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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, 2010**                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                      |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                 |
| [ ] TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                              |
| For the transition  period from       to       Commission File Number 1-12486                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                         |
| **Associated  Estates Realty Corporation**                                                                                                                                                                                                                                                                                                                                                                                        |
| *(Exact name of registrant as specified in its  charter)*                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                 |
| **OHIO**                                                                                                                                                                                                                                                                                                                                                                                                                          |     | **34-1747603** |
| *(State or other jurisdiction of incorporation or  organization)*                                                                                                                                                                                                                                                                                                                                                                 |           | *(I.R.S. Employer Identification Number)* |
|                                                                                                                                                                                                                                                                                                                                              |
| **1 AEC Parkway,  Richmond Heights, Ohio  44143-1467**                                                                                                                                                                                                                                                                                                                                                                       |
| *(Address of principal executive offices)*                                                                                                                                                                                                                                                                                                                                                                                        |
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| Registrant's telephone number, including area code (216)  261-5000                                                                                                                                                                                                                                                                                                                                                                |
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| Securities registered pursuant to Section 12(b) of  the Act:                                                                                                                                                                                                                                                                                                                                                                      |
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| **TITLE OF EACH CLASS**                                                                                                                                                                                                                                                                                                                                                                                                           | **          ** | **NAME OF EACH EXCHANGE ON WHICH REGISTERED** |
| Common Shares, without par value                                                                                                                                                                                                                                                                                                                                                                                                  | **         ** | New York Stock Exchange, Inc. |
|                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | 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 $380.7 million as of June 30, 2010.                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                    |
| The number of Common Shares outstanding as of  February 11, 2011 was 41,483,094.                                                                                                                                                                                                                                                                                                                                                  |
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| 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 4, 2011 (in Part III).                                                                                                                                                                                                                                                                                                     |
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**ASSOCIATEDESTATES REALTY CORPORATIONTABLE OF CONTENTSFORM 10-K ANNUAL REPORTFOR THE YEAR ENDED DECEMBER 31, 2010**
| 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                                                                                                                                                                                                                                                                              | 5      |
|    |     Competitive Conditions                                                                                                                                                                                                                                                                    | 5      |
|         |     Customers                                                                                                                                                                                                                                                                                 | 5      |
|         |     Employees                                                                                                                                                                                                                                                                                 | 5      |
|         |     Available Information                                                                                                                                                                                                                                                                     | 5      |
|         |     Reports to Security Holders                                                                                                                                                                                                                                                               | 5      |
| 1A.          | Risk Factors                                                                                                                                                                                                                                                                                                 | 5      |
| 1B.          | Unresolved Staff Comments                                                                                                                                                                                                                                                                                    | 9      |
| 2.           | Properties                                                                                                                                                                                                                                                                                                   | 10     |
|         |     Our Portfolio                                                                                                                                                                                                                                                                             | 10     |
|         |     Indebtedness Encumbering the Properties                                                                                                                                                                                                                                                   | 12     |
| 3.           | Legal Proceedings                                                                                                                                                                                                                                                                                            | 13     |
| 4.           | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                          | 13     |
|         |     Executive Officers of the Registrant and Other Key  Employees                                                                                                                                                                                                                             | 13     |
|         |                                                                                                                |   |
| PART II      |
|         |                                                    |   |
| 5.           | Market for Registrant's Common Equity, Related Stockholder  Matters                                                                                                                                                                                                                                          |   |
|         |     and Issuer Purchases of Equity Securities                                                                                                                                                                                                                                                 | 15     |
| 6.           | Selected Financial Data                                                                                                                                                                                                                                                                                      | 16     |
| 7.           | Management's Discussion and Analysis of Financial                                                                                                                                                                                                                                                            |   |
|         |     Condition and Results of Operations                                                                                                                                                                                                                                                       | 19     |
| 7A.          | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                   | 31     |
| 8.           | Consolidated Financial Statements and Supplementary Data                                                                                                                                                                                                                                                     | 32     |
| 9.           | Changes in and Disagreements with Accountants                                                                                                                                                                                                                                                                |   |
|         |     on Accounting and Financial Disclosure                                                                                                                                                                                                                                                    | 32     |
| 9A.          | Controls and Procedures                                                                                                                                                                                                                                                                                      | 32     |
| 9B.          | Other Information                                                                                                                                                                                                                                                                                            | 32     |
|         |                                                                                                      |   |
| PART III     |
|         |                                                                                  |   |
| 10.          | Directors, Executive Officers and Corporate Governance                                                                                                                                                                                                                                                       | 33     |
| 11.          | Executive Compensation                                                                                                                                                                                                                                                                                       | 33     |
| 12.          | Security Ownership of Certain Beneficial Owners and  Management                                                                                                                                                                                                                                              | 33     |
|         |     and Related Shareholder Matters                                                                                                                                                                                                                                                           |   |
| 13.          | Certain Relationships and Related Transactions and  Director Independence                                                                                                                                                                                                                                    | 34     |
| 14.          | Principal Accountant Fees and Services                                                                                                                                                                                                                                                                       | 34     |
|         |                                                                                                                |   |
| PART IV      |
|         |                                                                                                                                                                       |   |
| 15.          | Exhibits and Financial Statement Schedules                                                                                                                                                                                                                                                                   | 35     |

****

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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 ground lease.

****We engage in property management, development, acquisition, disposition,construction, operation and ownership activities involving multifamilyresidential real estate.  We own a taxable REIT subsidiary that performs constructionservices for our own account and for third parties.  During 2010, a secondtaxable REIT subsidiary completed its final asset management service contractfor a third party owner.  As of December 31, 2010, our operating propertyportfolio consisted of 52 owned apartment communities containing 13,662 unitsin eight states.  See Item 2 for a state-by-state listing of our portfolio. Our consolidated financial statements include the accounts of all subsidiariesand qualified REIT subsidiaries, including the two taxable REIT subsidiaries,each of which is separately taxed for federal income tax purposes as a TaxableREIT Subsidiary ("TRS") under the REIT Modernization Act("RMA") implemented in 1999.  Our consolidated financial statementsalso include a partnership in which we hold a 90.0% equity interest and anOperating Partnership structured as a DownREIT in which we own 97.4% equityinterest.

**BUSINESSSEGMENTS**

 All of our properties are multifamily rental communities that havesimilar economic characteristics.  Management evaluates the performance of ourproperties on an individual basis.  Our multifamily properties providedapproximately 88.4% of our consolidated revenue for 2010.  Our subsidiary,Merit Enterprises, Inc. (“Merit”), is a general contractor that acts as ourin-house construction division and provides general contracting andconstruction management services to third parties.  For 2010, constructionservices provided approximately 11.1% of our consolidated revenue.  As a result,we have determined that as of December 31, 2010, we have two reportable segmentswhich are multifamily properties and construction and other services.

**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 2011 outlook and strategy.

***Acquisition/Disposition.*** Our acquisition/dispositionstrategy in recent years has been to buy properties outside of the Midwest,sell older, low margin "legacy" properties located in the Midwest andsell properties in markets where we owned a single asset or didn’t plan to grow. In 2010, we expanded our presence in Northern Virginia, completing theacquisitions of three properties aggregating 1,272 units for a total ofapproximately $234 million.  We also acquired a 222-unit property in Dallas,Texas for approximately $21 million and broke ground on a new developmentproperty in Nashville, Tennessee, announcing our intentions to expand ourpresence in these new markets.  Since 2005, we have also acquired six otherproperties consisting of 2,131 units located in Florida, Georgia and Virginiaand have completed a 60-unit addition to a Virginia property.

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While most of our property sales have been comprised of Midwest andsingle property locations, we continually monitor the profitability of all ofour properties and we will consider opportunistic sales of properties in anymarket, including our targeted growth markets, if we determine that theproceeds from such sales would provide a greater return on equity and increasedcash flow when invested in other properties or used to reduce debt.

Since 2005, we have sold 31 propertiescontaining a total of 6,923 units including 12 Affordable Housing properties,14 Ohio non-core properties and one property in Florida that we sold at theheight of the condo conversion boom.

***Property Operations***.  We operate in many differentmarkets and submarkets.  Each of these markets may have economiccharacteristics that differ from other markets, and, as a result, the degree towhich we can increase rents varies between markets.  However, our goal is tomaximize property net operating income in all of our markets through acombination of increasing net collected rents and by continual efforts tocontain controllable operating expenses.  Strategies to increase rents includeconstant monitoring of our markets, providing superior resident service anddesirable communities in which to live, leveraging the power of the internetthrough enhanced property websites and resident portals and the implementationof programs such as utility and refuse reimbursements.  Our AEC Academy forCareer Development provides training and support for our employees, which helpsus to provide better trained, quality personnel at our communities as well asminimizing 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 uponthe expected return and the impact on our balance sheet.  Reducing overallinterest costs and increasing the number of unencumbered assets have been twoof our principal objectives.  During 2007, 2008, 2009 and 2010, we continued tofocus on lowering our cost of debt by financing, refinancing anddefeasing/prepaying debt.  Our weighted average interest rate on our total debtdeclined 170 basis points from 7.2% at the end of 2006 to 5.5% at December 31,2010.  Our interest coverage ratio and fixed charge coverage ratio were 1.97:1and 1.85:1, respectively, at December 31, 2010, up from 1.54:1 and 1.38:1,respectively, at December 31, 2006.

During 2010, we increased our $150.0million unsecured revolving credit facility, or revolver, to $250.0 million. This facility provides financial flexibility and the opportunity to capitalizeon strategic acquisitions without the delays associated with financingcontingencies.  As of December 31, 2010, we had $157.5 million of availabilityunder our unsecured revolving credit facility.  In addition, we have a creditfacility agreement with Wells Fargo Multifamily Capital, on behalf of theFederal Home Loan Mortgage Corporation, or Freddie Mac.  Pursuant to the termsof the facility, we have the potential to borrow up to $100.0 million over atwo-year period with obligations being secured by project specific, nonrecourse,non cross-collateralized fixed or variable rate mortgages having terms of five,seven or ten years.  In August, 2010, we used this facility to borrow $36.0million at a fixed rate of 5.1% for a term of 10 years, leaving $64.0 millionof availability under the terms of this facility.

During 2010, we sold 23,575,000 of our common shares in three separateunderwritten public offerings.  The net proceeds from these offerings, whichtotaled $288.8 million, were used to repay maturing debt, redeem all ouroutstanding 8.70% Class B Series II Preferred Shares, redeem all of our TrustPreferred Securities, partially pay for three operating properties, acquire aparcel of land that we are developing in a partnership, repay borrowings on ourunsecured revolver and for general corporate purposes.

 GeneralContractor/Construction***.***  Our subsidiary, Merit, is a general contractor that actsas our in-house construction division and provides general contracting and constructionmanagement services to third parties.  Among other things, we believe werealize significant cost savings and improved reliability and quality inimplementing our strategy to enhance the quality of our building exteriors andinteriors as a result of the in-house services performed by Merit.

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**INCOMETAXES**

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

**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 singlecustomer or a few customers.

**EMPLOYEES**

 On February 11, 2011, we employed approximately 390 people.  Satisfactoryrelations 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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**We are subject to risks inherent in the real estate business andoperation of a REIT.**  We own and manage multifamily apartment communitiesthat are subject to varying degrees of risk generally incident to the ownershipof real estate.  Our financial condition, the value of our properties and ourability to make distributions to our shareholders will be dependent upon ourcontinued access to the debt and equity markets and our ability to operate ourproperties in a manner sufficient to generate income in excess of operatingexpenses and debt service charges, which may be affected by the followingrisks, some of which are 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; |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •    | elimination or limitations to  federal government support for Fannie Mae and/or Freddie Mac that might  result in significantly reduced availability of mortgage financing sources as  well as increases in interest rates for mortgage financing;           |
| •    | our ability to refinance debt  on favorable terms at maturity;                                                                                                                                                                                               |
| •    | risks of a lessening of demand  for the multifamily units that we own;                                                                                                                                                                                       |
| •    | competition from other  available multifamily units and changes in market rental rates;                                                                                                                                                                      |
| •    | new acquisitions and/or  development projects that may fail to perform in accordance with our  expectations;                                                                                                                                                 |
| •    | 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, and unanticipated  repairs;                                                                                                                                               |
| •    | our inability to control  operating expenses or achieve increases in revenue;                                                                                                                                                                                |
| •    | shareholder ownership  limitations 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 that are not covered by our  insurance;                                                                                                                                          |
| •    | 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 failure to achieve expected results or matters not  discovered in due diligence;                                                                                                                        |
| •    | 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 and construction business  risks, including, without limitation, rapid and unanticipated increases in  prices of building materials and commodities.                                                                                            |

**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.  Foreclosedsingle family homes that become rental properties could create additionalcompetition in certain of our markets.  Such competition may affect our abilityto attract and retain residents and to increase or maintain rental rates.

 

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**The properties we own are concentrated in Ohio and Michigan.**  Asof December 31, 2010, approximately 29% and 21% of the units in properties weown were located in Ohio and Michigan, respectively.  Our performance,therefore, is linked to economic conditions and the market for available rentalhousing in the sub-markets located in these areas.  The decline in the marketfor apartment housing in these various sub-markets may adversely affect ourfinancial condition, results of operations and ability to make distributions toour shareholders.

**Our insurancemay not be adequate to cover certain risks. **There are certain types ofrisks, generally of a catastrophic nature, such as earthquakes, floods,windstorms, acts of war and terrorist attacks that may be uninsurable, are noteconomically insurable, or are not fully covered by insurance.  Moreover,certain risks, such as mold and environmental exposures, generally are notcovered by our insurance.  Other risks are subject to various limits, sub-limits,deductibles and self insurance retentions, which help to control insurancecosts, but which may result in increased exposures to uninsured loss.  Significantuninsured losses could have a material adverse effect on our business,financial condition and results of operations.

**Secured debt financing could adversely affect our performance.**  AtDecember 31, 2010, 27 of our 52 properties were encumbered by project specific,non-recourse, and except for five properties, non-cross-collateralized mortgagedebt.  There is a risk that these properties may not have sufficient cash flowfrom operations to pay required principal and interest.  We may not be able torefinance these loans at an amount equal to the loan balance and the terms ofany refinancing may not be as favorable as the terms of existing indebtedness. If we are unable to make required payments on indebtedness that is secured by amortgage, the property securing the mortgage may be foreclosed with aconsequent loss of income and value to us.  Although Fannie Mae and Freddie Maccontinue to provide needed financing to qualified borrowers, such as ourselves,there is no assurance that those mortgage capital sources will remain availableor available on competitively favorable terms.

**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 our shareholders**.**

**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 HousingAmendments Act of 1988 (the "FHAA") requires apartment communitiesfirst occupied after March 13, 1990 to be accessible to disabled individuals.  Otherstate and local laws also require apartment communities to be disability accessible. The Fair Housing Act also prohibits discrimination against protected classes ofindividuals.  Noncompliance with these laws could result in the imposition offines or an award of damages to private litigants.  We have been subject tolawsuits alleging violations of handicap design laws in connection with certainof our developments.

 

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 Under various federal, state and local laws, an owner or operator ofreal estate 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 applicable requirementscould complicate our ability to lease or sell an affected property and couldsubject us to monetary penalties, costs required to achieve compliance andpotential liability to third parties.  We are not aware of any materialnoncompliance, liability or claim relating to hazardous or toxic substances orother environmental matters in connection with any of our properties. Nonetheless, it is possible that material environmental contamination orconditions exist, or could arise in the future in the apartment communities oron the land upon which they are located.

**We are subject to risks associated with construction, development,acquisition and expansion of multifamily apartment communities.** Development projects, acquisitions and expansions of apartment communities aresubject to a number of risks, 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. |

The foregoing risksare also applicable to Merit, our construction services subsidiary, whetherengaged in providing services for our properties or for third parties (see“Construction Business Risk” below).

**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, prohibit theownership of more than 4.0% of our outstanding common shares and more than 9.8%of the shares of any series of any class of our preferred shares by any person,(the "Ownership Limit"), unless we grant a waiver.  Absent such awaiver, any shares owned in excess of such ownership limit are subject torepurchase by us and to other consequences as set forth in our Second Amendedand Restated Articles of Incorporation, as amended.  A transfer of shares maybe void if it causes a person to violate the Ownership Limit.  The OwnershipLimit could delay or prevent a change in control and, therefore, couldadversely affect our security holders' ability to realize a premium over thethen prevailing market price for their shares.

**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 incorporated inthe State of Ohio, where various state statutes place certain restrictions ontakeover activity.  While our Board of Directors believes that our shareholdersrights plan could assist in maximizing value for our shareholders in a changein control transaction, our shareholders rights plan and these restrictions arelikely to have the effect of precluding acquisition of control of us withoutour consent.

 

|  8 |
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**We may fail to qualify as a REIT and our shareholders may incur taxliability as a result.**  Commencing with our taxable year ending December31, 1993, we have operated in a manner so as to permit us to qualify as a REITunder the Code, and we intend to continue to operate in such a manner.  Many ofthe REIT requirements, however, are highly technical and complex.  We cannot,therefore, guarantee that we have qualified or will qualify in the future as aREIT.  The determination that we are a REIT requires an analysis of variousfactual matters that may not be totally within our control.  For example, toqualify as a REIT, our gross income must generally come from rental and otherreal estate or passive related sources that are itemized in the REIT tax laws. We are also required to distribute to security holders at least 90.0% of ourREIT taxable income excluding capital gains.  If we were to fail to qualify asa REIT in any taxable year, we would not be allowed a deduction fordistributions to our shareholders in computing our taxable income and would besubject to federal income tax (including any applicable alternative minimumtax) on our taxable income at regular corporate rates.  Unless we are entitledto relief under certain Code provisions, we also would be disqualified fromtreatment as a REIT for the four taxable years following the year during whichREIT qualification was lost.  As a result, the cash available for distributionto our shareholders could be reduced or eliminated for each of the yearsinvolved.

**We depend on our key personnel.**  Our success depends to asignificant degree upon the continued contribution of key members of ourmanagement team, who may be difficult to replace.  The loss of services ofthese executives could have a material adverse effect on us.  There can be noassurance that the services of such personnel will continue to be available tous.  Our Chairman of the Board, President and Chief Executive Officer, Mr.Jeffrey I. Friedman, is a party to an employment agreement with us.  Other thanMr. Friedman, we do not have employment agreements with key personnel.  We donot hold key-man life insurance on any of our key personnel.

**We may be exposed to construction business risk.**  Our subsidiary,Merit, is engaged in the construction business as a general contractor.  Inherentrisks of those operations include the following:
| •   | fixed price or guaranteed maximum cost 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;                                                                                                                                                                  |
| •   | rapid and  unanticipated increases in the costs of commodities and building materials;                                                                                                                                                             |
| •   | failure of  subcontractors to perform as anticipated;                                                                                                                                                                                              |
| •   | the  availability of qualified subcontractors, subcontractors in turn are  dependent on the availability of skilled workers; and                                                                                                                   |
| •   | bonding  indemnification obligations and standby letters of credit for which the  parent company is responsible.                                                                                                                                   |

**Item 1B.  Unresolved StaffComments**

None.

 

|  9 |
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**Item2.  Properties**

***Our Portfolio.***  The following table represents ourportfolio as of December 31, 2010, which consists of properties we owned,directly or indirectly.
|                               |  | **Total Number**  |  | **Total Number** |
|-------------------------------|--|-------------------|--|------------------|
|                               |  | **of Properties** |  | **of Units**     |
|                               |  |                   |  |                  |
| Baltimore/Washington          |  | 3                 |  | 667              |
| Florida                       |  | 4                 |  | 1,272            |
| Georgia                       |  | 4                 |  | 1,717            |
| Indiana                       |  | 3                 |  | 836              |
| Michigan                      |  | 11                |  | 2,888            |
| Ohio                          |  | 20                |  | 3,924            |
| Texas                         |  | 1                 |  | 222              |
| Virginia (1)                  |  | 6                 |  | 2,136            |
|                               |  | 52                |  | 13,662           |
| Development Project:          |  |                   |  |                  |
| Vista Germantown (2)          |  | -                 |  | -                |
|                               |  |              |  |             |
| **Total**                     |  | 52                |  | 13,662           |
|                               |  |                   |  |                  |
|                               |  | **Location**      |  | **Acres**        |
| **Undeveloped Land Parcels:** |  |                   |  |                  |
| Westlake                      |  | Westlake, OH      |  | 39.0             |
| Wyndemere                     |  | Franklin, OH      |  | 10.0             |
|                               |  |                   |  |                  |
| Total undeveloped acres       |  |                   |  | 49.0             |

* *
| (1)                                        | Includes  a 60-unit expansion to River Forest.                                                               |
|--------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|         |                                                                                                         |
| (2)                                        | Reflects  partnership development of 242-units in Nashville, Tennessee with a scheduled  completion in 2012. |

* *

* *

|  10 |
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|                              |  | **Total Number** |  |            |
|------------------------------|--|------------------|--|------------|
|                              |  | **of Units**     |  | **Age(1)** |
|                              |  |                  |  |            |
| **Baltimore/Washington**     |  |                  |  |            |
| Annen Woods                  |  | 131              |  | 23         |
| Hampton Point                |  | 352              |  | 24         |
| Reflections                  |  | 184              |  | 25         |
|                              |  | 667              |  |            |
| **Florida**                  |  |                  |  |            |
| Courtney Chase               |  | 288              |  | 7          |
| Cypress Shores               |  | 300              |  | 19         |
| Vista Lago                   |  | 316              |  | 7          |
| Windsor Pines                |  | 368              |  | 12         |
|                              |  | 1,272            |  |            |
| **Georgia**                  |  |                  |  |            |
| Cambridge at Buckhead        |  | 168              |  | 15         |
| The Falls                    |  | 520              |  | 24         |
| Idlewylde                    |  | 843              |  | 9          |
| Morgan Place                 |  | 186              |  | 21         |
|                              |  | 1,717            |  |            |
| **Indiana**                  |  |                  |  |            |
| Residence at White River     |  | 228              |  | 19         |
| Steeplechase                 |  | 264              |  | 12         |
| Center Point                 |  | 344              |  | 13         |
|                              |  | 836              |  |            |
| **Michigan**                 |  |                  |  |            |
| Arbor Landings               |  | 328              |  | 11         |
| Aspen Lakes Apartments       |  | 144              |  | 29         |
| Central Park Place           |  | 216              |  | 22         |
| Country Place Apartments     |  | 144              |  | 21         |
| Clinton Place Apartments     |  | 202              |  | 22         |
| Georgetown Park Apartments   |  | 480              |  | 11         |
| Oaks at Hampton              |  | 544              |  | 22         |
| The Landings at the Preserve |  | 190              |  | 19         |
| Spring Brook Apartments      |  | 168              |  | 22         |
| Spring Valley Apartments     |  | 224              |  | 23         |
| Summer Ridge                 |  | 248              |  | 19         |
|                              |  | 2,888            |  |            |
| **Ohio**                     |  |                  |  |            |
| St. Andrews at Little Turtle |  | 102              |  | 23         |
| Residence at Barrington      |  | 288              |  | 11         |
| Bedford Commons              |  | 112              |  | 23         |
| Bradford at Easton           |  | 324              |  | 14         |
| Heathermoor                  |  | 280              |  | 21         |
| Kensington Grove             |  | 76               |  | 15         |
| Lake Forest                  |  | 192              |  | 16         |

 
| (1) | Age  of property is determined by the number of years since construction of the  property was completed or, if applicable, the year the property was substantially  rehabilitated. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

|  11 |
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|                               |  | **Total Number** |  |            |  |                 |
|-------------------------------|--|------------------|--|------------|--|-----------------|
|                               |  | **of Units**     |  | **Age(1)** |  |                 |
| **Ohio (Continued)**          |  |                  |  |            |  |                 |
| Mallard's Crossing            |  | 192              |  | 20         |  |                 |
| Muirwood Village at Bennell   |  | 164              |  | 22         |  |                 |
| Perimeter Lakes               |  | 189              |  | 18         |  |                 |
| Remington Place               |  | 234              |  | 20         |  |                 |
| Residence at Christopher Wren |  | 264              |  | 17         |  |                 |
| Residence at Turnberry        |  | 216              |  | 19         |  |                 |
| Saw Mill Village              |  | 340              |  | 23         |  |                 |
| Sterling Park                 |  | 128              |  | 16         |  |                 |
| Village at Avon               |  | 312              |  | 9          |  |                 |
| Westchester Townhomes         |  | 136              |  | 21         |  |                 |
| Western Reserve               |  | 108              |  | 12         |  |                 |
| Westlake Townhomes            |  | 7                |  | 25         |  |                 |
| Williamsburg Townhomes        |  | 260              |  | 20         |  |                 |
|                               |  | 3,924            |  |            |  |                 |
| **Texas**                     |  |                  |  |            |  |                 |
| San Raphael                   |  | 222              |  | 11         |  |                 |
|                               |  |                  |  |            |  |                 |
| **Virginia**                  |  |                  |  |            |  |                 |
| The Alexander at Ghent        |  | 268              |  | 4          |  |                 |
| The Belvedere                 |  | 296              |  | 5          |  |                 |
| River Forest                  |  | 240              |  | 4          |  |                 |
| River Forest - Phase II       |  | 60               |  | 1          |  |                 |
| Riverside Station             |  | 304              |  | 5          |  |                 |
| The Ashborough                |  | 504              |  | 6          |  |                 |
| Westwind Farms                |  | 464              |  | 4          |  |                 |
|                               |  | 2,136            |  |            |  |                 |
|                               |  |                  |  |            |  |                 |
| **Total**                     |  | 13,662           |  | 15         |  |                 |
|                               |  |                  |  |            |  |                 |
|                               |  |                  |  |            |  | **Anticipated** |
|                               |  | **Location**     |  | **Acres**  |  | **Completion**  |
|                               |  |                  |  |            |  |                 |
| **Development Project:**      |  |                  |  |            |  |                 |
| Vista Germantown              |  | Nashville, TN    |  | 2.7        |  | 2012            |

 
| (1) | Age  of property is determined by subtracting from 2010 the year construction of  the property was completed or, if applicable, the year the property was  substantially rehabilitated. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***IndebtednessEncumbering the Properties.***  We have financed, and in many casesrefinanced, the acquisition, development and rehabilitation of our propertieswith a variety of sources of mortgage indebtedness.  At December 31, 2010, 25of the 52 wholly owned properties were unencumbered.  The remaining 27properties were encumbered by conventional mortgages, of which five propertieswere encumbered by cross-collateralized, cross-defaulted mortgage loans.

 

|  12 |
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**Item 3.  Legal Proceedings**

 For information concerning currentlegal proceedings, see Note 7 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 2010.

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

 The following information regardingour executive officers is provided pursuant to Instruction 3 to Item 401(b) ofRegulation S-K.
| Name                                                                                                                     |   | Age    |   | Position with  the Company                                    |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------|
| Jeffrey I. Friedman                                                                                                      |   | 59     |   | Chairman of the  Board, President and Chief Executive Officer |
|                                     |   |   |   |                                                          |
| Lou Fatica                                                                                                               |   | 44     |   | Vice President, Treasurer and Chief Financial Officer         |
|                      |   |   |   |                                                          |
| John T. Shannon                                                                                                          |   | 49     |   | Senior Vice President, Operations                             |
|                                          |   |   |   |                                                          |
| Bradley A. Van Auken                                                                                                     |   | 53     |   | Vice President, General Counsel and Secretary                 |

  Jeffrey I. Friedman has served asour Chairman 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 1999as Controller, 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.

 John T. Shannon joined the Company in2004 as Senior Vice President, Operations.  Mr. Shannon had previously held theposition of Vice President of Operations at The Shelter Group.  He has a degreein Business Administration with a concentration in real estate finance andconstruction management from the University of Denver.  Mr. Shannon has 21years of property management experience.

 Bradley A. Van Auken joined theCompany in November of 2010 and has been serving as Vice President, GeneralCounsel and Secretary since January 1, 2011.  Prior to that time he was engagedin the private practice of law, served as First Vice President-Legal for EquityResidential, and worked as Senior Vice President, General Counsel and Secretaryof Lexford Residential Trust.  Mr. Van Auken received both his undergraduateand law degrees from Notre Dame.  

 In additionto the officers named in the table above, the following persons have beenappointed as officers of the Company and hold positions in senior management asindicated:

 Michelle B. Creger joined the Companyin 2009 as Vice President, Associate General Counsel.  Ms. Creger waspreviously the Vice President of Human Resources at U-Store-It Trust, and hasalso worked for American Greetings Corporation and McDonald Hopkins, a majorCleveland law firm.  She earned her law degree from Case Western ReserveUniversity School of Law and a Bachelor's degree in Economics from CreightonUniversity.  Ms. Creger has over 28 years of legal experience and is 55 yearsold.

|       13 |
|----------------------------------------|

 

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Patrick Duffy joined the Company in2005 as Vice President of Strategic Marketing.  Mr. Duffy plays a key role inour diversification plan by assisting in identifying markets for assetacquisitions and dispositions.  In addition, he is responsible for developingproperty-specific marketing plans and strategies to assist in maximizing topline revenue growth for our properties, while also assisting with pricing andpositioning strategies.  Mr. Duffy previously held the position of Senior VicePresident of Marketing at The Shelter Group.  He graduated from Loyola College and holds a Master's Degree in Administrative Sciences from Johns Hopkins University.  Mr. Duffy has over 24 years of experience in the real estateindustry and is 49 years old.

 Jason A. Friedman joined the Companyin 2009 as Vice President, Construction and Development and as President ofMerit Enterprises, Inc.  He previously was the President of JAS Construction,Inc., a general contractor specializing in multifamily renovations.  During histenure at JAS, he was involved in approximately $100 million of multifamilyrenovation projects in various states.  Mr. Friedman has also worked forPricewaterhouseCoopers where he provided valuation and advisory services toreal estate clients.  He graduated from Auburn University with a major inCommunications and Business.  Mr. Friedman is a member of the Urban LandInstitute.  Mr. Friedman has over 11 years of real estate experience and is 36years old.

 Daniel E. Gold joined the Company in2009 as Vice President of Human Resources.  Mr. Gold previously served as theDirector of Corporate Human Resources for Falcon Transport and has also workedfor Rockwell Automation, Cap Gemini and Bailey Controls.  Mr. Gold isresponsible for the oversight of all Human Resource functions, includingemployee development, compensation, benefits, recruiting and payroll.  Mr. Goldhas a Bachelor's of Science degree in Communications from Ohio University, andis a member of both the Ohio Human Resource Planning Society and the Societyfor Human Resource Management.  Mr. Gold has over 17 years of Human Resourcesexperience and is 42 years old.

Jeremy S. Goldberg joined AssociatedEstates in February, 2010, and is currently serving as the Vice President ofCorporate Finance and Investor Relations.  Mr. Goldberg’s responsibilitiesinclude developing and implementing financial and capital markets strategies,facilitating the underwriting and analysis for acquisitions and dispositionsand establishing and maintaining investor and sell-side analyst contacts andrelationships.  Prior to joining Associated Estates, Mr. Goldberg was incommercial and retail banking for 15 years, at Bank of America and AmTrustBank.  He received his Bachelor Degree from the University of Michigan and hisMaster of Business Administration from Case Western Reserve University.  Mr.Goldberg is 37 years old.

John P. Hinkle joined the Company in2010 as Vice President of Acquisitions.  Mr. Hinkle most recently served as aconsultant for Federal Capital Partners.  His previous acquisitions experiencealso includes Fairfield Residential, Van Metre Companies and Archstone-SmithTrust.  Mr. Hinkle has responsibility for identifying and generating acquisitionopportunities that are consistent with the Company’s long-term investment andgrowth strategy.  He received his Bachelor of Science in Finance from LehighUniversity and is a member of the Urban Land Institute.  Mr. Hinkle has over 13years of experience in the acquisition, development, management and valuationof investment properties and is 39 years old.

  Miria C. Rabideau joined the Companyin 1994 as a Property Manager, and was promoted to Regional Manager in 2003. During 2006, she was promoted to Regional Vice President and during 2009 shewas promoted to Vice President of Operations.  Ms. Rabideau is responsible forproperties in Indiana, Michigan, Northeast Ohio and Florida.  Ms. Rabideau has18 years of asset and property management experience. She has a Bachelor'sdegree from Michigan State University and is 41 years old.

 Beth L. Stoll joined the Company in2004 as a Regional Vice President, and was promoted to Vice President ofOperations during 2006.  She is responsible for properties in Georgia,Maryland, Virginia, Central Ohio and Texas.  Ms. Stoll is also responsible forthe AEC Academy for Career Development, which provides training and support forour employees.  Ms. Stoll previously held the position of Regional VicePresident at The Shelter Group.  Ms. Stoll has over 23 years of propertymanagement experience and is 55 years old.

|  14 |
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**PARTII**

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

 Our common shares are traded on the NYSEand NASDAQ under the trading symbol "AEC."  The following table setsforth for the periods indicated the high and low closing sale prices per commonshare as reported on the NYSE (composite tape) and the dividends declared percommon share.
|                |  |             |             |             |         |             |  |            |            | Dividends Declared |
|----------------|--|-------------|-------------|-------------|---------|-------------|--|------------|------------|--------------------|
|                |  | Price Range |             | Per Share   |
|                |  | 2010        |             | 2009        |         | 2010        |  | 2009       |
|                |  | High        |             | Low         |         | High        |  | Low        |            |                    |  |  |
| First Quarter  |  |  $     | 13.99  |             |  $ | 11.01  |  |  $    | 8.75  |                    |  $ | 4.87  |  |  $ | 0.17  |  |  $ | 0.17  |
| Second Quarter |  | 14.55  |             | 12.60  |         | 6.71   |  | 5.08  |            | 0.17          |  | 0.17  |
| Third Quarter  |  | 14.80  |             | 12.27  |         | 10.21  |  | 5.16  |            | 0.17          |  | 0.17  |
| Fourth Quarter |  | 15.41  |             | 13.70  |         | 11.27  |  | 8.98  |            | 0.17          |  | 0.17  |
|                |  |             |             |             |         |             |  |            |            |  $            | 0.68  |  |  $ | 0.68  |
|                |  |             |             |             |         |             |  |            |            |                    |  |  |  |  |  |  |  |  |

 

 During theyear ended December 31, 2010, net income attributable to AERC was less than thetotal dividends declared on our common shares.  However, cash flow fromoperations was sufficient to pay cash dividends.  For a discussion of liquidityand capital resources, see Part II, Item 7 of this report on Form 10-K.

 On February 11, 2011, there wereapproximately 800 holders of record and approximately 8,730 beneficial owners ofour common shares.   For information concerning security ownership of certainbeneficial owners and management and related shareholder matters, see Part III,Item 12 of this report on Form 10-K.

 We maintain a dividend reinvestmentplan under which shareholders may elect to reinvest their dividendsautomatically in our common shares and may also make optional purchases of ourcommon shares.  The administrator of the plan will purchase shares directlyfrom us at our option (either treasury shares or newly-issued common shares), orin the open market, or in privately negotiated transactions with third parties. All shares purchased by the plan administrator during 2009 and 2010 were openmarket purchases.

 There is a total of $26.3 millionremaining on our Board of Director authorizations to repurchase our commonshares.  Additionally, we have a policy which allows employees to pay theirportion of the income taxes related to restricted shares vesting bysurrendering a number of shares to us equal in value on the day of vesting tothe amount of taxes due up to the statutory withholding amount.  The followingtable sets forth our repurchase activities for the fourth quarter of 2010. 
| Issuer Purchases of  Equity Securities for the Three Months Ended December 31, 2010 |
|-------------------------------------------------------------------------------------|
|                                                                                     |  |  |  |  |  |  |  |  |
|                                                                                     |  |  |  |  |  |  |  | Approximate Dollar |
|                                                                                     |  |  |  |  |  | Total Number of |  | Value of Shares |
|                                                                                     |  |  |  |  |  | Shares Purchased |  | That May Yet Be |
|                                                                                     |  | Total Number |  | Average |  | As Part of |  | Purchased Under the |
|                                                                                     |  | of Shares |  | Price Paid |  | Publicly Announced |  | Plans or Programs |
| Period                                                                              |  | Purchased |  | Per Share |  | Plans or Programs |  | (in thousands) |
| October 1 through                                                                   |  |  |  |  |  |  |  |  |
| October 31                                                                          |  | -    |  |  $ | -    |  | -    |  |  $ | 26,288  |
| November 1 through                                                                  |  |  |  |  |  |  |  |  |
| November 30                                                                         |  | 35  |  | 14.27  |  | -    |  | 26,288  |
| December 1 through                                                                  |  |  |  |  |  |  |  |  |
| December 31                                                                         |  | 2,491  |  | 15.29  |  | -    |  | 26,288  |
| Total                                                                               |  | 2,526  |  |  $ | 15.28  |  | -    |  |  |

 

|  15 |
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**Item 6.  Selected Financial Data**

 The following tables set forthselected financial and other data for us on a consolidated basis.  Thehistorical financial information contained in the tables has been derived fromand should be read in conjunction with (i) our Consolidated FinancialStatements and Notes thereto and (ii) Management's Discussion and Analysis ofFinancial Condition and Results of Operations both included elsewhere herein.
| *(In thousands, except per  share, unit count and net collected rent amounts)* |  | Year Ended December 31, |
|--------------------------------------------------------------------------------|--|-------------------------|
|                                                                                |  | 2010                    |  | 2009 |  | 2008 |  | 2007 |  | 2006 |
| **Operating Data:**                                                            |  |                         |  |  |  |  |  |  |  |  |
| Revenue                                                                        |  |                         |  |  |  |  |  |  |  |  |
| Property  revenue                                                              |  |  $                 | 135,847  |  |  $ | 127,972  |  |  $ | 127,848  |  |  $ | 113,772  |  |  $ | 102,771  |
| Management  and service operations:                                            |  |                         |  |  |  |  |  |  |  |  |
| Fees,  reimbursements and other                                                |  | 817                |  | 1,287  |  | 1,784  |  | 10,990  |  | 11,689  |
| Construction  and other services                                               |  | 17,051             |  | 1,160  |  | 1,010  |  | 2,218  |  | 1,078  |
| Total  revenue                                                                 |  | 153,715            |  | 130,419  |  | 130,642  |  | 126,980  |  | 115,538  |
|                                                                                |  |                         |  |  |  |  |  |  |  |  |
| Total expenses                                                                 |  | (130,875)               |  | (106,615) |  | (106,705) |  | (104,562) |  | (96,068) |
|                                                                                |  |                         |  |  |  |  |  |  |  |  |
| Interest  income                                                               |  | 34                 |  | 46  |  | 132  |  | 429  |  | 650  |
| Interest  expense                                                              |  | (31,704)                |  | (34,220) |  | (35,660) |  | (38,798) |  | (45,660) |
|                                                                                |  |                         |  |  |  |  |  |  |  |  |
| (Loss) income before gain on  insurance recoveries,                            |  |                         |  |  |  |  |  |  |  |  |
| equity  in net income (loss) of joint ventures,                                |  |                         |  |  |  |  |  |  |  |  |
| and  income from discontinued operations                                       |  | (8,830)                 |  | (10,370) |  | (11,591) |  | (15,951) |  | (25,540) |
| Gain on insurance recoveries                                                   |  | 245                |  | 665  |  | -  |  | -  |  | -  |
| Equity in net income (loss)  of joint ventures                                 |  | -                  |  | -  |  | 1,502  |  | (258) |  | (462) |
| **(Loss) income from  continuing operations**                                  |  | (8,585)                 |  | (9,705) |  | (10,089) |  | (16,209) |  | (26,002) |
| Income from discontinued  operations:                                          |  |                         |  |  |  |  |  |  |  |  |
| Operating  income (loss)                                                       |  | -                  |  | 568  |  | (433) |  | 5,563  |  | (1,009) |
| Gain  on disposition of properties                                             |  | -                  |  | 15,400  |  | 45,202  |  | 20,864  |  | 54,093  |
| Income from discontinued  operations                                           |  | -                  |  | 15,968  |  | 44,769  |  | 26,427  |  | 53,084  |
| **Net (loss) income**                                                          |  | (8,585)                 |  | 6,263  |  | 34,680  |  | 10,218  |  | 27,082  |
| Net income attributable to  noncontrolling redeemable interest                 |  | (51)                    |  | (53) |  | (53) |  | (53) |  | (61) |
| **Net (loss) income  attributable to AERC**                                    |  | (8,636)                 |  | 6,210  |  | 34,627  |  | 10,165  |  | 27,021  |
| Preferred share dividends                                                      |  | (2,030)                 |  | (4,199) |  | (4,655) |  | (4,924) |  | (5,046) |
| Preferred share  redemption/repurchase costs                                   |  | (993)                   |  | -  |  | (143) |  | (58) |  | -  |
| Discount/(premium) on  preferred share repurchase                              |  | -                  |  | -  |  | 2,289  |  | (114) |  | -  |
| Allocation to participating  securities                                        |  | -                  |  | (423) |  | (730) |  | (338) |  | (770) |
| **Net (loss) income  applicable to common shares**                             |  |  $                 | (11,659) |  |  $ | 1,588  |  |  $ | 31,388  |  |  $ | 4,731  |  |  $ | 21,205  |
|                                                                                |  |                         |  |  |  |  |  |  |  |  |
| **Earnings per common share  - Basic and Diluted:**                            |  |                         |  |  |  |  |  |  |  |  |
| (Loss)  income from continuing operations                                      |  |                         |  |  |  |  |  |  |  |  |
| applicable  to common shares                                                   |  |  $                 | (0.38) |  |  $ | (0.85) |  |  $ | (0.78) |  |  $ | (1.27) |  |  $ | (1.83) |
| Income  from discontinued operations                                           |  | -                  |  | 0.95  |  | 2.71  |  | 1.55  |  | 3.07  |
| Net  (loss) income applicable to common shares                                 |  |  $                 | (0.38) |  |  $ | 0.10  |  |  $ | 1.93  |  |  $ | 0.28  |  |  $ | 1.24  |
|                                                                                |  |                         |  |  |  |  |  |  |  |  |
| Weighted  average number of common shares outstanding                          |  | 30,421             |  | 16,516  |  | 16,262  |  | 16,871  |  | 17,023  |
|                                                                                |  |                         |  |  |  |  |  |  |  |  |
| **Dividends declared per  common share**                                       |  |  $                 | 0.68  |  |  $ | 0.68  |  |  $ | 0.68  |  |  $ | 0.68  |  |  $ | 0.68  |

            

 

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|                                                      |  | 2010          |               | 2009          |         | 2008          |  | 2007          |               | 2006          |
|------------------------------------------------------|--|---------------|---------------|---------------|---------|---------------|--|---------------|---------------|---------------|
| **Cash flow data:**                                  |  |               |               |               |         |               |  |               |               |               |
| Cash flow provided by  operations                    |  |  $       | 33,511   |               |  $ | 31,300   |  |  $       | 24,665   |               |  $ | 28,962  |  |  $ | 17,912  |
| Cash flow (used for)  provided by investing activity |  | (283,432)     |               | 16,450   |         | 41,051   |  | (38,610)      |               | 73,935   |
| Cash flow provided by (used  for) financing activity |  | 250,691  |               | (47,701)      |         | (63,714)      |  | (18,813)      |               | (101,570)     |
|                                                      |  |               |               |               |         |               |  |               |               |               |
| **Balance Sheet Data at  December 31:**              |  |               |               |               |         |               |  |               |               |               |
| Real estate assets, net                              |  |  $       | 875,000  |               |  $ | 638,535  |  |  $       | 673,848  |               |  $ | 659,586  |  |  $ | 591,520  |
| Total assets                                         |  | 918,235  |               | 662,505  |         | 699,896  |  | 686,796  |               | 648,829  |
| Total debt                                           |  | 555,666  |               | 525,836  |         | 557,481  |  | 556,695  |               | 498,634  |
| Total shareholders' equity  attributable to AERC     |  | 316,184  |               | 99,440   |         | 105,621  |  | 89,786   |               | 112,051  |
|                                                      |  |               |               |               |         |               |  |               |               |               |
| **Other Data:**                                      |  |               |               |               |         |               |  |               |               |               |
| Property net operating  income (1) (5)               |  |  $       | 78,262   |               |  $ | 73,170   |  |  $       | 73,787   |               |  $ | 63,852  |  |  $ | 56,616  |
| Funds from operations (2)  (6)                       |  |  $       | 25,908   |               |  $ | 19,836   |  |  $       | 21,893   |               |  $ | 17,659  |  |  $ | 930  |
| Funds from operations as  adjusted (3) (6)           |  |  $       | 27,075   |               |  $ | 19,273   |  |  $       | 21,706   |               |  $ | 22,055  |  |  $ | 16,453  |
| Total properties (at end of  period)                 |  | 52       |               | 48       |         | 50       |  | 64       |               | 66       |
| Total multifamily units (at  end of period)          |  | 13,662   |               | 12,108   |         | 12,672   |  | 14,450   |               | 15,355   |
| Average monthly net  collected rent per unit         |  |  $       | 859      |               |  $ | 852      |  |  $       | 858      |               |  $ | 815  |  |  $ | 750  |
| Physical occupancy (4)                               |  | 94.8%         |               | 93.9%         |         | 93.0%         |  | 94.1%         |               | 94.5%         |

 
| (1)   | We consider property net operating income (“property NOI")  to be an important indicator of the overall performance of our property  portfolio because it reflects the operating performance of our property  portfolio and is used to assess regional property level performance.  Property  NOI is determined by deducting property operating and maintenance expenses  from property revenue.  Property 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 property 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 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.  See Note 6 below for those items  that are used to compute FFO as adjusted.  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 property NOI  to net (loss) income attributable to AERC:

  |
|------------|------------------------------------------------------------------------------------|

 
|                                                                |  | Year Ended December 31, |              |
|----------------------------------------------------------------|--|-------------------------|--------------|
| *(In thousands)*                                               |  | 2010                    |              | 2009 |  | 2008 |  | 2007 |  | 2006 |  |
|                                                                |  |                         |              |  |  |  |  |  |  |  |  |
| Property net operating  income                                 |  |  $                 | 78,262  |  |  $ | 73,170  |  |  $ | 73,787  |  |  $ | 63,852  |  |  $ | 56,616  |  |
| Fees, reimbursements and  other revenue                        |  | 817                |              | 1,287  |  | 1,784  |  | 10,990  |  | 11,689  |  |
| Construction and other  services revenue                       |  | 17,051             |              | 1,160  |  | 1,010  |  | 2,218  |  | 1,078  |  |
| Direct property management  and service company expense        |  | (745)                   |              | (1,107) |  | (1,624) |  | (12,863) |  | (12,695) |  |
| Construction and other  services expenses                      |  | (16,623)                |              | (1,745) |  | (1,338) |  | (2,164) |  | (1,367) |  |
| Depreciation and  amortization                                 |  | (39,639)                |              | (34,937) |  | (35,913) |  | (29,288) |  | (26,011) |  |
| General and administrative  expense                            |  | (15,684)                |              | (14,024) |  | (13,769) |  | (10,327) |  | (9,840) |  |
| Costs associated with  acquisitions                            |  | (599)                   |              | -  |  | -  |  | -  |  | -  |  |
| Interest income                                                |  | 34                 |              | 46  |  | 132  |  | 429  |  | 650  |  |
| Interest expense                                               |  | (31,704)                |              | (34,220) |  | (35,660) |  | (38,798) |  | (45,660) |  |
| Gain on insurance recoveries                                   |  | 245                |              | 665  |  | -  |  | -  |  | -  |  |
| Equity in net income (loss)  of joint ventures                 |  | -                  |              | -  |  | 1,502  |  | (258) |  | (462) |  |
| Income from discontinued  operations:                          |  |                         |              |  |  |  |  |  |  |  |  |
| Operating  income (loss)                                       |  | -                  |              | 568  |  | (433) |  | 5,563  |  | (1,009) |  |
| Gain  on disposition of properties                             |  | -                  |              | 15,400  |  | 45,202  |  | 20,864  |  | 54,093  |  |
| Income from discontinued  operations                           |  | -                  |              | 15,968  |  | 44,769  |  | 26,427  |  | 53,084  |  |
| Net (loss) income                                              |  | (8,585)                 |              | 6,263  |  | 34,680  |  | 10,218  |  | 27,082  |  |
| Net income attributable to  noncontrolling redeemable interest |  | (51)                    |              | (53) |  | (53) |  | (53) |  | (61) |  |
| Net (loss) income  attributable to AERC                        |  |  $                 | (8,636)      |  |  $ | 6,210  |  |  $ | 34,627  |  |  $ | 10,165  |  |  $ | 27,021  |  |
|                                                                |  |                         |              |  |  |  |  |  |  |  |  |

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

 
|                                                                         |  | Year Ended December 31, |
|-------------------------------------------------------------------------|--|-------------------------|
| *(In thousands, except per  share amounts)*                             |  | 2010                    |  | 2009 |  | 2008 |  | 2007 |  | 2006 |
|                                                                         |  |                         |  |  |  |  |  |  |  |  |
| Net (loss) income  attributable to AERC                                 |  |  $                 | (8,636) |  |  $ | 6,210  |  |  $ | 34,627  |  |  $ | 10,165  |  |  $ | 27,021  |
| Depreciation - real estate  assets                                      |  | 35,593             |  | 32,822  |  | 32,560  |  | 31,363  |  | 31,205  |
| Depreciation - real estate  assets - joint ventures                     |  | -                  |  | -  |  | 91  |  | 529  |  | 962  |
| Amortization of joint  venture deferred costs                           |  | -                  |  | -  |  | -  |  | 17  |  | 34  |
| Amortization of intangible  assets                                      |  | 2,219              |  | 1,068  |  | 3,929  |  | 1,545  |  | 847  |
| Preferred share dividends                                               |  | (2,030)                 |  | (4,199) |  | (4,655) |  | (4,924) |  | (5,046) |
| Preferred share  redemption/repurchase costs                            |  | (993)                   |  | -  |  | (143) |  | (58) |  | -  |
| Preferred share repurchase  discount/(premium)                          |  | -                  |  | -  |  | 2,289  |  | (114) |  | -  |
| Gain on disposition of joint  venture property                          |  | -                  |  | -  |  | (1,603) |  | -  |  | -  |
| Gain on insurance  recoveries/gain on disposition of properties         |  | (245)                   |  | (16,065) |  | (45,202) |  | (20,864) |  | (54,093) |
| Funds from operations                                                   |  | 25,908             |  | 19,836  |  | 21,893  |  | 17,659  |  | 930  |
|                                                                         |  |                         |  |  |  |  |  |  |  |  |
| Defeasance and other  prepayment costs                                  |  | -                  |  | -  |  | 1,959  |  | 4,224  |  | 15,523  |
| Preferred share repurchase  costs                                       |  | 993                |  | -  |  | 143  |  | 58  |  | -  |
| Preferred share repurchase  (discount)/premium                          |  | -                  |  | -  |  | (2,289) |  | 114  |  | -  |
| Trust preferred redemption costs                                        |  | 727                |  | -  |  | -  |  | -  |  | -  |
| Refund of defeasance costs  for previously defeased loans               |  | (553)                   |  | (563) |  | -  |  | -  |  | -  |
| Funds from operations as  adjusted                                      |  |  $                 | 27,075  |  |  $ | 19,273  |  |  $ | 21,706  |  |  $ | 22,055  |  |  $ | 16,453  |
|                                                                         |  |                         |  |  |  |  |  |  |  |  |
| Funds from operations per  common share - basic and diluted             |  |  $                 | 0.85  |  |  $ | 1.20  |  |  $ | 1.35  |  |  $ | 1.05  |  |  $ | 0.06  |
| Funds from operations as  adjusted per common share - basic and diluted |  |  $                 | 0.89  |  |  $ | 1.17  |  |  $ | 1.33  |  |  $ | 1.31  |  |  $ | 0.97  |
|                                                                         |  |                         |  |  |  |  |  |  |  |  |
| Weighted average shares outstanding  - basic and diluted                |  | 30,421             |  | 16,516  |  | 16,262  |  | 16,871  |  | 17,023  |

 

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

 The following discussion should beread in conjunction with the consolidated financial statements and notesthereto included in Part II, Item 8 of this report on Form 10-K.  Thisdiscussion may contain forward-looking statements based on current judgmentsand current knowledge of management, which are subject to certain risks, trendsand uncertainties that could cause actual results to vary from those projected,including but not limited to, expectations regarding our 2010 performance thatare based on certain assumptions.  Accordingly, readers are cautioned not toplace undue reliance on forward-looking statements which speak only as of thedate of the document.  These forward-looking statements are intended to becovered by the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  The words "expects," "projects,""believes," "plans," "anticipates" and similarexpressions are intended to identify forward-looking statements.  Investors arecautioned that these forward-looking statements involve risks and uncertainty thatcould cause actual results to differ from estimates or projections contained inthese forward-looking statements.  For a discussion of these risks anduncertainties, see "Risk Factors" in Item 1A of this report on Form10-K.

***Overview.***  We areengaged primarily in the ownership and operation of multifamily residentialunits.  Our subsidiary, Merit, is a general contractor that acts as ourin-house construction division and provides general contracting andconstruction management services to third parties.  Our two primary sources ofcash and revenue from operations are rents from the leasing of owned apartmentunits, which represented 88.4% of our consolidated revenue and constructionservices, which represented 11.1% of our consolidated revenue for the yearended December 31, 2010.

 The operating performance of ourproperties is affected by general economic trends including, but not limited to,factors such as household formation, job growth, unemployment rates, populationgrowth, immigration, the supply of new multifamily rental communities and incertain markets the supply of other housing alternatives, such as condominiums,single and multifamily rental homes and owner occupied single and multifamilyhomes.  Additionally, our performance may be affected by the access to, andcost of, debt and equity.

 Rental revenue collections are impactedby rental rates, occupancy levels and rent concessions.  We adjust our rentalrates and concessions in our continuing efforts to adapt to changing marketconditions and maximize rental revenue.  We continuously monitor physicaloccupancy and net collected rent per unit to track our success in maximizingrental revenue.  These indicators are more fully described in the Results ofOperations comparison.  Additionally, we consider property NOI and FFO to beimportant indicators of our overall performance.  Property NOI (propertyoperating revenue less property operating and maintenance expenses) is ameasure of the profitability of our properties and has the largest impact onour financial condition and operating results.  FFO is used in the real estateindustry as a supplemental measure of the operating performance of real estatecompanies because it excludes charges such as real estate depreciation that aregenerally considered not to be reflective of the actual value of real estateassets over time.  Additionally, gains and losses from the sale of most realestate assets and certain other items are also excluded from FFO.  See SelectedFinancial Data presented in Part II, Item 6 of this report on Form 10-K for reconciliationsof property NOI and FFO to consolidated net (loss) income in accordance with accountingprinciples generally accepted in the United States ("GAAP").

 

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 Our Same Community portfolio for theyears 2009 and 2010 consists of 48 properties containing 12,108 units andaccounted for 83.9% of total revenue in 2010 and 94.3% of our property NOI.  Oursame community portfolio includes our properties that we have owned andoperated for the entire two-year period ending December 31, 2010.  SameCommunity NOI increased 0.8% in 2010 compared to 2009 primarily as a result ofa $537,000 or 3.1% increase in NOI from our Southeast portfolio.  Our Midwestportfolio NOI increased $276,000 or 0.7% while our Mid-Atlantic portfolio NOIdeclined $218,000 or 1.6% in 2010.  

Effective in October 2009, Merit, ourwholly owned subsidiary, changed its concentration from a subcontractor andpainting company to a general contractor that acts as our in-house constructiondivision and also provides general contracting and construction managementservices to third parties.  Merit’s 2010 revenue and expenses, which representconstruction supervision for third parties and are recorded on the percentageof completion method, exceed Merit’s painting and subcontracting revenues and expensesrecorded during 2009.

The following table presents propertyNOI results for 2010 and 2009:
|                            |  | Year Ended December 31, |
|----------------------------|--|-------------------------|
|                            |  | 2010                    |  | 2009 |
| *(In thousands)*           |  | Property NOI            |  | Property NOI |
| Same Community Properties: |  |                         |  |  |
| Midwest                    |  |  $                 | 42,177  |  |  $ | 41,901  |
| Mid-Atlantic               |  | 13,749             |  | 13,967  |
| Southeast                  |  | 17,839             |  | 17,302  |
| Total Same Community       |  | 73,765             |  | 73,170  |
| Acquired Properties        |  | 4,336              |  | -  |
| Development                |  | 161                |  | -  |
| Total Property NOI         |  |  $                 | 78,262  |  |  $ | 73,170  |

 

 Our 2011earnings guidance anticipates the acquisition of approximately $50.0 million to$150.0 million of properties and the disposition of approximately zero to $50.0million of properties.  Additionally, Merit has commenced the development of a 242-unitproperty, which is held by a partnership in which we are a 90.0% partner.  Weanticipate that our development costs on this project for 2011 will beapproximately $25.0 million to $30.0 million.  We intend to continue toevaluate potential property acquisitions when our investment criteria warrants anacquisition.  We also may sell properties where market conditions are such thatthe reinvestment of cash proceeds derived from a sale are expected to provide,over time, a significantly greater return on equity, an increase in cash flowor further enhance our strategic objectives. We will continue to focus on theratio of our total debt and preferred stock to gross real estate assets which improvedto 45.9% at December 31, 2010 compared with 61.0% at December 31, 2009.  Wewill also continue to focus on the reduction of our overall weighted averageinterest rate on our borrowings, which improved to 5.5% at December 31, 2010 comparedwith 6.2% at December 31, 2009 and our fixed charge coverage ratio whichimproved to 1.85 times at December 31, 2010 from 1.53 times at December 31,2009.

   In order to maximize property NOI,we plan to continue to focus our efforts on improving revenue, controllingcosts and realizing operational efficiencies at the property level, bothregionally and portfolio-wide.  In 2011, at the midpoint of our guidance, weexpect Same Community NOI to increase 4.5%, driven by a 3.5% increase inproperty revenue and a 2.0% increase in property operating expenses compared to2010.  However, the uncertainties caused by economic and financial conditions complicateour ability to forecast future performance.  We believe that the apartmentindustry is better situated to weather a continuing recessionary environment ordelayed recovery than other real estate sectors because people will normallychoose shelter over discretionary spending such as going to the mall or hotelstays and because government sponsored agencies such as Fannie Mae and FreddieMac continue to provide attractive apartment financing, which may be unavailableto other commercial real estate sectors. However, our 2011 expectations may beadversely impacted if recessionary forces resume or if Congress curtails FannieMae or Freddie Mac financing support to the apartment industry.  Moreover,unless and until real job growth occurs in our markets, significant rentalgrowth may be limited.

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***Federal Income Taxes.*** We have elected to be taxed as a Real Estate Investment Trust("REIT") under Sections 856 through 860 of the Internal Revenue Codeof 1986, as amended, commencing with our taxable year ending December 31,1993.  REITs are subject to a number of organizational and operationalrequirements including a requirement that 90.0% of the income that wouldotherwise be considered as taxable income be distributed to shareholders.  Providingwe continue to qualify as a REIT, we will generally not be subject to federalincome tax on net income.  However, our two REIT subsidiaries are subject tofederal income tax.

 A REIT is precluded from owningmore than 10.0% of the outstanding voting securities of any one issuer, otherthan a wholly owned subsidiary or another REIT, and more than 10.0% of thevalue of all securities of any one issuer.  As an exception to thisprohibition, a REIT is allowed to own up to 100% of the securities of a TRS thatcan provide non-customary services to REIT tenants and others withoutdisqualifying the rents that a REIT receives from its tenants.  However, nomore than 25.0% of the value of a REIT's total assets can be represented bysecurities of one or more TRS's.  The amount of intercompany interest and otherexpenses between a TRS and a REIT are subject to arms length allocations.  Wehave elected TRS status for our two REIT subsidiaries.

***LIQUIDITYAND CAPITAL RESOURCES***

***Cash Flows and Liquidity.*** Significant sources and uses of cash in the past three years are summarized asfollows:

***Significant Cash Sources(Uses):***
|                                                                      | Year Ended December 31, |
|----------------------------------------------------------------------|-------------------------|
| *(In thousands)*                                                     | 2010                    |  | 2009 |  | 2008 |
|                                                                      |                         |  |  |  |  |
| Net cash provided by  operations                                     |  $                 | 33,511  |  |  $ | 31,300  |  |  $ | 24,665  |
| Fixed assets:                                                        |                         |  |  |  |  |
| Acquisitions  and development expenditures, net                      | (266,283)               |  | (4,526) |  | (34,604) |
| Net  property disposition proceeds                                   | -                  |  | 32,746  |  | 88,347  |
| Recurring,  revenue enhancing and non-recurring capital expenditures | (15,012)                |  | (12,629) |  | (12,692) |
| Debt:                                                                |                         |  |  |  |  |
| Decrease  in mortgage notes                                          | (24,390)                |  | (22,645) |  | (45,716) |
| Increase  (decrease) in revolving credit facility borrowings         | 80,000             |  | (9,000) |  | 1,500  |
| Redemption  of trust preferred securities                            | (25,780)                |  | -  |  | -  |
| Exercise of stock options                                            | 5,418              |  | 403  |  | 1,843  |
| Common share issuances                                               | 288,835            |  | -  |  | -  |
| Preferred share redemption                                           | (48,263)                |  | -  |  | -  |
| Cash dividends and operating  partnership distributions paid         | (21,902)                |  | (15,529) |  | (15,813) |
| Purchase of preferred and/or  treasury shares                        | (634)                   |  | (179) |  | (4,882) |
|                                                                      |                         |  |  |  |  |  |  |  |

* *

**Ourprimary sources of liquidity are cash flow provided by operations, short-termborrowings on the unsecured revolver, project specific loans and the sale ofdebt or equity securities.  Our debt repayment obligations are relativelymodest.  We had six mortgage loans totaling approximately $78.3 million that maturedin 2010.  We repaid five of the maturing loans and refinanced the other one.  In2011, we have seven mortgage loans that mature totaling approximately $53.5million.  On February 10, 2011 we prepaid three of these loans having anoutstanding balance of approximately $19.4 million.  It is our intention toprepay the balance of the other four loans on March 1, 2011.  The funding ofthe repayment of these loans will come from our unsecured revolver and/or othersecured or unsecured financings.

 In December 2009, we enteredinto a credit facility agreement with Wells Fargo Multifamily Corporation onbehalf of Freddie Mac.  Pursuant to the terms of the facility, we have thepotential to borrow up to $100.0 million over a two-year period withobligations being secured by nonrecourse, non cross-collateralized fixed orvariable rate mortgages having terms of five, seven or ten years.  In August2010, we used this facility to borrow $36.0 million at a fixed rate of 5.1% fora term of 10 years leaving $64.0 million of availability under this facility. 

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In October 2010, we entered intoan Amended and Restated Credit Agreement that among other things increased themaximum amount of borrowings under the revolver to $250.0 million, extends thematurity date to October 18, 2013 and provides for a one year extension option. The Credit Agreement also provides for an increase to the total facility to$300.0 million upon our request and the agreement of the lenders participatingin the facility.  At December 31, 2010 we had borrowings of $92.5 millionoutstanding under this facility.

 Our ability to access thecapital markets affords us additional liquidity as demonstrated by our sale of 23,575,000of our common shares in 2010 in three separate underwritten offers to thepublic markets.  The net proceeds from these offerings, which totaled approximately$288.8 million, were used to repay maturing debt, redeem all of our outstanding8.70% Class B Series II Cumulative Redeemable Preferred Shares, redeem all ofour Trust Preferred Securities, partially pay for three newly acquired operatingproperties, acquire a parcel of land that we are developing in a partnership,to repay borrowings on our unsecured revolver, and for general corporatepurposes.

Cash flow provided by operationsincreased slightly when comparing 2010 to 2009.  The increase was primarily dueto the increase in construction receivables net of the increase in constructionpayables and the increase in share-based compensation.  The increase inconstruction activity was due to our subsidiary, Merit, commencing severalconstruction projects during 2010.  Merit records its revenues and relatedexpenses based on the percentage of completion method and as such records receivablesand payables as part of the estimate of the amounts completed.  

 Cash flow provided by operationsincreased during 2009 compared to 2008 primarily due to changes in accountspayable and accrued expenses.  These changes were primarily the result of anincrease in the fair value of deferred compensation, the payment of real estatetaxes in 2008 related to the sale of 15 properties and the payment of other liabilitiesin 2008 related to funds held for managed properties and our exit from theaffordable housing management business.

***Shelf Availability.*** We have a shelf registration statement that became effective in June 2010. This registration statement relates to possible offerings, from time to time,of debt securities (including convertible debt), preferred shares, depositaryshares, common shares and common share warrants.  This registration statement willexpire in June 2013.  In January 2010, we issued $57.4 million of new commonshares under our prior registration statement that was dated May 2009 and wasscheduled to expire May 2012.  In May 2010, we issued $119.6 million of newcommon shares under our prior registration statement.  After these twoofferings the amount available had been reduced to $37.7 million.  Therefore,we decided to file a new registration statement, which increased theavailability to $500.0 million.  In October 2010 we issued $125.1 million of newcommon shares under this current registration statement.  Securities and/ordebt offerings up to $374.9 million are available under this shelf registrationstatement, after giving effect to the October 2010 common share offering. Additionally, effective August 4, 2010, we registered a continuous offeringprogram, where we can sell up to $25.0 million of our common shares in openmarket transactions at the then market price per share.  As of the date of thisfiling no shares have been sold under this program.

***Liquidity:* *NormalBusiness Operations.**** *We anticipate that we will meet our normalbusiness operations and liquidity requirements for the upcoming year generallythrough net cash provided by operations.  We believe that if net cash providedby operations is below projections, other sources, such as the unsecured revolver,secured and unsecured borrowings are or can be made available and should besufficient to meet our normal business operations and liquidity requirements.

***Liquidity: Non-Operational Activities.***  Sources of cash available for repayment ofdebt, any property acquisitions and funding other capital expenditures areexpected to be provided primarily by proceeds from the refinancing of debtborrowings, our unsecured revolver, the sale of properties, and possibly thesale of common shares.  The partnership in which we are a 90.0% partner, isdeveloping a 242-unit apartment project that is expected to be completed during2012.  We anticipate financing the construction costs through a constructionloan which the partnership has already obtained.

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***Long-TermContractual Obligations.***  The following table summarizes our long-termcontractual obligations at December 31, 2010, as defined by Item 303(a) 5 ofRegulation S-K of the Securities and Exchange Act of 1934.
|                          |  | Payments Due In |
|--------------------------|--|-----------------|
| *(In thousands)*         |  |                 |  |  |  |  |  |  |  | 2016 and |
| Contractual Obligations  |  | Total           |  | 2011 |  | 2012-2013 |  | 2014-2015 |  | Later Years |
|                          |  |                 |  |  |  |  |  |  |  |  |
| Debt payable - principal |  |  $         | 555,666  |  |  $ | 55,888  |  |  $ | 308,442  |  |  $ | 68,469  |  |  $ | 122,867  |
| Debt payable - interest  |  | 141,116    |  | 27,381  |  | 38,496  |  | 16,595  |  | 58,644  |
| Operating leases         |  | 163        |  | 111  |  | 35  |  | 5  |  | 12  |
| Purchase obligations     |  | 30,336     |  | 28,549  |  | 1,787  |  | -    |  | -  |
| Total                    |  |  $         | 727,281  |  |  $ | 111,929  |  |  $ | 348,760  |  |  $ | 85,069  |  |  $ | 181,523  |

 

***DebtPayable - Principal.***  Debt payable - principal includes principalpayments on all property specific mortgages and the unsecured revolving creditfacility based on amounts and terms of debt in existence at December 31, 2010. 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, 2010 and interest payments as required based upon the terms of thedebt in existence at December 31, 2010.  Interest related to floating rate debtincluded in the above table was calculated based on applicable rates as ofDecember 31, 2010.

***Operating Leases.*** We lease certain equipment and facilities under operating leases.  For detailedinformation about our lease obligations, see Note 7 of the Notes toConsolidated Financial Statements presented in Part II, Item 8 of this reporton Form 10-K.

***PurchaseObligations.***  Purchase obligations represent agreements to purchasegoods or services and contracts for the acquisition of properties that are legallybinding 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, 2010, orearlier.

***Dividends.*** On December 9, 2010, we declared a dividend of $0.17 per common share, whichwas paid on February 1, 2011, to shareholders of record on January 14, 2011. We anticipate that we will continue paying quarterly regular dividends in cash. 

***CapitalExpenditures.***  We anticipate incurring approximately $11.4 million incapital expenditures for 2011.  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.  We expect to use cash provided byoperating activities to pay for these expenditures.

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***Financing and Other Commitments.***  The following tableidentifies our total debt outstanding as of December 31, 2010 (dollar amountsin thousands):
|                                      | Balance           |               | Percentage |        | Weighted      |
|--------------------------------------|-------------------|---------------|------------|--------|---------------|
|                                      | Outstanding       |               | of         |        | Average       |
|                                      | December 31, 2010 |               | Total Debt |        | Interest Rate |
| **FIXED RATE DEBT**                  |                   |               |            |        |               |
| Mortgages payable - CMBS             | $                 | 98,212   |            | 17.7%  |               | 7.7% |
| Mortgages payable - other            | 330,648      |               | 59.5%      |        | 5.7%          |
| **Total  fixed rate debt**           | 428,860      |               | 77.2%      |        | 6.2%          |
|                                      |                   |               |            |        |               |
| **VARIABLE RATE DEBT**               |                   |               |            |        |               |
| Mortgages payable                    | 34,306       |               | 6.2%       |        | 4.7%          |
| Unsecured revolving credit  facility | 92,500       |               | 16.6%      |        | 2.7%          |
| **Total  variable rate debt**        | 126,806      |               | 22.8%      |        | 3.2%          |
| **TOTAL  DEBT**                      | $                 | 555,666  |            | 100.0% |               | 5.5% |

 

  The following table provides information on fixed rate mortgage loans repaidat par as well as loans obtained during 2010:
| *(Dollar amounts in  thousands)* |  | Loans Repaid |              |                     | Loans Obtained |
|----------------------------------|--|--------------|--------------|---------------------|----------------|
| Property                         |  | Amount       |              |  Interest Rate |                |  | Amount |  | Rate |  | Maturity |
|                                  |  |              |              |                     |                |  |  |  |  |  |  |
| Idlewylde                        |  |  $      | 42,000  |                     | 5.9%           |  |  |  $ | -  |  | N/A |  | N/A |
| Sterling Park                    |  | 2,910   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Kensington Grove                 |  | 3,172   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Spring Brook                     |  | 4,351   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Western Reserve                  |  | 4,835   |              | 7.9%                |                |  | -  |  | N/A |  | N/A |
| Riverside Station                |  | -       |              | N/A                 |                |  | 36,000  |  | 5.1% |  | September 2020 |
| Village at Avon                  |  | 21,000  |              | 4.7%                |                |  | 21,000  |  | 4.6% |  | December 2015 |
| Total / weighted average  rate   |  |  $      | 78,268  |                     | 6.0%           | (1) |  |  $ | 57,000  |  | 4.9% | (1) |  |

 
| (1) | Represents  weighted average interest rate for the loans listed. |
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On February 10, 2011, we prepaid three mortgage loans at par that werescheduled to mature on May 10, 2011 for a total of $19.4 million.  This leavesa balance of $34.1 million of mortgage loans that will mature in 2011.  Ourcurrent intention is to prepay these loans at par on March 1, 2011.   Fundingfor the prepayments of all seven of these loans have been and will be made fromborrowings under our unsecured revolver or other secured or unsecured financings.

 At December 31, 2010, we had 25 unencumbered properties.  Theseproperties had net income of $8.9 million for the year ended December 31, 2010,and a net book value of $410.8 million at December 31, 2010.

We lease certain equipment and facilities under operating leases. Future minimum lease payments under all non-cancellable-operating leases inwhich we are the lessee, are included in the previous table of contractualobligations.

 

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***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 and ownsand operates Windsor Pines, a 368-unit property in Pembroke Pines, Florida. Under the terms of the DownREIT Partnership Agreement, the DownREIT Partnershipis obligated to redeem OP units for our common shares or cash, at ourdiscretion, at a price per OP unit equal to the 20 day trailing price of ourcommon shares for the immediate 20 day period preceding a limited partner'sredemption notice.  As of December 31, 2010 there were 74,083 OP unitsremaining having a carrying value of $1.7 million, and 447,949 of the original522,032 OP units had been redeemed.  These transactions had the effect ofincreasing our interest in the DownREIT Partnership from 85.0% to 97.6%.  Foradditional information regarding the OP units, see Note 1 of the Notes to theConsolidated Financial Statements presented in Part II, Item 8 of this reporton Form 10-K.

***DevelopmentPartnership. ***On September 24, 2010, we entered into a partnershipagreement with Bristol Development Group, an unrelated third-party, for thedevelopment of Vista Germantown, a 242-unit apartment community located indowntown Nashville, Tennessee.  We contributed $9.4 million to the partnershipand hold a 90.0% equity interest.  We have determined that this entity is not avariable interest entity and that we hold a controlling financial interest inthe entity.  As such, this entity is included in our consolidated financialstatements.  We have also determined that the non-controlling interest in thisentity meets the criterion to be classified as a component of permanentequity.  The partnership has engaged Merit to act as general contractor in theconstruction of this property.  Construction commenced during the fourthquarter of 2010 and is anticipated to be completed in 2012.   We have arrangedfor a $23.4 million construction loan and have guaranteed the partnership'srepayment of the loan.  No amounts had been borrowed under the loan at December31, 2010.

***Acquisition andDevelopment Activities.***  On May 18, 2010, we acquired RiversideStation, a 304-unit apartment community located in Woodbridge, Virginia for apurchase price of approximately   $54 million.  We paid cash for thisacquisition, a portion of which was funded with proceeds from our May 12, 2010,equity offering.  We determined that the fair value of the property was thesame as the purchase price.  Subsequently, in August 2010 we obtained a $36.0million first mortgage loan which is secured by this property.

 On September 15, 2010, weacquired The Ashborough, a 504-unit apartment community located in Ashburn,Virginia for a purchase price of approximately $90 million.  We used cash on handand borrowings on our unsecured revolver to fund the acquisition.  Wedetermined that the fair value of the property was the same as the purchaseprice.  Subsequently, on October 1, 2010 we completed an equity offering, aportion of which was used to repay the borrowings on our unsecured revolver.

 On October 12, 2010, weacquired San Raphael Apartments, a 222-unit apartment community located inDallas, Texas for a purchase price of approximately $21 million.  We paid cashfor this acquisition, which was funded with proceeds from our October 1, 2010equity offering.  We determined that the fair value of the property was thesame as the purchase price.

 On December 14, 2010, weacquired Westwind Farms, a 464-unit apartment community located in Ashburn,Virginia for a purchase price of approximately $90 million.  We used cash onhand and borrowings on our unsecured revolver to fund the acquisition.  Wedetermined that the fair value of the property was the same as the purchaseprice. 

During the quarter endedJune 30, 2010, we completed the construction of a 60-unit expansion of our existing240-unit River Forest apartment community located in the Richmond, Virginiametropolitan market area.  Total cost of development was approximately $6.8million, which included $311,000 of capitalized interest.

 We intend to continue toevaluate land and property acquisitions.  Any future acquisitions ordevelopments would be financed with the most appropriate sources of capital,which may include the assumption of mortgage indebtedness, bank and otherinstitutional borrowings, the exchange of properties, undistributed earnings,secured or unsecured debt financings, or the issuance of shares or unitsexchangeable into common shares.

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***Dispositions.***  During 2010, we did not complete any salesof our properties, but we continue to evaluate our portfolio for possibledispositions.  

***Management and Service Operations.***  During2010 all remaining management contracts with third parties were terminated,both property and asset management contracts, and as such will no longer recordsuch fees. 

 General Contractor/Construction.  Oursubsidiary, Merit, is engaged as a general contractor and construction manager whichacts as our in-house construction division as well as provides generalcontracting and construction management services to third parties.  Meritintends to concentrate its efforts on rehabilitation and ground-up constructionprojects, primarily for multifamily housing projects.  During 2010 Merit workedon ten projects for third parties, five of which have been completed. Additionally, Merit completed the rehabilitation of one of our properties andis currently constructing a 242-unit property for a partnership in which we area 90.0% partner, as previously described.

***RESULTS OF OPERATIONS***

 In the following discussion of the comparison of the year ended December31, 2010 to the year ended December 31, 2009 and the year ended December 31, 2009to the year ended December 31, 2008, Same Community properties represent 48wholly owned properties that were owned during all of 2008, 2009 and 2010. Acquired/Development properties represent four properties acquired in 2010 anda 60-unit expansion of a Virginia property, which was completed in June 2010.

 The net loss from continuing operations decreased $1.1 million during 2010compared to 2009 primarily as a net result of an increase in total revenues of$23.3 million net of an increase of $21.8 in expenses during 2010.  The netloss from continuing operations decreased $384,000 in 2009 compared to 2008primarily as a net result of a $1.4 million decrease in interest expense and a$665,000 increase in insurance recoveries, net of a decrease in equity in netincome of joint ventures of $1.5 million primarily resulting from the  sale of ourjoint venture property in 2008.  

 The following chart is intended to reflect the amount and percentagechange in line items that are relevant to the changes in overall operatingperformance:
|                                                          |  | Increase (decrease) when comparing |
|----------------------------------------------------------|--|------------------------------------|
|                                                          |  |  the years ended December 31, |
| *(In thousands)*                                         |  | 2010 to 2009                       |  | 2009 to 2008 |
|                                                          |  |                                    |  |  |  |  |
| Property revenue                                         |  | $                                  | 7,875 | 6.2% |  | $ | 124  | 0.1% |
| Fees, reimbursements and  other                          |  | (470)                              | (36.5)% |  | (497) | (27.9)% |
| Construction revenue                                     |  | 15,891                        | 1369.9% |  | 150  | 14.9% |
| Property operating and  maintenance expense items:       |  |                                    |  |  |  |  |
| Personnel                                                |  | 1,162                         | 7.8% |  | 285  | 1.9% |
| Utilities                                                |  | 562                           | 7.9% |  | 312  | 4.6% |
| Depreciation and  amortization                           |  | 4,702                         | 13.5% |  | (976) | (2.7)% |
| Direct property management  and service company expenses |  | (362)                              | (32.7)% |  | (517) | (31.8)% |
| Construction expense                                     |  | 14,878                        | 852.6% |  | 407  | 30.4% |
| General and administrative                               |  | 1,660                         | 11.8% |  | 255  | 1.9% |
| Interest expense                                         |  | (2,516)                            | (7.4)% |  | (1,440) | (4.0)% |
| Gain on insurance recoveries                             |  | (420)                              | (63.2)% |  | 665  | 100% |
| Equity in net income (loss)  of joint ventures           |  | -                             | N/A |  | (1,502) | N/A |
| Income from discontinued  operations                     |  | (15,968)                           | (100.0)% |  | (28,801) | (64.3)% |
|                                                          |  |                                    |  |  |  |  |  |  |

 

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***Property Revenue. ***Property revenue is impacted by acombination of rental rates, rent concessions and occupancy levels, i.e., netcollected rent per unit.  Physical occupancy at the end of each period and netcollected rent per unit are presented in the following tables:
|                            |  | Physical Occupancy              |
|----------------------------|--|---------------------------------|
|                            |  | For the year ended December 31, |
|                            |  | 2010                            |  | 2009 |  | 2008 |
| Same Community Properties: |  |                                 |  |  |  |  |
| Midwest                    |  | 95.6%                           |  | 94.9% |  | 94.8% |
| Mid-Atlantic               |  | 95.1%                           |  | 94.9% |  | 92.2% |
| Southeast                  |  | 92.1%                           |  | 91.0% |  | 88.8% |
| Total Same Community       |  | 94.7%                           |  | 93.9% |  | 93.4% |
| Acquired Properties        |  | 95.6%                           |  | N/A |  | N/A |
| Development                |  | 93.3%                           |  | N/A |  | N/A |

 
|                            |  | Average Monthly Net Collected   |
|----------------------------|--|---------------------------------|
|                            |  | Rent Per Unit                   |
|                            |  | For the year ended December 31, |
|                            |  | 2010                            |  | 2009 |  | 2008 |
| Same Community Properties: |  |                                 |  |  |  |  |
| Midwest                    |  | $                               | 786  |  | $ | 783  |  | $ | 778  |
| Mid-Atlantic               |  | $                               | 1,163  |  | $ | 1,161  |  | $ | 1,222  |
| Southeast                  |  | $                               | 894  |  | $ | 876  |  | $ | 1,001  |
| Total Same Community       |  | $                               | 859  |  | $ | 852  |  | $ | 852  |
| Acquired Properties        |  | $                               | 1,291  |  | N/A |  | N/A |
| Development                |  | $                               | 688  |  | N/A |  | N/A |

 

Property revenue increasedin 2010 compared to 2009 primarily as a result of an increase of $6.9 millioncontributed by the acquired and development properties.  Property revenue forthe Same Community properties increased $1.0 million primarily due to anincrease in net rents (potential rent less concessions) and a decline in theamount of vacancy losses.  The majority of the improvement was in the Southeastportfolio.  Property revenues remained consistent when comparing 2009 to 2008.

***Fees, Reimbursements and Other.**** *The management andservice company revenues – fees, reimbursements and others declined $470,000when comparing 2010 to 2009.  Effective during 2010 our remaining property andasset management contracts were terminated.  Therefore, we will no longer bereporting management fee revenue.  The decline when comparing 2009 to 2008 wasdue to the termination of a large third party management contract during 2009.

***Property Operating and Maintenance Expenses.***  Propertyoperating and maintenance expenses increased $2.8 million when comparing 2010to 2009.  This increase was primarily due to property operating and maintenanceexpenses for the acquired/development properties being $2.4 million in 2010compared to zero for 2009. Property operating and maintenance expenses remainedrelatively flat for the Same Community properties in 2009 compared to 2008.

***Depreciation and Amortization.***  Depreciation andamortization expenses increased $4.7 million when comparing 2010 to 2009.  Thisincrease was primarily due to an increase of approximately $3.6 million indepreciation due to the acquisition/development properties and an increase of$1.1 million in amortization of intangible assets recorded in connection withthe acquired properties.  The intangible assets are being amortized over a 12to 16 month period. Depreciation and amortization expenses decreased in  2009 comparedto 2008 primarily as a result of the amortization of the intangible assetsrecorded in connection with the properties acquired in 2008 having theiramortization being completed amortized during 2009.

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***Direct Property Management and Service Company Expenses******.**** *Direct property management and service company expenses decreased in 2010compared to 2009 due to the termination of all property and asset managementcontracts and in 2009 compared to 2008 as a result of the reduction in thenumber of properties managed for third party owners.  

***Constructionand Other Services.***  Our subsidiary, Merit, is engaged as a generalcontractor and construction manager which acts as our in-house constructiondivision as well as provides general contracting and construction managementservices to third parties.  Merit intends to concentrate its efforts onrehabilitation and ground-up construction projects, primarily for multifamilyhousing projects.  During 2010 Merit worked on ten projects for third parties,five of which have been completed.  Additionally, Merit completed therehabilitation of one of our properties and is currently constructing a242-unit property for a partnership in which we are a 90.0% partner, asdescribed above.  Merit records revenue and related expenses on the percentageof completion method.  Also, in accordance with the rules of consolidation,revenue and related expenses for the rehabilitation project that Meritcompleted for us and the construction of the 242-unit project that Merit is currentlyworking on are eliminated in consolidation .  The revenue and expenses shownfor 2010 represent construction services for third parties, while the revenueand expenses shown for 2009 were from third party painting services that Meritprovided at that time but has since ceased providing.

***General and Administrative Expenses.***  General andadministrative expenses increased $1.7 million when comparing 2010 to 2009. This increase was primarily due to an increase in adjustments to variouspayroll and incentive compensation accruals, including a one-time charge ofapproximately $400,000 related to the resignation of our former Vice Presidentand General Counsel, net of a decline in directors’ deferred compensationexpense.  Prior to January 1, 2010, the fair value of the directors’ deferredcompensation was adjusted based upon the closing price of our common shares atthe end of each period.  Effective January 1, 2010 this plan was modified toprovide that all distributions under the plan will be in the form of our commonshares instead of cash.  As a result, the fair value of the deferredcompensation is no longer adjusted based upon the closing price of our commonshares.  There were no significant variances when comparing 2009 to 2008. 

***Interest Expense.***  Interest expense decreased$2.5 million when comparing 2010 to 2009.  The decrease was primarily due tomortgage loan interest expense declining $2.3 million due to a reduction inmortgage loans of $21.3 million during 2010.  Additionally, on June 30, 2010 weredeemed all of our 7.92% Trust Preferred Securities, which resulted in areduction in interest expense of $1.0 million.  In connection with the originalissuance of the Trust Preferred Securities we incurred issuance costs that wererecorded as other assets and subsequently charged to interest expense eachperiod over the life of the securities.  We recognized the remaining balance of$727,000 of issuance costs as a one-time non-cash charge to interest expense in2010. Additionally, the average interest rate dropped to 5.5% at December 31,2010 from 6.2% at December 31, 2009.  Interest expense decreased $1.4 million in2009 compared to 2008 primarily due to the receipt in the first quarter of 2009of refunds totaling $563,000 of defeasance costs in connection with certainpreviously defeased loans and decreased interest expense of $310,000 forborrowings on our revolver as well as a reduction in mortgage loans of $20.0million during 2009.  

***Gain on Insurance Recoveries.***  During 2010 we settled awind storm damage claim at one of our central Ohio properties for the aggregatesum of $245,000 which is net of our deductible.  During 2009, we settled a windstorm damage claim involving 13 of our central Ohio properties for the aggregatesum of $906,000, net of our deductible.  Also included in this category for2009 was a settlement of $271,000, net of our deductible in connection with aclubhouse fire at one of our Ohio properties.  The gain on insurance recoveriesrecorded in 2010 and 2009 represent insurance proceeds received or to bereceived in amounts greater than the depreciated carrying (book) value of theassets written off and costs incurred to make repairs (a total of zero in 2010and $512,000 in 2009).

***Equity in Net Income of Joint Ventures.***  On December 31,2008, the joint venture in which we were a 50.0% partner sold the AffordableHousing property that it owned.  Our proportionate share of the gain recognizedin 2008 was $1.6 million.

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***Income from Discontinued Operations.***  Included indiscontinued operations for the years ended December 31, 2009 and 2008, are theoperating results and the gains related to two wholly owned properties thatwere sold in 2009, and 15 wholly owned properties that were sold in 2008.  Theoperating loss from discontinued operations in 2008 was primarily due to costsincurred to defease loans that were secured by properties that were sold.  Therewere no discontinued operations in 2010 as we did not dispose of anyproperties.  For further details on "Income from discontinuedoperations," see Note 2 of the Notes to the Consolidated FinancialStatements presented in Part II, Item 8 of this report on Form 10-K.

***Preferred Share Repurchase Costs.***  On June 7, 2010, weredeemed all of our 8.70% Class B Series II Cumulative Redeemable Preferred Sharesat a cost of approximately $48.3 million, plus accrued and unpaid dividendsthrough the redemption date.  In connection with the issuance of the 8.70% ClassB Preferred Shares in December 2004, we incurred approximately $1.0 million inissuance costs and recorded such costs as a reduction to shareholders’ equity. We recognized the $1.0 million of issuance costs as a reduction in net earningsin computing our net (loss) income applicable to common shares for the yearended December 31, 2010.

***Discount on Preferred Share Repurchase.***  In 2008, werepurchased 278,000 of our preferred depositary shares, which each represent1/10th of a share of our 8.70% Class B Series II Cumulative RedeemablePreferred Shares.  The depositary shares have a recorded value of $25.00 pershare.  The average price that we paid per share for the 2008 repurchases was$16.77, and we therefore recognized a total discount of $2.3 million.

***Inflation.***  We believe that the effects of inflation onlyminimally impacts our operational performance because our leases are mostly for12 month terms, which allows us the opportunity to increase our new lease andlease renewal rents to account for inflationary price increases.  We arecareful to account for inflationary factors when entering into guaranteedmaximum price contracts for third party construction services; however, therecan be no assurance that inflation will not have a material adverse impact uponthe profitability of our construction services subsidiary in future periods. See Item 1A "Risk Factors."

**CriticalAccounting Estimates**

 Our consolidated financial statements include accounts of allsubsidiaries, the two REIT subsidiaries, the Operating Partnership structuredas a DownREIT and the joint venture partnership in which we are a 90.0%partner.  The preparation of the consolidated financial statements inconformity with GAAP requires us to make estimates and assumptions in certaincircumstances that affect amounts reported in the consolidated financialstatements and related notes.  In preparing these consolidated financialstatements, we have utilized information available including industry practiceand our own past history in forming estimates and judgments of certain amountsincluded in the consolidated financial statements, giving due consideration tomateriality.  It is possible that the ultimate outcome that we anticipated informulating the estimates inherent in these consolidated financial statementsmay not materialize.  As a result, actual results could differ from theseestimates.  In addition, other companies may utilize different estimates thatmay impact comparability of our results of operations to those of othercompanies in similar businesses.

The Company has identified five significant accounting policies ascritical accounting policies.  These critical accounting policies are thosethat have the most impact on the reporting of our financial condition and thoserequiring significant judgments and estimates.  With respect to these criticalaccounting policies, management believes that the application of judgments andestimates is consistently applied and produces financial information thatfairly presents the results of operations for all periods presented.  The fivecritical accounting policies are:

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***Construction Services. ***We account for general contractingand construction management services that we provide to third parties using thepercentage completion method.  Under this method, the amount of revenue andexpense to be recognized for each project that we are engaged in at the end ofeach reporting period is estimated based on the percentage of work completed onthat date.  The use of judgment and/or estimates is required in determining thepercentage of work completed, the expected total cost of a project in process,and in certain circumstances the total amount of revenue for a project inprocess.  If we had used different estimates, different amounts would have beenrecognized in revenue and expense which may have resulted in a material impactto our results of operations.  If actual costs or revenue differ fromestimates, it may require us to make a material adjustment to our results ofoperations.

***Impairment of Long-Lived Assets. ***We assess therecoverability of the carrying value of long-lived assets when an event ofimpairment has occurred.  In performing this analysis, we estimate holdingperiods of the assets, changes in fair market value of the assets and cashflows 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.

 We review goodwill annually and whenever there is an impairmentindicator.  In performing this analysis, we use a multiple of revenues to therange of potential alternatives and assign a probability to the variousalternatives we consider.  Should estimates used to determine the alternativesconsidered or the probabilities of the occurrence thereof change, impairmentmay result which could materially impact our results of operations.

***Share Based Compensation. ***We estimate the fair value of share-basedcompensation awarded.  We use the Black-Scholes option-pricing model toestimate the fair value of the stock options, and the Monte Carlo method toestimate the fair value of restricted share awards in which the number ofshares that will ultimately vest are subject to market conditions.  The use ofjudgment and/or estimates is required in determining certain of the assumptionsused by these valuation models, such as volatility of share prices andforfeitures of awards.  If we had used different judgment and/or estimates,different valuations would have been produced that may have resulted in amaterial change to our results of operations.  We also estimate futureperformance results related to certain share-based awards.  If the results varyfrom our estimate, it may require us to make a material adjustment to ourresults of operations.

***Real Estate Taxes. ***We estimate the amount of real estatetaxes for which we will be liable based upon assumptions relating to possiblechanges in millage rates and property value reassessments.  In most circumstances,the actual millage rates or reassessment values are not available until thefollowing reporting period and consequently these rates or values could differfrom assumptions and require material adjustments to the liabilities recorded.

***Acquisitions of Investment Properties. ***The Companyallocates the purchase price of properties to net tangible and identifiedintangible assets acquired based on their fair values.  In making estimates offair values for purposes of allocating purchase price, the Company utilizes anumber of sources, including independent appraisals that may be obtained inconnection with the acquisition or financing of the respective property, ourown analysis of recently acquired and existing comparable properties in ourportfolio and other market data.  The Company also considers informationobtained about each property as a result of its pre-acquisition due diligence,marketing and leasing activities in estimating the fair value of the tangibleand intangible assets acquired.

 

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**Quantitativeand Qualitative Disclosures About Market Risk**

***Interest Rate Risk.***  Based on our variable rate debtoutstanding at December 31, 2010, an interest rate change of 100 basis pointswould impact interest expense by approximately $1.3 million on an annual basis. Additionally, we have interest rate risk associated with fixed rate debt atmaturity.  We have managed, and will continue to manage, interest rate risk asfollows:  (i) maintain what we believe to be a conservative ratio of fixedrate, long-term debt to total debt such that variable rate exposure is kept at anacceptable level; (ii) consider hedges for certain long term variable and/orfixed rate debt through the use of interest rate swaps or interest rate caps;and (iii) consider the use of treasury locks where appropriate to hedge rateson anticipated debt transactions.  We use various financial models and advisorsto assist us in analyzing opportunities to achieve those objectives.  Foradditional information related to interest rate hedge agreements, see"Derivative Instruments and Hedging Activities" in Note 1 of the Notes to Consolidated FinancialStatements presented in Part II, Item 8 of this report on Form 10-K.  The table below provides information about our financial instrumentsthat are sensitive to change in interest rates.  For debt obligations, thetable below presents principal cash flows and related weighted average interestrates based on expected maturity dates.

|                                            | December 31, 2010 |              | December 31, 2009 |
|--------------------------------------------|-------------------|--------------|-------------------|
| *(Dollar amounts in  thousands)*           |                   |              |                   |  |  |  |  |  |  |  |  |  |  |  | Fair Market |  |  |  | Fair Market |
| **Long term debt**                         | 2011              |              | 2012              |  | 2013 |  | 2014 |  | 2015 |  | Thereafter |  | Total |  | Value |  | Total |  | Value |
| **Fixed:**                                 |                   |              |                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Fixed rate mortgage debt (1)               |  $           | 53,464  |                   |  $ | 80,749  |  |  $ | 132,209  |  |  $ | 44,538  |  |  $ | 21,000  |  |  $ | 96,900  |  |  $ | 428,860  |  |  $ | 444,022  |  |  $ | 478,485  |  |  $ | 470,393  |
| Weighted average interest  rate            | 7.6%              |              | 7.0%              |  | 6.1% |  | 5.6% |  | 4.6% |  | 5.7% |  | 6.2% |  |  |  |  |  |  |
| **Variable:**                              |                   |              |                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Variable rate mortgage debt                | -            |              | -            |  | -  |  | -  |  | -  |  | 34,306  |  | 34,306  |  | 36,302  |  | 34,851  |  | 37,360  |
| Weighted average interest  rate            | -            |              | -            |  | -  |  | -  |  | -  |  | 4.7% |  | 4.7% |  |  |  |  |  |  |
| LIBOR based revolving credit  facility (2) | -            |              | -            |  | 92,500  |  | -  |  | -  |  | -  |  | 92,500  |  | 89,866  |  | 12,500  |  | 12,309  |
| Total variable rate debt                   | -            |              | -            |  | 92,500  |  | -  |  | -  |  | 34,306  |  | 126,806  |  | 126,168  |  | 47,351  |  | 49,669  |
| Total long term debt                       |  $           | 53,464  |                   |  $ | 80,749  |  |  $ | 224,709  |  |  $ | 44,538  |  |  $ | 21,000  |  |  $ | 131,206  |  |  $ | 555,666  |  |  $ | 570,190  |  |  $ | 525,836  |  |  $ | 520,062  |

 

| (1) | As  of February 10, 2011, we had prepaid $19.4 million of maturing 2011 mortgage  debt at par.  We further intend to prepay the remaining $34.1 million maturing  2011 debt at par on March 1, 2011.                                                           |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Our  unsecured revolving credit facility had a weighted average interest rate of 2.7%  at December 31, 2010.  This facility has a three-year term with an initial  maturity in October 2013; however, there is a provision for a one-year  extension at our option. |

**CONTINGENCIES**

***Environmental.***  We have reviewed tangible long-livedassets and other agreements for associated asset retirement obligations("AROs") and have determined that we do not have any material AROsthat would require recognition as a liability or disclosure in our financialstatements at December 31, 2010.  Phase I environmental audits were obtained atthe time of the IPO, property acquisition or property refinancing, as the casemay be, on all of our wholly owned properties.

 Future claims for environmental liabilities are not measurable given theuncertainties surrounding whether there exists a basis for any such claims tobe asserted and, if so, whether any claims will, in fact, be asserted.

***Pending Litigation.***  For a discussion of pendinglitigation, see Note 7 of the Notes to Consolidated Financial Statementspresented in Part II, Item 8 of this report on Form 10-K.

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

 For a discussion of the Quantitative and Qualitative Disclosures aboutMarket Risk, see "Quantitative and Qualitative Disclosures about MarketRisk" in Item 7.

 

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

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

**Item 9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 None.

**Item9A.  Controls and Procedures**

***Disclosure Controls and Procedures.***  We evaluated thedesign and operation of our disclosure controls and procedures to determinewhether they are effective in ensuring that the disclosure of requiredinformation is made timely in accordance with the Securities Exchange Act of1934 ("Exchange Act") and the rules and forms of the Securities andExchange Commission.  This evaluation was made under the supervision and withthe participation of management, including our Chief Executive Officer("CEO") and Chief Financial Officer ("CFO") as of the endof the period covered by this annual report on Form 10-K.  The CEO and CFO haveconcluded, based on their review, that our disclosure controls and procedures,as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), are effective toensure that information required to be disclosed in reports that we file underthe Exchange Act is (i) recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules and forms,and (ii) accumulated and communicated to management, including the CEO and CFO,as appropriate, to allow timely decisions regarding disclosure.

***Management's Report on Internal Control Over Financial Reporting.*** We are responsible for establishing and maintaining adequate internal controlover financial reporting as defined in Exchange Act Rule 13a-15(f).  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, 2010.  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 report onForm 10-K.

***Changes in Internal Control over Financial Reporting.*** There were no changes in our internal control over financial reporting duringthe fourth quarter of 2010 that materially affected or are reasonably likely tomaterially affect our internal control over financial reporting.

 We believe that because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

**Item9B.  Other Information**

 None.

 

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**PARTIII**

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

 The information regarding our Directors, including information regardingour Audit Committee's financial expert, contained in the Notice of AnnualMeeting and Proxy Statement for the Annual Meeting of Shareholders to be heldon May 4, 2011, is incorporated by reference in this report on Form 10-K.  Suchinformation will be filed with the SEC no later than April 30, 2011.

 The information regarding executive officers and other key employees isset forth in Part I of this report on Form 10-K under the heading"Executive Officers of the Registrant and Other Key Employees."

 We adopted a formal Code of Ethics for Senior Financial Officers thatapplies to our Chief Executive Officer, Chief Financial Officer and Director ofFinancial Reporting.  The Code of Ethics is posted on our website, www.AssociatedEstates.com. Any future amendments to, or waivers from, the Code of Ethics that apply tothese individuals will be posted on the website also.  More informationconcerning our Code of Ethics for Senior Financial Officers as well as otherCorporate Governance Matters will be included in our Proxy Statement and isincorporated by reference in this report on Form 10-K.

**Item11.  Executive Compensation**

 The information on Executive Compensation contained in the Notice ofAnnual Meeting and Proxy Statement for the Annual Meeting of Shareholders to beheld on May 4, 2011, is incorporated by reference in this report on Form 10-K. Such information will be filed with the SEC no later than April 30, 2011.

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

 We have two compensation plans under which grants of options toemployees and directors can be made and both of these plans were approved byour shareholders.  The 2008 Equity Based Award Plan was approved by ourshareholders on May 7, 2008, and the Amended and Restated 2001 Equity-BasedAward Plan was approved by our shareholders on May 4, 2005.  For moreinformation regarding all of our plans, see Note 14 of the Notes toConsolidated Financial Statements presented in Part II, Item 8 of this reporton Form 10-K.

 The following table summarizes information about our common shares thatmay be issued upon exercise of options outstanding and the total number ofsecurities available for future issuance under all of the existing compensationplans as of December 31, 2010:
|                                |  |                        |  |                     |                     | 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  |  | 769,640           |  | $                   | 9.94                |                                | 352,111  |
| Equity compensation plans  not |  |                        |  |                     |                     |                                |
| approved  by security holders  |  | -                 |  | $                   | -    |                                | -  |
|                                |  | 769,640           |  |                     |                     | 352,111                   |

 

 

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 Additionally, the information on Security Ownership of CertainBeneficial Owners and Management contained in the Notice of Annual Meeting andProxy Statement for the Annual Meeting of Shareholders to be held on May 4, 2011,is incorporated by reference in this report on Form 10-K.  Such informationwill be filed with the SEC no later April 30, 2011.

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

 The information on Certain Relationships and Related Transactionscontained in the Notice of Annual Meeting and Proxy Statement for the AnnualMeeting of Shareholders to be held on May 4, 2011, is incorporated by referencein this report on Form 10-K.  Such information will be filed with the SEC nolater April 30, 2011.

**Item14. Principal Accountant Fees and Services**

 The information on Principal Accountant Fees and Services contained inthe Notice of Annual Meeting and Proxy Statement for the Annual Meeting ofShareholders to be held on May 4, 2011, is incorporated by reference in thisreport on Form 10-K.  Such information will be filed with the SEC no later thanApril 30, 2011.

 

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**PART IV**

** **

**Item 15.  Exhibits andFinancial Statement Schedules**

****The following documents are filed as part of this Report.
| 1.     | Consolidated Financial Statements:                                                                                                                                                                                                                                                    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                              |
|   | Report of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                              |
|   |                                                                                                                                                     |
|   | Consolidated Balance Sheets at December 31, 2010 and 2009.                                                                                                                                                                                                                            |
|   |                                                                                                                                                                    |
|   | Consolidated Statements of Operations for the years ended  December 31, 2010, 2009 and 2008.                                                                                                                                                                                          |
|   |                                                                                                                                                                         |
|   | Consolidated Statements of Shareholders’ Equity for the  years ended December 31, 2010, 2009 and 2008.                                                                                                                                                                           |
|   |                                                                                                                                                                         |
|   | Consolidated Statements of Cash Flows for the years ended  December 31, 2010, 2009 and 2008.                                                                                                                                                                                          |
|   |                                                                                                                                                                         |
|   | 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**

 Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on the 23th day ofFebruary, 2011.
| **ASSOCIATED ESTATES REALTY  CORPORATION**                                                     |
|------------------------------------------------------------------------------------------------|
| **               ** |
| By: /s/ Jeffrey I. Friedman                                                                    |
| Jeffrey I. Friedman, Chairman  of the Board and Chief                                          |
|   Executive Officer                                                                  |

 Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on the 23th day of February, 2011.
|               Signature              |                                    Title                                  |             Date           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                |
| /s/ Jeffrey I. Friedman                                                                                                        | Chairman of the Board and Chief  Executive                                                                                                                                                                                                                                                                                                                                                                               | February 23, 2011                                                                                                         |
| Jeffrey I. Friedman                                                                                                                                                    | Officer (Principal Executive  Officer)                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                            |                                                                                                                                |
| /s/ Lou Fatica                                                     | Chief Financial Officer  (Principal Financial                                                                                                                                                                                                                                                                                                                                                                            | February 23, 2011                                                                                                         |
| Lou Fatica                                                                                                                                                             | Officer and Principal  Accounting Officer)                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                |
| /s/ Albert T. Adams                                                                                        | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 23, 2011                                                                                                         |
| Albert T. Adams                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ James M. Delaney                                                                                                           | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 23, 2011                                                                                                         |
| James M. Delaney                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
| /s/ Michael E. Gibbons                                                                                                              | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 23, 2011                                                                                                         |
| Michael E. Gibbons                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ Mark L. Milstein                                                                                  | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 23, 2011                                                                                                         |
| Mark L. Milstein                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ James A. Schoff                                                                                             | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 23, 2011                                                                                                         |
| James A. Schoff                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |
| /s/ Richard T. Schwarz                                                                                                         | Director                                                                                                                                                                                                                                                                                                                                                                                                                 | February 23, 2011                                                                                                         |
| Richard T. Schwarz                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                |
|                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                |

 

 

 

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**INDEX TO EXHIBITS**

 
| ** **                           | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **Filed herewith or**                                                                          |
|--------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
| ** **                           | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **incorporated herein**                                                                        |
| **Number**                           | **                                                        Title                                                          ** | **by reference**                                                                               |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                           |
| 1.1                                  | Equity Distribution  Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Exhibit 1.1 to Form 8-K  filed August 10, 2010.                                                |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                           |
| 1.2                                  | Underwriting Agreement dated  September 28, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Exhibit 1.1 to Form 8-K  filed October 4, 2010.                                                |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                           |
| 3.1                                  | Second Amended and Restated  Articles of Incorporation, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 3.1 to Form 10-Q  filed August 3, 2010.                                                |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                           |
| 3.2                                  | 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 the Company and National City Bank, as Depositary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 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 the Company  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 the  Company 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 the  Company to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 4.5b to Form 10-K  filed March 15, 2000.                                               |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                           |
| 4.12                                 | Amended  and Restated Credit Agreement Dated October 18, 2010 among the Company, as  Borrower and PNC Bank, National Association as Administrative Agent and PNC Capital  Markets, LLC, as Co-Lead Arranger and Book Manager and Wells Fargo Bank,  N.A., as Syndication Agent and Wells Fargo Securities, LLC, as Co-Lead  Arranger and U.S. Bank National Association, as Documentation Agent and The  Several Lenders From Time To Time Parties Hereto, as Lenders.                                                                                                                                                                | Exhibit 4.12 to Form 10-Q  filed November 3, 2010.                                             |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                           |
| 4.13                                 | Credit  Agreement Dated April 24, 2007 among the Company, 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.Exhibit 4.5b to Form 10-K filed March 15, 2000. |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                           |
| 4.15                                 | First  Amendment to Credit Agreement dated March 20, 2008, by and among the Company  (as 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.                                                  |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                           |
| 4.16                                 | Agreement  regarding Master Financing Agreement dated December 22, 2009 by and between  Wells Fargo Bank, National Association and the Company and Master Financing  Agreement dated December 22, 2009 by and between Wells Fargo Bank, National  Association and Federal Home Loan Mortgage Corporation.                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 4.17 to Form 10-Q  filed May 4, 2010.                                                  |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                           |
|                                 | Certain  of the Company'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.                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                           |

 

|  37 |
|----------|

 

----

 

| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **Filed herewith or**                                                              |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **incorporated herein**                                                            |
| **Number** | **                                                        Title                                                          ** | **by reference**                                                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
| 10         | Associated  Estates Realty Corporation Directors' Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 10 to Form 10-K  filed February 25, 2010.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                               |
| 10.1       | Stock  Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended). |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                               |
| 10.2       | Amended  and Restated Employment Agreement between the Company and Jeffrey I.  Friedman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Exhibit 10.1 to Form 10-Q  filed May 13, 1996.                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                               |
| 10.2a      | Employment  Agreement between Associated Estates Realty Corporation and Martin A. Fishman  dated October 25, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Exhibit 10.1 to Form 8-K  filed October 25, 2010.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                               |
| 10.3       | Amended  and Restated 2001 Equity-Based Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Exhibit 10.4 to Form 10-K  filed March 29, 1995.                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                               |
| 10.3a      | Amendment  to Associated Estates Realty Corporation Amended and Restated Equity based  Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Exhibit 10.7a to Form 10-K  filed February 25, 2009.                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                               |
| 10.3b      | Form  of Equity Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Exhibit 10.11 to Form 10-Q  filed August 2, 2005.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
| 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.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                               |
| 10.8       | Associated  Estates Realty Corporation Supplemental Executive Retirement Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Exhibit 10.7b to Form 10-K                                                         |
|       | (Restated).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | filed February 25, 2009.                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                               |
| 10.9       | 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.                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                               |
| 10.12      | 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.                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                               |
| 21.1       | List  of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Exhibit 21.1 to Form 10-K  filed herewith.                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                               |
| 23.1       | Consent  of Independent Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Exhibit 23.1 to Form 10-K  filed herewith.                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                               |
| 31         | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 31 to Form 10-Q  filed herewith.                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |
| 31.1       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Exhibit 31.1 to Form 10-Q  filed herewith.                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                               |
| 32         | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Exhibit 32 to Form 10-Q  filed herewith.                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                               |

 

 

|  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, 2010 and  2009                                                                                                                                                                                                                    | F-3                                                                                       |
|                                                      |                                                                                      |
|    Consolidated Statements of Operations for the                                                                                                                                                                                                                                 |                                                                                      |
|       years ended December 31, 2010, 2009 and 2008                                                                                                                                                                                                                | F-4                                                                                       |
|                                                                                    |                                                                                      |
|    Consolidated Statements of Shareholders' Equity for the                                                                                                                                                                                                                       |                                                                                      |
|       years ended December 31, 2010, 2009 and 2008                                                                                                                                                                                                                | F-5                                                                                       |
|                                                 |                                                                                      |
|    Consolidated Statements of Cash Flows for the                                                                                                                                                                                                                                 |                                                                                      |
|       years ended December 31, 2010, 2009 and 2008                                                                                                                                                                                                                | 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, 2010                                                                                                                                                                                        | F-38                                                                                      |

** **

** **

 All other schedules are omitted because they are not applicable or therequired information is shown in the consolidated financial statements or notesthereto.

 

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

 

----

 

 

 

 

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

In our opinion, the consolidated financial statementslisted in the index appearing under Item 15(1) present fairly, in all materialrespects, the financial position of Associated Estates Realty Corporation andits subsidiaries at December 31, 2010 and December 31, 2009, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2010****in conformity with accounting principles generally acceptedin the United States of America.  Inaddition, in our opinion, the financial statement schedules listed in the indexappearing under Item 15(2) present fairly,in all material respects, the information set forth therein when read inconjunction with the related consolidated****financial statements.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2010, based on criteria established in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  TheCompany's management is responsible for these financial statements andfinancial statement schedules, for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in accompanying Item 9A.  Our responsibility is to express opinions on thesefinancial statements, on the financial statement schedules, and on theCompany's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects.  Our audits of the financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.  A company’s internal control overfinancial reporting includes those policies and procedures that(i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and(iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

** **

** **

/s/ PricewaterhouseCoopers LLP 

Cleveland, Ohio

February 23, 2011

 

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

 

----

 

 

 

 

 

**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED BALANCE SHEETS**
|                                                                                          | December 31,    |               | December 31,  |
|------------------------------------------------------------------------------------------|-----------------|---------------|---------------|
| *(In thousands, except  share amounts)*                                                  | 2010            |               | 2009          |
| **ASSETS**                                                                               |                 |               |               |
| Real estate assets                                                                       |                 |               |               |
| Land                                                                                     |  $         | 169,955  |               |  $ | 107,815  |
| Buildings  and improvements                                                              | 1,003,909  |               | 798,321  |
| Furniture  and fixtures                                                                  | 33,690     |               | 29,710   |
| Construction  in progress                                                                | 2,735      |               | 4,797    |
| Gross  real estate                                                                       | 1,210,289  |               | 940,643  |
| Less:   accumulated depreciation                                                    | (335,289)       |               | (302,108)     |
| Real  estate, net                                                                        | 875,000    |               | 638,535  |
| Cash and cash equivalents                                                                | 4,370      |               | 3,600    |
| Restricted cash                                                                          | 8,959      |               | 7,093    |
| Accounts and notes  receivable, net                                                      |                 |               |               |
| Rents                                                                                    | 1,238      |               | 1,115    |
| Construction                                                                             | 9,119      |               | -        |
| Other                                                                                    | 1,110      |               | 2,045    |
| Goodwill                                                                                 | 1,725      |               | 1,725    |
| Other assets, net                                                                        | 16,714     |               | 8,392    |
| **Total assets**                                                                         |  $         | 918,235  |               |  $ | 662,505  |
| **LIABILITIES AND EQUITY**                                                               |                 |               |               |
| Mortgage notes payable                                                                   |  $         | 463,166  |               |  $ | 487,556  |
| Unsecured revolving credit  facility                                                     | 92,500     |               | 12,500   |
| Unsecured debt                                                                           | -          |               | 25,780   |
| Total  debt                                                                              | 555,666    |               | 525,836  |
| Accounts payable, accrued  expenses and other liabilities                                | 30,545     |               | 27,307   |
| Dividends payable                                                                        | 7,242      |               | 2,849    |
| Resident security deposits                                                               | 3,256      |               | 2,956    |
| Accrued interest                                                                         | 2,568      |               | 2,288    |
| **Total liabilities**                                                                    | 599,277    |               | 561,236  |
| Noncontrolling redeemable  interest                                                      | 1,734      |               | 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                                                                    | -          |               | 48,263   |
| Common  shares, without par value, $.10 stated value; 91,000,000                         |                 |               |               |
| authorized,  46,570,763 issued and 41,380,205 outstanding at                             |                 |               |               |
| December  31, 2010 and 41,000,000 authorized, 22,995,763 issued                          |                 |               |               |
| and  16,675,826 outstanding at December 31, 2009                                         | 4,657      |               | 2,300    |
| Paid-in  capital                                                                         | 574,994    |               | 283,090  |
| Accumulated  distributions in excess of accumulated net income                           | (205,021)       |               | (168,822)     |
| Accumulated  other comprehensive loss                                                    | -          |               | (1,420)       |
| Less:   Treasury shares, at cost, 5,190,558 and 6,319,937 shares                    |                 |               |               |
| at  December 31, 2010 and December 31, 2009, respectively                                | (58,446)        |               | (63,971)      |
| **Total shareholders' equity attributable to AERC**                                      | 316,184    |               | 99,440   |
| Noncontrolling  interest                                                                 | 1,040      |               | -        |
| **Total equity**                                                                         | 317,224    |               | 99,440   |
| **Total liabilities and equity**                                                         |  $         | 918,235  |               |  $ | 662,505  |
|                                                                                          |                 |               |               |
| 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)*                                              |  | 2010                    |  | 2009 |  | 2008 |
| **REVENUE**                                                                              |  |                         |  |  |  |  |
| Property revenue                                                                         |  |  $                 | 135,847  |  |  $ | 127,972  |  |  $ | 127,848  |
| Management and service  company revenue:                                                 |  |                         |  |  |  |  |
| Fees,  reimbursements and other                                                          |  | 817                |  | 1,287  |  | 1,784  |
| Construction  and other services                                                         |  | 17,051             |  | 1,160  |  | 1,010  |
| Total  revenue                                                                           |  | 153,715            |  | 130,419  |  | 130,642  |
| **EXPENSES**                                                                             |  |                         |  |  |  |  |
| Property operating and  maintenance                                                      |  | 57,585             |  | 54,802  |  | 54,061  |
| Depreciation and  amortization                                                           |  | 39,639             |  | 34,937  |  | 35,913  |
| Direct property management  and service company expense                                  |  | 745                |  | 1,107  |  | 1,624  |
| Construction and other  services                                                         |  | 16,623             |  | 1,745  |  | 1,338  |
| General and administrative                                                               |  | 15,684             |  | 14,024  |  | 13,769  |
| Costs associated with  acquisitions                                                      |  | 599                |  | -  |  | -  |
| Total  expenses                                                                          |  | 130,875            |  | 106,615  |  | 106,705  |
| Operating income                                                                         |  | 22,840             |  | 23,804  |  | 23,937  |
| Interest income                                                                          |  | 34                 |  | 46  |  | 132  |
| Interest expense                                                                         |  | (31,704)                |  | (34,220) |  | (35,660) |
| (Loss) income before gain on  insurance recoveries,                                      |  |                         |  |  |  |  |
| equity  in income of joint venture, and income                                           |  |                         |  |  |  |  |
| from  discontinued operations                                                            |  | (8,830)                 |  | (10,370) |  | (11,591) |
| Gain on insurance recoveries                                                             |  | 245                |  | 665  |  | -  |
| Equity in net income of  joint venture                                                   |  | -                  |  | -  |  | 1,502  |
| (Loss) income from  continuing operations                                                |  | (8,585)                 |  | (9,705) |  | (10,089) |
| Income from discontinued  operations:                                                    |  |                         |  |  |  |  |
| Operating  income (loss)                                                                 |  | -                  |  | 568  |  | (433) |
| Gain  on disposition of properties                                                       |  | -                  |  | 15,400  |  | 45,202  |
| Income from discontinued  operations                                                     |  | -                  |  | 15,968  |  | 44,769  |
| **Net (loss) income**                                                                    |  | (8,585)                 |  | 6,263  |  | 34,680  |
| Net  income attributable to noncontrolling redeemable interest                           |  | (51)                    |  | (53) |  | (53) |
| **Net (loss) income  attributable to AERC**                                              |  | (8,636)                 |  | 6,210  |  | 34,627  |
| Preferred share dividends                                                                |  | (2,030)                 |  | (4,199) |  | (4,655) |
| Preferred share repurchase  costs                                                        |  | (993)                   |  | -  |  | (143) |
| Discount on preferred share  repurchase                                                  |  | -                  |  | -  |  | 2,289  |
| Allocation to participating  securities                                                  |  | -                  |  | (423) |  | (730) |
| **Net (loss) income  applicable to common shares**                                       |  |  $                 | (11,659) |  |  $ | 1,588  |  |  $ | 31,388  |
|                                                                                          |  |                         |  |  |  |  |
| **Earnings per common share  - basic and diluted:**                                      |  |                         |  |  |  |  |
| (Loss) income from  continuing operations                                                |  |                         |  |  |  |  |
| applicable  to common shares                                                             |  |  $                 | (0.38) |  |  $ | (0.85) |  |  $ | (0.78) |
| Income from discontinued  operations                                           |  | -        |  | 0.95  |  | 2.71  |
| Net (loss) income applicable  to common shares                                      |  |  $                 | (0.38) |  |  $ | 0.10  |  |  $ | 1.93  |
|                                                                                          |  |                         |  |  |  |  |
| Weighted average shares  outstanding - basic and diluted                                 |  | 30,421             |  | 16,516  |  | 16,262  |
|                                                                                          |  |                         |  |  |  |  |
| 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)*                                                     | 2010                    |  | 2009 |  | 2008 |
| **Common shares outstanding**                                                            |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | 16,675,826         |  | 16,556,221  |  | 16,353,700  |
| Issuance of common shares                                                                | 23,575,000         |  | -  |  | -  |
| Shares purchased                                                                         | (51,424)                |  | (33,515) |  | (21,003) |
| Shares issued from treasury  for stock option exercises                                  | 615,724            |  | 47,500  |  | 180,021  |
| Restricted share activity,  net                                                          | 565,079            |  | 105,620  |  | 43,503  |
| Balance outstanding at end  of period                                                    | 41,380,205         |  | 16,675,826  |  | 16,556,221  |
| **Preferred shares  outstanding**                                                        |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | 193,050            |  | 193,050  |  | 220,850  |
| Purchase and retirement of  Class B Series II Cumulative Redeemable Preferred Shares     | (193,050)               |  | -  |  | (27,800) |
| Balance outstanding at end  of period                                                    | -                  |  | 193,050  |  | 193,050  |
| **Noncontrolling redeemable  interest**                                                  |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              |  $                 | 1,829  |  |  $ | 1,829  |  |  $ | 1,829  |
| Redemption of operating  partnership units                                               | (95)                    |  |  $ | -  |  |  $ | -  |
| Balance outstanding at end  of period                                                    |  $                 | 1,734  |  |  $ | 1,829  |  |  $ | 1,829  |
| **Preferred shares**                                                                     |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              |  $                 | 48,263  |  |  $ | 48,263  |  |  $ | 55,213  |
| Purchase and retirement of  Class B Series II Cumulative Redeemable Preferred Shares     | (48,263)                |  | -  |  | (6,950) |
| Balance outstanding at end  of period                                                    | -                  |  | 48,263  |  | 48,263  |
| **Common shares (at $.10  stated value)**                                                |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | 2,300              |  | 2,300  |  | 2,300  |
| Issuance of common shares                                                                | 2,357              |  | -  |  | -  |
| Balance outstanding at end  of period                                                    | 4,657              |  | 2,300  |  | 2,300  |
| **Paid-in capital**                                                                      |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | 283,090            |  | 282,501  |  | 281,152  |
| Share based compensation                                                                 | 1,936              |  | 538  |  | 1,294  |
| Reclassification of deferred  directors' compensation                                    | 2,233              |  | -  |  | -  |
| Shares issued from treasury  for stock option exercises                                  | 414                |  | 51  |  | (88) |
| Issuance of common shares                                                                | 286,328            |  | -  |  | -  |
| Purchase and retirement of  Class B Series II Cumulative Redeemable Preferred Shares     | 993                |  | -  |  | 143  |
| Balance outstanding at end  of period                                                    | 574,994            |  | 283,090  |  | 282,501  |
| **Accumulated distributions  in excess of accumulated net income**                       |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | (168,822)               |  | (159,595) |  | (180,436) |
| Net (loss) income                                                                        | (8,585)                 |  | 6,263  |  | 34,680  |
| Net income attributable to  noncontrolling redeemable interest                           | (51)                    |  | (53) |  | (53) |
| Share based compensation                                                                 | 9                  |  | 6  |  | 8  |
| Purchase and retirement of  Class B Series II Cumulative Redeemable Preferred Shares     | (993)                   |  | -  |  | 2,146  |
| Common share dividends  declared                                                         | (24,549)                |  | (11,244) |  | (11,285) |
| Preferred share dividends  declared                                                      | (2,030)                 |  | (4,199) |  | (4,655) |
| Balance outstanding at end  of period                                                    | (205,021)               |  | (168,822) |  | (159,595) |
| **Accumulated other  comprehensive loss**                                                |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | (1,420)                 |  | (2,899) |  | (1,050) |
| Change in fair value of  hedge instruments                                               | 1,420              |  | 1,479  |  | (1,849) |
| Balance outstanding at end  of period                                                    | -                  |  | (1,420) |  | (2,899) |
| **Treasury shares (at cost)**                                                            |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | (63,971)                |  | (64,949) |  | (67,393) |
| Purchase of common shares                                                                | (634)                   |  | (179) |  | (221) |
| Share based compensation                                                                 | 1,155              |  | 807  |  | 734  |
| Shares issued from treasury  for stock option exercises                                  | 5,004              |  | 350  |  | 1,931  |
| Balance outstanding at end  of period                                                    | (58,446)                |  | (63,971) |  | (64,949) |
| **Noncontrolling interest**                                                              |                         |  |  |  |  |
| Balance outstanding at  beginning of period                                              | -                  |  | -  |  | -  |
| Noncontrolling interest                                                                  | 1,040              |  | -  |  | -  |
| Balance outstanding at end  of period                                                    | 1,040              |  | -  |  | -  |
| **Total shareholders'  equity**                                                          |  $                 | 317,224  |  |  $ | 99,440  |  |  $ | 105,621  |
|                                                                                          |                         |  |  |  |  |
| 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)*                                                                         | 2010                    |  | 2009 |  | 2008 |
| **Cash flow from operating  activities:**                                                |                         |  |  |  |  |
| Net  (loss) income                                                                       |  $                 | (8,585) |  |  $ | 6,263  |  |  $ | 34,680  |
| Adjustments  to reconcile net income to net cash provided by operating activities:       |                         |  |  |  |  |
| Depreciation  and amortization (including discontinued operations)                       | 39,639             |  | 35,412  |  | 37,867  |
| Loss  on fixed asset replacements write-off                                              | 69                 |  | 60  |  | 288  |
| Gain  on disposition of properties                                                       | -                  |  | (15,400) |  | (45,202) |
| Gain  on insurance recoveries                                                            | (245)                   |  | (665) |  | -  |
| Amortization  of deferred financing costs and other, net                                 | 1,415              |  | 1,225  |  | 1,295  |
| Write-off  of unamortized debt procurement costs                                         | 727                |  | -  |  | -  |
| Share-based  compensation                                                                | 3,069              |  | 1,952  |  | 1,893  |
| Equity  in net income of joint venture                                                   | -                  |  | -  |  | (1,502) |
| Net  change in assets and liabilities:                                                   |                         |  |  |  |  |
| Accounts  and notes receivable - construction                                            | (9,119)                 |  | -  |  | -  |
| Accounts  and notes receivable - other                                                   | 705                |  | 613  |  | 210  |
| Accounts  payable and accrued expenses - construction                                    | 5,500              |  | -  |  | -  |
| Accounts  payable and accrued expenses - other                                           | 686                |  | 2,292  |  | (3,982) |
| Other  operating assets and liabilities                                                  | (350)                   |  | (452) |  | (882) |
| Total  adjustments                                                                       | 42,096             |  | 25,037  |  | (10,015) |
| Net  cash flow provided by operations                                                    | 33,511             |  | 31,300  |  | 24,665  |
| **Cash flow from investing  activities:**                                                |                         |  |  |  |  |
| Recurring  fixed asset additions                                                         | (7,067)                 |  | (7,807) |  | (8,873) |
| Revenue  enhancing/non-recurring fixed asset additions                                   | (7,945)                 |  | (4,822) |  | (3,819) |
| Net  proceeds from disposition of operating properties                                   | -                  |  | 32,746  |  | 88,347  |
| Acquisition  fixed asset additions                                                       | (266,283)               |  | (4,526) |  | (34,604) |
| Other  investing activity                                                                | (2,137)                 |  | 859  |  | -  |
| Net  cash flow (used for) provided by investing activities                               | (283,432)               |  | 16,450  |  | 41,051  |
| **Cash flow from financing  activities:**                                                |                         |  |  |  |  |
| Principal  payments on mortgage notes payable                                            | (3,122)                 |  | (2,999) |  | (2,865) |
| Repayments  of mortgage notes payable                                                    | (78,268)                |  | (72,096) |  | (42,851) |
| Payment  of debt procurement costs                                                       | (3,875)                 |  | (751) |  | (646) |
| Proceeds  from mortgage notes obtained                                                   | 57,000             |  | 52,450  |  | -  |
| Revolver  borrowings                                                                     | 288,950            |  | 141,350  |  | 149,175  |
| Revolver  repayments                                                                     | (208,950)               |  | (150,350) |  | (147,675) |
| Principal  repayments of unsecured trust preferred securities                            | (25,780)                |  |  |  |  |
| Common  share dividends paid                                                             | (19,821)                |  | (11,277) |  | (11,105) |
| Preferred  share dividends paid                                                          | (2,030)                 |  | (4,199) |  | (4,655) |
| Operating  partnership distributions paid                                                | (51)                    |  | (53) |  | (53) |
| Purchase  of operating partnership units                                                 | (59)                    |  | -  |  | -  |
| Exercise  of stock options                                                               | 5,418              |  | 403  |  | 1,843  |
| Issuance  of common shares                                                               | 288,835            |  | -  |  | -  |
| Purchase  of preferred and/or treasury shares                                            | (634)                   |  | (179) |  | (4,882) |
| Redemption  of preferred shares                                                          | (48,263)                |  | -  |  | -  |
| Noncontrolling  interest investment in partnership                                       | 1,040              |  | -  |  | -  |
| Other  financing activities, net                                                         | 301                |  | -  |  | -  |
| Net  cash flow provided by (used for) financing activities                               | 250,691            |  | (47,701) |  | (63,714) |
| Increase in cash and cash  equivalents                                                   | 770                |  | 49  |  | 2,002  |
| Cash and cash equivalents,  beginning of period                                          | 3,600              |  | 3,551  |  | 1,549  |
| **Cash and cash  equivalents, end of period**                                            |  $                 | 4,370  |  |  $ | 3,600  |  |  $ | 3,551  |
|                                                                                          |                         |  |  |  |  |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 

** **

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

 

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**ASSOCIATEDESTATES REALTY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.           BASIS OFPRESENTATION AND ACCOUNTING POLICIES**

**Business**

 We are a fully-integrated, self-administered and self-managed equityreal estate investment trust ("REIT") specializing in multifamily propertymanagement, development, acquisition, disposition, construction, operation andownership activities involving multifamily residential real estate.  Ourprimary source of income is rental revenue.  Additional income is derived fromconstruction services. We own a taxable REIT subsidiary that performsconstruction services for our own account and for third parties.  During 2010,a second taxable REIT subsidiary completed its final asset management servicecontract for a third party owner.  As of December 31, 2010, our operating portfolioconsisted of 52 apartment communities containing 13,622 units in eight statesthat are owned, either directly or indirectly through subsidiaries.

**Principlesof Consolidation**

 The accompanying consolidated financial statements include the accountsof all subsidiaries and qualified REIT subsidiaries, the two taxable REITsubsidiaries (which are taxed as Taxable REIT Subsidiaries ("TRS")under the REIT Modernization Act ("RMA") implemented in 1999), anOperating Partnership structured as a DownREIT in which we own an aggregate 97.6%equity interest as of December 31, 2010 and 2009 and a partnership in which weare a 90.0% partner.  

  Limited partnership interests held by others in the Operating Partnershipwe control is reflected as "Noncontrolling redeemable interest" inthe Consolidated Balance Sheets and the partnership in which we are a 90.0%partner is reflected as “Noncontrolling 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 and the partnership agreement.  The DownREITstructure enabled us to acquire multifamily real estate assets in an operatingpartnership entity that is separate from other properties that we own.  In theDownREIT structure, the limited partners originally contributed two real estateassets to the operating partnership and, in return, received partnership unitsentitling them to a share of the profits, based on the number of operatingpartnership units.  One of the properties was sold in October 2005.  Theoperating partnership units entitle the holders to exchange their partnershipunits at some future time for common shares or to redeem partnership units forcash (at our option).  We are the DownREIT general partner.  All significantintercompany balances and transactions 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 our propertieson an individual basis.  Our multifamily properties provided approximately 88.4%of our consolidated revenue for 2010.  Our subsidiary, Merit, is a generalcontractor that acts as our in-house construction division and provides generalcontracting and construction management services to third parties.  For 2010construction services provided approximately 11.1% of our consolidatedrevenue.  As a result, we have determined that as of December 31, 2010 we havetwo reportable segments, which are multifamily properties and construction andother services.

**Use ofEstimates**

 The preparation of the consolidated financial statements in accordancewith accounting 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**

 Highly liquid investments with an original maturity of three months orless when purchased are considered to be cash equivalents.

**RealEstate and Depreciation**

 Real estate assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated usefullives of the assets 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.

 We capitalize interest costs on funds used in construction, real estatetaxes and insurance from the commencement of development activity through thetime the property is ready for leasing.

 We discontinue the depreciation of assets that we have specificallyidentified as held for sale.  There were no properties classified as held forsale at December 31, 2010 and 2009, respectively.

**Classificationof Fixed Asset Additions**

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

 

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

 

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**Impairmentof Long-Lived Assets**

 We evaluate the recoverability of the carrying value of our held forsale investment real estate assets when a triggering event occurs.  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.  Real estateassets held for investment are not considered impaired if the undiscounted,estimated future cash flows of the asset (both the annual estimated cash flowfrom future operations and the estimated cash flow from the theoretical sale ofthe asset) over its estimated holding period are in excess of the asset's netbook value at the balance sheet date.  If any real estate asset held forinvestment is considered impaired, a loss is recorded to reduce the carryingvalue of the asset to its fair value.  

We periodically classify real estate assets as held for sale.  See Note 2for a discussion of our policy regarding classification of a property as heldfor sale.  Upon the classification of a real estate asset as held for sale, thecarrying value of the asset is reduced to the lower of its net book value orits fair value, less costs to sell.  Subsequent to the classification of assetsas held for sale, no further depreciation expense is recorded.  No impairmentswere recorded for the years ended December 31, 2010, 2009 and 2008.

**DeferredFinancing Costs**

****Costs incurred in obtaining long-term financing are deferred andamortized over the life of the associated instrument using the effectiveinterest method.

**IntangibleAssets and Goodwill**

 Intangible assets not subject to amortization and goodwill are testedfor 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 property leases are for terms of generally one year orless.  Rental income is recognized on the straight-line basis.  

 Rent concessions, including free rent, incurred in connection withresidential property leases, are capitalized and amortized on a straight-linebasis over the terms of the related leases (generally one year) and are chargedas a reduction of rental revenue.

**PropertyManagement Revenue Recognition**

 Acquisition, management and disposition fees and other fees arerecognized when the related services are performed and the earnings process iscomplete.

****We are reimbursed for expenses incurred in connection with themanagement of properties for third parties.  We are the primary obligor for theseexpenses, which are primarily salaries and benefits relating to employees atthese properties, and therefore we record these reimbursements as managementand service company revenue (included in "Fees, reimbursements andother") and as expenses (included in "Direct property management andservice company expense").  For the years ended December 31, 2010, 2009and 2008, the reimbursements shown as revenue were equivalent to the expenses,which were $442,000, $663,000 and $1.1 million, respectively.

During 2010, all remaining management contracts with third parties wereterminated, both property and asset management contracts, and as such, will nolonger record such fees. 

** **

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

 

----

 

 

 

 

 

**AdvertisingCosts**

 We recognize advertising costs as expense when incurred.  The totalamount charged to advertising expense for the years ended December 31, 2010, 2009and 2008, were $1.5 million, $1.6 million and $1.7 million, respectively.  Therewere no advertising costs reported as assets for the years ended December 31,2010 and 2009.

**Share-BasedCompensation**

 We account for share based compensation using the fair value method torecognized compensation cost.  See Note 14 for information about share-basedcompensation and our equity based award plans.

**NoncontrollingRedeemable Interest**

 In 1998, in conjunction with the acquisition of an operating partnershipthat owned 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, 2010,all units presented to date for redemption had been redeemed for cash.  Therewere 4,252 units redeemed for a total of $59,000 during 2010.  There were 74,083OP units remaining as of December 31, 2010.

**NoncontrollingInterest**

 On September24, 2010, we entered into a partnership agreement with Bristol DevelopmentGroup, an unrelated third-party for the development of Vista Germantown, a242-unit apartment community located in downtown Nashville, Tennessee.  Wecontributed $9.4 million to the partnership and hold a 90.0% equity interest.  Wehave determined that this entity is not a variable interest entity and that wehold a controlling financial interest in the entity.  As such, this entity isincluded in our consolidated financial statements.  We have also determinedthat the noncontrolling interest in this entity meets the criterion to beclassified as a component of permanent equity.

**Income Taxes**

 We have elected to be taxed as a REIT under the Internal Revenue Code of1986 (the "Code"), as amended.  As a REIT, we are entitled to a taxdeduction for dividends paid to shareholders, thereby effectively subjectingthe distributed net income to taxation at the shareholder level only, providedwe distribute at least 90.0% of our taxable income and meet certain otherqualifications.

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

 

----

 

 

 

 

 

Our two REIT subsidiaries have elected to be treated as Taxable REITSubsidiaries ("TRS") and operate as C-corporations under the Code.  Accordingly,these TRS entities separately account for income taxes.  Taxes are recorded forthese two TRS subsidiaries to the extent they recognize net profits for bothfinancial statement and income tax purposes.  The 2010, 2009 and 2008 netoperating loss carry forwards for these two TRS subsidiaries, in the aggregate,are approximately $9.1 million, $9.7 million and $8.9 million, respectively,and expire during the years 2018 to 2030.

 The gross deferred tax assets were $5.2 million, $5.4 million and $5.0million at December 31, 2010, 2009 and 2008, respectively, and relateprincipally to net operating losses of the two TRS subsidiaries.  Grossdeferred tax liabilities of $250,000, $223,000 and $159,000 at December 31, 2010,2009 and 2008, respectively, relate primarily to tax basis differences in fixedassets and intangibles.  The deferred tax valuation allowance was $4.9 million,$5.2 million and $4.9 million at December 31, 2010, 2009 and 2008,respectively.  We reserve for net deferred tax assets when we believe it ismore likely than not that they will not be realized.  The deferred tax assetsand the deferred tax valuation allowance are recorded in "Other assets,net" and the deferred tax liabilities are recorded in "Accountspayable, accrued expenses and other liabilities" in the ConsolidatedBalance Sheets.

 At December 31, 2010and 2009, our net tax basis of properties exceeds the amount set forth in theConsolidated Balance Sheets by $55.6 million and $37.9 million, respectively.

**ReconciliationBetween GAAP Net (Loss) Income and Taxable Income**
|                                                                                                                                         |  | Year Ended December 31, |
|-----------------------------------------------------------------------------------------------------------------------------------------|--|-------------------------|
| *(In thousands)*                                                                                                                        |  | 2010                    |  | 2009 |  | 2008 |
|                                                                                                                                         |  |                         |  |  |  |  |
| GAAP net (loss) income                                                                                                                  |  |  $                 | (8,636) |  |  $ | 6,210  |  |  $ | 34,627  |
| Add:       GAAP net loss  (income) of taxable REIT subsidiaries                                           |  |                         |  |  |  |  |
|                and noncontrolling  interest in joint venture, net |  | (187)                   |  | 802  |  | 2,058  |
| GAAP net (loss) income from  REIT operations (1)                                                                                        |  | (8,823)                 |  | 7,012  |  | 36,685  |
|                                                                                                                                         |  |                         |  |  |  |  |
| Add:       Book depreciation  and amortization                                                            |  | 41,054             |  | 36,637  |  | 39,162  |
| Less:      Tax depreciation  and amortization                                                                  |  | (28,019)                |  | (26,039) |  | (27,090) |
|                Book/tax  differences on losses from               |  |                         |  |  |  |  |
|                capital  transactions                              |  | -                  |  | (3,695) |  | (33,105) |
| Other book/tax differences,  net                                                                                                        |  | (3,524)                 |  | 1,346  |  | (651) |
| Taxable income before  adjustments                                                                                                      |  | 688                |  | 15,261  |  | 15,001  |
| Less:      Capital gain                                                                                        |  | -                  |  | (11,653) |  | (13,722) |
| Taxable income subject to  dividend requirement                                                                                         |  |  $                 | 688  |  |  $ | 3,608  |  |  $ | 1,279  |

 

 
| (1) | All  adjustments to GAAP net (loss) 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)*                                                                     |  | 2010                    |  | 2009 |  | 2008 |
|                                                                                      |  |                         |  |  |  |  |
| Cash dividends paid                                                                  |  |  $                 | 21,851  |  |  $ | 15,476  |  |  $ | 15,760  |
| Less:      Dividends  designated to prior year              |  | -                  |  | -  |  | -  |
| Less:      Portion  designated as capital gain distribution |  | -                  |  | (11,654) |  | (13,721) |
| Less:      Return of capital                                |  | (21,163)                |  | (214) |  | (760) |
| Dividends paid deduction                                                             |  |  $                 | 688  |  |  $ | 3,608  |  |  $ | 1,279  |

 

 

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

 

----

 

 

 

 

 

**DividendsPer Share**

Total dividends per common share and the related components for the yearsended December 31, 2010, 2009 and 2008, as reported for income tax purposes,were as follows:
| Year Ended December 31, 2010 |
|------------------------------|
|                              |  |  |  |  |  |  |  |  |  |  |
|                              |  |  |  |  Non-Taxable |  |  20% Rate |  |  Unrecaptured |  |  |
|                              |  |  Ordinary |  |  Return of |  |  Capital |  |  Section 1250 |  |  |
|  Date Paid              |  |  Income |  |  Capital |  |  Gain |  |  Gain |  |  Dividends |
| 2/1/2010                     |  |  $ | -  |  |  $ | 0.170000  |  |  $ | -  |  |  $ | -  |  |  $ | 0.170000  |
| 5/3/2010                     |  | -  |  | 0.170000  |  | -  |  | -  |  | 0.170000  |
| 8/2/2010                     |  | -  |  | 0.170000  |  | -  |  | -  |  | 0.170000  |
| 11/1/2010                    |  | -  |  | 0.170000  |  | -  |  | -  |  | 0.170000  |
|                              |  |  $ | -  |  |  $ | 0.680000  |  |  $ | -  |  |  $ | -  |  |  $ | 0.680000  |

 

 
| 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  |

 

 Preferred dividends of $2.0million, $4.2 million and $4.7 million were paid for the years ended December31, 2010, 2009 and 2008, respectively, of which zero, $3.0 million, and $4.0million, 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 upfront premium.  

**  **InterestRate Hedge Activity:  ****During 2007, we executed two interest rate swapsto hedge the cash flows of two existing variable rate loans.  In January 2010,we prepaid one of these loans but we did not terminate the correspondinginterest rate swap and as a result reclassified the fair value of the relatedinterest rate swap of $777,000 from other comprehensive income to earningsduring the three months ended March 31, 2010.  This derivative matured in June2010, and the change in fair value was recorded in earnings.  During December2010, the second derivative matured and the change in fair value was recordedin earnings.  

 The followingtable presents the fair value of our derivative financial instruments as wellas their classification on the Consolidated Balance Sheets (see Note 8 foradditional information regarding the fair value of these derivativeinstruments):
| Fair Value of Derivative Instruments |
|--------------------------------------|
|                                      |  |  |  |  |  |  |  |  |
|                                      |  | Liability Derivatives |
|                                      |  | As of December 31, 2010 |  | As of December 31, 2009 |
| *(In thousands)*                     |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |
| Derivatives  Not Designated as       |  |  |  |  |  |  |  |  |
| Hedging Instruments:                 |  |  |  |  |  |  |  |  |
|                                      |  |  |  |  |  |  |  |  |
| Interest  Rate Swaps                 |  |  Accounts payable, accrued |  |  |  |  Accounts payable, accrued |  |  |
|                                      |  |  expenses  and other liabilities |  |  $ | -  |  |  expenses  and other liabilities |  |  $ | 1,420  |

 

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

 

----

 

 

 

  The following tables present theeffect of our derivative financial instruments on the Consolidated Statementsof Operations (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) Recognized in |
|                                                                                    |  | Amount of Gain or |  |  |  | (Loss) Reclassified |  |  |  | Income on Derivative |
|                                                                                    |  | (Loss) Recognized |  |  |  |  from Accumulated |  | Location of Gain or |  | (Ineffective Portion and |
|                                                                                    |  | in OCI on Derivative |  |  |  | OCI into Income |  | (Loss) Recognized |  | Amount Excluded from |
| *(In thousands)*                                                                   |  | (Effective Portion) |  | Location of Gain |  | (Effective Portion) |  | in Income on |  | Effectiveness Testing) |
|                                                                                    |  | Three |  | Twelve |  | or (Loss) |  | Three |  | Twelve |  | Derivative (Ineffective |  | Three |  | Twelve |
|                                                                                    |  | Months |  | Months |  | Reclassified from |  | Months |  | Months |  | Portion and |  | Months |  | Months |
| Derivatives in Cash                                                                |  | Ended |  | Ended |  | Accumulated OCI |  | Ended |  | Ended |  | Amount Excluded |  | Ended |  | Ended |
| Flow Hedging                                                                       |  | December 31, |  | December 31, |  | into Income |  | December 31, |  | December 31, |  | from Effectiveness |  | December 31, |  | December 31, |
| Relationships                                                                      |  | 2010 |  | 2010 |  | (Effective Portion) |  | 2010 |  | 2010 |  | Testing) |  | 2010 |  | 2010 |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate swaps                                                                |  |  $ | -  |  |  $ | (59) |  |  Interest expense |  |  $ | (130) |  |  $ | (701) |  |  Interest expense |  |  $ | -  |  |  $ | (777) |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  | Amount of Gain or |
|                                                                                    |  |  |  |  |  |  |  | Amount of Gain or |  |  |  | (Loss) Recognized in |
|                                                                                    |  | Amount of Gain or |  |  |  | (Loss) Reclassified |  |  |  | Income on Derivative |
|                                                                                    |  | (Loss) Recognized |  |  |  |  from Accumulated |  | Location of Gain or |  | (Ineffective Portion and |
|                                                                                    |  | in OCI on Derivative |  |  |  | OCI into Income |  | (Loss) Recognized |  | Amount Excluded from |
| *(In thousands)*                                                                   |  | (Effective Portion) |  | Location of Gain |  | (Effective Portion) |  | in Income on |  | Effectiveness Testing) |
|                                                                                    |  | Three |  | Twelve |  | or (Loss) |  | Three |  | Twelve |  | Derivative (Ineffective |  | Three |  | Twelve |
|                                                                                    |  | Months |  | Months |  | Reclassified from |  | Months |  | Months |  | Portion and |  | Months |  | Months |
| Derivatives in Cash                                                                |  | Ended |  | Ended |  | Accumulated OCI |  | Ended |  | Ended |  | Amount Excluded |  | Ended |  | Ended |
| Flow Hedging                                                                       |  | December 31, |  | December 31, |  | into Income |  | December 31, |  | December 31, |  | from Effectiveness |  | December 31, |  | December 31, |
| Relationships                                                                      |  | 2009 |  | 2009 |  | (Effective Portion) |  | 2009 |  | 2009 |  | Testing) |  | 2009 |  | 2009 |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate swaps                                                                |  |  $ | 69  |  |  $ | (772) |  |  Interest expense |  |  $ | 662  |  |  $ | 2,251  |  |  Interest expense |  |  $ | -  |  |  $ | -  |
|                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                      | Amount of Gain or (Loss) Recognized |
|--------------------------------|-------------------------------------|
| *(In thousands)*               | in Income on Derivative             |
|                           |                                | Location of Gain |   |   |
|                           |                                | Or (Loss) |   | Twelve Months |
|                           |                                | Recognized in |   | Ended |
| Derivatives Not Designated  as |                                | Income on |   | December 31, |
|   Hedging Instruments     |                                | Derivative |   | 2010 |
|                           |                                |   |   |   |
| Interest Rate Swaps            |                                | Unrealized Gain or |   |   |
|                           |                                | (Loss) on Interest |   |   |
|                           |                                | Rate Hedges |   | $ | (18) |

 

 

  F-14
 

 

 

 

 

**TreasuryShares**

 We record the purchase of Treasury shares at cost.  From time to time,we may reissue these shares.  When shares are reissued, we account for theissuance based on the "First in, first out" method.  For additionalinformation regarding treasury shares, see Note 11.  We commonly use ourtreasury shares to provide for restricted share award grants and returnforfeited restricted shares to the status of treasury shares.

**Reclassifications**

 Certain reclassifications have been made to the 2009 and 2008consolidated financial statements to conform to the 2010 presentation.

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

**AcquisitionActivity**

 On May 18, 2010, we acquired Riverside Station, a 304-unit apartmentcommunity located in Woodbridge, Virginia for a purchase price of approximately$54 million.  We paid cash for this acquisition, a portion of which was fundedwith proceeds from our May 12, 2010, equity offering.  We determined that thefair value of the property was the same as the purchase price.  Subsequently,in September 2010, we obtained a $36.0 million first mortgage loan, which issecured by this property.

 On September 15, 2010, we acquired The Ashborough, a 504-unit apartmentcommunity located in Ashburn, Virginia for a purchase price of approximately$90 million.  We used cash on hand and borrowings on our unsecured line ofcredit to fund the acquisition.  We determined that the fair value of theproperty was the same as the purchase price.  Subsequently, on October 1, 2010,we completed an equity offering, a portion of which was used to repay theborrowings on our unsecured line of credit.

 On October 12, 2010, we acquired San Raphael Apartments, a 222-unitapartment community located in Dallas, Texas for a purchase price ofapproximately $21 million.  We paid cash for this acquisition, which was fundedwith proceeds from our October 1, 2010 equity offering.  We determined that thefair value of the property was the same as the purchase price.

 On December 14, 2010, we acquired Westwind Farms, a 464-unit apartmentcommunity located in Ashburn, Virginia for a purchase price of approximately $90million.  We used cash on hand and borrowings on our unsecured line of creditto fund the acquisition.  We determined that the fair value of the property wasthe same as the purchase price. 

 The following pro forma financial information is presented as if theseacquisitions had occurred at the beginning of each period presented.  Thisinformation is presented for informational purposes only and is not necessarilyindicative of what our actual results of operations would have been had theacquisitions occurred at such times:

Year Ended December 31,

*(Unaudited; in thousands,  except per share data)*

2010 

2009 

Pro forma revenue

 $

168,747  

 $

145,451  

Pro forma net income  applicable to common shares

(13,900)

(653)

Earnings per common share -  basic and diluted:

Pro  forma net income applicable to common shares

 $

(0.46)

 $

(0.04)

  

F-15 

 

 

 

 

 

 

 

 The purchase price allocation for the properties acquired during 2010was as follows:

*(In thousands)*

Land

 $

55,858  

Buildings and improvements

187,481  

Furniture and fixtures

3,116  

Existing leases and tenant  relationships (Other assets)(1)

8,481  

Total

 $

254,936  

 

(1)

See  Note 4 for additional information related to intangible assets identified as  existing leases and tenant relationships.

 

On April 21, 2008, we acquired two apartment communities located in the Richmond,Virginia metropolitan area totaling 536 units for a purchase price of approximately$75 million 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.

**DevelopmentActivity**

 During the quarter ended June 30, 2010, we completed the construction ofa 60-unit expansion of the existing 240-unit River Forest apartment communitylocated in the Richmond, Virginia metropolitan market area.  Total cost ofdevelopment was approximately $6.8 million, which included $311,000 ofcapitalized interest.

**ConstructionActivity**

 Our subsidiary, Merit, is engaged as a general contractor and constructionmanager that also acts as our in-house construction division as well as providesgeneral contracting and construction management services to third parties.  Meritintends to concentrate its efforts on rehabilitation and ground-up constructionprojects, primarily for multifamily housing projects.  We account for constructioncontracts using the percentage-of-completion method.  Under this method, werecognize revenue in the ratio of costs incurred to total estimated costs, withany changes in estimates recognized in the period in which they are known on aprospective basis.  We recognized $17.1 million in revenue under this methodduring the twelve months ended December 31, 2010 and $393,000 in revenue duringthe twelve months ended December 31, 2009.  At December 31, 2010 we had $9.1million still owed to us and reported on our Balance Sheets as accountsreceivable.  There was no receivable at December 31, 2009.  For the year endedDecember 31, 2010 we reported costs of $15.0 million of which $5.4 millionremained unpaid and was shown as accounts payable, accrued expenses and otherliabilities at December 31, 2010.  For the year ended December 31, 2009 wereported $107,000 of costs with no amounts unpaid. 

F-16 

 

 
****
 

 

 

 

**DispositionActivity**

 We report the results of operations and gain/loss related to the sale ofreal estate assets as discontinued operations.  Real estate assets that areclassified as held for sale are 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.

 During 2009, we completed the sale of two properties for a total salesprice of $33.9 million.  One of these properties was located in Ohio and theother in Pennsylvania.  We recognized total gains of $15.4 million related tothese sales, which are included in "Income from discontinuedoperations."  

 During 2008, we completed the sale of four properties and our entirewholly owned Affordable Housing portfolio of 11 properties, for a total salesprice of $91.8 million.  These 15 properties represented a total of 2,206 unitsand were all located in Ohio.  We recognized total gains of $45.2 millionrelated to these sales, which are included in "Income from discontinuedoperations."  

  The following chart summarizes "Income from discontinuedoperations" for the years ended December 31, 2009 and 2008, respectively:

*(In thousands)*

2009

2008

Property revenue

 $

2,021  

 $

9,147  

Property operating and  maintenance expense

(948)

(4,427)

Depreciation and  amortization

(475)

(1,954)

Interest income

1  

6  

Interest expense(1)

(31)

(3,205)

Operating income (loss)

568  

(433)

Gain on disposition of properties

15,400  

45,202  

**Income from discontinued  operations**

 $

15,968  

 $

44,769  

 

(1)

Includes  $2.0 million of defeasance/prepayment costs associated with the prepayment of  mortgage loans in 2008.

 

 

 

 

 

F-17 

 

 

 

 

 

 

**3.         RESTRICTEDCASH**

 Restricted cash, some of which is required by our lenders, includesresidents' security deposits, reserve funds for replacements and other escrowsheld for the future payment of real estate taxes and insurance.  The reservefunds for replacements are intended to provide cash to defray future costs thatmay be incurred to maintain the associated property.

 Restricted cash is comprised of the following:

December 31,

*(In thousands)*

2010

2009

Resident security deposits

 $

1,061  

 $

1,038  

Other escrows

1,349  

300  

Escrows and reserve funds  for replacements

required  by mortgages

6,549  

5,755  

 $

8,959  

 $

7,093  

 

 Restricted residentsecurity deposits are held in separate bank accounts in the name of theproperties for which the funds are being held.  Other escrows represent fundsdeposited with lending institutions as a good faith deposit in connection withour application for mortgage loans to be funded in the future.   These fundsare held in short-term investments.  Certain reserve funds for replacements areinvested in a combination of money market funds and certificates of depositwith maturities less than 18 months.

**4.         GOODWILL AND OTHERASSETS**

**Goodwill**

 We have a policyof completing our annual review of goodwill during the first quarter of eachyear and more frequently if events or changes in circumstances indicate thatthe carrying value may not be recoverable.  The review that was completedduring the three months ended March 31, 2010 determined that goodwill was notimpaired and no other events have occurred which would require that goodwill bereevaluated, as such there were no changes to the carrying value of goodwill asof December 31, 2010.  In performing this analysis, we use a multiple ofrevenues as applied to a range of potential alternatives.  We then assign aprobability to the various alternatives under our consideration.  Should theestimates used to determine alternatives or the probabilities of the occurrencethereof change, impairment may result which could materially impact our resultsof operations for the period in which it is recorded.

**OtherAssets, Net**

 Other assets, net, consist of the following:

December 31,

*(In thousands)*

2010

2009

Intangible assets

 $

8,481  

 $

8,478  

Deferred financing and  leasing costs

5,896  

8,699  

Less:  accumulated  amortization

(2,219)

(13,510)

12,158  

3,667  

Prepaid expenses

3,924  

4,153  

Other assets

632  

572  

 $

16,714  

 $

8,392  

 

 

F-18 

 

 

 

 

 

 

*PropertyAcquisitions. *We allocate a portion of the total purchase price of aproperty acquisition to any intangible assets identified, such as existingleases and tenant relationships.  The intangible assets are amortized over theremaining lease terms or estimated life of the tenant relationship, which isapproximately 12 months.  Due to the short term nature of residential leases,we believe that existing lease rates approximate market rates; therefore, noallocation is made for above/below market leases.

In connection with four property acquisitions completed during 2010, asdiscussed in Note 2, we recorded total intangible assets in the amount of $8.5million related to existing leases and tenant relationships, which are beingamortized over 12 months.

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

Information related to intangible assets at December 31, 2010 is asfollows:

*(In thousands)*
   
Gross carrying amount

 $

8,481  

Less: accumulated  amortization

(2,219)

Balance as of December 31,  2010

 $

6,262  

 

 The aggregate intangible asset amortization expense for the years endedDecember 31, 2010, 2009 and 2008 was $2.2 million, $1.2 million and $3.9million, respectively.  

**Deferred Financingand Leasing Costs**

 Amortization expense for deferred financing and leasing costs, includingamortization classified in income from discontinued operations, was $1.4million, $1.2 million and $1.3 million for the years ended December 31, 2010,2009 and 2008, respectively.

**5.         DEBT**

 The following table identifies our total debt outstanding and weightedaverage interest rates as of December 31, 2010 and 2009: 

December 31, 2010

December 31, 2009

Balance

Weighted Average

Balance

Weighted Average

*(Dollar amounts in  thousands)*

Outstanding

Interest Rate

Outstanding

Interest Rate

**FIXED RATE DEBT**

Mortgages payable - CMBS

 $

98,212  

7.7%

 $

115,464  

7.7%

Mortgages payable - other

330,648  

5.7%

337,241  

5.8%

Unsecured borrowings

-  

-  

25,780  

7.9%

**Total  fixed rate debt**

428,860  

6.2%

478,485  

6.4%

**VARIABLE RATE DEBT**

Mortgages payable

34,306  

4.7%

34,851  

4.7%

Unsecured revolving credit  facility

92,500  

2.7%

12,500  

2.6%

**Total  variable rate debt**

126,806  

3.2%

47,351  

4.1%

**Total  debt**

 $

555,666  

5.5%

 $

525,836  

6.2%

 

F-19 

 

 

 

 

 

 

 Real estate assetspledged as collateral for all debt had a net book value of $514.6 million and $475.6million at December 31, 2010 and 2009, respectively.

 As of December 31, 2010, the scheduled debt maturities for each of thenext five years and thereafter, are as follows (in thousands): 

2011

 $

53,464  

2012

80,748  

2013

224,709  

2014

44,538  

2015

21,000  

Thereafter

131,207  

 $

555,666  

 

 Cash paid for interest was$30.2 million, $33.7 million and $37.8 million for the years ended December 31,2010, 2009 and 2008, respectively.  Cash paid for interest does not includecapitalized interest of $300,000 and $119,000 for the years ended December 31,2010 and 2009, respectively.  However, cash paid for interest includes $2.0million of defeasance and other prepayment costs that were paid during the yearended December 31, 2008.

  During 2008, 2007 and 2006, we defeased 21 CMBS loans.  These loanswere defeased pursuant to the terms of the underlying loan documents.  Weremoved those financial assets and the mortgage loans from our financialrecords.  All risk of loss associated with these defeasances have beentransferred 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.  Wereceived defeasance refunds of $553,000 and $563,000 for the twelve monthsended December 31, 2010 and 2009, respectively, which were included as areduction to interest expense.  It is possible that we may receive additionalrefunds in the future, however such amounts cannot be estimated due to theuncertainty of future payments, and we believe that any amounts we may receivewould not be material to our consolidated financial position, cash flow orresults of operations.

 The following table provides information on loans repaid at par as wellas loans obtained during 2010:

*(Dollar amounts in  thousands)*

Loans Repaid

Loans Obtained

Property

Amount

 Interest Rate

Amount

Rate

Maturity

Idlewylde

 $

42,000  

5.9%

 $

-  

N/A

N/A

Sterling Park

2,910  

7.9%

-  

N/A

N/A

Kensington Grove

3,172  

7.9%

-  

N/A

N/A

Spring Brook

4,351  

7.9%

-  

N/A

N/A

Western Reserve

4,835  

7.9%

-  

N/A

N/A

Riverside Station

-  

N/A

36,000  

5.1%

September 2020

Village at Avon

21,000  

4.7%

21,000  

4.6%

December 2015

Total / weighted average  rate

 $

78,268  

6.0%

(1)

 $

57,000  

4.9%

(1)

 

(1)

Represents  weighted average interest rate for the loans listed.

 

 

F-20 

 

 

 

 

 

 

 In 2008, we repaid or prepaid/defeased eight mortgage loans totaling$42.9 million, obtained two mortgage loans totaling $45.0 million and paid $2.0million in defeasance/prepayment costs that are recognized in interest expense. These costs were included in "Income from discontinued operations."

**MortgageNotes Payable**

 At December 31, 2010, mortgage notes payable consisted of:

•   

22 project specific loans that  are each collateralized by the respective real estate and resident leases;  and

•   

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.

 At December 31, 2009,mortgage notes payable consisted of:

•   

26 project specific loans that  are each collateralized by the respective real estate and resident leases;  and

•   

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.

 Mortgages payablegenerally require monthly installments of principal and/or interest and matureat various dates through 2046.  Under certain of the mortgage agreements, weare required to make escrow deposits for taxes, insurance and replacement ofproject assets. 

 In December 2009, we entered into a credit facility agreement with WellsFargo Multifamily Capital, on behalf of the Federal Home Loan MortgageCorporation, or Freddie Mac.  Pursuant to the terms of the facility, we have thepotential to borrow up to $100 million over a two-year period with obligationsbeing secured by project specific, nonrecourse, non cross-collateralized fixedor variable rate mortgages having terms of five, seven or ten years.  In August2010, we used this facility to borrow $36.0 million at a fixed rate of 5.1% fora term of 10 years leaving $64.0 million of availability under this facility.

**UnsecuredRevolving Credit Facility**

 On October 18, 2010, the Company closed on a $250.0 million seniorunsecured revolving credit facility.  This credit facility replaced theCompany's $150.0 million line of credit.  This new facility has a three-yearterm with a one-year extension at the Company's option.  From time to time, wehave the option to choose either a LIBOR-based or Prime-based variable interestrate on this facility.  As of December 31, 2010, the LIBOR-based rate is LIBORplus 2.3% and the Prime-based rate is the prime rate plus 1.3%.   There wereoutstanding borrowings of $92.5 million on this facility at December 31, 2010,with a weighted average interest rate of 2.7%.  At December 31, 2009, therewere outstanding borrowings of $12.5 million on our predecessor facility with aweighted average interest rate of 2.6%.

**UnsecuredDebt**

On June 30, 2010, we redeemed all of our 7.92% Trust Preferred Securitiesat a cost of $26.3 million, which included accrued and unpaid interest up tobut excluding the redemption date.  In connection with the issuance of the7.92% Trust Preferred Securities in March 2005, we incurred issuance costs thatwere recorded as other assets and subsequently amortized to interest expenseeach period over the life of the securities.  We recognized the remaining unamortizedbalance of $727,000 of issuance costs as a charge to interest expense for thetwelve months ended December 31, 2010. 

F-21 

 

 

 

 

 

 

**6.         INVESTMENTSIN AND ADVANCES TO PARTNERSHIPS**

            OnSeptember 24, 2010, we entered into a partnership agreement with BristolDevelopment Group, an unrelated third-party for the development of Vista Germantown,a 242-unit apartment community located in downtown Nashville, Tennessee.  Wecontributed $9.4 million to the partnership and hold a 90.0% equity interest.  Wehave determined that this entity is not a variable interest entity and that wehold a controlling financial interest in the entity.  As such, this entity isincluded in our consolidated financial statements.  We have also determinedthat the noncontrolling interest in this entity meets the criterion to beclassified as a component of permanent equity.

On December 31, 2008, the joint venture in which we were a 50.0% partnersold the Affordable Housing property that it owned.  We accounted for ourinvestment in this unconsolidated joint venture under the equity method ofaccounting as we exercised significant influence, but did not control thisentity and were not required to consolidate it.  This investment was initiallyrecorded at cost as investment in joint ventures and subsequently adjusted forequity in earnings, cash contributions and distributions, and our portion of thegain recognized upon the sale of the property was $1.6 million. The debtassociated with this property was assumed by the buyer.

**7.         COMMITMENTSAND CONTINGENCIES**

***Leases***

****We had no equipment leased under capital leases at December 31,2010 and 2009.  We lease certain equipment and facilities under operatingleases.  Future minimum lease payments under all non-cancellable operatingleases in which we are the lessee are immaterial.

***LegalProceedings***

 We are subject to legal proceedings, lawsuits and other claims,including proceedings by government authorities (collectively"Litigation").  Litigation is subject to uncertainties and outcomesare difficult to predict.  We believe any current Litigation will not have amaterial adverse impact on us after final disposition.  However, because of theuncertainties of Litigation, one or more lawsuits could ultimately result in amaterial obligation.

***Guarantees***

 Merit has posted performance andpayment bonds and letters of credit that total approximately $19.0 million atDecember 31, 2010 to guaranty its performance under various constructioncontracts.  Merit has certain indemnification obligations owing to the bondingcompanies that issued the bonds and those obligations have been guaranteed bythe Company.  The letters of credit have been issued under the Company'sunsecured line of credit and, as such, the Company is directly liable in theevent of a draw on any such letters of credit.  The Company, from time to time,may also guaranty other Merit obligations.

 We routinely guaranty mortgage debt of our wholly owned subsidiaries andsome subsidiaries that own unencumbered property guaranty the Company'sobligations under the unsecured line of credit.  In the normal course ofbusiness, we may enter into contractual arrangements under which we may agreeto indemnify the third party to such arrangements from any losses incurredrelating to the services they perform on behalf of the Company or for lossesarising from certain events as defined within the particular contract, whichmay include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have not beenmaterial.

** **

F-22 

 

 
****
 

 

 

 

**8.         FAIRVALUE**

  Fair value amounts and disclosures 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 wherethe determination of the fair value measurement is based on inputs fromdifferent levels of the fair value hierarchy, the fair value measurement willfall within the lowest level input that is significant to the fair valuemeasurement in its entirety.

  Rents, accountsand notes receivable, accounts payable, accrued expenses and other liabilitiesare carried at amounts that reasonably approximate corresponding fair values.

 Mortgage notes payable, revolving debt and other unsecured debt with anaggregate carrying value of $555.7 million and $525.8 million at December 31,2010 and 2009, respectively, have an estimated aggregate fair value of approximately$570.2 million and $520.1 million, respectively.  Estimated fair value is basedon interest rates available to us as of the dates reported on for issuance ofdebt with 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.

9.         GAIN ON INSURANCE RECOVERIES

   During 2010 we settled a wind storm damage claim at one of our centralOhio properties for the aggregate sum of $245,000 which is net of ourdeductible.  In June 2009, we settled a wind storm damage insurance claiminvolving 13 of our central Ohio properties for the aggregate sum of $906,000,net of our deductible.  We recorded this settlement as a gain on insurancerecoveries.  The roofs of five of these properties sustained extensive damageand were replaced.  In December 2009, we settled a fire damage insurance claimin which the clubhouse of one of our Ohio properties was destroyed by a firefor the aggregate sum of $271,000, net of our deductible.  We recorded this settlementas a gain on insurance recoveries.  We reported a gain on insurance recoveriesof $665,000 in the Consolidated Statements of Income for the twelve monthsended December 31, 2009, which represents insurance proceeds to be received inan amount greater than the depreciated carrying (book) value of assets writtenoff and costs incurred to make repairs.

F-23 

 

 
****
 

 

 

 

**10.        SUPPLEMENTALDISCLOSURE OF CASH FLOW INFORMATION**

 The following table summarizes our non-cash investing and financingactivities which are not reflected in the Consolidated Statements of CashFlows: 

 Year Ended  December 31, 

*(In thousands)*

2010

2009

2008

Dividends declared but not paid

 $

7,242   

 $

2,849   

 $

2,920   

Assumption of debt in connection with property acquisition

-  

-  

45,002   

Reclassification of original issuance costs related to  repurchase

of preferred shares and related  discount, net

-  

-  

2,146   

Net change in accounts payable related to recurring fixed

asset additions

702   

(203)

558   

Reclassification of deferred directors' compensation

2,233   

-  

-  

** **

**11.        COMMON, TREASURY ANDPREFERRED SHARES**

***CommonShares***

            OnJanuary 15, 2010, we sold 5,175,000 of our common shares in a public offering ata price of $11.10 per share, which resulted in total net proceeds of approximately$54.9 million.  On May 12, 2010, we sold 9,200,000 common shares in a publicoffering at a price of $13.00 per share, which resulted in total net proceedsof approximately $114.3 million.  On October 1, 2010, we sold 9,200,000 commonshares in a public offering at a price of $13.60 per share, which resulted intotal net proceeds of approximately $119.6 million.

***TreasuryShares***

 Our Board of Directors has authorized the repurchase of up to $75.0million of our common and/or preferred shares.    As of December 31, 2010, wehad repurchased 3,825,125 common shares under this plan at a cost of $41.1 million and 389,500 preferred depositaryshares at a cost of $7.6 million.

 During the year ended December 31, 2010, a total of 153,576 restrictedshares had vested and were issued from treasury shares.  

***PreferredShares***

 We are authorized to issue a total of 9,000,000 Preferred Shares,designated as follows:

•  

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 reserved for  issuance in connection with our Shareholder Rights Plan 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. 

            F-24 

 

 

 

 

 

 

*8.70% Class BSeries II Cumulative Redeemable Preferred Shares. *On June 7, 2010, weredeemed all of our 8.70% Class B Series II Cumulative Redeemable PreferredShares at a cost of approximately $48.3 million, plus accrued and unpaiddividends through the redemption date.  In connection with the issuance of the8.70% Class B Preferred Shares in December 2004, we incurred approximately $1.0million in issuance costs and recorded such costs as a reduction toshareholders' equity.  We recognized the $1.0 million of issuance costs as areduction in net earnings to arrive at a net (loss) income applicable to commonshares for the twelve months ended December 31, 2010.

**ShareholderRights Plan**

In January 1999, we adopted a Shareholder Rights Plan.  To implement thePlan, the Board of Directors declared a distribution of one Right for each ofour outstanding common shares.  Each Right entitles the holder to purchase fromus 1/1,000th of a Class B Series I Cumulative Preferred Share (a"Preferred Share") at a purchase price of $40 per Right, subject toadjustment.  One one-thousandth of a Preferred Share is intended to beapproximately the economic equivalent of one common share.

The Rights are not currently exercisable and are traded with our commonshares.  The Rights will become exercisable if a person or group becomes thebeneficial owner of, or announces an offer to acquire, 15.0% or more of thethen outstanding common shares.

If a person or group acquires 15.0% or more of our outstanding commonshares, then each Right not owned by the acquiring person or its affiliateswill entitle its holder to purchase, at the Right's then-current exerciseprice, fractional preferred shares that are approximately the economicequivalent of common shares (or, in certain circumstances, common shares, cash,property or other securities) having a market value equal to twice thethen-current exercise price.  In addition, if, after the rights becomeexercisable, we are acquired in a merger or other business combinationtransaction with an acquiring person or its affiliates or sell 50.0% or more ofour assets or earning power to an acquiring person or its affiliates, eachRight will entitle its holder to purchase, at the Right’s then-current exerciseprice, a number of the acquiring common shares having a market value of twicethe Right’s exercise price.  The Board of Directors may redeem the Rights, inwhole, but not in part, at a price of $.01 per Right.

 The distribution was made on January 29, 1999, to shareholders of recordon that date.  The initial distribution of Rights was not taxable toshareholders.

  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.

**12.        EARNINGS PER SHARE**

In June 2008, the FASB issued guidance which clarifies that non-vestedawards containing non-forfeitable dividend rights are participating securitiesand are therefore required to be included in the computations of basic anddiluted earnings per share.  This guidance was effective for us January 1,2009, and requires retrospective application to all periods presented.

There were 770,000, 1.4 million and 1.4 million options to purchasecommon shares outstanding at December 31, 2010, 2009 and 2008, respectively.  Thedilutive effect of these options were not included in the calculation ofdiluted earnings per share for the years presented as their inclusion would beanti-dilutive to the net loss applicable to common shares from continuingoperations.

 The exchange of Operating Partnership noncontrolling redeemable interestinto common shares was not included in the computation of diluted EPS becausewe plan to settle these OP units in cash.

 

F-25 

 

 

Year Ended December 31,

*(In thousands)*

2010 

2009 

2008 

**Numerator - basic and  diluted:**

(Loss) income from  continuing operations

 $

(8,585)

 $

(9,705)

 $

(10,089)

Net  income attributable to noncontrolling redeemable interest

(51)

(53)

(53)

Preferred  share dividends

(2,030)

(4,199)

(4,655)

Preferred  share redemption/repurchase costs

(993)

-  

(143)

Discount  on preferred share repurchase

-  

-  

2,289  

(Loss) income from  continuing operations applicable to common shares

 $

(11,659)

 $

(13,957)

 $

(12,651)

Income from discontinued  operations

 $

-  

 $

15,968  

 $

44,769  

Allocation  to participating securities

-  

(423)

(730)

Income from discontinued  operations applicable to common shares

 $

-  

 $

15,545  

 $

44,039  

 

 

 

**Denominator - basic and  diluted:**

30,421  

16,516  

16,262  

**Net income applicable to  common shares - basic and diluted:**

(Loss) income from  continuing operations applicable to common shares

 $

(0.38)

 $

(0.85)

 $

(0.78)

Income from discontinued  operations

-    

0.95  

2.71  

Net (loss) income applicable  to common shares - basic and diluted

 $

(0.38)

 $

0.10  

 $

1.93  

** **

**13.        EMPLOYEE BENEFIT PLANS**

****We offer medical, dental, vision and life insurance benefits tothose employees who have completed their 90-day introductory period.  Employeeswho have completed six months of service are eligible for an educational assistanceprogram and to participate in the 401(k) plan and employees who have completedone year of service are provided with long-term disability coverage. Additionally, we offer employees an opportunity to purchase a variety ofsupplemental benefits for their own account at no expense to the Company.

 We sponsor a defined contribution plan pursuant to Section 401(k) of theInternal Revenue Code, whereby eligible employees may elect to contribute up to50.0% of their 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 $112,000, $85,000 and $116,000 for the years ended December 31,2010, 2009 and 2008, respectively.

**SupplementalExecutive Retirement Plan**

Our Supplemental Executive Retirement Plan (the "SERP") wasadopted by the Board of Directors on January 1, 1997.  This Plan wasimplemented to provide competitive retirement benefits for officers and to actas a retention incentive.  This non-qualified, unfunded, defined contributionplan extends to certain named officers nominated by the Chief Executive Officerand approved by the Executive Compensation Committee of the Board.  The SERPprovides for us to make a contribution accrual to the account of each of theparticipating officers at the end of each plan year.  The accrual amount is apercentage of eligible earnings (including base salary and cash payments underthe Annual Incentive Plan) that is set by the Committee.  Contribution accrualswill not be taxable to the participant, other than social security and federalunemployment taxes once vested, until distribution.  The account balances accrueinterest each year at a rate determined by the Executive Compensation Committeeof the Board to approximate the Company's weighted average cost of capital.  InJanuary 2007, the Executive Compensation Committee revised the annual contributionaccruals such that the accounts of participants not vested as of January 1,2007, would no longer receive annual contribution accruals, however theiraccounts will continue to accrue interest. 

F-26 

 

 

 

 

 

 

The following table summarizes the changes in SERP balances for the yearsended December 31, 2010, 2009 and 2008:

Supplemental Executive Retirement Plan Benefit

for the year ended December 31,

*(In thousands)*

2010

2009

2008

Balance at beginning of  period

 $

1,774  

 $

1,545  

 $

1,337  

Service cost

98  

101  

97  

Interest cost

147  

128  

111  

Balance at end of period

 $

2,019  

 $

1,774  

 $

1,545  

 

**14.        EQUITY BASED AWARD PLANS**

**2008Equity Based Award Plan**

 On May 7, 2008, our shareholders approved the 2008 Equity Based AwardPlan (the "Plan") which previously had been adopted by our Board ofDirectors (the "Board") on March 14, 2008, subject to shareholderapproval.  Subsequent to receiving shareholder approval on May 7, 2008, theBoard adopted amended language to the Plan consistent with the additional proxymaterials filed by the Company on May 1, 2008.

 A total of 750,000 common shares were made availablefor awards under the Plan.  The Plan provides for the grant to our officers,other employees and directors of options to purchase our common shares, rightsto receive the appreciation in value of common shares, awards of common sharessubject to vesting and restrictions on transfer, awards of common sharesissuable in the future upon satisfaction of certain conditions and other awardsbased on common shares.  At December 31, 2010, we had 352,111 common sharesavailable for awards under this plan.  There were no options outstanding underthis plan.

**Year 2001Equity Incentive Plan**

****Our 2001 Equity Incentive Plan was adopted by the Board onDecember 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, 2010,there were no common shares available for awards under this plan.  There were 542,640options outstanding under this plan, of which 476,640 were exercisable, atDecember 31, 2010.  Options were granted at per share prices not less than fairmarket value at the date of grant and must be exercised within ten yearsthereof.

**Equity-BasedIncentive Compensation Plan**

 The Equity-Based Incentive Compensation Plan (the "Omnibus EquityPlan") expired February 20, 2005, and therefore no additionalshares/awards will be granted under this plan.  At December 31, 2010, therewere 227,000 options outstanding and exercisable under this plan.  These optionswill remain in effect according to the original terms and conditions of theplan.  This plan provided key employees equity or equity based incentives underwhich 1.4 million of our common shares had been reserved for awards of shareoptions and restricted shares.  Options were granted at per share prices notless than fair market value at the date of grant and must be exercised within tenyears thereof.

 

F-27 

 

 

 

 

 

 

**Share-Based Compensation**

 Since 2007, our share-based compensation awards have consisted primarilyof restricted shares.  We award share-based compensation to our officers andemployees as a performance incentive and to align individual goals with thoseof the Company.  Certain of our share-based awards require only continuedservice with the company to vest.  These awards vest either at the end of the specifiedservice period or in equal increments during the service period on each anniversaryof the grant date.  We recognize compensation cost on these awards on astraight-line basis.  In addition to awards containing only service conditions,we issue certain awards in which the number of shares that will ultimately vestand the date at which they will vest is dependent upon the achievement ofspecified performance goals and/or market conditions.  Compensation cost forawards with performance conditions is recognized based on our best estimate ofthe number of awards that will vest and the period of time in which they willvest.  Compensation cost for awards dependent upon market conditions isrecognized based on the estimated fair market value of the award on the dategranted, as described below, and the vesting period.  We estimate the amount ofexpected forfeitures when calculating compensation costs.  The forfeiture rateswe use were calculated based on our historical forfeiture activity, adjustedfor activity that we believe is not representative of expected future activity.

 During the year ended December 31, 2010, 2009 and 2008, we recognizedtotal share-based compensation cost of $2.9 million, $2.0 million and $1.9million in "General and administrative expense."

*Stock Options.*  We use the Black-Scholes option pricing model toestimate the fair value of share-based awards.  There were 20,000, 58,000, and zerooptions granted in 2010, 2009 and 2008, respectively.  The weighted averageBlack-Scholes assumptions and fair value for 2010 and 2009 were as follows:

Year Ended December 31,

2010 

2009 

Expected volatility

38.8%

39.1%

Risk-free interest rate

1.8%

2.6%

Expected life of options (in  years)

7.1  

6.4  

Dividend yield

4.9%

8.4%

Grant-date fair value

$

3.27  

$

1.38  

 

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

           F-28 

 

 

 

 

 

 

The followingtable represents stock option activity for the year ended December 31, 2010:

Weighted-Average

Number of

Weighted-Average

Remaining 

Stock Options

Exercise Price

Contract Life

Outstanding at beginning of  period

1,365,364  

$

9.37  

Granted

20,000  

$

14.00  

Exercised

615,724  

$

8.80  

Forfeited

-    

$

-    

Outstanding at end of period

769,640  

$

9.94  

 4.8 years 

Exercisable at end of period

703,640  

$

9.93  

 4.5 years 

 

 The aggregate intrinsicvalue of stock options outstanding and stock options exercisable at December31, 2010, was $4.1 million and $3.7 million, respectively.  The aggregateintrinsic value of stock options exercised during the years ended December 31,2010, 2009 and 2008 was $2.9 million, $79,000, and $697,000, respectively.

*Restricted Shares.*  Restricted shares generally have the samerights as our common shares, except for transfer restrictions and forfeitureprovisions.  Cash distributions paid during the period of restriction on sharesthat are expected to vest are recorded as a charge to "Accumulateddistributions in excess of accumulated net income."  Cash distributionspaid during the period of restriction on shares that are expected to beforfeited are recorded as a charge to expense.

 The following table represents restricted share activity for the yearended December 31, 2010:

Weighted

Average

Number of

Grant-Date

Shares

Fair Value

Nonvested at beginning of  period

184,339  

 $

7.15  

Granted

571,033  

 $

7.45  

Vested

153,576  

 $

8.38  

Forfeited

5,954  

 $

8.25  

Nonvested at end of period

595,842  

 $

6.69  

** **

**** A portion of therestricted shares granted during 2010 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 discussed in Note 15, was $1.1 million.  We used the Monte Carlo method to estimate the fair value of these awards.  The Monte Carlo method,which is similar to the binomial analysis, evaluates the award for changingstock prices over the term of vesting and uses random situations that areaveraged based on past stock characteristics.  There were one millionsimulation paths used to estimate the fair value of these awards.  The expectedvolatility was based upon the historical volatility of our daily share closingprices over a period equal to the market condition performance periods.  Therisk-free interest rate used was based on a yield curve derived from U.S.Treasury zero-coupon bonds on the date of grant with a maturity equal to themarket condition performance periods.  The expected life used was the marketcondition performance periods.

F-29 

 

 

 

 

 

 

 The following table represents the assumption ranges used in the MonteCarlo method during 2010:

Expected volatility - AERC

31.8% to 63.1%

Expected volatility - peer  group

24.2% to 68.1%

Risk-free interest rate

0.1% to 1.5%

Expected life (performance  period)

3 years

 

 The weightedaverage grant-date fair value of restricted shares granted during the yearsended December 31, 2010, 2009 and 2008 was $7.46, $5.37 and $10.45,respectively.  The total fair value of restricted shares vested during the yearsended December 31, 2010, 2009 and 2008 was $1.8 million, $1.0 million and $583,000,respectively.  At December 31, 2010, there was $2.6 million of unrecognizedcompensation cost related to non-vested restricted share awards that we expectto recognize over a weighted average period of 2.4 years.

**15.        DIRECTOR/EXECUTIVECOMPENSATION**

**ElectiveDeferred Compensation Program**

****The Associated Estates Realty Corporation Elective DeferredCompensation Program is an unfunded, non-qualified deferred compensationprogram that is subject to the provisions of Section 409A of the InternalRevenue Code, which strictly regulates the timing of elections and payment. Eligibility under the plan shall be determined by the Executive CompensationCommittee or its designee, and at December 31, 2010, each of our appointed and/orelected officers was eligible.

 This plan permits deferral of up to 90.0% of base salary and up to 100%of any incentive payment.  An individual bookkeeping account will be maintainedfor each participant.  Participants are provided a number of measurement fundsfrom which they may select to determine earnings, which may be, but are notrequired to be, the same as those offered under our 401(k) Savings Plan. Deferrals of base salary and incentive payments (other than restricted shares,discussed below) are fully vested.

 The plan also permits the deferral of the receipt of restricted sharesgranted under the Equity-Based Award Plan, which also will be reflected in aseparate bookkeeping account for each individual as share equivalent units. Dividend credits shall be made to such account in the form of share equivalentunits.  Distribution of amounts reflected by such share equivalents will bemade in the form of shares.  The vesting of share equivalent units (togetherwith associated dividend credits) occurs on the same schedule as the restrictedshares that had been deferred.

 The plan allows for in-service and separation sub-accounts to permitelection of distribution at either a specified date or following separation. Payment of each deferral under the plan will be made in the form specified inthe participant'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.  Re-deferral elections are permitted withinthe parameters set forth in the plan.  Accounts will be distributed upon achange of control, and distribution due to unforeseen financial hardship isalso possible.   At December 31, 2010 and 2009, there were 242,621 and 311,583 shareequivalent units, respectively, deferred under this plan.

** **

F-30 

 

 
****
 

 

 

 

**Director’sDeferred Compensation Plan**

 The Directors' Deferred Compensation Plan allows persons serving as non-employeeDirectors the option of deferring receipt of compensation otherwise payable tothem for their services as Directors and creates an opportunity for appreciationof the amount deferred based upon appreciation of our Common Shares.

 Prior to January 1 of each year, any eligible Director may elect todefer all or a portion of the fees otherwise payable to that Director for thatyear and such amount will be credited to a deferral account maintained onbehalf of the Director.  Fees for each period are converted to "shareunits" and credited to the deferral account as they are earned.  This planalso permits the deferral of the receipt of restricted shares granted, which alsowill be reflected in a separate bookkeeping account for each individual asshare equivalent units.  Each deferral account is increased when we pay adividend on our common shares by the number of share units that represent thedividend paid per share multiplied by the number of share units in the accounton the date of record for the related dividend payment.  Share unitsrepresenting deferred fees and dividend units are vested at all times.  Shareunits representing deferred restricted shares (together with associateddividend credits) vest on the same schedule as the restricted shares that weredeferred.  In December 2009 and effective on January 1, 2010, this plan wasmodified such that all distributions from the plan will be in the form of ourcommon shares instead of cash, except for distributions with a commencementdate of December 31, 2009 or prior, which will be made in cash.  As a result,the value of the deferred compensation is included in "Paid-inCapital" in the Consolidated Balance Sheets and is not adjusted based uponsubsequent changes in the price of our common shares.  At December 31, 2010,there were 270,679 share equivalent units under this plan, of which 134,479units represent the deferral of cash fees earned.  Prior to this modification, thetotal value of the deferred compensation had been adjusted for changes in ourcommon share price and was included in "Accounts payable and accruedexpenses" in the Consolidated Balance Sheets.  At December 31, 2009, thetotal value of this plan included in Accounts payable and accrued expenses was$2.5 million.  Distributions of $69,000 and $24,000 were made from this accountduring 2010 and 2009, respectively.  

**ExecutiveCompensation and Employment Agreements**

We have a three year employment agreement with the Chairman, Presidentand Chief Executive Officer dated January 1, 1996, that is automaticallyextended for an additional year at the end of each year of the agreement,subject to the right of either party to terminate by giving one year's priorwritten notice.  Additionally, we have severance arrangements with certainother executive officers.

**AnnualIncentive Plan**

 In February 2010, the Executive Compensation Committee (the"Committee") approved the terms of the Annual Incentive Plan forOfficers.  Annual incentives emphasize pay for performance and serve as a keymeans of driving current objectives and priorities.  The Committee determinesspecific compensation 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 2010, 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 to a selected peergroup of multifamily REITs); financing activity; performance against budget;execution of strategic objectives; leverage ratios; funds available fordistribution and adjusted funds from operations.  Business unit and individualperformance were also considered.  The Committee reviewed our earnings resultseach quarter and assessed management's performance.  No specific targets orweightings amongst the aforementioned performance metrics were established.  TheOfficers earned annual incentives of approximately $1.7 million, $1.3 million and$1.4 million in cash in 2010, 2009 and 2008, respectively.

** **

F-31 

 

 
****
 

 

 

 

**Long-TermIncentive Plan**

 Our Long-Term Incentive Plan ("LTIP") that is intended tocreate a stronger link to shareholder returns, reward long-term performance andfoster retention of the executives.  The Committee determines specificcompensation levels for the five most highly compensated officers("Officers"), which includes our four "Named ExecutiveOfficers."  Each Officer has threshold, target and maximum awardopportunities established that are expressed as a percentage of base salary. The framework of the LTIP includes a single-year and multi-year component.  

*****Single-year component*.  Objectives under the single-year LTIPare established annually at the beginning of the year and evaluated at theconclusion of the year.  If one or all of the objectives is met, a grant ofrestricted shares will be issued.  One-third of the issued shares will vestimmediately and the remaining two-thirds will vest in equal, annualinstallments.  Restricted shares, if issued, have voting rights and dividendswill be paid on them during the restricted period.  

 In February 2010, the Committee approved the terms of the 2010single-year component of the LTIP.  This component focused primarily oninterest coverage and fixed charge coverage financial ratios and same propertyNOI over a one-year period, however the level of achievement under thiscomponent was determined at the discretion of the Committee.  Officers earnedapproximately $1.5 million under the 2010 single-year LTIP.

 In February 2009, the Committee approved the terms of the 2009single-year component of the LTIP.  This component focused primarily oninterest coverage and fixed charge coverage financial ratios and same propertyNOI over a one-year period, however the level of achievement under thiscomponent was determined at the discretion of the Committee.  Officers earnedapproximately $1.1 million under the 2009 single-year LTIP.

 In February 2008, the Committee approved the terms of the 2008single-year component of the LTIP.  This component focused on interest coverageand fixed charge coverage financial ratios and same property NOI over a one-yearperiod.  Officers earned approximately $1.3 million under the 2008 single-yearLTIP.

*Multi-year component.*  The multi-year component focuses onperformance over a three year measurement period.  Grants under the multi-yearcomponent are issued and metrics and objectives are established every threeyears.  Any shares that are earned at the end of the measurement period willvest one year from the end of such measurement period.  Restricted shares havevoting rights and dividends accrue and earn interest at a rate determined bythe Executive Compensation Committee during the restricted period.  Only thedividends and accrued interest attributable to shares that vest will be paidwhen such shares vest.

In February 2010, the Committee approved the terms of the 2010 multi-yearcomponent.  This component focuses on absolute and relative cumulative totalshareholder return over the three year period and continued employment with theCompany.  Total shareholder return threshold, target and maximum objectiveswere established and a grant of restricted shares was issued to the Officerswith a value of $4.0 million.

In February 2007, the Committee approved the terms of the 2007 multi-yearcomponent.  This component focused on cumulative total shareholder return overthe three year period and continued employment with the Company.  Totalshareholder return threshold, target and maximum objectives were establishedand a grant of restricted shares was issued to the Officers in February 2007 witha value of $3.3 million.  The total shareholder return objectives under the2007 plan were not met and only the shares attributable to continued employmentwith the Company vested on December 31, 2010, which had a value of $403,000when granted.

** **

F-32 

 

 
****
 

 

 

 

**16.        SEGMENT REPORTING**

****We have two reportable segments which are multifamily propertiesand construction and other services.  Our multifamily properties segment ownsand manages multifamily communities and our construction and other servicessegment is a general contractor that acts as our in-house construction divisionand provides general contracting and construction management services to thirdparties.

The accounting policies of our segments are the same as those describedin Note 1, “Basis of Presentation and Accounting Policies.”  All of ourproperties are multifamily communities that have similar economiccharacteristics.  We evaluate the performance of our properties on anindividual and segment basis based on property NOI.  See Selected FinancialData presented in Part II, Item 6 of this report on Form 10-K for reconciliationsof property NOI to consolidated net (loss) income attributable to AERC inaccordance with GAAP.  We evaluate the performance of our construction andother services segment based on income from construction services, whichincludes direct as well as allocated general and administrative expenses.  

Segment information for the years ended December 31, 2010, 2009, and 2008is as follows:

Year Ended December 31,

*(In thousands)*

2010 

2009 

2008 

**Revenue**

Property  operations

Total  segment revenue

 $

135,847  

 $

127,972  

 $

127,848  

Less:  Intersegment revenue

-  

-  

-  

Total  net segment revenue

135,847  

127,972  

127,848  

Construction  and other services 

Total  segment revenue

22,524  

1,160  

1,010  

Less:  Intersegment revenue

(5,473)

-  

-  

Total  net segment revenue

17,051  

1,160  

1,010  

Reconciliation  of segment revenue to total consolidated revenue:

Total  revenue for reportable segments

158,371  

129,132  

128,858  

Elimination  of intersegment revenue

(5,473)

-  

-  

Fees,  reimbursements and other

817  

1,287  

1,784  

Total  consolidated revenue

 $

153,715  

 $

130,419  

 $

130,642  

 

F-33 

 

 

 

 

 

 

 

Year Ended December 31,

*(In thousands)*

2010 

2009 

2008 

**Profit (net of  intersegment revenue and expense)**

Property  operations

Property  revenue

 $

135,847  

 $

127,972  

 $

127,848  

Property  expenses

57,585  

54,802  

54,061  

Property  operations NOI

78,262  

73,170  

73,787  

Construction  and other services 

Construction  revenue

17,051  

1,160  

1,010  

Construction  expenses - direct

(15,025)

(606)

(150)

Construction  expenses - general and administrative (1)

(1,598)

(1,139)

(1,188)

Construction  and other services income

428  

(585)

(328)

Total  profit for reportable segments

78,690  

72,585 

73,459 

Reconciliation  of segment profit to consolidated (loss) income

from  continuing operations:

Total  profit for reportable segments

78,690  

72,585 

73,459 

Fees,  reimbursements and other revenue

817  

1,287  

1,784  

Depreciation  and amortization

(39,639)

(34,937)

(35,913)

Direct  property management and service company expense

(745)

(1,107)

(1,624)

General  and administrative

(15,684)

(14,024)

(13,769)

Costs  associated with acquisitions

(599)

-  

-  

Interest  income

34  

46  

132  

Interest  expense

(31,704)

(34,220)

(35,660)

Gain  on insurance recoveries

245  

665  

-  

Equity  in net income of joint venture

-  

-  

1,502  

Consolidated  (loss) income from continuing operations

 $

(8,585)

 $

(9,705)

 $

(10,089)

 

(1)

This  amount is included in construction and other services expenses on the  Consolidated Statements of Operations.

** **

Year Ended December 31,

*(In thousands)*

2010 

2009 

2008 

**Assets (net of  intersegment assets)**

Property  operations

Total  segment assets

 $

902,515  

 $

658,093  

 $

695,708  

Intersegment  assets

-  

-  

-  

Construction  and other services 

Total  segment assets

12,023  

812  

637  

Intersegment  assets

673  

-  

-  

Total  assets for reportable segments

914,538  

658,905  

696,345  

Elimination  of intersegment receivables

(673)

-  

-  

Other  assets

4,370  

3,600  

3,551  

Total  consolidated assets

 $

918,235  

 $

662,505  

 $

699,896  

 

 

F-34 

 

 

 

 

 

 

**17.        COMPREHENSIVEINCOME**

 The following chart identifies our total comprehensive income for theyears ended December 31, 2010, 2009 and 2008:

Year Ended December 31,

*(In thousands)*

2010 

2009 

2008 

**Comprehensive income:**

Net (loss) income  attributable to AERC

 $

(8,636)

 $

6,210  

 $

34,627  

Other comprehensive income  (loss):

Change  in fair value of hedge instruments

1,420  

1,479  

(1,849)

Total comprehensive (loss)  income

 $

(7,216)

 $

7,689  

 $

32,778  

 

 For informationregarding the change in fair value of hedge instruments, see “Derivative Instrumentsand Hedging Activity” in Note 1.

**18.        SUBSEQUENTEVENTS**

***Dividends.***  On February 1, 2011, we paid a dividend of$0.17 per common share to shareholders of record on January 14, 2011, which hadbeen declared on December 9, 2010.

 

F-35 

 

 
****
 

 

 

 

**19.        QUARTERLYFINANCIAL INFORMATION (UNAUDITED)**

2010

First

Second

Third

Fourth 

*(In thousands, except per  share data)*

Quarter

Quarter

 

Quarter

 

Quarter

Revenue

 $

32,956  

 $

34,880  

 $

40,290  

 $

45,589  

Operating income

 $

5,159  

 $

5,732  

 $

5,726  

 $

6,223  

Net (loss) income 

 $

(2,893)

 $

(2,561)

 $

(1,784)

 $

(1,346)

Net (loss) income attributable  to AERC

 $

(2,906)

 $

(2,574)

 $

(1,797)

 $

(1,359)

Basic and diluted earnings  per share

 $

(0.19)

 $

(0.17)

 $

(0.06)

 $

(0.03)

** **

2009

First

Second

Third

Fourth 

*(In thousands, except per  share data)*

Quarter

Quarter

 

Quarter

 

Quarter

Revenue

 $

32,388  

 $

32,748  

 $

32,866  

 $

32,415  

Operating income

 $

5,715  

 $

6,514  

 $

5,859  

 $

5,716  

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)

** **

** **

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,  2010:

Deducted  from asset accounts:

Allowance  for doubtful accounts

 $

80  

 $

2,239  

 $

-  

 $

(2,219)

 $

100  

Valuation allowance-deferred  tax asset

5,176  

(228)

-  

-  

4,948  

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  

 

(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, 2010**

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**

Residence at Barrington

September, 1995

5-30

 $

2,357  

 $

21,986  

 $

1,295  

Mallard's Crossing

February, 1995

5-30

941  

8,499  

2,230  

Village at Avon

June, 1998

5-30

2,145  

21,704  

2,373  

Westchester Townhomes

November, 1989

5-15

693  

5,686  

986  

Western Reserve

August, 1996

5-30

691  

6,866  

534  

Westlake Townhomes

October, 1995

5-30

559  

332  

293  

Williamsburg Townhomes

February, 1994

5-30

844  

12,787  

2,547  

**CENTRAL OHIO**

St. Andrews at Little Turtle

March, 1995

5-30

478  

4,216  

953  

Bedford Commons

December, 1994

5-30

929  

5,751  

717  

Bradford at Easton

October, 1995

5-30

2,033  

16,303  

2,071  

Residence at Christopher  Wren

March, 1994

5-30

1,560  

13,754  

2,801  

Heathermoor

August, 1994

5-30

1,796  

8,535  

1,784  

Kensington Grove

July, 1995

5-30

533  

4,600  

616  

Lake Forest

July, 1994

5-30

824  

6,135  

786  

Muirwood Village at Bennell

March, 1994

5-30

790  

4,657  

609  

Perimeter Lakes

Sept, 1996

5-30

1,265  

8,647  

1,053  

Saw Mill Village

April, 1997

5-30

2,548  

17,218  

3,321  

Sterling Park

August, 1994

5-30

646  

3,919  

478  

Residence at Turnberry

March, 1994

5-30

869  

11,567  

4,204  

Wyndemere Land

March, 1997

-

200  

-  

-  

**SOUTHERN OHIO**

Remington Place

April, 1997

5-30

1,645  

10,031  

1,596  

 

** **

F-38 

 

 
****
**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATION**

**REAL ESTATE AND ACCUMULATED DEPRECIATION**

**December 31, 2010**

 

*(In thousands)*

Gross Amount at Which Carried at December 31, 2010

Buildings &

Accumulated

Encumbrances

Property

Land

Improvements

Total

Depreciation

(1)

**RESIDENTIAL MULTIFAMILY  PROPERTIES**

**NORTHERN OHIO**

Residence at Barrington

 $

2,355  

 $

23,283  

 $

25,638  

 $

9,994  

 $

19,500  

Mallard's Crossing

941  

10,729  

11,670  

5,680  

-  

Village at Avon

2,145  

24,077  

26,222  

8,828  

21,000  

Westchester Townhomes

693  

6,672  

7,365  

5,035  

-  

Western Reserve

691  

7,400  

8,091  

2,911  

-  

Westlake Townhomes

-  

1,184  

1,184  

1,123  

-  

Williamsburg Townhomes

844  

15,334  

16,178  

8,782  

-  

**CENTRAL OHIO**

St. Andrews at Little Turtle

478  

5,169  

5,647  

2,752  

-  

Bedford Commons

929  

6,468  

7,397  

3,489  

-  

Bradford at Easton

2,033  

18,374  

20,407  

8,206  

12,359  

Residence at Christopher  Wren

1,560  

16,555  

18,115  

9,387  

9,082  

Heathermoor

1,796  

10,319  

12,115  

5,832  

8,260  

Kensington Grove

533  

5,216  

5,749  

2,696  

-  

Lake Forest

824  

6,921  

7,745  

3,796  

-  

Muirwood Village at Bennell

790  

5,266  

6,056  

2,889  

-  

Perimeter Lakes

1,265  

9,700  

10,965  

4,952  

5,494  

Saw Mill Village

2,548  

20,539  

23,087  

9,748  

16,886  

Sterling Park

646  

4,397  

5,043  

2,345  

-  

Residence at Turnberry

869  

15,771  

16,640  

9,060  

7,769  

Wyndemere Land

200  

-  

200  

-  

-  

**SOUTHERN OHIO**

Remington Place

1,645  

11,627  

13,272  

5,122  

-  

****

F-39 

 

 
****
**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATION**

**REAL ESTATE AND ACCUMULATED DEPRECIATION**

**December 31, 2010**

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  

 $

10,244  

Aspen Lakes Apartments

September, 1996

5-30

742  

5,501  

1,418  

Central Park Place

December, 1994

5-30

1,013  

7,363  

1,520  

Country Place Apartments

June, 1995

5-30

768  

4,181  

736  

Clinton Place Apartments

August, 1997

5-30

1,219  

9,478  

1,719  

Georgetown Park Apartments

June, 1999

5-30

1,778  

12,141  

13,651  

Oaks at Hampton

August, 1995

5-30

3,026  

27,204  

3,831  

The Landings at the Preserve

September, 1995

5-30

1,081  

7,190  

1,162  

Spring Brook Apartments

June, 1996

5-30

610  

5,308  

577  

Spring Valley Apartments

October, 1997

5-30

1,433  

13,461  

1,435  

Summer Ridge

April, 1996

5-30

1,251  

11,194  

1,929  

**FLORIDA**

Cypress Shores

February, 1998

5-30

2,769  

16,452  

1,487  

Windsor Pines

October, 1998

5-30

4,834  

28,795  

1,044  

Courtney Chase (2)

August, 2004

5-30

3,032  

20,452  

346  

Vista Lago (2)

March, 2005

5-30

4,012  

35,954  

309  

**GEORGIA**

The Falls

February, 1998

5-30

5,403  

23,420  

3,279  

Morgan Place

July, 1998

5-30

3,292  

9,159  

955  

Cambridge at Buckhead (2)

October, 2005

5-30

6,166  

16,730  

511  

Idlewylde (2)

June, 2007

5-30

12,058  

53,124  

761  

**BALTIMORE/WASHINGTON**

Reflections

February, 1998

5-30

1,807  

12,447  

3,581  

Annen Woods

July, 1998

5-30

1,389  

9,069  

1,504  

Hampton Point

July, 1998

5-30

3,394  

21,703  

6,695  

**INDIANA**

Residence at White River

February, 1997

5-30

1,064  

11,631  

1,653  

Center Point

August, 1997

5-30

1,508  

22,861  

1,561  

Steeplechase

July, 1998

5-30

2,261  

16,257  

872  

****

F-40 

 

 
****
**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATION**

**REAL ESTATE AND ACCUMULATED DEPRECIATION**

**December 31, 2010**

 

*(In thousands)*

Gross Amount at Which Carried at December 31, 2010

Buildings &

Accumulated

Encumbrances

Property

Land

Improvements

Total

Depreciation

(1)

**RESIDENTIAL MULTIFAMILY  PROPERTIES**

**MICHIGAN**

Arbor Landings

 $

1,682  

 $

20,094  

 $

21,776  

 $

9,150  

 $

16,405  

Aspen Lakes Apartments

1,087  

6,574  

7,661  

3,231  

-  

Central Park Place

1,013  

8,883  

9,896  

4,670  

6,181  

Country Place Apartments

768  

4,917  

5,685  

2,546  

-  

Clinton Place Apartments

1,219  

11,197  

12,416  

5,033  

8,172  

Georgetown Park Apartments

2,128  

25,442  

27,570  

12,510  

-  

Oaks at Hampton

3,026  

31,035  

34,061  

16,090  

-  

The Landings at the Preserve

1,143  

8,290  

9,433  

4,133  

-  

Spring Brook Apartments

610  

5,885  

6,495  

2,839  

-  

Spring Valley Apartments

1,433  

14,896  

16,329  

6,724  

10,817  

Summer Ridge

1,251  

13,123  

14,374  

6,408  

8,506  

**FLORIDA**

Cypress Shores

2,769  

17,939  

20,708  

7,658  

27,344  

Windsor Pines

4,834  

29,839  

34,673  

12,527  

39,390  

Courtney Chase(2)

3,032  

20,798  

23,830  

5,008  

20,878  

Vista Lago(2)

4,012  

36,263  

40,275  

7,808  

-  

**GEORGIA**

The Falls

5,403  

26,699  

32,102  

11,814  

15,984  

Morgan Place

3,292  

10,114  

13,406  

4,290  

-  

Cambridge at Buckhead(2)

6,166  

17,241  

23,407  

3,423  

-  

Idlewylde(2)

11,849  

54,094  

65,943  

8,393  

-  

**BALTIMORE/WASHINGTON**

Reflections

1,807  

16,028  

17,835  

6,536  

19,450  

Annen Woods

1,389  

10,573  

11,962  

4,626  

13,025  

Hampton Point

3,394  

28,398  

31,792  

10,905  

33,000  

**INDIANA**

Residence at White River

1,064  

13,284  

14,348  

6,051  

9,221  

Center Point

1,470  

24,460  

25,930  

11,003  

16,500  

Steeplechase

2,261  

17,129  

19,390  

7,146  

13,428  

** **

** **

F-41 

 

 
****
**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATION**

**REAL ESTATE AND ACCUMULATED DEPRECIATION**

**December 31, 2010**

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  

 $

966  

The Ashborough(2)

 September, 2010 

5-30

20,136  

65,885  

108  

The Belvedere (2)

 April, 2008 

5-30

6,044  

35,353  

149  

River Forest (2)

 April, 2008 

5-30

3,751  

25,758  

339  

River Forest - Phase II

 April, 2008 

5-30

904  

-  

6,715  

Riverside Station(2)

 May, 2010 

5-30

13,680  

38,708  

144  

Westwind Farms(2)

 December, 2010 

5-30

18,265  

67,098  

  4  

**TEXAS**

San Raphael Apartments(2)

 October, 2010 

5-30

3,777  

15,795  

16  

**TENNESSEE**

Vista Germantown (3)

5,649  

-  

-  

 $

167,959  

 $

896,531  

102,468  

**MANAGEMENT SERVICE  COMPANIES**

Land, Building and  Improvements

 November, 1993 

10-30

6,731  

 $

109,199  

** **

** **

F-42 

 

 
****
**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATION**

**REAL ESTATE AND ACCUMULATED DEPRECIATION**

**December 31, 2010**

 

*(In thousands)*

Gross Amount at Which Carried at December 31, 2010

Buildings &

Accumulated

Encumbrances

Property

Land

Improvements

Total

Depreciation

(1)

**RESIDENTIAL MULTIFAMILY  PROPERTIES**

**VIRGINIA**

The Alexander at Ghent

 $

4,367  

 $

44,230  

 $

48,597  

 $

6,165  

 $

24,500  

The Ashborough

20,136  

65,993  

86,129  

826  

-  

The Belvedere

6,044  

35,502  

41,546  

3,558  

25,520  

River Forest

3,751  

26,097  

29,848  

2,663  

18,495  

River Forest - Phase II

893  

6,726  

7,619  

155  

-  

Riverside Station

13,680  

38,852  

52,532  

863  

36,000  

Westwind Farms

18,265  

67,102  

85,367  

194  

-  

**TEXAS**

San Raphael Apartments

3,777  

15,811  

19,588  

149  

-  

**TENNESSEE**

Vista Germantown (3)

5,649  

-  

5,649  

-  

-  

168,449  

998,509  

1,166,958  

307,722  

 $

463,166  

**MANAGEMENT SERVICE  COMPANIES**

1,506  

5,400  

6,906  

2,561  

Land, Building and  Improvements

 $

169,955  

 $

1,003,909  

1,173,864  

310,283  

Furniture, Fixtures and  Equipment

33,690  

25,006  

Construction in Progress

2,735  

-  

**GRAND  TOTALS**

 $

1,210,289  

 $

335,289  

 

 

(1)

Encumbrances  include mortgage debt and other obligations secured by the real estate  assets.
      
(2)

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.

(3)

Under  development with an expected completion of 2012.

 

****

F-43 

 

 
****
 

 

 

 

**SCHEDULE III**

**ASSOCIATED ESTATES REALTY CORPORATIONREAL ESTATE AND ACCUMULATED DEPRECIATIONDECEMBER 31, 2010**

 The Aggregate Cost for Federal Income Tax purposes was approximately $1.2billion at December 31, 2010.

 The changes in Total Real Estate Assets for the years ended December 31,2010, 2009 and 2008 are as follows:

*(In thousands)*

2010

2009

2008

Balance, beginning of period

 $

940,643   

 $

957,061   

 $

965,013   

Disposal of fixed assets

(4,344)

(30,449)

(99,523)

New acquisition properties

253,240   

-   

78,320   

Improvements

20,750   

14,031   

13,251   

Balance, end of period

 $

1,210,289   

 $

940,643   

 $

957,061   

 

The changes inAccumulated Depreciation for the years ended December 31, 2010, 2009 and 2008are as follows:

            

*(In thousands)*

2010

2009

2008

Balance, beginning of period

 $

302,108   

 $

283,213   

 $

305,427   

Disposal of fixed assets

(4,238)

(15,448)

(56,152)

Depreciation for period

37,419   

34,343   

33,938   

Balance, end of period

 $

335,289   

 $

302,108   

 $

283,213   

 

F-44