted shares granted during 2007 were awards in which the number of sharesthat will ultimately vest are subject to market conditions.  The totalestimated grant-date fair value of these awards, including the awards that weredeferred, as noted above, was $1.4 million.  We used the Monte Carlo method toestimate the fair value of these awards.  The Monte Carlo method, which issimilar to the binomial analysis, evaluates the award for changing stock pricesover the term of vesting and uses random situations that are averaged based onpast stock characteristics.  There were one million simulation paths used toestimate the fair value of these awards.  The expected volatility was basedupon the historical volatility of our daily share closing prices over a periodequal to the market condition performance periods.  The risk-free interest rateused was based on a yield curve derived from U.S. Treasury zero-coupon bonds onthe date of grant with a maturity equal to the market condition performanceperiods.  The expected life used was the market condition performance periods.

| F-31 |
|------|

 

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            The following table represents the assumptionranges used in the Monte Carlo method during 2007:

 
| * *                            |   | 2007               |
|-------------------------------------|--------|--------------------|
| * *                            |   |               |
| Expected volatility                 |   | 25.7% to 27.7%     |
| Risk-free interest rate             |   | 4.5% to 5.1%       |
| Expected life (performance  period) |   | One to three years |

 

            Theweighted average grant-date fair value of restricted shares granted during the yearsended December 31, 2009, 2008 and 2007 was $5.37, $10.45 and $11.77,respectively.  The total fair value of restricted shares vested during the yearsended December 31, 2009, 2008 and 2007 was $1.0 million, $583,000 and $1.2million, respectively.  At December 31, 2009, there was $1.8 million ofunrecognized compensation cost related to nonvested restricted share awardsthat we expect to recognize over a weighted average period of 1.8 years.

**16.        DIRECTOR/EXECUTIVECOMPENSATION**

**ElectiveDeferred Compensation Program**

**           **InJune 2007, we implemented The Associated Estates Realty Corporation ElectiveDeferred Compensation Program.  This plan is an unfunded, non-qualifieddeferred compensation program that is subject to the provisions of Section 409Aof the Internal Revenue code, which strictly regulates the timing of electionsand payment.  This plan was developed in lieu of updating our ExecutiveDeferred Compensation Plan, which was initially adopted by the Board ofDirectors on July 1, 1999.  Eligibility under the plan shall be determined bythe Executive Compensation Committee or its designee, and initially consists ofeach of our appointed and/or elected officers.

            Thisplan permits deferral of up to 90.0% of base salary and up to 100% of anyincentive payment.  An individual bookkeeping account will be maintained for eachparticipant.  Participants are provided a number of measurement funds fromwhich they may select to determine earnings, which may be, but are not requiredto be, the same as those offered under our 401(k) Savings Plan.  Deferrals ofbase salary and incentive payments (other than restricted shares, discussedbelow) are fully vested.

            Theplan also permits the deferral of the receipt of restricted shares grantedunder the Equity-Based Award Plan, which also will be reflected in a separatebookkeeping account for each individual as share equivalent units.  Dividendcredits shall be made to such account in the form of share equivalent units. Distribution of amounts reflected by such share equivalents will be made in theform of shares.  The vesting of share equivalent units occurs on the sameschedule as the restricted shares that had been deferred.

            Theplan allows for in-service and separation sub-accounts to permit election ofdistribution at either a specified date or following separation.  Payment ofeach deferral under the plan will be made in the form specified in theparticipant's election, and may be in the form of a lump sum or annualinstallment payments over a period not to exceed four years.  Payment of eachdeferral under the plan will be made on account of separation from service,death, or disability, or at a time specified by the participant, within theparameters set forth in the plan.  Redeferral elections are permittedwithin the parameters set forth in the plan.  Accounts will be distributedupon a change of control, and distribution due to unforeseen financial hardshipis also possible.  At December 31, 2009 and 2008, there were 311,583and 187,000 share equivalent units, respectively, deferred under this plan.

 

| F-32 |
|------|

 

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**Director’sDeferred Compensation Plan**

            The Directors' DeferredCompensation Plan was adopted by our Board of Directors on August 22, 1996.  Thisplan was implemented to allow persons serving as Independent Directors theoption of deferring receipt of compensation otherwise payable to them for theirservices as Directors and to create an opportunity for appreciation of theamount deferred based upon appreciation of our Common Shares.

            Prior to January 1 ofeach year, any eligible Director may elect to defer all or a portion of the feesotherwise payable to that Director for that year and such amount will becredited to a deferral account maintained on behalf of the Director.  Fees foreach period are credited to the deferral account as they are earned.  Amountscredited to the deferral account are converted to "share units" whichare valued based upon the closing price of our common shares at the end of eachreporting period.  This plan also permits the deferral of the receipt of restrictedshares granted, which also will be reflected in a separate bookkeeping accountfor each individual as share equivalent units.  Each deferral account isincreased when we pay a dividend on our common shares by the number of shareunits that represent the dividend paid per share multiplied by the number ofshare units in the account on the date of record for the related dividendpayment.  Share units representing deferred fees and dividend units are vestedat all times.  Share units representing deferred restricted shares vest on thesame schedule as the restricted shares that were deferred.  At the end of eachreporting period, the total value of the deferred compensation had beenadjusted for increases in share units and for changes in our common shareprice.  In December 2009 and effective on January 1, 2010, this plan wasmodified such that all future distributions from the plan will be in the formof our common shares instead of cash, except for distributions with acommencement date of December 31, 2010 or prior, which will be made in cash. As a result, the value of the deferred compensation will no longer be adjustedbased upon the closing price of our common shares.  The total amount of deferredcompensation relating to this plan is included in "Accounts payable andaccrued expenses" in the Consolidated Balance Sheets.  Adjustments to thetotal value of the plan are reflected in "General and administrativeexpenses" in the Consolidated Statements of Operations.  Distributions of $24,000were made from this account during both 2009 and 2008.  At December 31, 2009and 2008, deferred director compensation totaled $2.5 million and $1.5 million,respectively.  

**ExecutiveCompensation and Employment Agreements**

            Wehave a three year employment agreement with the Chairman, President and ChiefExecutive Officer dated January 1, 1996, that is automatically extended for anadditional year at the end of each year of the agreement, subject to the rightof either party to terminate by giving one year's prior written notice. Additionally, we have severance arrangements with certain other executiveofficers.

**AnnualIncentive Plan**

            InFebruary 2009, the Executive Compensation Committee (the "Committee")approved the terms of the Annual Incentive Plan for Officers.  Annualincentives emphasize pay for performance and serve as a key means of drivingcurrent objectives and priorities.  The Committee determines specificcompensation levels for the five most highly compensated officers("Officers"), which includes our four "Named ExecutiveOfficers."  Officers are rewarded for accomplishing our short-termfinancial and business unit objectives.  In 2009, annual incentiveopportunities for the Officers were determined at the discretion of theCommittee.  The Committee based its determination on one or more of thefollowing measures of corporate performance: same property net operating income;physical occupancy; property operating margins; fixed charge coverage; interestcoverage; total shareholder return (actual and relative); financing activity;performance against budget; execution of strategic objectives; leverage ratios;funds available for distribution and adjusted funds from operations.  Businessunit and individual performance were also considered.  The Committee reviewedour earnings results each quarter and assessed management's performance.  Nospecific targets or weightings amongst the aforementioned performance metricswere established.  The Officers earned annual incentives of approximately $1.3million, $1.4 million and $1.3 million in cash in 2009, 2008 and 2007, respectively.

| F-33 |
|------|

 

----

 

 

 

 

 

**Long-TermIncentive Plan**

            InFebruary 2007, the Committee established the terms of the Company's 2007 Long-TermIncentive Plan ("LTIP") that is intended to create a stronger link toshareholder returns, reward long-term performance and foster retention of theexecutives.  The Committee determines specific compensation levels for the fivemost highly compensated officers ("Officers"), which includes ourfour "Named Executive Officers."  Each Officer had threshold, targetand maximum award opportunities established that are expressed as a percentageof base salary.  The framework of the LTIP includes a single-year andmulti-year component.  

**           ***Single-yearcomponent*.  Objectives under the single-year LTIP are established annuallyat the beginning of the year and evaluated at the conclusion of the year.  Ifone or all of the objectives is met, a grant of restricted shares will beissued.  One-third of the issued shares will vest immediately and the remainingtwo-thirds will vest in equal, annual installments.  Restricted shares, ifissued, have voting rights and dividends will be paid on them during therestricted period.  

            InFebruary 2009, the Committee approved the terms of the 2009 single-yearcomponent of the LTIP.  This component focused primarily on interest coverageand fixed charge coverage financial ratios and same property NOI over a one-yearperiod, however the level of achievement under this component was determined atthe discretion of the Committee.  Officers earned approximately $1.1 millionunder the 2009 single-year LTIP.

            InFebruary 2008, the Committee approved the terms of the 2008 single-yearcomponent of the LTIP.  This component focused on interest coverage and fixedcharge coverage financial ratios and same property NOI over a one-year period. Officers earned approximately $1.3 million under the 2008 single-year LTIP.

            In2007, the single-year component of the LTIP focused on total shareholderreturn, our strategic objectives and property NOI over a one year period.  Officersearned approximately $780,000 under the 2007 single-year LTIP.

            *Multi-yearcomponent.*  The multi-year component focused on performance over a three yearmeasurement period.  When established in 2007, this component comprisedapproximately 50.0% of the total LTIP on an annualized basis over the three-yearperiod.  The multi-year long term component focused on cumulative totalshareholder return over the three year period and continued employment with theCompany.  Any shares vesting under this plan will vest during the first quarterof 2011.  Total shareholder return threshold, target and maximum objectiveswere established and a grant of restricted shares was issued in February 2007with a value of $3.3 million.  The TSR objectives under the 2007 plan were notmet and only the shares that are attributable to continued employment with theCompany are eligible for vesting at the end of the service period, which had avalue of $403,000 when granted.  Restricted shares have voting rights anddividends accrue and earn interest at a rate determined by the ExecutiveCompensation Committee during the restricted period.  Only the dividends andaccrued interest attributable to shares that vest will be paid when such sharesvest.  Grants under the multi-year component are issued and metrics andobjectives are established every three years.

| F-34 |
|------|

 

----

 

 

 

 

 

**17.        COMPREHENSIVEINCOME**

            The following chart identifies our total comprehensive income forthe years ended December 31, 2009, 2008 and 2007:

 
|                                       | Year Ended December 31, |
|--------------------------------------------|-------------------------|
| *(In thousands)*                           | 2009                    |   | 2008 |   | 2007 |
| **Comprehensive income:**                  |                    |   |   |   |   |
| Net income attributable to  AERC           |  $                 | 6,210  |   |  $ | 34,627  |   |  $ | 10,165  |
| Other comprehensive income  (loss):        |                    |   |   |   |   |
| Change  in fair value of hedge instruments | 1,479              |   | (1,849) |   | (979) |
| Total comprehensive income                 |  $                 | 7,689  |   |  $ | 32,778  |   |  $ | 9,186  |

 

            Forinformation regarding the change in fair value of hedge instruments, see“Derivative Instruments and Hedging Activity” in Note 1.

**18.        SUBSEQUENTEVENTS**

            ***Dividends.*** On February 1, 2010, we paid a dividend of $0.17 per common share toshareholders of record on January 15, 2010, which had been declared on December9, 2009.

            OnJanuary 28, 2010, we declared a quarterly dividend of $0.54375 per DepositaryShare on our Class B Cumulative Redeemable Preferred Shares, which will be paidon March 15, 2010, to shareholders of record on February 26, 2010.

            ***CommonShares.***  On January 15, 2010, we sold 5,175,000 of our common shares ina public offering at a price of $11.10 per share, which resulted in total netproceeds of approximately $54.7 million.

            ***MortgageNotes Payable.***  On January 29, 2010, we prepaid a $42.0 millionmortgage loan that was to mature in June 2010 with a portion of the proceedsfrom the January 2010 public sale of our common shares.

| F-35 |
|------|

 

----

 

 

 

 

 

**19.        QUARTERLYFINANCIAL INFORMATION (UNAUDITED)**
| ** **                                |   | 2009    |
|-------------------------------------------|--------|---------|
| ** **                                |   | First   |   | Second |   | Third |   | Fourth |
| *(In thousands, except per  share data)*  |   | Quarter |   | Quarter |   | Quarter |   | Quarter |
|                                      |   |    |   |   |   |   |   |   |
| Revenue as reported in Form  10-Q's       |   |  $ | 33,458  |   |  $ | 32,748  |   |  $ | 32,866  |   |   |
| Revenue of sold/held for sale  properties |   |    |   |   |   |   |   |   |
| transferred  to discontinued operations   |   | (1,069) |   | -  |   | -  |   |   |
| Revenue                                   |   |  $ | 32,389  |   |  $ | 32,748  |   |  $ | 32,866  |   |  $ | 32,415  |
| Operating (loss) income                   |   |  $ | (33) |   |  $ | 267  |   |  $ | -  |   |  $ | -  |
| Net income (loss)                         |   |  $ | 127  |   |  $ | 11,742  |   |  $ | (2,802) |   |  $ | (2,803) |
| Net income (loss)  attributable to AERC   |   |  $ | 113  |   |  $ | 11,728  |   |  $ | (2,816) |   |  $ | (2,816) |
| Basic and diluted earnings  per share     |   |  $ | (0.06) |   |  $ | 0.62  |   |  $ | (0.23) |   |  $ | (0.23) |

** **
| ** **                                |   | 2008    |
|-------------------------------------------|--------|---------|
| ** **                                |   | First   |   | Second |   | Third |   | Fourth |
| *(In thousands, except per  share data)*  |   | Quarter |   | Quarter |   | Quarter |   | Quarter |
|                                      |   |    |   |   |   |   |   |   |
| Revenue as reported in Form  10-Q's       |   |  $ | 31,925  |   |  $ | 32,751  |   |  $ | 34,052  |   |   |
| Revenue of sold/held for  sale properties |   |    |   |   |   |   |   |   |
| transferred  to discontinued operations   |   | (1,010) |   | -  |   | 1  |   |   |
| Revenue                                   |   |  $ | 30,915  |   |  $ | 32,751  |   |  $ | 34,053  |   |  $ | 32,926  |
| Operating (loss) income                   |   |  $ | (1,308) |   |  $ | 241  |   |  $ | 325  |   |  $ | 245  |
| Net income (loss)                         |   |  $ | 38,659  |   |  $ | (166) |   |  $ | (3,030) |   |  $ | (782) |
| Net income (loss)  attributable to AERC   |   |  $ | 38,645  |   |  $ | (179) |   |  $ | (3,043) |   |  $ | (795) |
| Basic and diluted earnings  per share     |   |  $ | 2.27  |   |  $ | (0.09) |   |  $ | (0.26) |   |  $ | 0.02  |

 

** **

| F-36 |
|------|

 

----

 

 

 

 

 

**SCHEDULE II**

**ASSOCIATED ESTATESREALTY CORPORATION**

**VALUATIONAND QUALIFYING ACCOUNTS**
| Column A                                |   | Column B    |      | Column C     |    | Column D    |   | Column E       |
|-----------------------------------------|--------|-------------|-----------|--------------|---------|-------------|--------|----------------|
|                                    |   |        |      | ADDITIONS    |    |        |   |           |
| *(In thousands)*                        |   | Balance at  |      | Charged to   |    | Charged     |   |           |   | Balance |
|                                    |   | Beginning   |      | Costs and    |    | to Other    |   |           |   | at End |
| DESCRIPTION                             |   | of Period   |      | Expenses (1) |    | Accounts    |   | Deductions (2) |   | of Period |
|                                    |   |        |      |         |    |        |   |           |   |   |
| Year ended December 31,  2009:          |   |        |      |         |    |        |   |           |   |   |
| Deducted  from asset accounts:          |   |        |      |         |    |        |   |           |   |   |
| Allowance  for doubtful accounts        |   |  $     | 67   |         |  $ | 1,926  |   |  $        | -  |   |  $ | (1,913) |   |  $ | 80  |
| Valuation allowance-deferred  tax asset |   | 4,863  |      | 313     |    | -      |   | -         |   | 5,176  |
|                                    |   |        |      |         |    |        |   |           |   |   |
| Year ended December 31,  2008:          |   |        |      |         |    |        |   |           |   |   |
| Deducted  from asset accounts:          |   |        |      |         |    |        |   |           |   |   |
| Allowance  for doubtful accounts        |   |  $     | 49   |         |  $ | 1,825  |   |  $        | -  |   |  $ | (1,807) |   |  $ | 67  |
| Valuation allowance-deferred  tax asset |   | 4,668  |      | 195     |    | -      |   | -         |   | 4,863  |
|                                    |   |        |      |         |    |        |   |           |   |   |
| Year ended December 31,  2007:          |   |        |      |         |    |        |   |           |   |   |
| Deducted  from asset accounts:          |   |        |      |         |    |        |   |           |   |   |
| Allowance  for doubtful accounts        |   |  $     | 106  |         |  $ | 2,076  |   |  $        | -  |   |  $ | (2,133) |   |  $ | 49  |
| Valuation allowance-deferred  tax asset |   | 4,297  |      | 371     |    | -      |   | -         |   | 4,668  |

 
| (1) | Adjustments  to the valuation allowance for deferred taxes are recorded to adjust deferred  tax asset to net realizable value. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|
| (2) | Uncollectible  amounts reserved for or written off.                                                                            |

** **

| F-37 |
|------|

 

----

 

| **SCHEDULE III**                             |
|----------------------------------------------|
| **ASSOCIATED ESTATES REALTY CORPORATION**    |
| **REAL ESTATE AND ACCUMULATED DEPRECIATION** |
| **December 31, 2009**                        |
|                                         |   |   |   |   |   |   |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | Initial Cost to Company | ** ** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | Costs |
| *(In thousands)*                             | * * |   |   |   |   |   |   |   | ** ** | Capitalized |
|                                         |   | Dates Acquired/ |   | Depreciable |   |   |   | Buildings & | ** ** | Subsequent |
| Property                                     |   | Constructed |   | Lives - Years |   | Land |   | Improvements | ** ** | to Acquisition |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **RESIDENTIAL MULTIFAMILY  PROPERTIES**      | ** ** |   |   |   |   |   |   |   |   |   |
| **NORTHERN OHIO**                            | ** ** |   |   |   |   |   |   |   |   |   |
| Barrington                                   |   | September, 1995 |   | 5-30 |   |  $ | 2,357  |   |  $ | 21,986  |   |  $ | 1,117  |
| Mallard's Crossing                           |   | February, 1995 |   | 5-30 |   | 941  |   | 8,499  |   | 2,119  |
| Village at Avon                              |   | June, 1998 |   | 5-30 |   | 2,145  |   | 21,704  |   | 2,250  |
| Westchester Townhomes                        |   | November, 1989 |   | 5-15 |   | 693  |   | 5,686  |   | 877  |
| Western Reserve                              |   | August, 1996 |   | 5-30 |   | 691  |   | 6,866  |   | 278  |
| Westlake Townhomes                           |   | October, 1995 |   | 5-30 |   | 559  |   | 332  |   | 277  |
| Williamsburg Townhomes                       |   | February, 1994 |   | 5-30 |   | 844  |   | 12,787  |   | 2,367  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **CENTRAL OHIO**                             | ** ** |   |   |   |   |   |   |   |   |   |
| St. Andrews at Little Turtle                 |   | March, 1995 |   | 5-30 |   | 478  |   | 4,216  |   | 816  |
| Bedford Commons                              |   | December, 1994 |   | 5-30 |   | 929  |   | 5,751  |   | 688  |
| Bradford at Easton                           |   | October, 1995 |   | 5-30 |   | 2,033  |   | 16,303  |   | 1,506  |
| Residence at Christopher  Wren               |   | March, 1994 |   | 5-30 |   | 1,560  |   | 13,754  |   | 2,723  |
| Heathermoor                                  |   | August, 1994 |   | 5-30 |   | 1,796  |   | 8,535  |   | 1,724  |
| Kensington Grove                             |   | July, 1995 |   | 5-30 |   | 533  |   | 4,600  |   | 545  |
| Lake Forest                                  |   | July, 1994 |   | 5-30 |   | 824  |   | 6,135  |   | 747  |
| Muirwood Village at Bennell                  |   | March, 1994 |   | 5-30 |   | 790  |   | 4,657  |   | 567  |
| Perimeter Lakes                              |   | Sept, 1996 |   | 5-30 |   | 1,265  |   | 8,647  |   | 959  |
| Saw Mill Village                             |   | April, 1997 |   | 5-30 |   | 2,548  |   | 17,218  |   | 3,234  |
| Sterling Park                                |   | August, 1994 |   | 5-30 |   | 646  |   | 3,919  |   | 464  |
| Residence at Turnberry                       |   | March, 1994 |   | 5-30 |   | 869  |   | 11,567  |   | 3,871  |
| Wyndemere Land                               |   | March, 1997 |   | - |   | 200  |   | -  |   | -  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **SOUTHERN OHIO**                            | ** ** |   |   |   |   |   |   |   |   |   |
| Remington Place                              |   | April, 1997 |   | 5-30 |   | 1,645  |   | 10,031  |   | 1,411  |
|                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

** **

| F-38 |
|------|

 

----

 

| **SCHEDULE III**                             |
|----------------------------------------------|
| **ASSOCIATED ESTATES REALTY CORPORATION**    |
| **REAL ESTATE AND ACCUMULATED DEPRECIATION** |
| **December 31, 2009**                        |
|                                         |   |   |   |   |   |   |   |   |   |   |
|                                         |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                         |   |   |   |   |   |   |   |   |   |   |
| *(In thousands)*                             | * * | Gross Amount at Which Carried at December 31, 2009 |
|                                         |   |   |   | Buildings & |   |   |   | Accumulated |   | Encumbrances |
| Property                                     |   | Land |   | Improvements |   | Total |   | Depreciation |   | (1) |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **RESIDENTIAL MULTIFAMILY  PROPERTIES**      | ** ** |   |   |   |   |   |   |   |   |   |
| **NORTHERN OHIO**                            | ** ** |   |   |   |   |   |   |   |   |   |
| Barrington                                   |   |  $ | 2,355  |   |  $ | 23,105  |   |  $ | 25,460  |   |  $ | 9,184  |   |  $ | 19,500  |
| Mallard's Crossing                           |   | 941  |   | 10,618  |   | 11,559  |   | 5,250  |   | -  |
| Village at Avon                              |   | 2,145  |   | 23,954  |   | 26,099  |   | 8,003  |   | 21,000  |
| Westchester Townhomes                        |   | 693  |   | 6,563  |   | 7,256  |   | 4,819  |   | -  |
| Western Reserve                              |   | 691  |   | 7,144  |   | 7,835  |   | 2,832  |   | 4,849  |
| Westlake Townhomes                           |   | -  |   | 1,168  |   | 1,168  |   | 1,112  |   | -  |
| Williamsburg Townhomes                       |   | 844  |   | 15,154  |   | 15,998  |   | 8,140  |   | -  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **CENTRAL OHIO**                             |   |   |   |   |   |   |   |   |   |   |
| St. Andrews at Little Turtle                 |   | 478  |   | 5,032  |   | 5,510  |   | 2,542  |   | -  |
| Bedford Commons                              |   | 929  |   | 6,439  |   | 7,368  |   | 3,250  |   | -  |
| Bradford at Easton                           |   | 2,033  |   | 17,809  |   | 19,842  |   | 7,527  |   | 12,590  |
| Residence at Christopher  Wren               |   | 1,560  |   | 16,477  |   | 18,037  |   | 8,758  |   | 9,270  |
| Heathermoor                                  |   | 1,796  |   | 10,259  |   | 12,055  |   | 5,482  |   | 8,430  |
| Kensington Grove                             |   | 533  |   | 5,145  |   | 5,678  |   | 2,489  |   | 3,180  |
| Lake Forest                                  |   | 824  |   | 6,882  |   | 7,706  |   | 3,547  |   | -  |
| Muirwood Village at Bennell                  |   | 790  |   | 5,224  |   | 6,014  |   | 2,703  |   | -  |
| Perimeter Lakes                              |   | 1,265  |   | 9,606  |   | 10,871  |   | 4,580  |   | 5,608  |
| Saw Mill Village                             |   | 2,548  |   | 20,452  |   | 23,000  |   | 8,951  |   | 17,092  |
| Sterling Park                                |   | 646  |   | 4,383  |   | 5,029  |   | 2,183  |   | 2,918  |
| Residence at Turnberry                       |   | 869  |   | 15,438  |   | 16,307  |   | 8,859  |   | 7,930  |
| Wyndemere Land                               |   | 200  |   | -  |   | 200  |   | -  |   | -  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **SOUTHERN OHIO**                            | ** ** |   |   |   |   |   |   |   |   |   |
| Remington Place                              |   | 1,645  |   | 11,442  |   | 13,087  |   | 4,644  |   | -  |
|                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

****

| F-39 |
|------|

 

----

 

| **SCHEDULE III**                             |
|----------------------------------------------|
| **ASSOCIATED ESTATES REALTY CORPORATION**    |
| **REAL ESTATE AND ACCUMULATED DEPRECIATION** |
| **December 31, 2009**                        |
|                                         |   |   |   |   |   |   |
|                                         |   |   |   | ** ** | ** ** | Initial Cost to Company |   |   |
|                                         |   |   |   |   |   |   |   |   |   | Costs |
| *(In thousands)*                             | * * |   |   |   |   |   |   |   |   | Capitalized |
|                                         |   | Dates Acquired/ |   | Depreciable |   |   |   | Buildings & |   | Subsequent |
| Property                                     |   | Constructed |   | Lives - Years |   | Land |   | Improvements |   | to Acquisition |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **RESIDENTIAL MULTIFAMILY  PROPERTIES**      | ** ** |   |   |   |   |   |   |   |   |   |
| **MICHIGAN**                                 |   |   |   |   |   |   |   |   |   |   |
| Arbor Landings                               |   | June, 1999 |   | 5-30 |   |  $ | 1,129  |   |  $ | 10,403  |   |  $ | 9,757  |
| Aspen Lakes Apartments                       |   | September, 1996 |   | 5-30 |   | 742  |   | 5,501  |   | 1,030  |
| Central Park Place                           |   | December, 1994 |   | 5-30 |   | 1,013  |   | 7,363  |   | 1,375  |
| Country Place Apartments                     |   | June, 1995 |   | 5-30 |   | 768  |   | 4,181  |   | 721  |
| Clinton Place Apartments                     |   | August, 1997 |   | 5-30 |   | 1,219  |   | 9,478  |   | 1,495  |
| Georgetown Park Apartments                   |   | June, 1999 |   | 5-30 |   | 1,778  |   | 12,141  |   | 13,558  |
| Oaks at Hampton                              |   | August, 1995 |   | 5-30 |   | 3,026  |   | 27,204  |   | 3,459  |
| The Landings at the Preserve                 |   | September, 1995 |   | 5-30 |   | 1,081  |   | 7,190  |   | 1,015  |
| Spring Brook Apartments                      |   | June, 1996 |   | 5-30 |   | 610  |   | 5,308  |   | 537  |
| Spring Valley Apartments                     |   | October, 1997 |   | 5-30 |   | 1,433  |   | 13,461  |   | 1,323  |
| Summer Ridge                                 |   | April, 1996 |   | 5-30 |   | 1,251  |   | 11,194  |   | 1,789  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **FLORIDA**                                  |   |   |   |   |   |   |   |   |   |   |
| Cypress Shores                               |   | February, 1998 |   | 5-30 |   | 2,769  |   | 16,452  |   | 1,405  |
| Windsor Pines                                |   | October, 1998 |   | 5-30 |   | 4,834  |   | 28,795  |   | 958  |
| Courtney Chase (2)                           |   | August, 2004 |   | 5-30 |   | 3,032  |   | 20,452  |   | 302  |
| Vista Lago (2)                               |   | March, 2005 |   | 5-30 |   | 4,012  |   | 35,954  |   | 70  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **GEORGIA**                                  |   |   |   |   |   |   |   |   |   |   |
| The Falls                                    |   | February, 1998 |   | 5-30 |   | 5,403  |   | 23,420  |   | 2,982  |
| Morgan Place                                 |   | July, 1998 |   | 5-30 |   | 3,292  |   | 9,159  |   | 839  |
| Cambridge at Buckhead (2)                    |   | October, 2005 |   | 5-30 |   | 6,166  |   | 16,730  |   | 420  |
| Idlewylde (2)                                |   | June, 2007 |   | 5-30 |   | 12,058  |   | 53,124  |   | 511  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **BALTIMORE/WASHINGTON**                     | ** ** |   |   |   |   |   |   |   |   |   |
| Reflections                                  |   | February, 1998 |   | 5-30 |   | 1,807  |   | 12,447  |   | 3,354  |
| Annen Woods                                  |   | July, 1998 |   | 5-30 |   | 1,389  |   | 9,069  |   | 1,369  |
| Hampton Point                                |   | July, 1998 |   | 5-30 |   | 3,394  |   | 21,703  |   | 2,517  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **INDIANA**                                  |   |   |   |   |   |   |   |   |   |   |
| Residence at White River                     |   | February, 1997 |   | 5-30 |   | 1,064  |   | 11,631  |   | 1,501  |
| Waterstone Apartments                        |   | August, 1997 |   | 5-30 |   | 1,508  |   | 22,861  |   | 1,201  |
| Steeplechase                                 |   | July, 1998 |   | 5-30 |   | 2,261  |   | 16,257  |   | 793  |
|                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |

****

| F-40 |
|------|

 

----

 

| **SCHEDULE III**                             |
|----------------------------------------------|
| **ASSOCIATED ESTATES REALTY CORPORATION**    |
| **REAL ESTATE AND ACCUMULATED DEPRECIATION** |
| **December 31, 2009**                        |
|                                         |   |   |   |   |   |   |   |   |   |   |
|                                         |   |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                         |   |   |   |   |   |   |   |   |   |   |
| *(In thousands)*                             | * * | Gross Amount at Which Carried at December 31, 2009 |
|                                         |   |   |   | Buildings & |   |   |   | Accumulated |   | Encumbrances |
| Property                                     |   | Land |   | Improvements |   | Total |   | Depreciation |   | (1) |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **RESIDENTIAL MULTIFAMILY  PROPERTIES**      | ** ** |   |   |   |   |   |   |   |   |   |
| **MICHIGAN**                                 |   |   |   |   |   |   |   |   |   |   |
| Arbor Landings                               |   |  $ | 1,682  |   |  $ | 19,607  |   |  $ | 21,289  |   |  $ | 8,344  |   |  $ | 16,712  |
| Aspen Lakes Apartments                       |   | 742  |   | 6,531  |   | 7,273  |   | 2,945  |   | -  |
| Central Park Place                           |   | 1,013  |   | 8,738  |   | 9,751  |   | 4,317  |   | 6,309  |
| Country Place Apartments                     |   | 768  |   | 4,902  |   | 5,670  |   | 2,365  |   | -  |
| Clinton Place Apartments                     |   | 1,219  |   | 10,973  |   | 12,192  |   | 4,565  |   | 8,340  |
| Georgetown Park Apartments                   |   | 2,128  |   | 25,349  |   | 27,477  |   | 11,588  |   | -  |
| Oaks at Hampton                              |   | 3,026  |   | 30,663  |   | 33,689  |   | 14,905  |   | -  |
| The Landings at the Preserve                 |   | 1,081  |   | 8,205  |   | 9,286  |   | 3,820  |   | -  |
| Spring Brook Apartments                      |   | 610  |   | 5,845  |   | 6,455  |   | 2,635  |   | 4,363  |
| Spring Valley Apartments                     |   | 1,433  |   | 14,784  |   | 16,217  |   | 6,150  |   | 10,817  |
| Summer Ridge                                 |   | 1,251  |   | 12,983  |   | 14,234  |   | 5,897  |   | 8,682  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **FLORIDA**                                  |   |   |   |   |   |   |   |   |   |   |
| Cypress Shores                               |   | 2,769  |   | 17,857  |   | 20,626  |   | 6,973  |   | 27,344  |
| Windsor Pines                                |   | 4,834  |   | 29,753  |   | 34,587  |   | 11,448  |   | 39,390  |
| Courtney Chase(2)                            |   | 3,032  |   | 20,754  |   | 23,786  |   | 4,248  |   | 21,210  |
| Vista Lago(2)                                |   | 4,012  |   | 36,024  |   | 40,036  |   | 6,553  |   | -  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **GEORGIA**                                  |   |   |   |   |   |   |   |   |   |   |
| The Falls                                    |   | 5,403  |   | 26,402  |   | 31,805  |   | 10,792  |   | 16,282  |
| Morgan Place                                 |   | 3,292  |   | 9,998  |   | 13,290  |   | 3,901  |   | -  |
| Cambridge at Buckhead(2)                     |   | 6,166  |   | 17,150  |   | 23,316  |   | 2,781  |   | -  |
| Idlewylde(2)                                 |   | 11,849  |   | 53,844  |   | 65,693  |   | 5,933  |   | 42,000  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **BALTIMORE/WASHINGTON**                     |   |   |   |   |   |   |   |   |   |   |
| Reflections                                  |   | 1,807  |   | 15,801  |   | 17,608  |   | 5,983  |   | 19,450  |
| Annen Woods                                  |   | 1,389  |   | 10,438  |   | 11,827  |   | 4,233  |   | 13,025  |
| Hampton Point                                |   | 3,394  |   | 24,220  |   | 27,614  |   | 9,848  |   | 33,000  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **INDIANA**                                  |   |   |   |   |   |   |   |   |   |   |
| Residence at White River                     |   | 1,064  |   | 13,132  |   | 14,196  |   | 5,509  |   | 9,221  |
| Waterstone Apartments                        |   | 1,470  |   | 24,100  |   | 25,570  |   | 10,126  |   | 16,500  |
| Steeplechase                                 |   | 2,261  |   | 17,050  |   | 19,311  |   | 6,561  |   | 13,641  |
|                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

| F-41 |
|------|

 

----

 

| **SCHEDULE III**                             |
|----------------------------------------------|
| **ASSOCIATED ESTATES REALTY CORPORATION**    |
| **REAL ESTATE AND ACCUMULATED DEPRECIATION** |
| **December 31, 2009**                        |
|                                         |   |   |   |   |   |   |
|                                         |   |   |   | ** ** | ** ** | Initial Cost to Company |   |   |
|                                         |   |   |   |   |   |   |   |   |   | Costs |
| *(In thousands)*                             | * * |   |   |   |   |   |   |   |   | Capitalized |
|                                         |   | Dates Acquired/ |   | Depreciable | ** ** |   |   | Buildings & |   | Subsequent |
| Property                                     |   | Constructed |   | Lives - Years | ** ** | Land |   | Improvements |   | to Acquisition |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **RESIDENTIAL MULTIFAMILY  PROPERTIES**      | ** ** |   |   |   |   |   |   |   |   |   |
| **VIRGINIA**                                 |   |   |   |   |   |   |   |   |   |   |
| The Alexander at Ghent (2)                   |   |  June, 2007 |   | 5-30 |   |  $ | 4,368  |   |  $ | 43,263  |   |  $ | 696  |
| The Belvedere (2)                            |   |  April, 2008 |   | 5-30 |   | 6,044  |   | 35,353  |   | 99  |
| River Forest (2)                             |   |  April, 2008 |   | 5-30 |   | 3,751  |   | 25,758  |   | 303  |
| River Forest Land                            |   |  April, 2008 |   | 5-30 |   | 904  |   | -  |   | (11) |
|                                         |   |   |   |   |   |  $ | 106,452  |   |  $ | 709,045  |   | 83,908  |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **MANAGEMENT SERVICE  COMPANIES**            |   |  November, 1993 | 10-30 |   |   |   |   |   | 6,731  |
| Land, Building and  Improvements             |   |   |   |   |   |   |   |   |   |  $ | 90,639  |
|                                         |   |   |   |   |   |   |   |   |   |   |

** **

** **

| F-42 |
|------|

 

----

 

| **SCHEDULE III**                             |
|----------------------------------------------|
| **ASSOCIATED ESTATES REALTY CORPORATION**    |
| **REAL ESTATE AND ACCUMULATED DEPRECIATION** |
| **December 31, 2009**                        |
|                                         |   |   |   |   |   |   |   |   |   |   |
|                                         |   |   |   |   |   |   |   |   |   |   |
|                                         |   |   |   |   |   |   |   |   |   |   |
| *(In  thousands)*                            | * * | Gross Amount at Which Carried at December 31, 2009 |
|                                         |   |   |   | Buildings & |   |   |   | Accumulated |   | Encumbrances |
| Property                                     |   | Land |   | Improvements |   | Total |   | Depreciation |   | (1) |
| ** **                                   | ** ** |   |   |   |   |   |   |   |   |   |
| **RESIDENTIAL  MULTIFAMILY PROPERTIES**      | ** ** |   |   |   |   |   |   |   |   |   |
| **VIRGINIA**                                 |   |   |   |   |   |   |   |   |   |   |
| The Alexander at  Ghent                      |   |  $ | 4,367  |   |  $ | 43,960  |   |  $ | 48,327  |   |  $ | 4,412  |   |  $ | 24,500  |
| The Belvedere                                |   | 6,044  |   | 35,452  |   | 41,496  |   | 2,214  |   | 25,748  |
| River Forest                                 |   | 3,751  |   | 26,061  |   | 29,812  |   | 1,648  |   | 18,655  |
| River Forest  Land                           |   | 893  |   | -  |   | 893  |   | -  |   | -  |
|                                         |   | 106,535  |   | 792,870  |   | 899,405  |   | 275,549  |   |  $ | 487,556  |
|                                         |   |   |   |   |   |   |   |   |   |   |
|                                         |   |   |   |   |   |   |   |   |   |   |
| **MANAGEMENT  SERVICE COMPANIES**            |   | 1,280  |   | 5,451  |   | 6,731  |   | 2,458  |   |   |
| Land, Building  and Improvements             |   |  $ | 107,815  |   |  $ | 798,321  |   | 906,136  |   | 278,007  |   |   |
| Furniture,  Fixtures and Equipment           |   |   |   |   |   | 29,710  |   | 24,101  |   |   |
| Construction in  Progress                    |   |   |   |   |   | 4,797  |   | -  |   |   |
| **GRAND TOTALS**                             |   |   |   |   |   |  $ | 940,643  |   |  $ | 302,108  |   |   |
|                                         |   |   |   |   |   |   |   |   |   |   |
|                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| (1)    | Encumbrances  include mortgage debt and other obligations secured by the real estate  assets.                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Due  to changes in GAAP for acquisitions initiated after June 30, 2001, intangible  assets such as in place leases were recognized upon the acquisition of these  properties and are not included in the initial costs or historical costs  shown. |
|   |                                                                                                                                                                                                                                               |

 

****

| F-43 |
|------|

 

----

 

 

 

 

 

**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATIONREAL ESTATE AND ACCUMULATED DEPRECIATIONDECEMBER 31, 2009**

            The Aggregate Cost forFederal Income Tax purposes was approximately $903.1 million at December 31,2009.

            Thechanges in Total Real Estate Assets for the years ended December 31, 2009, 2008and 2007 are as follows:
| *(In thousands)*             | 2009         |          | 2008         |    | 2007          |
|------------------------------|--------------|---------------|--------------|---------|---------------|
|                         |         |          |         |    |          |
| Balance, beginning of period |  $      | 957,061  |         |  $ | 965,013  |   |  $ | 877,797  |
| Disposal of fixed assets     | (30,449)     |          | (99,523)     |    | (39,984)      |
| New acquisition properties   | -       |          | 78,320  |    | 113,748  |
| Improvements                 | 14,031  |          | 13,251  |    | 13,452   |
| Balance, end of period       |  $      | 940,643  |         |  $ | 957,061  |   |  $ | 965,013  |

 

            The changes inAccumulated Depreciation for the years ended December 31, 2009, 2008 and 2007are as follows:
| *(In thousands)*             | 2009         |          | 2008         |    | 2007          |
|------------------------------|--------------|---------------|--------------|---------|---------------|
|                         |         |          |         |    |          |
| Balance, beginning of period |  $      | 283,213  |         |  $ | 305,427  |   |  $ | 286,277  |
| Disposal of fixed assets     | (15,448)     |          | (56,152)     |    | (13,468)      |
| Depreciation for period      | 34,343  |          | 33,938  |    | 32,618   |
| Balance, end of period       |  $      | 302,108  |         |  $ | 283,213  |   |  $ | 305,427  |
|                         |         |          |         |    |          |

 

| F-44 |
|------|

 

----