****







**Form 10-K**



















|Ohio                                     | 34-1747603            
|---------------------------------------- | ----------------------
|(State or other jurisdiction of          | (I.R.S. Employer      
|incorporation or organization)           | Identification Number)
|                                         |                       
|1 AEC Parkway, Richmond Heights, Ohio    | 44143-1467            
|(Address of principal executive offices) | (Zip Code)            
|                                         |                       







|                                                                                                                                                 | Name of Each Exchange        
|------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------
|Title of Each Class                                                                                                                              | on Which Registered          
|                                                                                                                                                 |                              
|Common Shares, without par value                                                                                                                 | New York Stock Exchange, Inc.
|                                                                                                                                                 |                              
|Depositary Shares, each representing 1/10 of a Share of 8.70% Class B Series II                                                                  | New York Stock Exchange, Inc.
|Cumulative Redeemable Preferred Shares, without par value                                                                                        |                              
|                                                                                                                                                
|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 requirement for the past 90 days. Yes [x] No [ ]                        
|                                                                                                                                                
|Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and                   
|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, or a non-accelerated filer.                   
|See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):                               
|                                                                                                                                                
|Large accelerated filer [ ] Accelerated filer [ x ] Non-accelerated filer [ ]                                                                   
|                                                                                                                                                
|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 $172.4 million as of June 30, 2006.                
|                                                                                                                                                
|The number of Common Shares outstanding as of February 23, 2007 was 17,262,567.                                                                 
|                                                                                                                                                
|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 2, 2007 (in Part III).                    

****



**TABLE OF CONTENTS**

**FORM 10-K ANNUAL REPORT**

**FOR THE YEAR ENDED DECEMBER 31, 2006**

|                                                                              | **Page**
|----------------------------------------------------------------------------- | --------
|**Item**                                                                      | ****    
|**PART I**                                                                    |         
|1.	Business                                                                   | 1       
|General Development of Business                                               | 1       
|Business Segments                                                             | 1       
|Acquisition/Disposition                                                       | 1       
|Market-Rate                                                                   | 1       
|Affordable Housing                                                            | 2       
|Management and Service Operations                                             | 2       
|Operating Strategy and Business Objectives                                    | 2       
|Acquisition/Disposition                                                       | 2       
|Property Operations                                                           | 2       
|Fee Management/Advisory Business                                              | 2       
|Financing and Capital                                                         | 3       
|Income Taxes                                                                  | 3       
|Competitive Conditions                                                        | 3       
|Customers                                                                     | 3       
|Employees                                                                     | 3       
|Available Information                                                         | 3       
|Reports to Security Holders                                                   | 3       
|1A.	  Risk Factors                                                            | 4       
|1B.	  Unresolved Staff Comments                                               | 7       
|2.	Properties                                                                 | 7       
|Our Portfolio                                                                 | 7       
|Indebtedness Encumbering the Properties                                       | 11      
|3.	Legal Proceedings                                                          | 11      
|4.	Submission of Matters to a Vote of Security Holders                        | 12      
|Executive Officers of the Registrant and Other Key Employees                  | 12      
|                                                                              |         
|**PART II**                                                                   |         
|                                                                              |         
|5.	Market for Registrant's Common Equity, Related Stockholder Matters         | 14      
|and Issuer Purchases of Equity Securities                                     |         
|6.	Selected Financial Data                                                    | 15      
|7.	Management's Discussion and Analysis of Financial                          | 17      
|Condition and Results of Operations                                           |         
|7A.	Quantitative and Qualitative Disclosures About Market Risk                | 30      
|8.	Consolidated Financial Statements and Supplementary Data                   | 30      
|9.	Changes in and Disagreements with Accountants                              |         
|on Accounting and Financial Disclosure                                        | 30      
|9A.	Controls and Procedures                                                   | 30      
|9B.	Other Information                                                         | 31      
|                                                                              |         
|**PART III**                                                                  |         
|                                                                              |         
|10.	Directors, Executive Officers and Corporate Governance                    | 32      
|11.	Executive Compensation                                                    | 32      
|12.	Security Ownership of Certain Beneficial Owners and Management            | 32      
|and Related Shareholder Matters                                               |         
|13.	Certain Relationships and Related Transactions, and Director Independence | 33      
|14.	Principal Accountant Fees and Services                                    | 33      
|                                                                              |         
|**PART IV**                                                                   |         
|                                                                              |         
|15.	Exhibits and Financial Statement Schedules                                | 34      



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

**Item 1.  Business**

**GENERAL DEVELOPMENT OF BUSINESS**

We are a self-administered and self-managed equity real estate investment trust ("REIT").  We are
publicly traded on the New York Stock Exchange ("NYSE") under the ticker symbol "AEC".  Our
headquarters is located at 1 AEC Parkway in Richmond Heights, Ohio.  The headquarters is comprised of
one office building of approximately 41,000 square feet and an adjacent 3.7 acre parcel of land suitable for
further development or expansion, both of which we own under a ground lease.

We are a fully integrated multifamily real estate company engaged in property acquisition, advisory,
development, management, disposition, operation and ownership activities.  We own three taxable REIT
subsidiaries that provide management and other services to us and to third parties (collectively the "Service
Companies").  As of December 31, 2006, we owned or property managed 99 apartment communities in nine
states consisting of 20,558 units.  See Item 2 for a state-by-state listing of our portfolio.  We own, either
directly or indirectly through subsidiaries, or hold ownership interests in 66 of the 99 apartment communities
containing 15,355 units in eight states.  Twelve of those owned or partially owned apartment communities,
consisting of 1,254 units, are Affordable Housing communities.  We also property manage 33 communities
in which we do not have an ownership interest, consisting of 5,203 units.  Additionally, we asset manage
a 186-unit apartment community and one commercial property containing approximately 145,000 square
feet.  Large pension funds, non-profit organizations, and affiliated or non-affiliated third parties own the
managed properties.  In January 2007, we assumed property management responsibilities for a 200-unit
Affordable Housing property located in Pennsylvania.  In February 2007 we completed the sale of a 120-unit
congregate care property located in Northeast Ohio.  Our consolidated financial statements include the
accounts of all subsidiaries and qualified REIT subsidiaries, which include but are not limited to, separate
legal entities that were formed in connection with project specific, nonrecourse mortgage refinancing for
which records, books of accounts and depository accounts must be maintained separately and apart from
any other person or entity; the Service Companies, each of which is taxed as a Taxable REIT Subsidiary
("TRS") under the REIT Modernization Act ("RMA") implemented in 1999, certain variable interest entities
of which we are the primary beneficiary and holder of a majority voting interest, and an Operating
Partnership structured as a DownREIT, of which we own 97.4%.

**BUSINESS SEGMENTS**

We have four reportable segments: (1) Acquisition/Disposition multifamily properties, (2) Same
Community Market-Rate ("Market-Rate") multifamily properties, (3) Affordable Housing multifamily
properties, and (4) Management and Service Operations.  We have identified these segments based upon
types of property and services.  All of our segments are located in the United States.

See Note 19 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of
this report on Form 10-K for the segment financial information.

***Acquisition/Disposition***.The Acquisition/Disposition properties represent acquired or developed
properties which have not yet reached stabilization (we consider a property stabilized when its occupancy
rate reaches 93.0% and we have owned the property for one year) and properties that have been sold or
are classified as held for sale in accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."

***Market-Rate***.The Market-Rate properties are wholly owned conventional multifamily residential
properties that we have owned for the entirety of the comparison periods.

***Affordable Housing***.The Affordable Housing properties are multifamily properties for which the
rents are subsidized and certain aspects of the operations are regulated by U.S. Department of Housing and
Urban Development ("HUD") in compliance with Section 8 of the National Housing Act of 1937.

***Management and Service Operations***.The Management and Service Operations provide
management and advisory services to the Acquired, Market-Rate and Affordable Housing properties that
we own or have an investment in, as well as to non-owned properties that we manage.  This segment also
includes the results from our painting subsidiary, Merit Painting Services.

**OPERATING STRATEGY AND BUSINESS OBJECTIVES**

****See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report on Form 10-K for additional discussion of 2007 outlook and strategy.

***Acquisition/Disposition.***Our objective is to systematically migrate our portfolio to higher growth
markets such as Florida, Atlanta, and the Baltimore/Washington, DC/Northern Virginia corridor, and to
reduce the number of markets in which we operate.  In doing so, we expect to continue to sell non-core
properties located in the Midwest while evaluating potential acquisition opportunities in the markets noted
above and other markets that we believe will offer an acceptable return on our investment.  We continually
monitor the profitability of all of our properties and therefore we may also consider opportunistic sales of
properties in any market, including our targeted growth markets, if we determine that the proceeds from such
sales would provide a greater return on equity and increased cash flow when invested in other properties
or used to reduce debt or repurchase our shares.  During 2006, we sold eight properties totaling 2,040 units,
seven of which were located in Ohio and one property located in North Carolina, which was the only property
that we owned or managed in that market.  Strong competition for the acquisition of apartment communities
in our targeted growth markets during 2006 resulted in acquisition prices that did not meet our investment
criteria, thus impeding our ability to execute new property acquisitions.  During 2007, we expect to sell five
properties located in Ohio and the one property we own in Texas, and reinvest the sale proceeds in the
higher growth markets that we have identified, provided we are able to acquire properties in accordance with
our investment criteria and to pay off debt.

**Property Operations: Market-Rate Properties.**  We operate in many different markets and sub-markets.  Each of these markets may have economic characteristics that differ from other markets, and as
a result, the degree to which we can increase rents may vary between markets.  However, our goal is to
maximize Market-Rate property operating income in all of our markets through a combination of increasing
net collected rents and by continual efforts to contain controllable operating expenses.  Strategies to
increase rents include constant monitoring of our markets, providing superior resident service and desirable
communities in which to live, and the implementation of new programs such as utility and refuse
reimbursements.  Our AEC Academy for Career Development provides training and support for our
employees, which we believe results in high quality personnel at the communities and aids in employee
retention.  Additionally, we attempt to minimize controllable operating expenses through strategies such as
the negotiation of centralized purchasing contracts benefitting multiple properties and through diligent
upkeep and regular maintenance at our apartment communities.

**Property Operations: Affordable Housing Properties.**    We wholly own 11 Affordable Housing
properties comprised of 1,146 units, which have been part of the portfolio since 1993.  While these
properties' rent growth is limited, due to regulatory restrictions, they have provided a stabilizing influence
on the portfolio.  We have developed detailed systems and processes to effectively operate these properties,
which by their nature, exist within a complex, highly regulated environment.  Economic efficiencies are
realized in conjunction with the management of another 30 Affordable Housing properties (4,804 units)
owned by third parties and one property (108 units) in which we are a joint venture partner.

***Fee Management/Advisory Business*****.  We apply our management approach to the management
of properties for third parties.  We believe that third party property management broadens our knowledge
of a market, creates opportunities for future acquisitions, enhances purchasing power and provides a
network for new personnel while at the same time generating fee income.

***Financing and Capital****.*  Our overall investment goal is to maximize the return on our investments
in order to increase shareholder value.  Proceeds received from new debt, debt refinancing, property sales,
or equity issuances are invested based upon the expected return and the impact on our balance sheet.  The
reduction of overall interest costs and an increase in the number of unencumbered assets are two of our
objectives.  During 2006, we focused on reducing our total debt in order to reduce our debt to real estate
assets ratio (on an undepreciated basis).  We believe that this is an important measure of our long term
liquidity.  Proceeds received from debt refinancings and the sale of eight properties in 2006 and one property
at the end of 2005 were used to defease/prepay 19 mortgage loans totaling $201.8 million, pay $14.4 million
in related defeasement and other prepayment costs, and to repurchase $10.2 million of our common shares.
Our ratio of total debt to real estate assets (on an undepreciated basis) was reduced to 56.8% at December
31, 2006 compared to 60.7% at December 31, 2005.  We expect to further reduce this ratio during 2007.
We estimate the fair value of our unencumbered assets at December 31, 2006 to currently be in excess of
$200.0 million.  Additionally, in January 2007, we prepaid a $15.2 million mortgage loan and incurred $1.6
million in related prepayment costs.  We estimate the fair value of this asset to be approximately $29.0
million.



**INCOME TAXES**

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

**COMPETITIVE CONDITIONS**

See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report on Form 10-K.

**CUSTOMERS**

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

**EMPLOYEES**

At February 21, 2007, we employed approximately 650 people.  Satisfactory relations have generally
prevailed between us and our employees.

**AVAILABLE INFORMATION**

Shareholders may obtain, free of charge from our Internet site at http://www.aecrealty.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 to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of
1934, as amended, as soon as reasonably practicable after we file such material electronically with, or
furnish it to, the Securities and Exchange Commission ("SEC").

**REPORTS TO SECURITY HOLDERS**

We issue annual reports to our security holders which contain financial statements.

**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 be additional risks that we do not presently know of or that we
currently consider immaterial.  All of these risks could adversely affect our business, financial condition,
results of operations and cash flows.  Our ability to pay dividends on, and the market price of, our equity
securities may be adversely affected if any of such risks are realized.

**We are subject to risks inherent in the ownership of real estate.**  We own and manage
multifamily apartment communities that are subject to varying degrees of risk generally incident to the
ownership of real estate.  Our financial condition, the value of our properties and our ability to make
distributions to our shareholders will be dependent upon our ability to operate our properties in a manner
sufficient to generate income in excess of operating expenses and debt service charges, which may be
affected by the following risks, 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, our ability to consummate the sale of properties pursuant to our current
plan, the overall level of economic activity, the availability of consumer credit and mortgage
financing, unemployment rates and other similar factors;
- a lessening of demand for the multifamily units that we own or manage;
- competition from other available multifamily units and changes in market rental rates;
- increases in property and liability insurance costs;
- unanticipated increases in real estate taxes and other operating expenses (e.g., cleaning,
utilities, repair and maintenance costs, insurance and administrative costs, security,
landscaping, staffing and other general costs);
- weather conditions that adversely affect operating expenses;
- expenditures that cannot be anticipated, such as utility rate and usage increases, unanticipated
repairs and real estate tax valuation reassessments or millage rate increases;
- our inability to control operating expenses or achieve increases in revenue;
- the results of litigation filed or to be filed against us;

risks of personal injury claims and property damage related to mold claims because of
diminished insurance coverage;

catastrophic property damage losses that are not covered by our insurance;

risks associated with property acquisitions such as environmental liabilities, among others;

changes in government regulations affecting properties the rents of which are subsidized and
certain aspects of which are regulated by the United States Department of Housing and Urban
Development ("HUD") and other properties we own;

- our inability to renew current contracts with HUD for rent-subsidized properties at existing rents;
- changes in or termination of contracts relating to our third party management and advisory
business;
- risks related to our joint ventures;
- 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

**We are dependent on rental income from our multifamily apartment communities.**  If we are
unable to attract and retain residents or if our residents are unable to pay their rental obligations, our
financial condition and funds available for distribution to our shareholders will be adversely affected.

**Our multifamily apartment communities are subject to competition.**Our apartment
communities are located in developed areas that include other apartment communities.  Our apartment
communities also compete with other housing alternatives, such as condominiums, single and multifamily
rental homes and owner occupied single and multifamily homes, in attracting residents.  In certain markets,
such as Florida, failed condominium conversions are reverting back to apartment rentals creating increasing
competition in those markets.  Such competition may affect our ability to attract and retain residents and to
increase or maintain rental rates.

**The properties we own are primarily concentrated in Ohio, Michigan, Indiana, Maryland,
Pennsylvania, Florida and Georgia.**   As of December 31, 2006, approximately 50%, 20%, 6%, 5%, 3%,
9% and 6% of the units in properties we own are located in Ohio, Michigan, Indiana, Maryland,
Pennsylvania, Florida and Georgia, respectively.  Our performance, therefore, is linked to economic
conditions and the market for available rental housing in these states and, more importantly, their respective
sub-markets.  The decline in the market for apartment housing in the various sub-markets in Ohio, or to a
lesser extent, the sub-markets in the other states, may adversely affect our financial condition, results for
third parties of operations and ability to make distributions to our shareholders.

**We own or manage properties that are subject to government programs.**  As of December 31,
2006, we own directly or through subsidiaries or joint ventures 12 properties with 1,254 units and manage,
for third parties with one or more of our affiliates, 29 properties with approximately 4,604 units, which benefit
from some form of interest rate or rental subsidy subject to governmental programs administered by HUD.
As a condition to the receipt of assistance under HUD programs, many of the properties must comply with
various HUD requirements, which typically include maintenance of decent, safe and sanitary housing, HUD
approval of rent adjustments, and, in the case of a HUD insured mortgage, approval of a transfer of the
property.  We can give no assurance that we will be able to renew current agreements with HUD at existing
or higher rents.  HUD requirements, and other current and future laws regarding the provision of affordable
housing and any changes to existing law making it more difficult to meet such requirements, could adversely
affect our results of operations, financial condition and ability to make distributions to our shareholders.

**Our insurance may not be adequate to cover certain risks.**  There are certain types of risks,
generally of a catastrophic nature, such as earthquakes, floods, windstorms, act of war and terrorist attacks
that may be uninsurable, or are not economically insurable, or are not fully covered by insurance.  Moreover,
certain risks, such as mold and environmental exposures, generally are not covered by our insurance.  Any
such uninsured loss could have a material adverse effect on our business, financial condition and results
of operations.

**Debt financing could adversely affect our performance.**  A majority of our assets are
encumbered by project specific, non-recourse, and except for five properties non-cross-collateralized
mortgage debt.  There is a risk that these properties may not have sufficient cash flow from operations to
pay required principal and interest.  We may not be able to refinance these loans at an amount equal to the
loan balance and the terms of any 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 a mortgage,
the property securing the mortgage may be foreclosed with a consequent loss of income and value to us.

**Real estate investments are generally illiquid, and we may not be able to sell our properties
when it is economically or strategically advantageous to do so.**  Real estate investments generally
cannot be sold quickly, and our ability to sell properties may be affected by market conditions.  We may not
be able to diversify or vary our portfolio promptly in accordance 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 some situations when it may be economically
advantageous to do so, thereby potentially adversely affecting our ability to make distributions to our
shareholders.

**Our access to public debt markets is limited.**  Substantially all of our debt financings are secured
by mortgages on our properties because of our limited access to public debt markets.

**Revenue from third party management may further decline.**  We could lose a significant portion
of our third party management revenue if a client failed to renew or terminated our management
agreements.  Sixty-seven percent of the properties we manage for third parties are owned or controlled by
a single client.  The asset advisory and property management contracts with pension funds and non-affiliated third party owners are generally terminable upon 30 days notice.

**Litigation that may result in unfavorable outcomes.**  Like many real estate operators, we are
frequently involved in lawsuits involving premises liability claims, housing discrimination claims and alleged
violations of landlord-tenant laws, which may give rise to class action litigation or governmental
investigations.  Any material litigation not covered by insurance, such as a class action, could result in
substantial costs being incurred.

**Our financial results may be adversely impacted if we are unable to sell properties and
employ the proceeds in accordance with our strategic plan.**  Our ability to pay down debt, reduce our
interest costs, buy back stock and acquire properties is impacted by our ability to sell the properties we have
selected for disposition at the prices and within the deadlines we have established for each respective
property.  Moreover, if we are unable to acquire properties at prices consistent with our investment criteria,
we may reduce or discontinue selling properties.

**The costs of complying with laws and regulations could adversely affect our cash flow and
ability to make distributions to our shareholders.**  Our properties must comply with Title III of the
Americans with Disabilities Act (the "ADA") to the extent that they are "public accommodations" or
"commercial facilities" as defined in the ADA.  The ADA does not consider apartment communities to be
public accommodations or commercial facilities, except for portions of such communities that are open to
the public.  In addition, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment
communities first occupied after March 13, 1990, to be accessible to the handicapped.  Other laws also
require apartment communities to be handicap accessible.  Noncompliance with these laws could result in
the imposition of fines or an award of damages to private litigants.  We have been subject to lawsuits
alleging violations of handicap design laws in connection with certain of our developments.  If compliance
with these laws involves substantial expenditures or must be made on an accelerated basis, our ability to
make distributions to our shareholders could be adversely affected.

Under various federal, state and local laws, an owner or operator of real estate may be liable for the
costs of removal or remediation of certain hazardous or toxic substances on, under or in the property.  This
liability may be imposed without regard to whether the owner or operator knew of, or was responsible for,
the presence of the substances.  Other law imposes on owners and operators certain requirements
regarding conditions and activities that may affect human health or the environment.  Failure to comply with
applicable requirements could complicate our ability to lease or sell an affected property and could subject
us to monetary penalties, costs required to achieve compliance and potential liability to third parties.  We
are not aware of any material noncompliance, liability or claim relating to hazardous or toxic substances or
other environmental matters in connection with any of our properties.  Nonetheless, it is possible that
material environmental contamination or conditions exist, or could arise in the future in the apartment
communities or on the land upon which they are located.

**We are subject to the risks associated with investments through joint ventures.**  Two of our
properties are owned by joint ventures in which we do not have a controlling interest.  We may enter into
joint ventures, including joint ventures that we do not control, in the future.  Any joint venture investment
involves risks such as the possibility that the co-venturer may seek relief under federal or state insolvency
laws, or have economic or business interests or goals that are inconsistent with our business interests or
goals.  While the bankruptcy or insolvency of our co-venturer generally should not disrupt the operations of
the joint venture, we could be forced to purchase the co-venturer's interest in the joint venture or the interest
could be sold to a third party.  We also may guarantee the indebtedness of our joint ventures.  If we do not
have control over a joint venture, the value of our investment may be affected adversely by a third party that
may have different goals and capabilities than ours.

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

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

**Our ownership limit may discourage takeover attempts.**  With certain limited exceptions, our
Second Amended and Restated Articles of Incorporation, as amended and supplemented to date, prohibit
the ownership of more than 4.0% of the outstanding common shares and more than 9.8% of the shares of
any series of any class of our preferred shares by any person.  These restrictions are likely to have the effect
of precluding acquisition of control of us without our consent even if a change in control is in the interests
of shareholders.

**We are subject to control by our directors and officers.**  Our directors and executive officers and
some members of their respective families owned approximately 18.0% of our common shares as of
December 31, 2006.  Accordingly, those persons have substantial influence over us and the outcome of
matters submitted to our shareholders for approval.

**We depend on our key personnel.**  Our success depends to a significant degree upon the
continued contribution of key members of our management team, who may be difficult to replace.  The loss
of services of these executives could have a material adverse effect on us.  There can be no assurance that
the services of such personnel will continue to be available to us.  Mr. Jeffrey I. Friedman, Associated
Estates' Chairman of the Board, President and Chief Executive Officer, is a party to an employment
agreement with Associate Estates.  We do not hold key-man life insurance on any of our key personnel.

**Item 1B.  Unresolved Staff Comments**

None.

**Item 2.  Properties**



***Our Portfolio****.*  The following table represents our portfolio as of December 31, 2006, which consists
of properties we owned, directly or indirectly, properties in which we are a joint venture partner and
properties we manage.

|                                      | **Total Number**      | **Total Number**     
|------------------------------------- | --------------------- | ---------------------
|                                      | **of Properties at**  | **of Units at**      
|                                      | **December 31, 2006** | **December 31, 2006**
|**Wholly Owned Properties**           |                       |                      
|Market-Rate Properties:               |                       |                      
|Florida                               | 3                     | 956                  
|Georgia                               | 2                     | 706                  
|Indiana                               | 3                     | 836                  
|Maryland                              | 3                     | 667                  
|Michigan                              | 11                    | 2,888                
|Ohio                                  | 26                    | 6,029                
|Pennsylvania                          | 1                     | 468                  
|Texas                                 | 1                     | 104                  
|                                      | 50                    | 12,654               
|Affordable Housing Properties:        |                       |                      
|Ohio                                  | 11                    | 1,146                
|Acquisition/Disposition Properties:   |                       |                      
|Florida                               | 1                     | 316                  
|Georgia                               | 1                     | 168                  
|Ohio                                  | 1                     | 120                  
|                                      | 3                     | 604                  
|                                      |                       |                      
|Total wholly owned properties         | 64                    | 14,404               
|                                      |                       |                      
|**Joint Ventures:**                   |                       |                      
|Market-Rate Property:                 |                       |                      
|49.0% owned - Georgia                 | 1                     | 843                  
|Affordable Housing Property:          |                       |                      
|50.0% owned - Ohio                    | 1                     | 108                  
|Total joint ventures                  | 2                     | 951                  
|                                      |                       |                      
|**Managed for Pension Fund Clients:** |                       |                      
|Market-Rate Properties:               |                       |                      
|Colorado                              | 1                     | 258                  
|                                      |                       |                      
|**Managed for Other Third Parties:**  |                       |                      
|Affordable Housing Properties:        |                       |                      
|Florida                               | 2                     | 200                  
|Ohio                                  | 23                    | 3,908                
|Pennsylvania                          | 4                     | 496                  
|                                      | 29                    | 4,604                
|Market-Rate Properties:               |                       |                      
|Ohio                                  | 3                     | 341                  
|                                      | 32                    | 4,945                
|Total managed properties              | 33                    | 5,203                
|**Total Portfolio**                   | **99**                | **20,558**           
|                                      |                       |                      
|**********Other Properties:**         | ****                  | **Units/Square Feet**
|**Asset Managed for Third Parties:**  |                       |                      
|Multifamily:                          |                       |                      
|Texas                                 | 1                     | 186                  
|Commercial:                           |                       |                      
|California                            | 1                     | 145,000              
|                                      | 2                     |                      

|                                              | **Total Number**      | **Age of Owned**        
|--------------------------------------------- | --------------------- | ------------------------
|**Wholly Owned and Joint Venture Properties** | **of Units at**       | **Properties at**       
|                                              | **December 31, 2006** | **December 31, 2006(a)**
|                                              |                       |                         
|**Wholly Owned Properties**                   |                       |                         
|Market-Rate Properties:                       |                       |                         
|                                              |                       |                         
|**Florida**                                   |                       |                         
|Courtney Chase                                | 288                   | 3                       
|Cypress Shores                                | 300                   | 15                      
|Windsor Pines                                 | 368                   | 8                       
|                                              | 956                   |                         
|**Georgia**                                   |                       |                         
|The Falls                                     | 520                   | 20                      
|Morgan Place                                  | 186                   | 17                      
|                                              | 706                   |                         
|**Indiana**                                   |                       |                         
|Residence at White River                      | 228                   | 15                      
|Steeplechase                                  | 264                   | 8                       
|Waterstone Apartments                         | 344                   | 9                       
|                                              | 836                   |                         
|**Maryland**                                  |                       |                         
|Annen Woods                                   | 131                   | 19                      
|Hampton Point                                 | 352                   | 20                      
|Reflections                                   | 184                   | 21                      
|                                              | 667                   |                         
|**Michigan**                                  |                       |                         
|Arbor Landings                                | 328                   | 11                      
|Aspen Lakes Apartments                        | 144                   | 25                      
|Central Park Place                            | 216                   | 18                      
|Country Place Apartments                      | 144                   | 17                      
|Clinton Place Apartments                      | 202                   | 18                      
|Georgetown Park Apartments                    | 480                   | 12                      
|Oaks and Woods at Hampton                     | 544                   | 18                      
|The Landings at the Preserve                  | 190                   | 15                      
|Spring Brook Apartments                       | 168                   | 18                      
|Spring Valley Apartments                      | 224                   | 19                      
|Summer Ridge                                  | 248                   | 15                      
|                                              | 2,888                 |                         
|                                              |                       |                         
|**Ohio**                                      |                       |                         
|St. Andrews at Little Turtle                  | 102                   | 19                      
|Barrington                                    | 288                   | 7                       
|Bay Club                                      | 96                    | 16                      
|Bedford Commons                               | 112                   | 19                      
|Bradford at Easton                            | 324                   | 10                      
|Country Club Apartments                       | 316                   | 17                      
|The Cloisters                                 | 506                   | 16                      
|Hawthorne Hills Apartments                    | 88                    | 33                      
|Heathermoor                                   | 280                   | 17                      

(a) 	Age of property is determined by subtracting the year the property was built or the year the property was rehabilitated from 2006.

|                                              | **Total Number**      | **Age of Owned**         
|--------------------------------------------- | --------------------- | -------------------------
|**Wholly Owned and Joint Venture Properties** | **of Units at**       | **Properties at**        
|                                              | **December 31, 2006** | **December 31, 2006 (a)**
|                                              |                       |                          
|**Wholly Owned Properties**                   |                       |                          
|                                              |                       |                          
|**Ohio (Continued)**                          |                       |                          
|Kensington Grove                              | 76                    | 11                       
|Lake Forest                                   | 192                   | 12                       
|Mallard's Crossing                            | 192                   | 16                       
|Muirwood Village at Bennell                   | 164                   | 18                       
|Perimeter Lakes                               | 189                   | 14                       
|Remington Place                               | 234                   | 16                       
|Residence at Christopher Wren                 | 264                   | 13                       
|Residence at Turnberry                        | 216                   | 15                       
|Saw Mill Village                              | 340                   | 19                       
|Sterling Park                                 | 128                   | 12                       
|Village at Avon                               | 312                   | 5                        
|North Pointe                                  | 949                   | 35                       
|Westchester Townhouses                        | 136                   | 17                       
|Western Reserve                               | 108                   | 8                        
|Westlake Townhouses                           | 7                     | 21                       
|Williamsburg at Greenwood Village             | 260                   | 16                       
|The Woodlands                                 | 150                   | 32                       
|                                              | 6,029                 |                          
|**Pennsylvania**                              |                       |                          
|Chestnut Ridge                                | 468                   | 20                       
|                                              |                       |                          
|**Texas**                                     |                       |                          
|Fleetwood                                     | 104                   | 13                       
|                                              |                       |                          
|Affordable Housing Properties:                |                       |                          
|**Ohio**                                      |                       |                          
|Ellet                                         | 100                   | 28                       
|Puritas Place                                 | 100                   | 25                       
|Riverview Towers                              | 98                    | 27                       
|Shaker Park Gardens II                        | 151                   | 42                       
|State Road Apartments                         | 72                    | 29                       
|Statesman II                                  | 47                    | 19                       
|Sutliff Apartments                            | 185                   | 27                       
|Tallmadge Acres                               | 125                   | 25                       
|Twinsburg Apartments                          | 100                   | 27                       
|Village Towers                                | 100                   | 27                       
|West High Apartments                          | 68                    | 25                       
|                                              | 1,146                 |                          

(a) 	Age of property is determined by subtracting the year the property was built or the year the property was rehabilitated from 2006.

|                                                      | **Total Number**      | **Age of Owned**         
|----------------------------------------------------- | --------------------- | -------------------------
|                                                      | **of Units**          | **Properties at**        
|                                                      | **December 31, 2006** | **December 31, 2006 (a)**
|Acquisition/Disposition Properties:                   |                       |                          
|**Florida**                                           |                       |                          
|Vista Lago (Acquired March 2005)                      | 316                   | 3                        
|                                                      |                       |                          
|**Georgia**                                           |                       |                          
|Cambridge at Buckhead (Acquired October 2005)         | 168                   | 11                       
|                                                      |                       |                          
|**Ohio**                                              |                       |                          
|Gates Mills Club (Held for Sale at December 31, 2006) | 120                   | 26                       
|**Total wholly owned properties**                     | 14,404                |                          
|                                                      |                       |                          
|**Joint Venture Properties**                          |                       |                          
|Market-Rate Property:                                 |                       |                          
|**49% Owned - Georgia**                               |                       |                          
|Idlewylde                                             | 843                   | 6                        
|                                                      |                       |                          
|Affordable Housing Property:                          |                       |                          
|**50% Owned - Ohio**                                  |                       |                          
|Lakeshore Village                                     | 108                   | 24                       
|**Total joint venture properties**                    | 951                   |                          



|                               |                  |           | **Anticipated**
|------------------------------ | ---------------- | --------- | ---------------
|                               | **Location**     | **Units** | **Completion** 
|                               |                  |           |                
|**Undeveloped Land Parcels:**  |                  | **Acres** |                
|Aspen Lakes land               | Grand Rapids, MI | 19.5      | On Hold        
|Landings at the Preserve land  | Battle Creek, MI | 4.3       | On Hold        
|Westlake land                  | Westlake, OH     | 39.0      | On Hold        
|Wyndemere land                 | Franklin, OH     | 10.0      | On Hold        
|Total undeveloped land parcels |                  | **72.8**  |                

(a) 	Age of property is determined by subtracting the year the property was built or the year the property was rehabilitated from 2006.

***Indebtedness Encumbering the Properties****.*We have financed and, in many cases, refinanced
the acquisition, development and rehabilitation of our properties with a variety of sources of mortgage
indebtedness.  At December 31, 2006, twenty-one of the sixty-four wholly owned properties were
unencumbered (eleven of which are Affordable Housing properties and one that was classified as held for
sale), thirty-six properties were encumbered by conventional mortgages, five properties were encumbered
by cross-collateralized, cross-defaulted mortgage loans, and two properties secured our lines of credit.

**Item 3.  Legal Proceedings**

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

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year
covered by this report.

**Executive Officers of the Registrant and Other Key Employees**

The following information regarding our executive officers is provided pursuant to Instruction 3 to
Item 401(b) of Regulation S-K.

|Name                | Age | Position with the Company                                   
|------------------- | --- | ------------------------------------------------------------
|Jeffrey I. Friedman | 55  | Chairman of the Board, President and Chief Executive Officer
|Martin A. Fishman   | 65  | Vice President, General Counsel and Secretary               
|Lou Fatica          | 40  | Vice President, Treasurer and Chief Financial Officer       
|John T. Shannon     | 45  | Senior Vice President, Operations                           

Jeffrey I. Friedman has served as our Chairman of the Board and Chief Executive Officer since the
Company was organized in 1993 and served as our President from the Company's organization until
February 24, 2000.  In August 2002, Mr. Friedman reassumed the role of President.  Mr. Friedman joined
the Company's predecessor, Associated Estates Group, ("AEG"),  in 1974 and was the Chief Executive
Officer and President of Associated Estates Corporation, a company in the AEG group, from 1979 to 1993.

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

Lou Fatica joined the Company in 1999 as Controller, and was promoted to Vice President-Controller during 2000.  On March 15, 2001, Mr. Fatica became Vice President, Treasurer and Chief
Financial Officer of the Company.  Mr. Fatica is a Certified Public Accountant (CPA), a member of the
American Institute of Certified Public Accountants (AICPA) and the Ohio Society of CPA's.

John T. Shannon joined the Company in 2004 as Senior Vice President, Operations.  Mr. Shannon
had previously held the position of Vice President of Operations at The Shelter Group and has 17 years of
property management experience.

In addition to the officers named in the table above, the following persons have been appointed as
officers of the Company and hold positions in senior management as indicated:

Patrick Duffy joined the Company in 2005 as Vice President of Strategic Marketing.  Mr. Duffy plays
a key role in our diversification plan by assisting in identifying markets for asset acquisitions and
dispositions.  In addition, he is responsible for developing property-specific marketing plans and strategies
to assist in maximizing top line revenue growth for our Market-Rate properties, while also assisting with
pricing and positioning strategies.  Mr. Duffy previously held the position of Senior Vice President 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 20 years of experience in the
real estate industry and is 45 years old.

Kara Florack joined the Company in 2004 as Director of Compensation, and was promoted to
Director of Human Resources in November 2005.  In January 2007, she became Vice President of Human
Resources.  Ms. Florack previously held the position of Assistant Manager of Compensation at Charter One
Bank where she worked for 3 years.  Ms. Florack has a Bachelor's degree from Boston University and is 31
years old.



Jenee McClain-Bankhead joined the Company in 1994.  She is currently a Regional Vice President
and is responsible for the Company's Affordable Housing portfolio and related Affordable Housing fee
management business.  Ms. McClain-Bankhead holds the designations of Certified Financial Manager,
Certified Occupancy Specialist and Certified Credit Compliance Professional and is 36 years old.

Miria C. Rabideau joined the Company in 1994 as a Property Manager, and was promoted to
Regional Manager in 2003.  During 2006, she was promoted to Regional Vice President.  Ms. Rabideau is
responsible for properties in Colorado, Indiana, Michigan, Northwest Ohio and Texas.  Ms. Rabideau has
14 years of asset and property management experience.  She has a Bachelor's degree from Michigan State
University and is 37 years old.

Beth L. Stoll joined the Company in 2004 as a Regional Vice President, and was promoted to Vice
President of Operations during 2006.  She is responsible for the Market-Rate properties that we own and
manage in Georgia, Maryland, Florida and Central Ohio.  Ms. Stoll is also responsible for the AEC Academy
for Career Development, which provides training and support for our employees.  Ms. Stoll previously held
the position of Regional Vice President at The Shelter Group. Ms. Stoll has over 20 years of property
management experience and is 51 years old.

**PART II**

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

Our common shares are traded on the New York Stock Exchange under the trading symbol "AEC."

The following table sets forth for the periods indicated the high and low closing sale prices per
common share as reported on the New York Stock Exchange (composite tape) and the dividends declared
per common share.

|               |             | Dividends Declared
|-------------- | ----------- | ------------------
|               | Price Range | Per Share         
|               | 2006        | 2005              
|               | High        | Low               
|               |             |                   
|First Quarter  | $ 11.56     | $ 9.16            
|Second Quarter | 12.40       | 10.42             
|Third Quarter  | 15.90       | 12.50             
|Fourth Quarter | 16.49       | 13.59             
|               |             |                   

On February 21, 2007, there were approximately 980 holders of record of our common shares.

For information concerning security ownership of certain beneficial owners and management and
related shareholder matters, reference is made to Part III, Item 12 of this report on Form 10-K.

We maintain a dividend reinvestment plan under which shareholders may elect to reinvest their
dividends automatically in our common shares.  Under the plan, the administrator of the plan will purchase
shares directly from us (either treasury shares or newly-issued common shares), in the open market, or in
privately negotiated transactions with third parties on behalf of participating shareholders.

Our Board of Directors has authorized the repurchase of up to $50.0 million of our common and
preferred shares.  Additionally, we have a policy which allows employees to pay their portion of the payroll
taxes related to restricted share vesting by surrendering a number of shares to us equal in value on the day
of vesting to the amount of taxes due. The following table sets forth our repurchase activities for the fourth
quarter of 2006:

|Issuer Purchases of Equity Securities For the Three Months Ended December 31, 2006
|----------------------------------------------------------------------------------
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Period                                                                            
|                                                                                  
|October 1 through                                                                 
|October 31                                                                        
|November 1 through                                                                
|November 30                                                                       
|December 1 through                                                                
|December 31                                                                       
|Total                                                                             

**Item 6.  Selected Financial Data**

The following tables set forth selected financial and other data for us on a consolidated basis.  The
historical financial information contained in the tables has been derived from and should be read in
conjunction with (i) our consolidated financial statements and notes thereto and (ii) Management's
Discussion and Analysis of Financial Condition and Results of Operations both included elsewhere herein.

|**Associated Estates Realty Corporation**                         |           |           |           |            |               
|----------------------------------------------------------------- | --------- | --------- | --------- | ---------- | --------------
|*(Dollars in thousands except per share***                        |           |           |           |            |               
|*amounts and average monthly net collected rent)***               |           |           |           |            |               
|                                                                  | **2006    | 2005      | 2004      | 2003       | 2002          
|**Operating Data:**                                               |           |           |           |            |               
|*Revenue*                                                         |           |           |           |            |               
|Property revenue                                                  | $ 132,994 | $	123,594 | $	116,145 | $ 114,325  | $	113,693     
|Management and service operations:                                |           |           |           |            |               
|Fees, reimbursements and other                                    | 11,689    | 11,723    | 13,400    | 14,310     | 20,472        
|Painting services                                                 | 1,078     | 1,094     | 6,147     | 2,827      | 1,642         
|Total revenue                                                     | 145,761   | 136,411   | 135,692   | 131,462    | 135,807       
|                                                                  |           |           |           |            |               
|Total expenses                                                    | (118,505) | (111,071) | (106,627) | (106,600)  | (107,619)     
|                                                                  |           |           |           |            |               
|Interest income                                                   | 680       | 638       | 309       | 148        | 320           
|Interest expense                                                  | (51,991)  | (40,070)  | (36,846)  | (36,990)   | (36,851)      
|                                                                  |           |           |           |            |               
|(Loss) income before gain on disposition of properties and        |           |           |           |            |               
|land, gain on disposition of investment, equity in net            |           |           |           |            |               
|loss of joint ventures, gain on sale of partnership interest,     |           |           |           |            |               
|minority interest, and income from discontinued operations        | (24,055)  | (14,092)  | (7,472)   | (11,980)   | (8,343)       
|Gain on disposition of properties and land                        | -         | -         | -         | -          | 227           
|Gain on disposition of investment                                 | -         | 150       | -         | -          | -             
|Equity in net loss of joint ventures                              | (462)     | (644)     | (923)     | (1,157)    | (1,627)       
|Gain on sale of partnership interest                              | -         | -         | -         | 1,314      | -             
|Minority interest in operating partnership                        | (61)      | (63)      | (63)      | (75)       | (324)         
|**(Loss) income from continuing operations**                      | (24,578)  | (14,649)  | (8,458)   | (11,898)   | (10,067)      
|Income from discontinued operations:                              |           |           |           |            |               
|Operating (loss) income                                           | (2,494)   | 2,319     | 2,100     | 985        | 1,886         
|Gain on disposition of properties                                 | 54,093    | 48,536    | 9,682     | -          | 9,660         
|Income from discontinued operations                               | 51,599    | 50,855    | 11,782    | 985        | 11,546        
|**Net income (loss)**                                             | 27,021    | 36,206    | 3,324     | (10,913)   | 1,479         
|Preferred share dividends                                         | (5,046)   | (5,130)   | (5,805)   | (5,484)    | (5,485)       
|Original issuance costs related to redemption of preferred shares | -         | (2,163)   | -         | -          | -             
|**Net income (loss) applicable to common shares**                 | $	21,975  | $	28,913  | $	(2,481) | $ (16,397) | $	(4,006)     
|****                                                              |           |           |           |            |               
|**Earnings per common share  - Basic and Diluted:**               |           |           |           |            |               
|(Loss) income from continuing operations applicable to            |           |           |           |            |               
|common shares                                                     | $	(1.74)  | $	(1.14)  | $	(.73)   | $	(.90)    | $	(.80)       
|Income from discontinued operations                               | 3.03      | 2.65      | .60       | .05        | .59           
|Net income (loss) applicable to common shares                     | $	1.29    | $	1.51    | $	(.13)   | $	 (.85)   | $	(.21)       
|Weighted average number of common shares outstanding              | 17,023    | 19,162    | 19,519    | 19,401     | 19,343        
|                                                                  |           |           |           |            |               
|**Dividends declared per common share**                           | $	.68     | $	.68     | $	.68     | $	.68      | $          .92

|                                                    | 2006      | 2005     | 2004     | 2003     | 2002    
|--------------------------------------------------- | --------- | -------- | -------- | -------- | --------
|**Cash flow data:**                                 |           |          |          |          |         
|Cash flow provided by operations                    | $	17,912  | $	24,376 | $	32,935 | $	30,758 | $	32,897
|Cash flow provided by (used for) investing activity | 73,935    | 4,421    | (12,745) | (11,509) | 13,260  
|Cash flow (used for) provided by financing activity | (101,570) | (50,798) | 37,332   | (15,937) | (48,421)

|**Balance Sheet Data at December 31:** |           |           |           |           |          
|-------------------------------------- | --------- | --------- | --------- | --------- | ---------
|Real estate assets, net                | $	591,520 | $	645,937 | $	665,268 | $ 661,585 | $ 683,058
|Total assets                           | 648,829   | 719,242   | 762,917   | 704,793   | 735,303  
|Total debt                             | 498,634   | 573,570   | 557,279   | 543,496   | 540,498  
|Total shareholders' equity             | 112,051   | 108,980   | 163,590   | 121,428   | 150,865  

|**Other Data:**                                                      |               |          |          |              |             
|-------------------------------------------------------------------- | ------------- | -------- | -------- | ------------ | ------------
|Net operating income (a) (c)                                         | $	68,613      | $	64,645 | $	64,880 | $   60,117   | $   63,974  
|Total properties (at end of period) - includes joint ventures        | 66            | 74       | 76       | 78           | 79          
|                                                                     |               |          |          |              |             
|Total multifamily units (at end of period) - includes joint ventures | 15,355        | 17,395   | 17,854   | 18,313       | 18,313      
|Average monthly net collected rent per unit                          | $         750 | $	675    | $	671    | $        670 | $        659
|Physical occupancy (b)                                               | 94.5%         | 92.9%    | 91.7%    | 92.7%        | 87.4%       

(a)	We evaluate the performance of our reportable segments based on net operating income ("NOI").  NOI is determined by deducting
property operating and maintenance expenses, direct property management and service company expenses and painting service
expense from total revenue.  We consider NOI to be an appropriate supplemental measure of our performance because it reflects
the operating performance of our real estate portfolio and management and service companies at the property and management
and service company level and is used to assess regional property and management and service company level performance.
NOI should not be considered (i) as an alternative to net income determined in accordance with accounting principles generally
accepted in the United States ("GAAP"), (ii) as an indicator of financial performance, (iii) as cash flow from operating activities
(determined in accordance with GAAP) or (iv) as a measure of liquidity; nor is it necessarily indicative of sufficient cash flow to fund
all of our needs.  Other real estate companies may define NOI in a different manner.

(b)	Physical occupancy represents the actual number of units leased divided by the total number of units available at the end of the
period.

(c)	Reconciliation of NOI to net income (loss):

|                                           | 2006     | 2005     | 2004     | 2003        | 2002    
|------------------------------------------ | -------- | -------- | -------- | ----------- | --------
|Net operating income                       | $ 68,613 | $	64,645 | $	64,880 | $	60,117    | $	63,974
|Depreciation and amortization              | (31,517) | (31,306) | (28,044) | (29,171)    | (28,770)
|General and administrative expense         | (9,840)  | (7,999)  | (7,771)  | (6,084)     | (7,016) 
|Interest income                            | 680      | 638      | 309      | 148         | 320     
|Interest expense                           | (51,991) | (40,070) | (36,846) | (36,990)    | (36,851)
|Gain on disposition of properties and land | -        | -        | -        | -           | 227     
|Gain on disposition of investment          | -        | 150      | -        | -           | -       
|Equity in net loss of joint ventures       | (462)    | (644)    | (923)    | (1,157)     | (1,627) 
|Gain on sale of partnership interest       | -        | -        | -        | 1,314       | -       
|Minority interest in operating partnership | (61)     | (63)     | (63)     | (75)        | (324)   
|Income from discontinued operations:       |          |          |          |             |         
|Operating (loss) income                    | (2,494)  | 2,319    | 2,100    | 985         | 1,886   
|Gain on disposition of properties          | 54,093   | 48,536   | 9,682    | -           | 9,660   
|Income from discontinued operations        | 51,599   | 50,855   | 11,782   | 985         | 11,546  
|Net income (loss)                          | $	27,021 | $	36,206 | $	3,324  | $	 (10,913) | $	1,479 

**Item 7.	Management's Discussion and Analysis of FinancialCondition and Results of Operations**

The following discussion should be read in conjunction with the consolidated financial statements
and notes thereto included in Part II, Item 8 of this report on Form 10-K.  This discussion contains forward-looking statements based on current judgments and current knowledge of management, which are subject
to certain risks, trends and uncertainties that could cause actual results to vary from those projected,
including, but not limited to, preliminary expectations regarding our 2007 performance which is based on
certain assumptions.  Accordingly, readers are cautioned not to place undue reliance on forward-looking
statements which speak only as of the dates of the document.  These forward-looking statements are
intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The words "expects," "projects," "believes," "plans," "anticipates," and similar expressions are intended to
identify forward-looking statements.  Investors are cautioned that our forward-looking statements involve
risks and uncertainty that could cause our actual results to differ from estimates or projections contained in
these forward-looking statements.  For a discussion of these risks and uncertainties, see "Risk Factors" in
Item 1A.

***Overview***.  We are engaged primarily in the operation of multifamily residential units that we own.
We also provide asset and property management services to third party owners of multifamily residential
units for which we are paid fees.  Our primary source of cash and revenue from operations is rents from the
leasing of owned apartment units.  Approximately 91.2% of our consolidated revenue was generated from
the leasing of these owned units for the twelve months ended December 31, 2006, and approximately 88.0%
of the property revenue generated by these owned properties was related to the Market-Rate properties.

We consider property NOI to be an important indicator of our overall performance.  Property NOI
(property operating revenue and interest income less property operating and maintenance expenses) is a
measure of the profitability of our properties, which has the largest impact of all of our sources of income
and expense on our financial condition and operating results.  See Note 19 of the Notes to Consolidated
Financial Statements presented in Part II, Item 8 of this report on Form 10-K for additional information
regarding property NOI and total NOI, in addition to a reconciliation of total NOI to consolidated net income
in accordance with accounting principals generally accepted in the United States of America ("GAAP").

Our four reportable segments are based upon types of property and services and consist of our
Market-Rate properties (80.3% of total revenue), properties we acquired or developed within the prior year
and properties that have been sold or are classified as held for sale, which segment is referenced as
Disposition/Acquisition (4.5% of total revenue), our Affordable Housing properties (6.4% of total revenue)
and Management and Service Operations (8.8% of total revenue, which is primarily derived from third party
asset and property management operations).

Our Same Community Market-Rate Midwest portfolio, consisting of 41 properties, containing 10,221
units, accounts for 59.8% of our revenue and 64.2% of our NOI.  While we achieved growth in net collected
rents of 4.8% in our Midwest markets, we face continuing challenges in achieving growth similar to the 9.5%
growth realized in net collected rents in our Mid-Atlantic and Southeast markets, primarily due to a sluggish
Midwest economy with higher unemployment rates and a lack of job growth, coupled with fewer household
formations.  In response to these conditions, our strategy has been to reduce our Midwest property exposure
by selling certain non-core Midwest properties and acquiring properties in other markets that have a greater
potential for growth.  During 2006, we sold eight properties containing 2,040 units, seven of which were
located in Ohio and one property located in North Carolina, which was the only property that we owned or
managed in that market.

In 2007, we intend to continue with our strategy of reducing our Midwest presence by selling
properties.  We will also continue to evaluate potential property acquisitions in higher growth markets that
we have identified.  However, strong competition for replacement properties in these markets may hinder
our ability to find suitable replacement properties that satisfy our investment criteria.   We may also consider
selling assets in any market, including the Mid-Atlantic and Southeast markets, where market conditions are
such that the reinvestment of cash proceeds derived from a sale are expected to provide a significantly
greater return on equity and an increase in cash flow.

We are also focused on reducing overall interest rate charges on our borrowings which, at
December 31, 2006, had a weighted average rate of 7.2%.  We plan to accomplish this goal by using sale
proceeds to pay off debt or refinance existing debt with new debt at lower interest rates.

In order to increase property NOI, we plan to continue to focus our efforts on improving revenue,
controlling costs and realizing operational efficiencies at the asset level, both regionally and portfolio-wide.

**2007 Expectations:**

- ***Portfolio performance***** - We expect to increase our Market-Rate property NOI by approximately
2.8% to 3.3% in 2007.  We expect our Midwest portfolio to deliver NOI of 2.7% to 3.2% driven
by property revenue increases of 3.3% to 3.8%.  We also expect our Mid-Atlantic and Southeast
portfolio to deliver NOI increases of 3.0% to 3.5% as a result of property revenue increases of
2.9% to 3.4%.

- ***Property acquisitions and sales*****-** We plan to acquire approximately $50.0 million of
properties, while disposing of approximately $50.0 million to $75.0 million of properties.



***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 Code of 1986, as amended, commencing with our
taxable year ending December 31, 1993.  REITs are subject to a number of organizational and operational
requirements including a requirement that 90.0% of the income that would otherwise be considered as
taxable income be distributed to shareholders.  Providing we continue to qualify as a REIT, we will generally
not be subject to federal income tax on net income.  However, our Service Companies are subject to federal
income tax.

A REIT is precluded from owning more than 10.0% of the outstanding voting securities of any one
issuer, other than a wholly owned subsidiary or another REIT, and more than 10.0% of the value of all
securities of any one issuer.  As an exception to this prohibition, a REIT is allowed to own up to 100% of the
securities of a Taxable REIT Subsidiary ("TRS") that can provide non-customary services to REIT tenants
and others without disqualifying the rents that a REIT receives from its tenants.  However, no more than
20.0% of the value of a REIT's total assets can be represented by securities of one or more TRS's.  The
amount of intercompany interest and other expenses between a TRS and a REIT are subject to arms length
allocations.  We have elected TRS status for all of our Service Companies.

***LIQUIDITY AND CAPITAL RESOURCES***

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

*Significant Cash Sources (Uses):*

|                                                  | For the year ended December 31,
|------------------------------------------------- | -------------------------------
|(In thousands)                                    | 2006                           
|                                                  |                                
|Net cash provided by operating activities         | $	17,912                       
|Property acquisition and capital expenditures     | (12,782)                       
|Property disposition proceeds, net                | 87,038                         
|(Decreases) increases related to debt - net       | (74,937)                       
|Redemption of Class A Preferred Shares            | -                              
|Issuance of 8.7% Class B Cumulative               |                                
|Redeemable Preferred Shares                       | -                              
|Cash dividends and operating partnership          |                                
|distributions paid                                | (16,872)                       
|Purchase of treasury shares under repurchase plan | (10,185)                       

Our primary sources of liquidity are cash flow provided by operations, short term borrowings on the
lines of credit and proceeds from property sales.  The decrease in cash provided by operations in 2006
compared to 2005 was primarily due to the payment of $14.4 million of defeasance and other prepayment
costs, which were funded by property sales and secured borrowings.  Excluding these costs, cash flow from
operations would have increased $7.9 million primarily due to changes in accounts payable and accounts
receivable resulting from the timing of cash payments.

During 2006, funds received from the sale of properties were primarily used to reduce debt,
including the payment of associated defeasance and other prepayment costs.  Sale proceeds were also
used to repurchase our common shares and partially fund capital expenditures.

The decrease in cash provided by operations in 2005 compared to 2004 was primarily due to an
increase in property operating and maintenance expenses, an increase in interest expense and a reduction
in net painting service revenue.  These factors were partially offset by increases in property revenue.  See
the discussion of our results of operations below for additional information regarding these fluctuations.
Additionally, in April 2005, our CEO repaid two notes to us totaling $3.4 million, which were scheduled to
mature May 1, 2005.

***Lines of Credit.*****  We have a $14.0 million line of credit that is available for regular borrowings and
letter of credit transactions.  This line of credit is secured by one of our properties.  There were no regular
borrowings outstanding under this line at December 31, 2006 and 2005.  At December 31, 2006, a letter of
credit in the amount of $63,000 had been issued against this line.  The interest rate on this line is LIBOR
plus 1.8% or the one month reference rate and it matures December 31, 2007.

We also have a $17.0 million secured line of credit that is available for regular borrowings which is
secured by one of our properties.  This line was unavailable at December 31, 2005, because the property
securing that credit line had been sold.  In February 2006, we identified a replacement property to serve as
security for this credit line and amended the loan terms by increasing the credit line to $17.0 million from
$15.0 million with interest calculated at LIBOR plus 1.5%.  This line matures March 1, 2008.  Borrowings
under the line may be restricted based upon the operating performance of the property.  There were no
borrowings outstanding under this line at December 31, 2006 and 2005.

***Shelf Availability.***We have a shelf registration statement on file with the Securities and Exchange
Commission relating to a possible offering, from time to time, of debt securities, preferred shares, depositary
shares, common shares and common share warrants.  In December 2004, we issued $58.0 million of 8.7%
Class B Series II Cumulative Redeemable Preferred Shares under this registration statement.  The
remaining availability under the shelf registration at December 31, 2006 is $214.7 million.  Currently, we do
not have access to issue debt securities under this shelf registration.

***Liquidity:  Normal Business Operations*.**We anticipate that we will meet our business operations
and liquidity requirements for the upcoming year generally through net cash provided by operations.  We
believe that if net cash provided by operations is below projections, other sources, such as secured
borrowings (primarily the lines of credit), unsecured borrowings, and property sales proceeds are available
and should be sufficient to meet operating requirements, capital additions, mortgage amortization payments
and the payment of dividends in accordance with REIT requirements.

***Liquidity: Non-Operational Activities*.**Sources of cash available for paying down debt, acquiring
properties or buying back our shares include the net proceeds from the sale of properties and the issuance
of shares.  Although we intend to sell between $50.0 million and $75.0 million of properties in 2007, market
conditions and other factors may adversely impact our ability to execute such sales.

***Long Term Contractual Obligations.***The following table summarizes our long term contractual
obligations at December 31, 2006, as defined by Item 303(a)5 of Regulation S-K of the Securities and
Exchange Act of 1934.



|                            | Payments Due In
|--------------------------- | ---------------
|(In thousands)              |                
|Contractual Obligations     | Total          
|Mortgages payable-principal | $	498,634      
|Mortgages payable-interest  | 209,053        
|Operating leases            | 1,109          
|Purchase obligations        | 9,881          
|Total                       | $	718,677      

***Mortgages Payable-Principal.***Mortgages payable-principal includes principal payments on all
property specific mortgages and lines of credit.  For detailed information about our debt, see Note 6 of the
Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

***Mortgages Payable-Interest.***Mortgages payable-interest includes accrued interest at December
31, 2006 and interest payments as required based upon the terms of the mortgages in existence at
December 31, 2006.  Interest related to floating rate debt is calculated based on applicable rates as of
December 31, 2006.

***Operating Leases.***We lease certain equipment and facilities under operating leases.  For detailed
information about our lease obligations, see Note 10 of the Notes to Consolidated Financial Statements
presented in Part II, Item 8 of this report on Form 10-K.

***Purchase Obligations.***Purchase obligations represent agreements to purchase goods or services
that are legally binding and enforceable and that specify all significant terms of the agreement.  Our
purchase obligations include, but are not limited to, contracts that individual properties have entered into in
the normal course of operations, such as landscaping, snow removal, elevator maintenance, security, etc,
as well as obligations entered into at the corporate level.  Obligations included in the above table represent
agreements dated December 31, 2006 or earlier.

***Dividends.***On December 13, 2006, we declared a dividend of $0.17 per common share which was
paid on February 1, 2007 to shareholders of record on January 12, 2007.  We anticipate that we will continue
paying quarterly dividends and that we will sustain our current dividend rate.  Additionally, on January 22,
2007, we declared a quarterly dividend of $0.54375 per Depositary Share on our Class B Cumulative
Redeemable Preferred Shares, which will be paid on March 15, 2007, to shareholders of record on March
1, 2007.



***Capital Expenditures****.*We anticipate incurring approximately $13.9 million in capital expenditures
for 2007.  This includes replacement of worn carpet and appliances, parking lots, roofs and similar items in
accordance with our current property expenditure plan, as well as commitments for investment/revenue
enhancing and non-recurring expenditures.  These commitments are expected to be funded largely with
cash provided by operating activities and proceeds from property sales.

***Financing and Other Commitments*****.  The following table identifies our total debt outstanding and
weighted average interest rates as of December 31, 2006 and 2005:

|                             |                   | Weighted |                   | Weighted
|---------------------------- | ----------------- | -------- | ----------------- | --------
|                             | Balance           | Average  | Balance           | Average 
|                             | Outstanding       | Interest | Outstanding       | Interest
|                             | December 31, 2006 | Rate     | December 31, 2005 | Rate    
|                             |                   |          |                   |         
|**Fixed rate debt**          |                   |          |                   |         
|Mortgages payable - CMBS     | $ 303,945         | 7.7%     | $ 455,166         | 7.7%    
|Mortgages payable - other    | 132,209           | 6.1%     | -                 | -       
|Unsecured borrowing          | 25,780            | 7.9%     | 25,780            | 7.9%    
|**Total fixed rate debt**    | 461,934           | 7.3%     | 480,946           | 7.7%    
|                             |                   |          |                   |         
|**Variable rate debt**       |                   |          |                   |         
|Mortgages payable            | 36,700            | 6.6%     | 92,624            | 5.9%    
|Lines of credit borrowings   | -                 | -        | -                 | -       
|**Total variable rate debt** | 36,700            | 6.6%     | 92,624            | 5.9%    
|**Total debt**               | $ 498,634         | 7.2%     | $ 573,570         | 7.4%    

During 2006, we defeased/prepaid 19 mortgage loans totaling $201.8 million.  Of these 19 loans,
ten fixed rate loans and one variable rate loan were prepaid with the proceeds received from property sales;
and five fixed rate loans and three variable rate loans were prepaid with the proceeds of a $132.2 million
mortgage refinancing involving five properties.  The new loans are structured as five separate loans;
however, each loan is cross-collateralized, cross-defaulted, and includes a collateral substitution feature.



At December 31, 2006, we had 21 unencumbered properties, 11 of which are Affordable Housing
properties.  These 21 properties had net income of $2.1 million for the year ended December 31, 2006, and
a net book value of $115.0 million at December 31, 2006.  We believe that we would be able to obtain
financing on these properties should the need arise; however, financing may be restricted on ground leased
properties and the property subject to a right of reverter because of their finite remaining terms (see
discussion below).  Five of these unencumbered properties are scheduled for disposition during 2007.
Additionally, in January 2007, we unencumbered one additional asset by defeasing/prepaying the mortgage
secured by that property.



We lease certain equipment and facilities under operating leases.  Future minimum lease payments
under all noncancellable operating leases in which we are the lessee, principally for ground leases, are
included in the previous table of contractual obligations.

The ground lease agreements contain provisions which, upon expiration of the lease, require
reversion of the land and building to the lessor.  Such provisions exist for seven properties at December 31,
2006.  These ground leases expire at various dates from 2021 to 2036.  In September 2006, we sold one
property that was subject to a ground lease with a term expiring in 2021.  Total revenue derived from such
properties were $6.4 million, $8.8 million and $10.3 million for the years ended December 31, 2006, 2005
and 2004, respectively.  Furthermore, at the end of the term of each lease, any remaining replacement
reserves revert to the lessor.  Such cash reserves included in restricted cash were $565,000 and $773,000
at December 31, 2006 and 2005, respectively.  With respect to such leases, we paid ground rent of $50,000,
$85,000 and $101,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

We own one property which is subject to a right of reverter.  This provision requires that the land
and real estate assets revert at expiration back to the original grantor from whom we acquired this property
or its successors and assignees, which is in September 2037.  The net book value of this property was
$774,000 at December 31, 2006.  This property generated revenue and net income of $997,000 and
$318,000 for 2006, $934,000 and $344,000 for 2005, $988,000 and $377,000 for 2004.

***Guarantees.***We routinely guaranty mortgage debt of our wholly owned subsidiaries.  Additionally,
we had one guaranty at December 31, 2006, related to a mortgage loan secured by one of our joint venture
properties.  For further information on this guaranty, see Note 11 of the Notes to the Consolidated Financial
Statements presented in Part II, Item 8 of this report on Form 10-K.  In the normal course of business, we
may enter into contractual arrangements under which we may agree to indemnify the third party to such
arrangement from any losses incurred relating to the services they perform on behalf of AERC or for losses
arising from certain events as defined within the particular contract, which may 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 been
material.

***Off-Balance Sheet Investments and Financing Commitments.***We have investments in two joint
ventures that each own one multifamily apartment community.  One of these properties is a Market-Rate
property and the other property is an Affordable Housing property.  The operations of these properties are
similar to the operations of our wholly owned portfolio.  These investments enable us to exercise influence
over the operations of the properties and share in their profits, while earning additional fee income.  We
account for our investments in unconsolidated joint ventures under the equity method of accounting as we
exercise significant influence, but do not control these entities and are not required to consolidate them in
accordance with FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" or under EITF 04-05, "Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General
Partner and the Limited Partners Have Certain Rights".  These investments are initially recorded at cost, as
investments in joint ventures and subsequently adjusted for equity in earnings and cash contributions and
distributions.

The Affordable Housing joint venture property had negative cash flow during 2006 and is expected
to have negative cash flow during 2007 as a result of operating expenses exceeding the housing assistance
payments from HUD.  We are pursuing a request for an increase in housing assistance payments in order
to address the deficit.  The joint venture partnership that owns this property intends to sell it.  Additional cash
contributions that may be required of us to pay deficits, if any, are not expected to be material.

We have one guaranty obligation related to our joint ventures which was previously discussed under
Guarantees.  Both of these joint venture properties were encumbered by debt at December 31, 2006.  Our
proportionate share of this debt was $22.7 million.

For summarized financial information for these joint ventures, see Note 7 of the Notes to the
Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

***Operating Partnership**.*As provided in the AERC HP Investors Limited Partnership Agreement
("DownREIT Partnership"), we, as general partner, have guaranteed the obligation of the DownREIT
Partnership to redeem OP units held by the limited partners.  The DownREIT Partnership was formed in
1998.  Under the terms of the DownREIT Partnership Agreement, the DownREIT Partnership is obligated
to redeem OP units for our common shares or cash, at our discretion, at a price per OP unit equal to the 20
day trailing price of our common shares for the immediate 20 day period preceding a limited partner's
redemption notice.  During 2006, we redeemed 13,746 OP units.  As of December 31, 2006, there were
79,277 OP units remaining having a carrying value of $1.9 million, and 442,755 of the original 522,032 OP
units had been redeemed.  These transactions had the effect of increasing our interest in the DownREIT
Partnership from 85.0% to 97.4%.  In January 2007, we redeemed an additional 942 units.  For additional
information regarding the OP units, see Note 1 of the Notes to the Consolidated Financial Statements
presented in Part II, Item 8 of this report on Form 10-K.

***Acquisitions and Development*****.  We intend to continue to evaluate potential property acquisitions
in higher growth markets that we previously identified.  Any future property acquisitions or developments
would be financed with the most appropriate sources of capital, which may include the assumption of
mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed
earnings, secured or unsecured debt financings, or the issuance of shares or units exchangeable into
common shares.

During 2005, we acquired a 168-unit Market-Rate property located in Atlanta, Georgia, and a 316-unit Market-Rate property located in West Palm Beach, Florida.  The purchases were funded primarily by
mortgage financing on the acquired properties, mortgage funding on another Market-Rate property, by cash
received from property dispositions, and cash previously received through the issuance of trust preferred
securities.

***Dispositions.***During 2006, we sold eight properties (seven Market-Rate properties and one
Affordable Housing property) for net cash proceeds of $87.0 million.  These proceeds were used primarily
to defease/prepay debt, repurchase $10.2 million of our common shares and partially fund capital
expenditures.  The operating results of these properties, along with the gains of $54.1 million that we
recognized, are included in "Income from discontinued operations".

During 2005, we sold three Market-Rate properties for net cash proceeds of $78.7 million.  These
proceeds were used primarily in the acquisition of two properties in 2005, to repay borrowings on our line
of credit and to defease/prepay debt during the first quarter of 2006.

Additionally, we classified one property as held for sale at December 31, 2006.  This property was
sold on February 20, 2007.  We tested this property for impairment under SFAS 144 and determined that
it was not impaired.  The results of operations for this property are included in "Income from discontinued
operations" in the Consolidated Statements of Operations for all periods presented.  Additionally, the major
classes of assets and liabilities related to this property have been reclassified as such in the accompanying
Consolidated Balance Sheets at December 31, 2006.



***Management and Service Operations.***** Concurrently with the sale of an Affordable Housing
property in September 2006, we entered into a management contract with the buyer of the property to
provide property management services for that property. We anticipate a total of approximately $30,000 in
annual fee revenue related to this property.  Additionally, in January 2007, we entered into a management
contract for a property located in Pennsylvania for which we anticipate receiving a total of approximately
$64,000 in annual fee revenue.

During 2006, the following management contracts were canceled:

|            |                              | Property           | Approximate      
|----------- | ---------------------------- | ------------------ | -----------------
|Effective   |                              | and/or Asset       | Property and/or  
|Date of     |                              | Management Fees    | Asset Management 
|Termination | Management Contract Canceled | Earned During 2006 | Fees Lost in 2006
|            |                              | (In thousands)    
|3/3/06      | Hillwood ll (1)              | $   20             | $ 84             
|5/1/06      | University Circle            | 27                 | 64               
|7/19/06     | Advised Asset (1)(2)         | 184                | 125              
|7/24/06     | St. Andrews (1)              | 35                 | 33               
|9/1/06      | Advised Asset                | 78                 | 40               



(1)  Properties that were sold by the owners.

(2)  A disposition fee of $198,000 was received in relation to this sale.

During 2007, our management services on the following properties may no longer be required due
to the potential sale of the properties:

|            |                                       | Property          
|----------- | ------------------------------------- | ------------------
|Effective   |                                       | and/or Asset      
|Date of     |                                       | Management Fees   
|Termination | Management Contract                   | Earned During 2006
|            |                                       | (In thousands)    
|            |                                       |                   
|Unknown     | Lakeshore Village (50% joint venture) | $ 21(1)           
|Unknown     | Stow-Kent Gardens                     | 35                



(1)  Represents net fees.

***RESULTS OF OPERATIONS FOR 2006 COMPARED WITH 2005 AND 2005 COMPARED WITH 2004***

In the following discussion of the comparison of the year ended December 31, 2006 to the year
ended December 31, 2005 and the year ended December 31, 2005 to the year ended December 31, 2004,
Market-Rate properties refers to the Same Community Market-Rate property portfolio.  Market-Rate
properties represent 50 wholly owned properties.  Acquired/Disposed properties represent two acquired
properties.  The results of operations for the property designated as held for sale at December 31, 2006,
have been recorded in "Income from discontinued operations".  Affordable Housing properties represent 11
properties subject to HUD regulations.

During the 2006 to 2005 comparison period, operating income increased $1.9 million primarily as
a result of increased property revenue. Interest expense during this comparison period, however, increased
due to $12.7 million in costs recognized related to the defeasement/prepayment of debt ($2.8 million of
additional prepayments costs were recognized in "Income from discontinued operations"), which was
partially offset by reduced mortgage interest costs.  The increased interest expense resulted in an increase
in the loss from continuing operations during this comparison period.  During the 2005 to 2004 comparison
period, increases in real estate taxes and insurance expense, utilities expense, and amortization costs
related to property acquisitions were greater than increases in property revenue, resulting in a decrease in
operating income and an increase in the loss from continuing operations.

The following chart reflects the amount and percentage change in line items that are relevant to the
changes in overall operating performance when comparing the years ended December 31, 2006 to 2005
and 2005 to 2004:

|                                             | Increase (decrease) when comparing the years ended December 31,
|-------------------------------------------- | ---------------------------------------------------------------
|                                             | 2006 to 2005                                                   
|(Amounts in thousands)                       |                                                                
|Property revenue                             | $	9,400                                                        
|Fees, reimbursements and other               | (34)                                                           
|Painting service revenue and expenses, net   | (233)                                                          
|Property operating and maintenance expenses: |                                                                
|Repairs and maintenance                      | 993                                                            
|Personnel                                    | 1,296                                                          
|Real estate taxes and insurance              | 1,621                                                          
|Utilities                                    | 432                                                            
|Property operating and maintenance expenses  | 4,973                                                          
|Interest expense                             | 11,921                                                         
|Depreciation and amortization                | 211                                                            
|General and administrative                   | 1,841                                                          

***Property Revenue.***Property revenue is primarily impacted by a combination of rental rates, rent
concessions and occupancy levels.  We measure these factors using indicators such as physical occupancy
(number of units occupied divided by total number of units), and average monthly net collected rent per unit
(gross potential rents less vacancies and concessions divided by total number of units).  This information
is presented in the following table for the years ended December 31, 2006, 2005 and 2004 (information for
the years ended December 31, 2005 and 2004 reflect results based upon the operating properties and their
respective segments as of December 31, 2006):

|                          | For the year ended December 31, 2006
|------------------------- | ------------------------------------
|                          |                                     
|                          | Physical                            
|                          | Occupancy                           
|                          |                                     
|Acquisitions/Dispositions | 91.7%                               
|Market-Rate               | 94.5%                               
|Affordable Housing        | 99.6%                               

|                          | For the year ended December 31, 2005
|------------------------- | ------------------------------------
|                          |                                     
|                          | Physical                            
|                          | Occupancy                           
|                          |                                     
|Acquisitions/Dispositions | -                                   
|Market-Rate               | 92.9%                               
|Affordable Housing        | 99.2%                               

|                          | For the year ended December 31, 2004
|------------------------- | ------------------------------------
|                          |                                     
|                          | Physical                            
|                          | Occupancy                           
|                          |                                     
|Acquisitions/Dispositions | -                                   
|Market-Rate               | 91.4%                               
|Affordable Housing        | 99.7%                               

Property revenue increased in 2006 compared to 2005 primarily as a result of increased rental
revenue of $8.0 million, $5.4 million of which was contributed by the Market-Rate properties. The increase
in Market-Rate property rental revenue was primarily due to increased occupancy, increased rental rates
and a reduction in concessions during 2006.  Additionally, the two properties acquired in 2005 contributed
$2.5 million in rental revenue during 2006.  Other property revenue increased $1.4 million in 2006 compared
to 2005 primarily as a result of our utility and refuse reimbursement programs, which increased a total of
$1.2 million.  These programs were initiated in late 2004 and 2005, and provided increasing revenue during
their phase-in period, leveling off in late 2005.  Other property revenue increased $1.8 million in 2005
compared to 2004 primarily as a result of $1.5 million of increases related to the utility and refuse
reimbursement programs.

Property revenue for the Affordable Housing properties increased $183,000 in 2006 compared to
2005 and $121,000 in 2005 compared to 2004 primarily as a result of HUD approved rent increases during
2006 and 2005.  The revenue is primarily dependent upon the receipt of rental assistance subsidies from
HUD via monthly housing assistance payments ("HAP Payments").  The amount of each monthly HAP
Payment is equal to the rent amount (the "Contract Rent") stated in the HAP Contract with HUD, less the
amount payable by the Eligible Resident for such month.

Below is a table setting forth the expiration dates of the HAP Contracts and the HAP Payments
revenue recognized for our Affordable Housing properties as of December 31, 2006:



|(In thousands)                             | Final           | Revenue Recognized During
|------------------------------------------ | --------------- | -------------------------
|Property                                   | Expiration Date | 2006                     
|                                           |                 |                          
|Ellet                                      | December 2017   | $	401                    
|Lakeshore Village (50.0% joint venture)(1) | July 2024       | 585                      
|Puritas Place                              | September 2011  | 673                      
|St. James (Riverview)                      | November 2009   | 454                      
|Shaker Park Gardens II                     | June 2007       | 718                      
|State Road Apartments                      | December 2016   | 440                      
|Statesman II                               | November 2007   | 318                      
|Sutliff Apartments                         | November 2019   | 758                      
|Tallmadge Acres                            | March 2008      | 812                      
|Twinsburg Apartments                       | June 2009       | 437                      
|Village Towers                             | November 2009   | 416                      
|West High Apartments                       | November 2007   | 608                      

(1) Amounts shown represent 100% payment.

The eleven wholly owned properties shown in the above table had positive cash flow during 2006
and are anticipated to have positive cash flow for the remaining contract terms.  Therefore, none of these
HAP contracts are considered to be loss contracts.  Lakeshore Village had negative cash flow during 2006
as a result of increased operating expenditures related to increased repairs and maintenance expenses that
exceeded the mark-to-market modeled expectations.  We intend to continue to pursue a request for a
budget-based increase in monthly HAP payments sufficient to support a positive cash flow at this property.
We anticipate that additional cash requirements resulting from the negative cash flow, if any, will be funded
by us and our joint venture partner.  Such funding requirements are not expected to be material obligations.
Due to the increase in cash requirements resulting from negative cash flow coupled with the uncertainty of
increased HAP funding, the partnership that owns this property is marketing it for sale.

Contract Rents may be adjusted at least annually in accordance with the annual adjustment factor
method for some of the properties.  Generally, these types of adjustments are only permitted if current rents
are below the HUD published Fair Market Rent ("FMR") threshold.  If current rents exceed FMRs, a rent
comparability study must be completed to demonstrate that the property's rents are below "market."

"Contract Renewal Request Forms" must be submitted to HUD (or its corresponding contract agent)
not less than 120 days prior to the applicable HAP anniversary date in order to renew an existing HAP
contract.  We understand that the following options are available to us for expiring HAP contracts: (i) for
properties without mortgages, we may renew at current rents plus an operating cost adjustment factor
("OCAF") that is set by HUD on an annual basis; (ii) for properties encumbered by a mortgage, we may
renew at the lesser of (x) current rents plus an OCAF or (y) comparable market rents; or, (iii) opt out of the
Section 8 program.  Opting out of the Section 8 program requires an additional one-year notice to HUD (or
the contract agent) and the affected residents.

We believe, that upon expiration of the contracts, the contracts will be renewed, or we will enter into
another government subsidized or mortgage restructuring program.

The following represents our current expectations concerning those HAP contracts that expire in
2007 and 2008.

*Shaker Park Gardens II.*  In April 2006, we requested a renewal of the current contract for a one-year
term with a budget based rent increase of 19.2%.  HUD denied our request.  Subsequently we applied for
a 3.9% increase, as calculated using the OCAF published on October 21, 2005.  Our request for an OCAF
increase was granted and the contract was renewed for a one-year term through June 30, 2007.  We intend
to request a renewal in March 2007 for an additional one year period.

*Statesman II.*  In July 2006, we requested a renewal of the current contract for a one-year term with
an increase in rents of 3.9%, as calculated using the OCAF published on October 21, 2005.  Our request
for an OCAF increase was granted and the contract was renewed for a one-year term through November
30, 2007.  Prior to expiration of the current contract, we intend to request a renewal for an additional one
year period.

*Tallmadge Acres.*  In November 2006, we requested a renewal of the current contract for a one-year
term with an increase in rents of 4.7%, as calculated using the OCAF published on October 2, 2006.  Our
request for an OCAF increase was granted and the contract will be renewed for a one-year term effective
March 17, 2007.  Prior to expiration of the current contract, we intend to request a renewal for an additional
one year period.

*West High Apartments.*  In July 2006, we requested a renewal of the current contract for a one-year
term with an increase in rents of 3.9%, as calculated using the OCAF published on October 21, 2005.  Our
request for an OCAF increase was granted and the contract was renewed for a one-year term through
November 30, 2007.  Prior to expiration of the current contract, we intend to request a renewal for an
additional one year period.

***Fees, Reimbursements and Other.***Fee revenue for the management and service operations
decreased $812,000 during 2005 compared to 2004 primarily as a result of a reduction in the number of
properties that we manage for clients.  In 2005, four managed properties were sold, one property was
transferred to another advisor, and we purchased our joint venture partners' share of one property.
Disposition fees were recognized in 2004 related to two of these property sales.  Management and advisory
fees attributed to properties owned by non-affiliated third party owners and advisory clients are earned
pursuant to contracts that are generally terminable upon 30 days notice.

***Painting Service Revenue and Expenses.***Painting service revenue and expenses both
decreased in 2005 compared to 2004 primarily as a result of contracts that were entered into by our
subsidiary, Merit Painting Services in 2003 and 2004.  Work related to these contracts was completed during
2004.

***Property Operating and Maintenance Expenses.***Property operating and maintenance expenses
increased when comparing 2006 to 2005 primarily as a result of real estate tax expense, personnel expense,
and repairs and maintenance expense.  The increase in real estate taxes was primarily due to assessed
property value and millage rate increases and a decrease in refunds received related to prior year taxes.
The increase in repairs and maintenance expense was primarily due to increases in maintenance project
costs, unit preparation costs, landscaping costs, and trash removal costs.  Property operating and
maintenance expenses increased when comparing 2005 to 2004 primarily as a result of real estate tax
expense, utilities expense, and personnel expense.  The increase in real estate taxes was primarily due to
assessed property value and millage rate increases that resulted in $1.4 million in additional expense in
2005 and an Ohio tax law change that resulted in an increase of approximately $805,000 in 2005.  This law
was signed June 30, 2005, and became effective July 1, 2005, retroactive to January 1, 2005.  Utilities
increased primarily due to increased consumption and cost per unit of natural gas and an increase in water
and sewer rates in 2005 compared to 2004.

***Interest Expense.*****Interest expense increased in 2006 compared to 2005 primarily due to $12.7
million in costs recognized related to the prepayment, primarily through defeasance, of 14 mortgage loans
(the costs related to four additional loan prepayments are included in "Income from discontinued operations"
below).  Interest expense increased in 2005 compared to 2004 primarily due to increased borrowings,
primarily the $25.8 million of unsecured debt obtained in March 2005, and mortgage loans obtained on the
two properties acquired during 2005.

***Depreciation and Amortization.***Depreciation andamortization expenses increased in 2005
compared to 2004 primarily as a result of the acquisition of one property in July 2004, one property in March
2005, and one property in October 2005 and the completion of major renovation work at one of our
properties in late 2004.

***General and Administrative Expenses.***General and administrative expenses increased when
comparing 2006 to 2005 primarily due to salary, benefit and share-based payment costs and an increase
of $585,000 in Directors' compensation, primarily as a result of valuation adjustments in deferred
compensation based on common share units which are valued using the closing price of our common
shares at the end of each period.  Additionally, we recorded an estimated loss contingency in connection
with the out of court settlement reached with Montgomery County, Maryland.  See Note 10 of the Notes to
the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

***Income From Discontinued Operations.*****  Included in discontinued operations for the years ended
December 31, 2006, 2005, and 2004, are the operating results and the gains related to eight wholly owned
properties that were sold in 2006, three wholly owned properties that were sold in 2005 and one wholly
owned property that was sold in 2004.  The decrease in operating income from discontinued operations in
2006 compared to 2005 was primarily due to costs incurred to defease four loans that were secured by the
properties that were sold.  For further details on "Income from discontinued operations," see Note 2 of the
Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

***Inflation***.  It is our belief that the effects of inflation would be minimal on the operational performance
of our portfolio as a result of the short term nature of our leases which are typically for terms of one year or
less.

**Critical Accounting Estimates**

Our consolidated financial statements include accounts of all subsidiaries, the Service Companies
and the Operating Partnership structured as a DownREIT.  The preparation of the consolidated financial
statements in conformity with GAAP requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the consolidated financial statements and related notes.   In
preparing these consolidated financial statements, we have utilized information available including industry
practice and our own past history in forming estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality.  It is possible that the ultimate
outcome that we anticipated in formulating the estimates inherent in these consolidated financial statements
may not materialize.  However, application of the accounting policies below involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from
these estimates.  In addition, other companies may utilize different estimates, which may impact
comparability of our results of operations to those of companies in similar businesses.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires us to
assess the recoverability of the carrying value of long-lived assets when an event of impairment has
occurred.  In performing this analysis, we estimate holding periods of the assets, changes in fair market
value of  the assets and cash flows related to the operations of the assets to determine the range of potential
alternatives and assign a probability to the various alternatives under consideration by management.  Should
the estimates used to determine alternatives or the probabilities of the occurrence thereof change, an
impairment may result which could materially impact our results of operations.

SFAS No. 142, "Goodwill and Other Intangible Assets," requires us to review goodwill annually and
whenever there is an impairment indicator.  In performing this analysis, we use a multiple of revenues to the
range of potential alternatives and assign a probability to the various alternatives we consider.  Should
estimates used to determine the alternatives considered or the probabilities of the occurrence thereof
change, an impairment may result which could materially impact our results of operations.



SFAS No. 123(R), "Share-Based Payment," requires us to estimate the fair value of stock options
awarded.  We use the Black-Scholes option pricing model to estimate the fair value of the stock options,
which requires the use of judgement and/or estimates in determining certain of the assumptions used by
this model.  If we had used different judgement and/or estimates, a different valuation would have been
produced that may have resulted in a material change to our results of operations.  SFAS No. 123(R) also
requires us to estimate future performance results related to certain share-based awards.  If the results vary
from our estimate it may require us to make a material adjustment to our results of operations.

We estimate the amount of real estate taxes for which we will be liable based upon assumptions
relating to possible changes in millage rates and property value reassessments.  In certain circumstances,
it is possible that the actual millage rates or reassessment values are not available until the following
reporting period and that these rates or values could differ from assumptions and require material
adjustments to the liabilities recorded.

**Quantitative and Qualitative Disclosures About Market Risk**

***Interest Rate Risk*****.  At December 31, 2006, we had $36.7 million of variable rate mortgage debt.  Additionally, we have interest rate risk associated with fixed
rate debt at maturity.  We have and will continue to manage interest rate risk as follows:  (i) maintain what we believe to be a conservative ratio of fixed rate, long term
debt to total debt such that variable rate exposure is kept at an acceptable level; (ii) consider hedges for certain long term variable and/or fixed 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 rates on anticipated debt transactions.  We
use various financial models and advisors to assist us in analyzing opportunities to achieve those objectives.  For additional information related to interest rate hedge
agreements, see "Derivative Instruments and Hedging Activities" in Note 1 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report
on Form 10-K.  The table below provides information about our financial instruments that are sensitive to changes in interest rates.  For debt obligations, the table
below presents principal cash flows and related weighted average interest rates by expected maturity dates.

|                               | **********December 31, 2006** | **December 31, 2005**
|------------------------------ | ----------------------------- | ---------------------
|**(In thousands)**             | ****                          |                      
|**Long term debt**             | **2007**                      | **2008**             
|**Fixed:**                     |                               |                      
|Fixed rate mortgage debt       | $	57,139                      | $	39,056             
|Weighted average interest rate | 7.6%                          | 7.8%                 
|**Variable:**                  |                               |                      
|Variable rate mortgage debt    | -                             | -                    
|Weighted average interest rate | -                             | -                    
|LIBOR based credit facilities* | -                             | -                    
|Total variable rate debt       | -                             | -                    
|Total long term debt           | $	57,139                      | $	39,056             
|                               |                               |                      

*One LIBOR based credit facility matures December 31, 2007, and the second LIBOR based credit facility matures March 1, 2008.  At December 31, 2006 and 2005,  there were no

borrowings outstanding on either facility.



**CONTINGENCIES**

***Environmental*****.  We have reviewed tangible long-lived assets and other agreements for associated
asset retirement obligations ("AROs"), in accordance with FASB Statement No. 143, "Accounting for Asset
Retirement Obligations" and FIN 47 "Accounting for Conditional Asset Retirement Obligations".  Based on
that analysis, we do not have any material AROs that would require recognition as a liability or disclosure
in our financial statements at December 31, 2006.  Phase I environmental audits were obtained at the time
of the IPO, property acquisition, or property refinancing, as the case may be, on all of our wholly owned and
joint venture properties.

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

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

**Item 7A.  Quantitative and Qualitative Disclosures About Market Risk**

For a discussion of the Quantitative and Qualitative Disclosure about Market Risk, reference
Management's Discussion and Analysis.

**Item 8.	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 Financial Disclosure**

None.

**Item 9A.  Controls and Procedures**

*Disclosure Controls and Procedures.*  We have evaluated the design and operation of our disclosure
controls and procedures to determine whether they are effective in ensuring that the disclosure of required
information is timely made in accordance with the Securities Exchange Act of 1934 ("Exchange Act") and
the rules and forms of the Securities and Exchange Commission.  This evaluation was made under the
supervision and with the participation of management, including our Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO") as of the end of the period covered by this annual report on Form 10-K.  The
CEO and CFO have concluded, 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 to ensure that information required
to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange Commission rules and forms.

*Management's Report on Internal Control over Financial Reporting.*We are responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act.  We assessed the effectiveness of our internal control over financial reporting using
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in "Internal Control - Integrated Framework".  Based on that assessment and those criteria, we  concluded
that our internal control over financial reporting is effective as of December 31, 2006.  Our independent
registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report on
management's assessment of our internal control over financial reporting, which is included in the "Report
of Independent Registered Public Accounting Firm" in Part II, Item 8 of this report on Form 10-K.

*Changes in Internal Control over Financial Reporting.*There were no changes in our internal control
over financial reporting during the fourth quarter of 2006 that materially affected or are reasonably likely to
materially affect our internal control over financial reporting.

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

**Item 9B.  Other Information**

None.



**Item 10.  Directors, Executive Officers and Corporate Governance**

The information regarding our Directors, including information regarding the audit committee's
financial expert, contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of
Shareholders to be held on May 2, 2007, is incorporated by reference in this report on Form 10-K.  Such
information will be filed with the SEC no later than 120 days after the year covered by this report.

The information regarding executive officers and other key employees is set 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 that applies to our Chief Executive Officer,  Chief Financial
Officer and Director of Financial Reporting. The Code of Ethics is posted on our website,
www.aecrealty.com.  Any future amendments to, or waivers from, the Code of Ethics that apply to these
individuals will be posted on the website also.

**Item 11.  Executive Compensation**

The information on Executive Compensation contained in the Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Shareholders to be held on May 2, 2007 is incorporated by reference
in this report on Form 10-K.  Such information will be filed with the SEC no later than 120 days after the year
covered by this report.

**Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters**

The following table summarizes information about our common stock that may be issued upon
exercise of options outstanding and the total number of securities available for future issuance under all the
existing compensation plans as of December 31, 2006.  On May 4, 2005, our shareholders approved the
Amended and Restated 2001 Equity-Based Award Plan which is currently the only plan under which grants
of options to employees and directors can be made.  Also, certain options previously granted to outside
Directors, which were not made under any of those plans, were not approved by shareholders as
shareholder approval for these grants was not required at the time the grants were made.  For more
information regarding all of our plans, see Note 17 in the Notes to the Consolidated Financial Statements
presented in Part II, Item 8 of this report on Form 10-K.

Previously, we had three equity compensation plans, two of which, the AERC Share Option Plan
and the Equity-Based Incentive Compensation Plan had been approved by shareholders and one, the Year
2001 Equity Incentive Plan which had not been approved by shareholders, as there was no requirement for
this plan to be approved by shareholders when it was formed.  As previously stated, this plan was amended
and approved by shareholders in 2005.

|                              |                        |                     | Number of Securities Remaining
|----------------------------- | ---------------------- | ------------------- | ------------------------------
|                              | Number of              |                     | Available for Future Issuance 
|                              | Securities to be       | Weighted Average    | Under Equity Compensation     
|                              | Issued Upon Exercise   | Exercise Price of   | Plans [Excluding Securities   
|Plan Category                 | of Outstanding Options | Outstanding Options | Reflected in the First Column]
|                              |                        |                     |                               
|Equity compensation plans     |                        |                     |                               
|approved by security holders  | 1,454,772              | $12.49              | 764,127                       
|Equity compensation plans not |                        |                     |                               
|approved by security holders  | 45,000                 | $13.26              | -                             
|Total                         | 1,499,772              |                     | 764,127                       

Additionally, the information on Security Ownership of Certain Beneficial Owners and Management
contained in the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to
be held on May 2, 2007 is incorporated by reference in this report on Form 10-K.  Such information will be
filed with the SEC no later than 120 days after the year covered by this report.

**Item 13.  Certain Relationships and Related Transactions, and Director Independence**

The information on Certain Relationships and Related Transactions contained in the Notice of
Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 2, 2007,
is incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later
than 120 days after the year covered by this report.

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

The information on Principal Accountant Fees and Services contained in the Notice of Annual
Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 2, 2007, is
incorporated by reference in this report on Form 10-K.  Such information will be filed with the SEC no later
than 120 days after the year covered by this report.



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

The following documents are filed as part of this Report.

1.	Consolidated Financial Statements: The following documents are filed as part of
this report.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2006 and 2005.

Consolidated Statements of Operations for the years ended December
31, 2006, 2005 and 2004.

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2006, 2005 and 2004.

Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004.

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-38

III	Real Estate and Accumulated Depreciation					F-39

Schedules not listed above have been omitted because they are not
applicable or are 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.



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th
day of February, 2007.

**ASSOCIATED ESTATES REALTY CORPORATION**

By /s/ Jeffrey I. Friedman

Jeffrey I. Friedman, Chairman of the Board,

and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated on the 28th day of February,
2007.

|Signature               | Title                                        | Date             
|----------------------- | -------------------------------------------- | -----------------
|                        |                                              |                  
|/s/ Jeffrey I. Friedman | Chairman of the Board and Chief Executive    | February 28, 2007
|Jeffrey I. Friedman     | Officer (Principal Executive Officer)        |                  
|                        |                                              |                  
|/s/ Lou Fatica          | Chief Financial Officer (Principal Financial | February 28, 2007
|Lou Fatica              | Officer and Principal Accounting Officer)    |                  
|                        |                                              |                  
|/s/ Albert T. Adams     | Director                                     | February 28, 2007
|Albert T. Adams         |                                              |                  
|                        |                                              |                  
|/s/ James M. Delaney    | Director                                     | February 28, 2007
|James M. Delaney        |                                              |                  
|                        |                                              |                  
|/s/ Michael E. Gibbons  | Director                                     | February 28, 2007
|Michael E. Gibbons      |                                              |                  
|                        |                                              |                  
|/s/ Mark L. Milstein    | Director                                     | February 28, 2007
|Mark L. Milstein        |                                              |                  
|                        |                                              |                  
|/s/ James A. Schoff     | Director                                     | February 28, 2007
|James A. Schoff         |                                              |                  
|                        |                                              |                  
|/s/ Richard T. Schwarz  | Director                                     | February 28, 2007
|Richard T. Schwarz      |                                              |                  



|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | **Filed herewith or**                                                            
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | **incorporated**                                                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | **herein by**                                                                    
|**Number** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | **reference**                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|3.1        | Amendment to Second Amended and Restated Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 3.1 to Form 8-K
filed December 8, 2004.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|3.2        | Second Amended and Restated Articles of Incorporation, as amended by the
Company.                                                                                                                                                                                                                                                                                                                                                                                                       |  | Exhibit 3.2 to Form 8-K
filed December 8, 2004.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|3.3        | Amended and Restated Code of Regulations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Exhibit 3.3 to Form 10-Q filed August 1, 2006                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.1        | Specimen Common Share Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 3.1 to Form S-11 filed September 2,
1993 (File No. 33-68276
as amended). 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.2        | Specimen 8.70% Class B Series II Cumulative Redeemable Preferred
Shares.                                                                                                                                                                                                                                                                                                                                                                                                                |  | Exhibit 4.3 to Form 8-A
filed December 8, 2004.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.3        | Deposit Agreement by and among Associated Estates Realty Corporation and
National City Bank and Depositary Receipts.                                                                                                                                                                                                                                                                                                                                                                    |  | Exhibit 4.5 to Form 8-A
filed December 8, 2004                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.4        | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 4.2 to Form S-11 filed September 2,
1993 (File No. 33-68276
as amended). 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.5        | Form of Promissory Note and Form of Mortgage and Security Agreement
dated May 10, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                           |  | Exhibit 4.5 to Form 10-Q filed August 13, 1999.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.5a       | Form of Promissory Note and Form of Mortgage and Security Agreement
dated September 10, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 4.5a to Form 10-Q filed November 12,
1999.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.5b       | Form of Promissory Note and Form of Mortgage and Security Agreement

dated November 18, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 4.5b to Form 10-K filed March 15, 2000.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9        | Second Amended and Restated Loan Agreement dated April 19, 2002
between Associated Estates Realty Corporation and National City Bank.                                                                                                                                                                                                                                                                                                                                                   |  | Exhibit 4.13a to Form
10-Q filed August 13,
2002.                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9a       | Third Amended and Restated Loan Agreement dated November 1, 2005
between Associated Estates Realty Corporation and National City Bank.                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 4.9a to Form 10-K filed March 1, 2006.                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9a(i)    | Amendment No. 1 to Third Amended and Restated Loan Agreement dated                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 4.9a(i) to Form                                                          
|           | May 15, 2006 between Associated Estates Realty Corporation and National                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 10-Q filed August 1,                                                             
|           | City Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 2006.                                                                            
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9b       | First Amendment to Second Amended and Restated Loan Agreement dated
May 14, 2002 between Associated Estates Realty Corporation and National
City Bank.                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 4.13b to Form
10-Q filed August 13,
2002.                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9c       | Second Amendment to Second Amended and Restated Loan Agreement
dated April 17, 2003 between Associated Estates Realty Corporation and
National City Bank.                                                                                                                                                                                                                                                                                                                               |  | Exhibit 4.13c to Form
10-Q filed August 1,
2003.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9d       | Third Amendment to Second Amended and Restated Loan Agreement dated
July 15, 2003 between Associated Estates Realty Corporation and National
City Bank.                                                                                                                                                                                                                                                                                                                                 |  | Exhibit 4.13d to Form
10-Q filed November
20, 2003.                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9e       | Fourth Amendment to Second Amended and Restated Loan Agreement dated
September 7, 2004 between Associated Estates Realty Corporation and
National City Bank.                                                                                                                                                                                                                                                                                                                            |  | Exhibit 4.13e to Form
10-Q filed November 2,
2004.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.11       | Loan Agreement dated July 22, 2003 between The Huntington National Bank
and MIG/Orlando Development, Ltd.                                                                                                                                                                                                                                                                                                                                                                               |  | Exhibit 4.15 to Form 10-Q filed November 20,
2003.                               
|4.12       | Amended and Restated Loan Agreement dated February 20, 2006 between                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 4.12 to Form                                                             
|           | The Huntington National Bank and MIG/Orlando Development Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 10-Q filed May 2, 2006                                                           
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|           | Certain of the Registrant's assets are subject to mortgage obligations each of
which individually relates to indebtedness totaling less than 10.0% of the total
assets of the Registrant.  The Registrant hereby agrees to furnish a copy of
such agreements to the Commission upon its request.                                                                                                                                                                                        |  |                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|           | The Registrant issued unsecured debt in the form of Trust Preferred
Securities on March 15, 2005 in a private placement in an amount less than
10.0% of the total assets of the Registrant.  The Registrant hereby agrees to
furnish a copy of the Purchase Agreement dated March 15, 2005 between
Associated Estates Realty Corporation, AERC Delaware Trust and Taberna
Preferred Funding 1, Ltd. and a specimen Preferred Securities Certificate to
the Commission upon its request. |  |                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10         | Associated Estates Realty Corporation Directors' Deferred Compensation
Plan.                                                                                                                                                                                                                                                                                                                                                                                                            |  | Exhibit 10 to Form 10-Q
filed November 14,
1996.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.1       | Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 10.2 to Form S-11 filed September 2,
1993 (File No. 33-68276
as amended).
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.2       | Amended and Restated Employment Agreement between the Company and
Jeffrey I. Friedman.                                                                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 10.1 to Form 10-Q filed May 13, 1996.                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.3       | Equity-Based Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Exhibit 10.4 to Form 10-K filed March 29, 1995.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.4       | Form of Restricted Agreement dated by and among the Company and Its
Independent Directors.                                                                                                                                                                                                                                                                                                                                                                                              |  | Exhibit 10.9 to Form 10-K filed March 28, 1996.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.8       | Form of Share Option Agreement by and among the Company and Its
Independent Directors.                                                                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 10.14 to Form
10-K filed March 30,
1993.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.9       | Partnership Interests Purchase Agreement dated July 17, 2004 by and among
Jeffrey I. Friedman and JIFCO, an Ohio Corporation  and Winchester, Inc., an
Ohio Corporation.                                                                                                                                                                                                                                                                                                                |  | Exhibit 10.21 to Form
10-K filed February 25,
2005.                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.10      | Associated Estates Realty Corporation Amended and Restated 2001 Equity-Based Plan (as amended on May 4, 2005).  Incorporated by reference to
Appendix 1 to the Definitive Proxy Statement filed March 28, 2005.                                                                                                                                                                                                                                                                         |  | Exhibit 99.01 to Form
S-8 filed May 26, 2005.                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.11      | Form of Equity Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Exhibit 10.11 to Form
10-Q filed August 2,
2005.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.12      | Long Term Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 10.12 to Form
10-Q filed November 1,
2005.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|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-K
filed herewith.                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|31.1       | Certification of Chief Financial Officer Pursuant to Section 302 of the

Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                            |  | Exhibit 31.1 to Form 10-K filed herewith.                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|32         | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                 |  | Exhibit 32 to Form 10-K
filed herewith.                                          





|Consolidated Financial Statements:                                  | Page
|------------------------------------------------------------------- | ----
|                                                                    |     
|Report of Independent Registered Public Accounting Firm             | F-2 
|Consolidated Balance Sheets at December 31, 2006 and 2005           | F-4 
|Consolidated Statements of Operations for the                       |     
|years ended December 31, 2006, 2005 and 2004                        | F-5 
|Consolidated Statements of Shareholders' Equity for the             |     
|years ended December 31, 2006, 2005 and 2004                        | F-6 
|Consolidated Statements of Cash Flows for the                       |     
|years ended December 31, 2006, 2005 and 2004                        | F-7 
|Notes to Consolidated Financial Statements                          | F-8 
|                                                                    |     
|Financial Statement Schedules:                                      |     
|II - Valuation and Qualifying Accounts                              | F-38
|III - Real Estate and Accumulated Depreciation at December 31, 2006 | F-39
|                                                                    |     

All other schedules are omitted because they are not applicable or the required information is shown
in the consolidated financial statements or notes thereto.

*****Index*****

To the Board of Directors and Shareholders of

Associated Estates Realty Corporation:

We have completed integrated audits of Associated Estates Realty Corporation's consolidated financial
statements and of its internal control over financial reporting as of December 31, 2006, in accordance with
the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on
our audits, are presented below.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the index appearing under item 15(a)(1)
present fairly, in all material respects, the financial position of Associated Estates Realty Corporation and
its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.  In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 15(a)(2) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial statements and financial
statement schedules based on our audits.  We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 17 to the consolidated financial statements, the Company changed the manner in
which it accounts for share-based compensation in 2006 in accordance with guidance provided in Statement
of Financial Accounting Standards No. 123(R), "Share-Based Payment".

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over
Financial Reporting appearing under item 9A, that the Company maintained effective internal control over
financial reporting as of December 31, 2006 based on criteria established in *Internal Control - Integrated
Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.  Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31,
2006, based on criteria established in *Internal Control - Integrated Framework* issued by the COSO.  The
Company's management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to
express opinions on management's assessment and on the effectiveness of the Company's internal control
over financial reporting based on our audit.  We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects.  An audit
of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we consider necessary in the
circumstances.  We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.  A company's internal control over
financial 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 assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have
a material effect on the financial statements.

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



/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 28, 2007



*****Index*****

**CONSOLIDATED BALANCE SHEETS**

|                                                                          | December 31,
|------------------------------------------------------------------------- | ------------
|(In thousands, except share amounts)                                      | 2006        
|**ASSETS**                                                                |             
|Real estate assets                                                        |             
|Land                                                                      | $	92,341    
|Buildings and improvements                                                | 751,393     
|Furniture and fixtures                                                    | 28,126      
|                                                                          | 871,860     
|Less:  accumulated depreciation                                           | (281,994)   
|                                                                          | 589,866     
|Construction in progress                                                  | 1,323       
|Real estate associated with property held for sale, net                   | 331         
|Real estate, net                                                          | 591,520     
|Cash and cash equivalents                                                 | 30,010      
|Restricted cash                                                           | 7,279       
|Accounts and notes receivable, net                                        |             
|Rents                                                                     | 1,582       
|Affiliates and joint ventures                                             | 322         
|Other                                                                     | 1,955       
|Investments in joint ventures, net                                        | 5,247       
|Goodwill                                                                  | 1,725       
|Other assets, net                                                         | 9,155       
|Other assets associated with property held for sale, net                  | 34          
|**Total assets**                                                          | $	648,829   
|                                                                          |             
|**LIABILITIES AND SHAREHOLDERS' EQUITY**                                  |             
|Mortgage notes payable                                                    | $	472,854   
|Unsecured debt                                                            | 25,780      
|Total debt                                                                | 498,634     
|Accounts payable, accrued expenses and other liabilities                  | 24,568      
|Dividends payable                                                         | 2,934       
|Resident security deposits                                                | 3,601       
|Funds held on behalf of managed properties                                |             
|Affiliates and joint ventures                                             | 200         
|Other                                                                     | 1,978       
|Accrued interest                                                          | 2,992       
|Other liabilities associated with property held for sale                  | 20          
|**Total liabilities**                                                     | 534,927     
|                                                                          |             
|Operating partnership minority interest                                   | 1,851       
|                                                                          |             
|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 outstanding                                | 58,000      
|Common shares, without par value, $.10 stated value; 41,000,000           |             
|authorized; 22,995,763 issued and 17,261,224 and 17,950,326               |             
|outstanding at December 31, 2006 and 2005, respectively                   | 2,300       
|Paid-in capital                                                           | 280,369     
|Accumulated distributions in excess of accumulated net income             | (173,962)   
|Accumulated other comprehensive loss                                      | (71)        
|Less:  Treasury shares, at cost, 5,734,539 and 5,045,437 shares           |             
|at December 31, 2006 and 2005, respectively                               | (54,585)    
|**Total shareholders' equity**                                            | 112,051     
|**Total liabilities and shareholders' equity**                            | $	648,829   





*****Index***ASSOCIATED ESTATES REALTY CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

|                                                                             | For the year ended December 31,
|---------------------------------------------------------------------------- | -------------------------------
|(In thousands, except per share amounts)                                     | 2006                           
|Revenue                                                                      |                                
|Property revenue                                                             | $	132,994                      
|Management and service company revenue:                                      |                                
|Fees, reimbursements and other                                               | 11,689                         
|Painting services                                                            | 1,078                          
|Total revenue                                                                | 145,761                        
|Expenses                                                                     |                                
|Property operating and maintenance                                           | 63,086                         
|Depreciation and amortization                                                | 31,517                         
|Direct property management and service company expenses                      | 12,695                         
|Painting services                                                            | 1,367                          
|General and administrative                                                   | 9,840                          
|Total expenses                                                               | 118,505                        
|Operating income                                                             | 27,256                         
|Interest income                                                              | 680                            
|Interest expense                                                             | (51,991)                       
|(Loss) income before gain on disposition of investment, equity               |                                
|in net loss of joint ventures, minority interest and income from             |                                
|discontinued operations                                                      | (24,055)                       
|Gain on disposition of investment                                            | -                              
|Equity in net loss of joint ventures                                         | (462)                          
|Minority interest in operating partnership                                   | (61)                           
|(Loss) income from continuing operations                                     | (24,578)                       
|Income from discontinued operations:                                         |                                
|Operating (loss) income                                                      | (2,494)                        
|Gain on disposition of properties                                            | 54,093                         
|Income from discontinued operations                                          | 51,599                         
|**Net income**                                                               | 27,021                         
|Preferred share dividends                                                    | (5,046)                        
|Original issuance costs related to redemption of preferred shares            | -                              
|**Net income (loss) applicable to common shares**                            | $	21,975                       
|                                                                             |                                
|**Earnings per common share - basic and diluted:**                           |                                
|(Loss) income from continuing operations applicable to common shares         | (1.74)                         
|Income from discontinued operations                                          | 3.03                           
|Net income (loss) applicable to common shares                                | $	1.29                         
|                                                                             |                                
|**Dividends declared per common share**                                      | $	.68                          
|                                                                             |                                
|**Weighted average number of common shares outstanding	-	basic and diluted** | 17,023                         







*****Index***ASSOCIATED ESTATES REALTY CORPORATION**

******CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**

|                                                                 |           | Class A    | Class B    |               |                       |              | Accumulated   |               |           
|---------------------------------------------------------------- | --------- | ---------- | ---------- | ------------- | --------------------- | ------------ | ------------- | ------------- | ----------
|                                                                 |           | Cumulative | Cumulative |               |                       |              | Distributions | Accumulated   |           
|                                                                 |           | Redeemable | Redeemable | Common Shares | Total Paid-In Capital | in Excess of | Other         | Treasury     
|                                                                 |           | Preferred  | Preferred  | (at $.10      | Paid-In               | Unearned     | Accumulated   | Comprehensive | Shares    
|(In thousands, except share amounts)                             | Total     | Shares     | Shares     | stated value) | Capital               | Compensation | Net Income    | Loss          | (at cost) 
|Balance, December 31, 2003                                       | $	121,428 | $	56,250   | $	-        | $	2,300       | $	279,354             | $	(267)      | $	(184,436)   | $	-           | $	(31,773)
|Comprehensive income-net income                                  | 3,324     | -          | -          | -             | -                     | -            | 3,324         | -             | -         
|Issuance of Class B Cumulative Preferred Shares                  | 56,793    | -          | 58,000     | -             | (1,207)               | -            | -             | -             | -         
|Amortization of unearned compensation                            | 318       | -          | -          | -             | -                     | 318          | -             | -             | -         
|Forfeiture of 4,083 restricted common shares to treasury         | (7)       | -          | -          | -             | 14                    | 25           | -             | -             | (46)      
|Issuance of 74,451 restricted common shares from treasury shares | 66        | -          | -          | -             | (215)                 | (555)        | -             | -             | 836       
|Purchase of 8,862 common shares                                  | (74)      | -          | -          | -             | -                     | -            | -             | -             | (74)      
|Issuance of 113,000 common shares for stock option exercises     |           |            |            |               |                       |              |               |               |           
|from treasury shares                                             | 928       | -          | -          | -             | (329)                 | -            | -             | -             | 1,257     
|Other                                                            | (21)      | -          | -          | -             | (21)                  | -            | -             | -             | -         
|Common share dividends declared                                  | (13,360)  | -          | -          | -             | -                     | -            | (13,360)      | -             | -         
|Preferred share dividends declared                               | (5,805)   | -          | -          | -             | -                     | -            | (5,805)       | -             | -         
|Balance, December 31, 2004                                       | 163,590   | 56,250     | 58,000     | 2,300         | 277,596               | (479)        | (200,277)     | -             | (29,800)  
|Comprehensive income:                                            |           |            |            |               |                       |              |               |               |           
|Net income                                                       | 36,206    | -          | -          | -             | -                     | -            | 36,206        | -             | -         
|Other comprehensive income (loss):                               |           |            |            |               |                       |              |               |               |           
|Change in fair value of hedge instruments                        | (25)      | -          | -          | -             | -                     | -            | -             | (25)          |           
|Total comprehensive income                                       | 36,181    | -          | -          | -             | -                     | -            | 36,206        | (25)          |           
|Amortization of unearned compensation                            | 326       | -          | -          | -             | -                     | 326          | -             | -             | -         
|Forfeiture of 18,063 restricted common shares to treasury        | (22)      | -          | -          | -             | 28                    | 141          | -             | -             | (191)     
|Issuance of 77,167 restricted common shares from treasury shares | 144       | -          | -          | -             | (128)                 | (587)        | -             | -             | 859       
|Purchase of 1,823,265 common shares                              | (17,427)  | -          | -          | -             | -                     | -            | -             | -             | (17,427)  
|Issuance of 61,300 common shares for stock option exercises      |           |            |            |               |                       |              |               |               |           
|from treasury shares                                             | 493       | -          | -          | -             | (189)                 | -            | -             | -             | 682       
|Adjustment to December 2004 issuance of 8.70% Class B Series II  |           |            |            |               |                       |              |               |               |           
|Cumulative Redeemable Preferred Shares                           | 14        | -          | -          | -             | 14                    | -            | -             | -             | -         
|Redemption of Class A Cumulative Redeemable Preferred Shares     | (56,250)  | (56,250)   | -          | -             | 2,163                 | -            | (2,163)       | -             | -         
|Common share dividends declared                                  | (12,939)  | -          | -          | -             | -                     | -            | (12,939)      | -             | -         
|Preferred share dividends declared                               | (5,130)   | -          | -          | -             | -                     | -            | (5,130)       | -             | -         
|Balance, December 31, 2005                                       | 108,980   | -          | 58,000     | 2,300         | 279,484               | (599)        | (184,303)     | (25)          | (45,877)  
|Comprehensive income:                                            |           |            |            |               |                       |              |               |               |           
|Net income                                                       | 27,021    | -          | -          | -             | -                     | -            | 27,021        | -             | -         
|Other comprehensive income (loss):                               |           |            |            |               |                       |              |               |               |           
|Change in fair value of hedge instruments                        | (46)      | -          | -          | -             | -                     | -            | -             | (46)          | -         
|Total comprehensive income                                       | 26,975    | -          | -          | -             | -                     | -            | 27,021        | (46)          | -         
|Share-based compensation                                         | 1,022     | -          | -          | -             | 1,500                 | 599          | 14            | -             | (1,091)   
|Purchase of 992,423 common shares                                | (10,269)  | -          | -          | -             | -                     | -            | -             | -             | (10,269)  
|Issuance of 236,599 common shares for stock option exercises     |           |            |            |               |                       |              |               |               |           
|from treasury shares                                             | 2,037     | -          | -          | -             | (615)                 | -            | -             | -             | 2,652     
|Common share dividends declared                                  | (11,648)  | -          | -          | -             | -                     | -            | (11,648)      | -             | -         
|Preferred share dividends declared                               | (5,046)   | -          | -          | -             | -                     | -            | (5,046)       | -             | -         
|Balance, December 31, 2006                                       | $	112,051 | $	-        | $	58,000   | $	2,300       | $	280,369             | $	-          | $	(173,962)   | $	(71)        | $	(54,585)







*********Index*******ASSOCIATED ESTATES REALTY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

****

|                                                                     | For the year ended December 31,
|-------------------------------------------------------------------- | -------------------------------
|(In thousands)                                                       | 2006                           
|Cash flow from operating activities:                                 |                                
|Net income                                                           | $	27,021                       
|Adjustments to reconcile net income to net cash provided by          |                                
|operating activities:                                                |                                
|Depreciation and amortization (including discontinued operations)    | 33,389                         
|Loss on fixed asset replacements write-off                           | 163                            
|Minority interest in operating partnership                           | 61                             
|Amortization of deferred financing costs and other                   | 2,163                          
|Amortization of swap termination payments received                   | (497)                          
|Gain on disposition of properties, land and investment, net          | (54,093)                       
|Share-based compensation                                             | 965                            
|Equity in net loss of joint ventures                                 | 462                            
|Earnings distributed from joint ventures                             | 318                            
|Net change in assets and liabilities:                                |                                
|-   Accounts and notes receivable                                    | 1,414                          
|-   Accounts and notes receivable from affiliates and joint ventures | 1,081                          
|-   Accounts payable and accrued expenses                            | 4,215                          
|-   Other operating assets and liabilities                           | (86)                           
|-   Restricted cash                                                  | 1,218                          
|-   Funds held for non-owned managed properties                      | 877                            
|-   Funds held for non-owned managed properties of affiliates        | (759)                          
|Total adjustments                                                    | (9,109)                        
|Net cash flow provided by operations                                 | 17,912                         
|Cash flow from investing activities:                                 |                                
|Recurring fixed asset additions                                      | (11,049)                       
|Revenue enhancing/non-recurring fixed asset additions                | (1,477)                        
|Acquisition/development fixed asset additions                        | (256)                          
|Purchase of operating partnership units                              | (184)                          
|Net proceeds received from sale of properties, land and investment   | 87,038                         
|Contributions to joint ventures                                      | (137)                          
|Net cash flow provided by (used for) investing activities            | 73,935                         
|Cash flow from financing activities:                                 |                                
|Principal payments on mortgage notes payable                         | (207,146)                      
|Payment of debt procurement costs                                    | (1,540)                        
|Proceeds from mortgage notes obtained                                | 132,209                        
|Proceeds from issuance of unsecured trust preferred securities       | -                              
|Principal payment on Medium Term Notes                               | -                              
|Line of credit borrowings                                            | 96,300                         
|Line of credit repayments                                            | (96,300)                       
|Redemption of Class A preferred shares                               | -                              
|Exercise of stock options                                            | 2,037                          
|Common share dividends paid                                          | (11,765)                       
|Preferred share dividends paid                                       | (5,046)                        
|Operating partnership distributions paid                             | (61)                           
|Issuance of Class B Cumulative Redeemable Preferred Shares, net      | -                              
|Purchase of treasury shares                                          | (10,185)                       
|Other financing activities, net                                      | (73)                           
|Net cash flow (used for) provided by financing activities            | (101,570)                      
|(Decrease) increase in cash and cash equivalents                     | (9,723)                        
|Cash and cash equivalents, beginning of year                         | 39,733                         
|Cash and cash equivalents, end of year                               | $	30,010                       







*****Index*******ASSOCIATED ESTATES REALTY CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**	**BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**

**Business**

We are a self-administered and self-managed equity real estate investment trust ("REIT")
specializing in multifamily property management, advisory, development, acquisition, disposition, operation
and ownership activities.  In addition to rental revenue, we receive certain property, asset management and
disposition fees.  Our MIG subsidiary is a registered investment advisor and serves as a real estate advisor
to pension funds.  We own three taxable REIT subsidiaries (the "Service Companies") that provide
management and other services to us and to third parties.

As of December 31, 2006, we owned or managed 99 apartment communities in nine states
consisting of 20,558 units.  We own, either directly or indirectly through subsidiaries, or hold ownership
interests in 66 of the 99 apartment communities containing 15,355 units in eight states.  Twelve of those
owned or partially owned apartment communities, consisting of 1,254 units, are Affordable Housing
communities.  We property manage 33 communities in which we do not have an ownership interest
consisting of 5,203 units. We asset manage a 186-unit apartment community and one commercial property
containing approximately 145,000 square feet.  In January 2007, we assumed property management
responsibilities for a 200-unit Affordable Housing property located in Pennsylvania.

**Principles of Consolidation**

The accompanying consolidated financial statements include the accounts of all subsidiaries and
qualified REIT subsidiaries, which include but are not limited to:

- separate legal entities that were formed in connection with project specific, nonrecourse
mortgage refinancing for which records, books of accounts and depository accounts must be
maintained that are separate and apart from any other person or entity;

certain variable interest entities in which we have a controlling interest, including where we have
been determined to be a primary beneficiary of a variable interest entity in accordance with the
provisions of Interpretation No. 46(R), "Consolidation of Variable Interest Entities", or meet
certain criteria of a sole general partner or managing member in accordance with EITF 04-05,
"Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole
General Partner and the Limited Partners Have Certain Rights"; and

an Operating Partnership structured as a DownREIT in which we own an aggregate 97.4% as
of December 31, 2006.

Limited partnership interests held by others in real estate partnerships controlled by us are reflected
as "Operating partnership minority interest" in the Consolidated Balance Sheets.  Capital contributions,
distributions and profits and losses are allocated to minority interests in accordance with the terms of the
Operating Partnership agreement.  The DownREIT structure enabled us to acquire multifamily real estate
assets in an operating partnership entity that is separate from other properties that we own.  In the
DownREIT structure, the limited partners originally contributed two real estate assets to the operating
partnership and, in return, received partnership units entitling them to a share of the profits, based on the
number of operating partnership units.  One of the properties was sold in October 2005.  The operating
partnership units entitle the holder to exchange their partnership units at some future time for common
shares or to redeem partnership units for cash (at our option).  We are the DownREIT general partner.  All
significant intercompany balances and transactions have been eliminated in consolidation.

We own 100% of the common stock of all qualified REIT subsidiaries included in our consolidated
financial statements.

**Use of Estimates**

The preparation of the consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and reported amounts of revenues and
expenses during the reporting periods.  Actual results could differ from these estimates.

**Cash Equivalents**

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

**Real Estate and Depreciation**

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

Buildings and improvements		5 - 30 years

Furniture, fixtures and equipment		5 - 10 years



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

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

In accordance with SFAS 144, we discontinue the depreciation of assets that we have specifically
identified as held for sale.  There was one property classified as held for sale at December 31, 2006 and
2005.

**Classification of Fixed Asset Additions**

We consider recurring fixed asset additions to a property to be capital expenditures made to replace
worn out assets necessary to maintain or enhance the property's value.  We consider investment/revenue
enhancing and/or non-recurring fixed assets to be capital expenditures if such improvements increase the
value of the property and/or enable us to increase rents.  We consider acquisition and development fixed
asset additions to be for the purchase of, or construction of, new properties to be added to our portfolio, or
fixed asset additions identified at the time of purchase that are not made until subsequent periods.

**Impairment of Long-Lived Assets**

We evaluate the recoverability of the carrying value of our real estate assets using the methodology
prescribed in Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."  Factors we consider in evaluating impairment of existing real
estate assets held for investment include significant declines in property operating profits, recurring property
operating losses and other significant adverse changes in general market conditions that are considered
permanent in nature.  Under SFAS No. 144, a real estate asset held for investment is not considered
impaired if the undiscounted, estimated future cash flows of the asset (both the annual estimated cash flow
from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated
holding period are in excess of the asset's net book value at the balance sheet date.  If any real estate asset
held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to
its fair value.  We periodically classify real estate assets as held for sale.  See Note 2 for a discussion of our
policy regarding classification of a property as held for sale.  Upon the classification of a real estate asset
as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its fair value,
less costs to sell the asset.  Subsequent to the classification of assets as held for sale, no further
depreciation expense is recorded.  No impairment was recorded in connection with our owned real estate
assets for the years ended December 31, 2006, 2005 and 2004.

Investments in joint ventures that we own 50.0% or less are presented using the equity method of
accounting as we have the ability to exercise significant influence over, but we do not have financial or
operating control over such entities.  Since we intend to fulfill our obligations as a partner in the joint
ventures, we have recognized our share of losses and distributions in excess of our investment.  Our
investment in unconsolidated entities is periodically reviewed for other than temporary declines in market
value.  Any decline that is not expected to recover in the next 12 months is considered other than temporary
and an impairment is recorded as a reduction in the carrying value of the investment.  Estimated fair values
are based on our projections of cash flows and market capitalization rates.  As of December 31, 2006, no
impairment has been recorded in connection with any of our joint venture investments.  For additional
information concerning our activity in connection with our joint venture investments, see Note 7.  Also, we
have guaranteed certain debt obligations at one joint venture property that may require us to incur fundings
above our prorata share.  This guaranty is detailed in Note 11.

**Deferred Leasing and Financing Costs**

Costs incurred in obtaining long-term financing are deferred and amortized over the life of the
associated instrument on a straight-line basis, which approximates the effective interest method.

**Intangible Assets and Goodwill**

SFAS 142, "Goodwill and Other Intangible Assets," requires that intangible assets not subject to
amortization and goodwill are tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the carrying value may not be recoverable.  See Note 4 for additional information
related to intangible assets and goodwill.

**Revenue Recognition**

Our residential property leases are for terms of generally one year or less.  Rental income is
recognized on the straight-line basis.  Retroactive revenue increases related to budget based Affordable
Housing properties are generally recognized based on rental increase applications that are approved by
HUD.

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

Rent concessions, including free rent, incurred in connection with residential property leases, are
capitalized and amortized on a straight-line basis over the terms of the related leases (generally one year)
and are charged as a reduction of rental revenue.

**Property Management**

We are reimbursed for expenses incurred in connection with the management of properties for third
parties, joint ventures and other affiliates.  We are the primary obligor for these expenses, which are
primarily salaries and benefits relating to employees at these properties, and therefore we record these
reimbursements as management and service company revenue (included in "Fees, reimbursements and
other") and as expenses (included in "Direct property management and service company expenses").  For
the years ended December 31, 2006, 2005 and 2004, the reimbursements shown as revenue were
equivalent to the expenses, which were $8.3 million, $8.6 million and $9.2 million, respectively.

**Advertising Costs**

We recognize advertising costs as expense when incurred.  The total amount charged to advertising
expense was $2.0 million for the years ended December 31, 2006 and 2005, and $1.9 million for the year
ended December 31, 2004.   There were no advertising costs reported as assets for the years ended
December 31, 2006 and 2005.

**Share-Based Compensation**

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment" ("SFAS 123(R)") using the modified prospective
application method.  Prior to the adoption of SFAS 123(R), we accounted for share-based compensation
using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 ("APB No.
25"), and accordingly, we recognized no compensation expense for stock option awards.  For information
about our equity based award plans, see Note 17.

Under the modified prospective method of SFAS 123(R), share-based compensation cost is
recognized on (i) all awards granted on or after January 1, 2006 using the fair-value method, (ii) nonvested
stock option awards granted prior to January 1, 2006 based on their grant date fair value as previously
calculated under the pro-forma disclosure provisions of SFAS 123 over the remaining requisite service
periods, and (iii) nonvested restricted share awards based on their grant date fair value over the remaining
service periods.  Prior periods were not restated to reflect the impact of adopting this Statement.
Additionally, SFAS 123(R) requires us to estimate the amount of expected forfeitures when calculating
compensation costs, instead of accounting for forfeitures as they occur, which was our previous method.
Forfeiture rates were calculated based on our historical forfeiture activity, which was adjusted for activity that
we believe is not representative of future expectations.  The following table reflects the effect on operating
results and per share information if we had accounted for share-based compensation in accordance with
SFAS 123(R) for the twelve months ended December 31, 2005 and 2004:

|(In thousands, except per share data)                      | 2005     | 2004     
|---------------------------------------------------------- | -------- | ---------
|                                                           |          |          
|Net income                                                 | $	36,206 | $	3,324  
|Total stock compensation cost recognized                   | 358      | 339      
|Total stock compensation cost had SFAS 123(R) been adopted | (663)    | (502)    
|Proforma net income had SFAS 123(R) been adopted           | $	35,901 | $	3,161  
|                                                           |          |          
|Net income (loss) applicable to common shares:             |          |          
|Net income (loss) as reported                              | $	28,913 | $	(2,481)
|Total stock compensation cost recognized                   | 358      | 339      
|Total stock compensation cost had SFAS 123(R) been adopted | (663)    | (502)    
|Pro forma net income (loss) had SFAS 123(R) been adopted   | $	28,608 | $	(2,644)
|                                                           |          |          
|Income (loss) per common share - basic and diluted         |          |          
|Net income (loss) as reported                              | $	1.51   | $	(.13)  
|Total stock compensation cost recognized                   | .02      | .02      
|Total stock compensation cost had SFAS 123(R) been adopted | (.04)    | (.03)    
|Pro forma net income (loss) had SFAS 123(R) been adopted   | $	1.49   | $	(.14)  

**Operating Partnership Minority Interest**

In 1998, in conjunction with the acquisition of an operating partnership that owned two apartment
communities, one of which was sold in October 2005, we issued a total of 522,032 operating partnership
units ("OP units").  If and when the OP units are presented for redemption, we have the option to redeem,
in certain circumstances, the OP units for common shares exchangeable on a one-for-one basis, or the cash
equivalent amount.  The OP unitholders are entitled to receive cumulative distributions per OP unit equal
to the per share distributions on our common shares.  We charged $61,000, $63,000 and $63,000 to
"Minority interest in operating partnership" in the Consolidated Statements of Operations relating to the OP
unitholders allocated share of net income for the years ended December 31, 2006, 2005 and 2004,
respectively.  There were 79,277 OP units remaining as of December 31, 2006.

The following table identifies the number of OP units redeemed, the cash paid to redeem the units,
the recorded value of the units when issued and the difference between the cash paid and the recorded
value which reduced the recorded amount of the underlying real estate (in thousands, except units
redeemed):

|     |          |           | Recorded   | Reduction    
|---- | -------- | --------- | ---------- | -------------
|     | Units    |           | Value At   | in Underlying
|Year | Redeemed | Cash Paid | Issuance   | Real Estate  
|     |          |           |            |              
|2000 | 19,662   | $    144  | $      436 | $    292     
|2001 | 39,314   | 393       | 929        | 536          
|2002 | 335,000  | 3,100     | 7,600      | 4,500        
|2003 | 35,033   | 211       | 800        | 589          
|2004 | -        | -         | -          | -            
|2005 | -        | -         | -          | -            
|2006 | 13,746   | 184       | 321        | 137          
|     | 442,755  | $ 4,032   | $ 10,086   | $ 6,054      

**Income Taxes**

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986 (the "Code"), as
amended.  As a REIT, we are entitled to a tax deduction for dividends paid to shareholders, thereby
effectively subjecting the distributed net income to taxation at the shareholder level only, provided we
distribute at least 90.0% of our taxable income and meet certain other qualifications.

The Service Companies operate as taxable C-corporations under the Code and have accounted
for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes".  The
Service Companies have elected to be treated as Taxable REIT Subsidiaries.  Taxes are provided for those
Service Companies having net profits for both financial statement and income tax purposes.  The 2006,
2005 and 2004 net operating loss carryforwards for the Service Companies, in the aggregate, are
approximately $8.0 million, $7.0 million and $5.9 million, respectively, and expire during the years 2018 to
2026.

The gross deferred tax assets were $4.5 million, $4.3 million and $4.0 million at December 31, 2006,
2005 and 2004, respectively, and relate principally to net operating losses of the Service Companies.  Gross
deferred tax liabilities of $166,000, $150,000 and $154,000 at December 31, 2006, 2005 and 2004,
respectively, relate primarily to tax basis differences in fixed assets and intangibles.  The deferred tax
valuation allowance was $4.3 million, $4.2 million and $3.8 million at December 31, 2006, 2005 and 2004,
respectively.  We reserve for net deferred tax assets when we believe it is more likely than not that they will
not be realized.  The deferred tax assets and the deferred tax valuation allowance are recorded in "Other
assets, net" and the deferred tax liabilities are recorded in "Accounts payable, accrued expenses and other
liabilities" in the Consolidated Balance Sheets.

At December 31, 2006 and 2005, our net tax basis of properties exceeds the amount set forth in the
Consolidated Balance Sheets by $66.5 million and $99.0 million, respectively.

**Reconciliation Between GAAP Net Income and Taxable (Loss) Income**

The following reconciles GAAP net income to taxable (loss) income:

|(In thousands)                                           | Year ended December 31,
|-------------------------------------------------------- | -----------------------
|                                                         | 2006                   
|GAAP net income                                          | $	27,021               
|Add:	GAAP net loss (income) of taxable REIT              |                        
|subsidiaries and minority interest in joint venture, net | 748                    
|GAAP net income from REIT operations (1)                 | 27,769                 
|                                                         |                        
|Add:	Book depreciation and amortization                  | 35,388                 
|Less:	Tax depreciation and amortization                  | (27,058)               
|Book/tax differences on (losses) gains from              |                        
|capital transactions                                     | (27,106)               
|Other book/tax differences, net                          | 1,496                  
|Taxable income before adjustments                        | 10,489                 
|Less: Capital gains                                      | (26,986)               
|Taxable (loss) income subject to dividend requirement    | $	(16,497)             

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

**Reconciliation Between Cash Dividends Paid and Dividends Paid Deduction**



|(In thousands)                                     | Year ended December 31,
|-------------------------------------------------- | -----------------------
|                                                   | 2006                   
|Cash dividends paid                                | $	16,691               
|Plus: Dividends designated (to prior)              |                        
|from following year                                | (1,252)                
|Less: Portion designated capital gain distribution | (11,169)               
|Less: Return of capital                            | (4,270)                
|Dividends paid deduction                           | $	-                    

**Dividends Per Share**

Total dividends per common share and the related components for the years ended December 31,
2006, 2005 and 2004, as reported for income tax purposes, were as follows:

|For the year ended December 31, 2006
|------------------------------------
|                                    
|                                    
|                                    
|Date Paid                           
|                                    
|1/23/06(1)                          
|5/1/06                              
|8/1/06                              
|11/1/06                             
|                                    

(1)	Represents a portion of the dividend paid on January 23, 2006.  The remaining portion of this dividend was reported for the year
ended December 31, 2005, for income tax purposes.

|For the year ended December 31, 2005
|------------------------------------
|                                    
|                                    
|                                    
|Date Paid                           
|                                    
|2/1/05                              
|5/2/05                              
|8/1/05                              
|11/1/05                             
|1/23/06 (1)                         
|                                    

(1)	Represents a portion of the dividend paid on January 23, 2006.  The remaining portion of this dividend was reported for the year
ended December 31, 2006, for income tax purposes.

|For the year ended December 31, 2004
|------------------------------------
|                                    
|                                    
|                                    
|Date Paid                           
|                                    
|2/1/2004                            
|5/1/2004                            
|8/1/2004                            
|11/1/2004                           
|                                    



Preferred dividends of $5.0 million, $5.1 million and $5.8 million were paid for the years ended
December 31, 2006, 2005 and 2004, respectively of which $5.0 million, $5.1 million and $5.4 million were
designated as a capital gain dividend for the years ended December 31, 2006, 2005 and 2004, respectively.

**Derivative Instruments and Hedging Activities**

Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), as amended and interpreted, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments embedded in other contracts
and for hedging activities.  As required by SFAS 133, we record all derivatives on the balance sheet at fair
value.  The accounting for changes in the fair value of derivatives depends on the intended use of the
derivative and the resulting designation.  Derivatives used to hedge the exposure to changes in the fair value
of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges.  Derivatives used to hedge the exposure to variability in expected future cash
flows or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the
hedged item related to the hedged risk are recognized in earnings.  For derivatives designated as cash flow
hedges, the effective portion of changes in the fair value of the derivative is initially reported in other
comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged
transaction affects earnings and the ineffective portion of changes in the fair value of the derivative is
recognized directly in earnings.  Hedge effectiveness is assessed by comparing the changes in fair value
or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the
designated hedged item or transaction.  For derivatives not designated as hedges, changes in fair value are
recognized in earnings.

We do not use derivatives for trading or speculative purposes.  Further, we have a policy of only
entering into contracts with major financial institutions based upon their credit ratings and other factors.
When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed
to hedge, we have not sustained a material loss from those instruments and we do not anticipate any
material adverse effect on our net income or financial position in the future from the use of derivatives.

During 2006, we utilized forward contracts with respect to forecasted probable purchases of
natural gas used in heating certain properties that we own or manage.  We utilize the gas forwards to limit
the market price risk associated with the forecasted gas purchase. Identification of a forward contract as a
qualifying cash-flow hedge requires us to determine that the forecasted transaction(s) is probable, and the
hedging relationship between the gas contract and the expected future purchase is expected to be highly
effective at the initiation of the hedge and throughout the hedging relationship.  We reassess this hedge on
a quarterly basis to determine if it continues to be effective and the forecasted transactions are probable.
The changes in fair value of the contracts will be recorded in other comprehensive income ("OCI").  The
amount in OCI will be reclassified into earnings when the cost of the gas affects earnings.  If any portion of
the hedge is determined to be ineffective, that amount will also be recorded into earnings.  As of December
31, 2006, this hedge was reported at fair value on the Consolidated Balance Sheets as "Accounts payable,
accrued expenses and other liabilities" in the amount of $80,000.  The unrealized gain/loss in the fair value
of this hedge is deferred in OCI and will be recognized in earnings as the hedged transaction occurs.  The
change in net unrealized gain/loss on this hedge reflects a reclassification of net unrealized gain/loss from
accumulated OCI to earnings of $143,000 during the year ended December 31, 2006.  We estimate the
$71,000 unrealized loss in OCI will be reclassified into earnings during the first quarter of 2007.

The forward contracts related to properties that we manage are accounted for as derivatives and
are not designated as hedges.  Therefore, these forwards are recognized at fair value with the changes in
fair value recorded in earnings.  Additionally, we have contracts with certain of the owners of the managed
properties involved in the forward contracts.  These contracts create a reverse derivative, in which we are
the seller, and are also recognized at fair value with the changes in fair value recorded in earnings.  The
changes in fair value of the reverse derivatives are exactly opposite the changes in fair value of the initial
derivative for contracts with identical critical terms, and therefore result in a net impact of zero to our (loss)
income from continuing operations.

We have utilized interest rate swaps to add stability to interest expense as part of our hedging
strategy.  Interest rate swaps designated as fair value hedges involve the payment of variable-rate amounts
in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying
principal amount.   At December 31, 2006 and 2005, there were no interest rate swap derivatives included
on the Consolidated Balance Sheet.

*Interest Rate Hedge Activity:*On June 30, 2004, we terminated an interest rate swap with a notional
amount of $17.2 million (which was entered into in May, 2002) as a result of the refinancing of the related
fixed rate loan.  We recorded a credit to interest expense of $270,000 for the twelve months ended
December 31, 2004 with regards to this swap.

On April 19, 2002, we executed an interest rate swap with a notional amount of $14.0 million (which
commenced on May 15, 2002) to hedge the fair market value of a fixed rate loan.  This swap expired in
November 2005 upon the maturity of the related loan.  We recorded a credit to interest expense of
$147,000, and $418,000 for the years ended December 31, 2005, and 2004, respectively, with regards to
this swap.

On February 25, 2000, we executed two interest rate swaps.  The notional amounts of the swaps
were approximately $10.6 million (which commenced March 1, 2000) and $54.8 million (which commenced
March 10, 2000).  The swaps amortized monthly in accordance with the amortization of the hedged loans
and were to expire upon maturity of the loans.  These swaps were executed to hedge the fair market value
of five fixed rate loans.  On December 11, 2000, we executed termination agreements for both swaps, and
received a total termination payment of $3.2 million. This termination payment is being amortized, as a credit
to interest expense, through the maturity dates  of the related loans in 2007.  If a loan is extinguished prior
to the original maturity date, any unamortized termination payment related to such loan is immediately
credited to interest expense.  Total amortization related to the termination payments was $497,000,
$727,000, and $1.2 million for the twelve months ended December 31, 2006, 2005, and 2004.

**Treasury Shares**

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 the issuance based on the "First in, first out" method.
For additional information regarding treasury shares, see Note 14.

**Recent Accounting Pronouncements**

In September 2005, the EITF issued Issue 04-05, Investor's Accounting for an Investment in a
Limited Partnership.  When the Investor is the Sole General Partner and the Limited Partners Have Certain
Rights, ("EITF 04-05").  At issue is what rights held by the limited partner(s) preclude consolidation in
circumstances in which the sole general partner would consolidate the limited partnership in accordance with
GAAP.  The assessment of limited partners' rights and their impact on the presumption of control of the
limited partnership by the sole general partner should be made when an investor becomes the sole general
partner and should be reassessed if (i) there is a change to the terms or in the exercisability of the rights of
the limited partners, (ii) the sole general partner increases or decreases its ownership of limited partnership
interests, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests.
This issue was effective no later than for fiscal years beginning after December 15, 2005, and as of
September 29, 2005, for new or modified arrangements.  The impact of adopting EITF 04-05 did not have
a material impact on our financial position, results of operations or cash flows.

In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No. 154,
"Accounting Changes and Error Corrections" ("SFAS 154"), which replaces APB Opinion No. 20,
"Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An
Amendment of APB Opinion No. 28."  SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections.  It establishes retrospective application, on the latest practicable
date, as the required method for reporting a change in accounting principle and the reporting of a correction
of an error.  SFAS 154 was effective for us in the first quarter of 2006.  The adoption of this standard did not
have a material impact on our financial position, results of operations or cash flows.

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48,
"Accounting  for Uncertainty in Income Taxes" - an interpretation of FASB Statement No. 109, "Accounting
for Income Taxes" ("FIN 48").  This Interpretation clarifies the accounting for uncertain tax positions and
provides guidance for the recognition and measurement of a tax position taken or expected to be taken in
a tax return.  This Interpretation will become effective for us on January 1, 2007.  We do not anticipate that
the adoption of FIN 48 will have a material impact on our financial position, results of operations or cash
flows.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which upon adoption
will replace various definitions of fair value in existing accounting literature with a single definition, will
establish a framework for measuring fair value, and will require additional disclosures about fair value
measurements.  The statement clarifies that fair value is the price that would be received to sell an asset
or the price paid to transfer a liability in the most advantageous market available to the entity and
emphasizes that fair value is a market-based measurement and should be based on the assumptions
market participants would use.  The statement also creates a three-level hierarchy under which individual
fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.  This
hierarchy is the basis for the disclosure requirements, with fair value estimates based on the least reliable
inputs requiring more extensive disclosures about the valuation method used and the gains and losses
associated with those estimates.  SFAS 157 is required to be applied whenever another financial accounting
standard requires or permits an asset or liability to be measured at fair value.  The statement does not
expand the use of fair value to any new circumstances.  We will be required to apply the new guidance
beginning January 1, 2008.  We are currently evaluating the impact that this statement will have on our
financial condition, results of operations and cash flows.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 ("SAB 108") "Considering the Effects of Prior Year Misstatements in Current Year Financial Statements."
SAB 108 provides guidance on quantifying financial statement misstatements, including the effects of prior
year errors on current year financial statements.  SAB 108 is effective for fiscal years ending after November
15, 2006.  The adoption of SAB 108 did not have a material impact on our financial position, results of
operations or cash flows.

**Reclassifications**

Certain reclassifications have been made to the 2005 and 2004 consolidated financial statements
to conform to the 2006 presentation.

**2.	ACQUISITION AND DISPOSITION ACTIVITY**

**Acquisition Activity**

On October 11, 2005, we acquired a 168-unit Market-Rate property located in Atlanta, Georgia.  The
purchase was funded primarily by mortgage financing on the acquired property, by cash received from the
disposition of a Market-Rate property on June 29, 2005, which had previously been placed in escrow in
accordance with Section 1031 of the Internal Revenue Code, and cash previously received through the
March 15, 2005 issuance of trust preferred securities.  See Note 6 for further information on the trust
preferred securities.

On March 9, 2005, we acquired a 316-unit Market-Rate property located in West Palm Beach,
Florida.  The purchase was funded primarily by mortgage financing on the acquired property and on a
previously unencumbered Market-Rate property.  See Note 6 for further information concerning these
mortgage notes.  Additionally, this property was part of a reverse Like-Kind Exchange under Section 1031
of the Internal Revenue Code.

On July 16, 2004, we acquired our joint venture partner's interest in Courtney Chase Apartments,
a Market-Rate property located in Orlando, Florida.  We previously had a 24.0% ownership interest in this
partnership and had accounted for this investment under the equity method of accounting. We paid $7.9
million in cash and assumed the existing debt on the property of $15.6 million.  Funding for this acquisition
was derived from net proceeds received from the sale of a Market-Rate property located in Northeast Ohio.
Consequently, commencing July 16, 2004, the results of operations, financial condition and cash flows of
this property are included in our consolidated financial statements.

**Disposition Activity**

We report the results of operations and gain/loss related to the sale of real estate assets as
discontinued operations in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."  Real estate assets that are classified as held for sale are also reported as discontinued
operations.  We generally classify properties as held for sale when all significant contingencies surrounding
the closing have been resolved.  In many transactions, these contingencies are not satisfied until the actual
closing of the transaction.  Interest expense included in discontinued operations is limited to interest and
related prepayment costs on mortgage debt specifically associated with properties sold or classified as held
for sale.

During 2006, we completed the sale of eight properties containing a total of 2,040 units for a total
sales price of $92.5 million.  Seven of these properties were located in Ohio (six Market-rate properties and
one Affordable Housing property) and one was a Market-Rate property located in North Carolina.  We
recognized total gains of $54.1 million related to these sales, which are included in "Income from
discontinued operations".

Additionally, we classified one property as held for sale at December 31, 2006.  We tested this
property for impairment under SFAS 144 and determined that it was not impaired.  The major classes of
assets and liabilities related to this property have been reclassified as such in the accompanying
Consolidated Balance Sheet at December 31, 2006.

During 2005, we completed the sale of three Market-Rate properties containing a total of  943 units
for a total sales price of $108.5 million.  One of these properties was located in Cleveland, Ohio, one was
located in Orlando, Florida, and one was located in Phoenix, Arizona.  We recognized total gains of $48.5
million related to these sales, which are included in "Income from discontinued operations".

During 2004, we completed the sale of one Market-Rate property containing 459 units with a sales
price of $10.0 million.  We recognized a gain of $9.7 million related to this sale, which is included in "Income
from discontinued operations".

The following chart summarizes the "Income from discontinued operations" for the years ended
December 31, 2006, 2005, and 2004, respectively:



|                                                | 2006     | 2005     | 2004    
|----------------------------------------------- | -------- | -------- | --------
|(In thousands)                                  |          |          |         
|Property revenue                                | $	10,239 | $	22,723 | $	25,532
|                                                |          |          |         
|Property operating and maintenance expense      | (7,046)  | (13,175) | (14,239)
|Real estate asset depreciation and amortization | (1,872)  | (4,158)  | (5,710) 
|Interest income                                 | 16       | 8        | 5       
|Interest expense (1)                            | (3,831)  | (3,079)  | (3,488) 
|                                                |          |          |         
|Operating (loss) income                         | (2,494)  | 2,319    | 2,100   
|Gain on disposition of properties               | 54,093   | 48,536   | 9,682   
|**Income from discontinued operations**         | $	51,599 | $	50,855 | $	11,782

(1) Includes $2.8 million of defeasance/prepayment costs associated with the prepayment of four mortgage loans in 2006.

**3.	RESTRICTED CASH**

Restricted cash, some of which is required by HUD for certain government subsidized properties
and some of which is required by our lenders, includes residents' security deposits, reserve funds for
replacements and other escrows held for the future payment of real estate taxes and insurance.  The
reserve funds for replacements are intended to provide cash to defray future costs that may be incurred to
maintain the associated property.  In addition, certain escrows are maintained in connection with mortgage
servicing operations.

Restricted cash is comprised of the following:

|                                           | December 31,
|------------------------------------------ | ------------
|                                           | 2006        
|(In thousands)                             |             
|Resident security deposits                 | $	1,423     
|Investor's escrow                          | 86          
|Escrows and reserve funds for replacements |             
|required by mortgages                      | 5,770       
|                                           | $	7,279     

Restricted resident security deposits are held in separate bank accounts in the name of the
properties for which the funds are being held.  Investor's escrow represent funds held primarily for the
payment of operating expenses associated with properties we manage on behalf of our advisory  clients.
These funds are held in short term investments.  Certain reserve funds for replacements are invested in a
combination of money market funds and U.S. treasury bills with maturities less than 18 months.

**4.	GOODWILL AND OTHER ASSETS**

**Goodwill**



*MIG Realty Advisors, Inc.*    In June 1998, we recorded goodwill in connection with the MIG Realty
Advisors, Inc. merger.  The goodwill was allocated fully to the Management and Service Operations
Segment.

We completed our annual review of goodwill during 2006.  In performing this analysis, we use a
multiple of revenues to the range of potential alternatives and assign a probability to the various alternatives
we consider.  Based on this analysis, we determined that  goodwill was not impaired as of December 31,
2006 and 2005.  Should the estimates used to determine alternatives or the probabilities of the occurrence
thereof change, an impairment may result which could materially impact our results of operations for the
period in which it is recorded.



**Other Assets, Net**

Other assets, net, consist of the following:

|                                     | December 31,
|------------------------------------ | ------------
|(In thousands)                       | 2006        
|                                     |             
|Intangible assets                    | $	1,945     
|Deferred financing and leasing costs | 8,112       
|Less: Accumulated amortization       | (5,976)     
|                                     | 4,081       
|Prepaid expenses                     | 4,712       
|Other assets                         | 362         
|                                     | $	9,155     

**Intangible assets**

*Property Acquisitions*.  In accordance with SFAS 141, "Business Combinations", we
allocate a portion of the total purchase price of a property acquisition to any intangible assets
identified, such as existing leases and tenant relationships.  The intangible assets are amortized
over the remaining lease terms or estimated life of the tenant relationship, which is approximately
twelve to sixteen months.  Due to the short term nature of residential leases, we believe that existing
lease rates approximate market rates, and therefore, no allocation is made for above/below market
leases.

In connection with the October 2005 property acquisition discussed in Note 2, we recorded
intangible assets in the amount of $540,000 related to existing leases, which had been amortized
over twelve months, and $148,000 related to tenant relationships, which are being amortized over
sixteen months.  These intangible assets have been fully allocated to the Acquisition/Disposition
segment.

In connection with the March 2005 property acquisition discussed in Note 2, we recorded
intangible assets in the amount of $975,000 related to existing leases, which had been amortized
over thirteen months, and $282,000 related to tenant relationships, which had been amortized over
sixteen months.These intangible assets were fully allocated to the Acquisition/Disposition segment.

In connection with the July 2004 property acquisition discussed in Note 2, we recorded
intangible assets in the amount of $539,000 related to existing leases, which had been amortized
over thirteen months, and $142,000 related to tenant relationships, which had been amortized over
sixteen months.These intangible assets were allocated to the Acquisition/Disposition segment.

Information on the intangible assets at December 31, 2006 is as follows:

|(In thousands)                  | In Place | Tenant       
|------------------------------- | -------- | -------------
|                                | Leases   | Relationships
|Gross carrying amount           | $	1,515  | $	430        
|Less: Accumulated amortization  | (1,515)  | (421)        
|Balance as of December 31, 2006 | $	-      | $	9          

The aggregate amortization expense for the years ended December 31, 2006, 2005 and
2004  was $847,000, $1.5 million and $434,000, respectively.  The estimated amortization expense
related to intangible assets existing at December 31, 2006, is $9,000 for the twelve months ended
December 31, 2007.

**Deferred financing and leasing costs**

Amortization expense for deferred financing and leasing costs, including amortization
classified in income from discontinued operations, was $1.0 million, $1.2 million, and  $1.1 million
for the years ended December 31, 2006, 2005 and 2004, respectively.

**5.	GAIN ON DISPOSITION OF INVESTMENT**

During the year ended December 31, 2005, a property in which we had a $5,000 limited partnership
interest was sold.  We recorded a net gain of $150,000 related to this sale in "Gain on disposition of
investment".  We had previously recorded the investment at cost in "Other assets" in the Consolidated
Balance Sheets.

**6.	DEBT**

Our debt at December 31, 2006 and 2005, consists of the following:

|                                                    | December 31,
|--------------------------------------------------- | ------------
|(In thousands)                                      | 2006        
|                                                    |             
|Conventional mortgage debt, maturing                |             
|at various dates to 2012                            | $	340,645   
|Other mortgage debt, maturing 2013                  | 132,209     
|Federally insured mortgage debt                     | -           
|Unsecured debt, maturing 2035                       | 25,780      
|                                                    | $	498,634   
|Weighted average interest rate - fixed rate debt    | 7.3%        
|Weighted average interest rate - variable rate debt | 6.6%        

Real estate assets pledged as collateral for all debt had a net book value of $439.2 million and
$603.6 at December 31, 2006 and 2005, respectively.

As of December 31, 2006, the scheduled debt maturities for each of the next five years and
thereafter, are as follows (in thousands):

|2007       | $	53,469 
|---------- | ---------
|2008       | 36,186   
|2009       | 54,167   
|2010       | 76,590   
|2011       | 72,515   
|Thereafter | 205,707  
|           | $	498,634

Cash paid for interest was $54.6 million, $41.9 million, and $39.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively.  Included in the cash paid for interest of $54.6 million
during 2006 is $14.4 million of defeasance and other prepayment costs.

**Conventional Mortgage Debt**

During 2006, we prepaid a total of 18 conventional mortgage loans totaling $200.6 million.  Of these
18 loans, ten fixed rate loans were prepaid with the proceeds received from property sales, and five fixed rate
loans and three variable rate loans were prepaid with the proceeds of a $132.2 million mortgage refinancing
involving five properties.  The new loans are structured as five separate loans; however each loan is cross-collateralized, cross-defaulted, and includes a collateral substitution feature.These loans mature in October
2013 and accrue interest at a fixed rate of 6.09%.  The fifteen fixed rate loans that were prepaid totaled
$146.0 million and had a weighted average interest rate of 7.6%.  In relation to the loan
defeasances/prepayments, we recognized in interest expense defeasement/prepayment costs totaling $15.5
million, of which $14.4 million were paid during 2006 and $1.1 million were deferred financing costs that had
been charged to expense.  A total of $12.7 million of these costs were included in "Income from continuing
operations", and $2.8 million were included in "Income from discontinued operations".

During 2005, we repaid a total of $49.9 million of mortgage loans upon maturity, we prepaid a total
of $21.4 million mortgage loans, and a $10.1 million mortgage loan was assumed by the buyer of the Market-Rate property that secured the loan.  We recorded a discount of $330,000 as a reduction to interest expense
in relation to the prepayment of a $5.3 million, zero percent Urban Development Action Grant loan.

Conventional mortgages payable are comprised of 36 loans at December 31, 2006 and 54 loans at
December 31, 2005,  each of which is a project specific loan collateralized by the respective real estate and
resident leases.   Mortgages payable are generally due in monthly installments of principal and/or interest
and mature at various dates through June 2012.  Under certain of the mortgage agreements, we are required
to make escrow deposits for taxes, insurance and replacement of project assets.

**Other Mortgage Debt**

Other mortgages payable are comprised of 5 loans at December 31, 2006 that arecross-collateralized, cross-defaulted, and include a collateral substitution feature.  These loans are payable in
monthly payments of interest only and mature in October 2013.

**Federally Insured Mortgage Debt**

During 2006, we prepaid the $1.2 million federally insured mortgage which previously encumbered
one of our properties with the proceeds from the sale of this property.  This loan was insured by HUD
pursuant to one of the mortgage insurance programs administered under the National Housing Act of 1934.

**Line of Credit**

We have a $14.0 million line of credit that is available for regular borrowings and letter of credit
transactions.  This line of credit is secured by one of our properties.  There were no regular borrowings
outstanding under this line at December 31, 2006 and 2005.  At December 31, 2006, a letter of credit in the
amount of $63,000 had been issued against this line.  In November 2005, we completed an agreement that
reduced the interest rate on this line to LIBOR plus 1.8% or the one month reference rate from LIBOR plus
2.0% or the prime rate and extended the maturity date for two years to December 2007.

We have a $17.0 million secured line of credit that is available for regular borrowings which is
secured by one of our properties.  This line was unavailable at December 31, 2005, because the property
securing that credit line had been sold.  In February 2006, we identified a replacement property to serve as
security for this credit line and amended the loan terms by increasing the credit line to $17.0 million from
$15.0 million with interest calculated at LIBOR plus 1.5%.  This line matures March 1, 2008.  Borrowings
under the line may be restricted based upon the operating performance of the property.    There were no
borrowings outstanding under this line at December 31, 2006 and 2005.

**Unsecured Debt**

On March 15, 2005, AERC Delaware Trust (the "Trust"), a newly formed wholly owned subsidiary,
sold trust preferred securities for an aggregate amount of $25.8 million.  Associated Estates Realty
Corporation ("AERC") owns all of the common securities of the Trust.  The Trust used the proceeds to
purchase AERC's junior subordinated note due March 30, 2035, which represents all of the Trust's assets.
The terms of the trust preferred securities are substantially the same as the terms of the junior subordinated
note.  Interest on the junior subordinate note is payable at a fixed rate equal to 7.9% per annum through the
interest rate payment date in March 2015 and thereafter at a variable rate equal to LIBOR plus 3.25% per
annum.  AERC may redeem the junior subordinated note at par at any time on and after March 30, 2010.
To the extent that AERC redeems the junior subordinated note, the Trust is required to redeem a
corresponding amount of trust preferred securities.

**7.	INVESTMENTS IN AND ADVANCES TO JOINT VENTURES**

At December 31, 2006, our interests in joint venture properties were as follows:

|                  | Ownership
|----------------- | ---------
|                  |          
|Lakeshore Village | 50.0%    
|Idlewylde         | 49.0%    

The following tables represent summarized financial information at 100% for all joint ventures in
which we have been an investor during the years presented.

|**Balance sheet data**             | December 31,
|---------------------------------- | ------------
|(In thousands)                     | 2006        
|                                   |             
|Real estate, net                   | $	51,865    
|Other assets                       | 3,446       
|                                   | $	55,311    
|                                   |             
|Amounts payable to us              | $	11        
|Mortgages payable                  | 46,149      
|Other liabilities                  | 1,059       
|Equity                             | 8,092       
|                                   | $	55,311    
|                                   |             
|Investments in joint ventures, net | $	5,247     

|**Operating data**                       | For the year ended December 31,
|---------------------------------------- | -------------------------------
|(In thousands)                           | 2006                           
|                                         |                                
|Property revenue                         | $	8,602                        
|Operating and maintenance expenses       | (4,353)                        
|Depreciation and amortization            | (2,329)                        
|Interest expense                         | (2,784)                        
|(Loss) income from continuing operations | (864)                          
|Income from discontinued operations:     |                                
|Operating income                         | -                              
|Gain on disposition of property          | -                              
|Income from discontinued operations      | -                              
|Net (loss) income                        | $	(864)                        
|                                         |                                
|Equity in net loss of joint ventures     | $	(462)                        

Of the $46.1 million of mortgages payable at December 31, 2006, $42.0 million matures in 2010 and
$4.1 million matures in 2031.

On July 16, 2004, we acquired our joint venture partner's interest in Courtney Chase Apartments, a
288-unit Market-Rate multifamily community located in Orlando, Florida.  We previously had a 24.0%
ownership interest in this partnership and had accounted for this investment under the equity method of
accounting.  We paid $7.9 million in cash and assumed the existing debt on the property of $15.6 million.
Consequently, commencing July 16, 2004, the results of operations, financial condition and cash flows of this
property are included in our consolidated financial statements.

We received distributions of $318,000 and $418,000 for the twelve months ended December 31,
2006 and 2004, respectively.  There were no distributions received during 2005.  Revenue from property and
asset management fees charged to joint ventures aggregated $281,000, $245,000, and $334,000 for the
years ended December 31, 2006, 2005, and 2004, respectively.  The corresponding expenses are included
in the operating and maintenance expenses of the joint ventures, as set forth above.

We capitalize interest costs in accordance with SFAS No. 58 "Capitalization of Interest Cost in
Financial Statements That Include Investments Accounted for by the Equity Method" related to our investment
in certain joint venture properties during their construction period.  The remaining amount of capitalized
interest was $874,000 and $908,000 at December 31, 2006 and December 31, 2005, respectively.  This
excess  investment over equity in the underlying net assets of the joint ventures is included in "Investment
in joint ventures, net" in the Consolidated Balance Sheets, and is amortized as a reduction to earnings on
a straight-line basis over the lives of the related assets.

Lakeshore Village is governed by regulations pursuant to the property's HUD rent subsidy and
mortgage insurance programs, which contain provisions governing certain aspects of the operations of the
property (See Note 10).  Rent subsidies of $585,000, $581,000 and $597,000 for the years ended December
31, 2006, 2005 and 2004, respectively, were received by the property.

**8.	TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES**

We provide management and other services to (and are reimbursed for certain expenses incurred
on behalf of) certain non-owned properties in which our Chief Executive Officer ("CEO") and/or other related
parties have varying ownership interests.  The entities which own these properties, as well as other related
parties, are referred to as "affiliates".  We also provide similar services to joint venture properties.

Accounts and notes receivable from affiliates and joint ventures primarily consists of funds advanced,
property management fees and other miscellaneous receivables.

In the normal course of business, we have advanced funds on behalf of affiliates and joint ventures
and held funds for the benefit of affiliates and joint ventures.

We held two notes of equal amounts payable by our CEO aggregating $3.4 million, both of which
were to mature May 1, 2005.  These notes were paid in full on April 25, 2005.  For the years ended December
2005 and 2004, the interest rate charged on these notes was approximately 3.1% and 3.3%, respectively.

Merit Painting Services ("Merit"), a subsidiary of ours,has provided services to JAS Construction, Inc.
("JAS") related to property rehabilitation and other work from time to time.  JAS is owned by a son of our
CEO.  Reported revenue related to work performed by Merit for JAS is included in the table below.Accounts
receivable from affiliates and joint ventures related to JAS at December 31, 2006 and 2005 respectively were
$33,000 and $392,000.

Summarized affiliate and joint venture transaction activity was as follows:

|                                                           | For the year ended December 31,
|---------------------------------------------------------- | -------------------------------
|(In thousands)                                             | 2006                           
|Property management fee and other                          |                                
|miscellaneous service revenue                              | $	587                          
|                                                           |                                
|Painting service revenue related to JAS Construction       | 265                            
|Other affiliate and joint venture painting service revenue | 11                             
|                                                           |                                
|Expenses incurred on behalf of and reimbursed by (1)       | 1,055                          
|                                                           |                                
|Interest income on Notes due from CEO                      | -                              

(1)  *Primarily payroll and employee benefits, reimbursed at cost.*

**9.	NOTEHOLDER INTEREST**

On May 15, 2006, we completed the sale of a Market-Rate property located in Northeast Ohio.  The
sale price was a net $28.4 million and we recorded a gain of $23.4 million.  In connection with our IPO in
1993, we acquired a Noteholder Interest which was secured by a limited partnership interest in one-half of
this property.  We had declared the notes to be in default because of nonpayment of interest and principal.
On July 16, 2004, we accepted a 98.999% limited partnership interest in the limited partnership that owned
the property in full satisfaction of all obligations under the notes.  In addition, one of our subsidiaries acquired
the remaining 1.001% general partnership interest in that limited partnership held by our President and CEO
Jeffrey I. Friedman and a company controlled by him.  The subsidiary acquired such partnership interest in
return for a promise to pay Mr. Friedman and his controlled company 1.001% of the net sale proceeds derived
from any future sale of the property.  Pursuant to the terms of the buyout, Mr. Friedman and his controlled
company were paid a total of $127,000 from the proceeds of this sale.  The independent members of the
Board of Directors approved the terms of the buyout.

**10.	COMMITMENTS AND CONTINGENCIES**

***Leases***

At December 31, 2006, we had no equipment leased under capital leases and at December 31, 2005,
we had an immaterial amount of equipment leased under capital leases, which were included in property,
plant and equipment.  We lease certain equipment and facilities under operating leases.  Future minimum
lease payments under all noncancellable operating leases in which we are the lessee, principally for ground
leases, for each of the next five years and thereafter, are as follows (in thousands):

|           | Operating leases
|---------- | ----------------
|           |                 
|2007       | $    177        
|2008       | 136             
|2009       | 66              
|2010       | 65              
|2011       | 53              
|Thereafter | 612             
|           | $ 1,109         

The ground lease agreements contain provisions which, upon expiration of the lease, require
reversion of the land and building to the lessor.  Such provisions exist for seven properties at December 31,
2006 and expire at various dates from 2021 to 2036.  In September 2006, we sold one property that was
subject to a ground lease expiring in 2021.  Total revenue derived from such properties were $6.4 million,
$8.8 million and $10.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Furthermore, at the end of the term of each lease, any remaining replacement reserves revert to the lessor.
Such cash reserves included in restricted cash were $565,000 and $773,000 at December 31, 2006, and
2005, respectively.  With respect to such leases, we incurred ground rent expense of $50,000, $85,000 and
$101,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

We own one property which is subject to a right of reverter.  This provision requires that the land and
real estate assets revert at expiration back to the original grantor from whom we acquired this property or its
successors and assignees, which is in September 2037.  The net book value of this property was $774,000
at December 31, 2006.  This property generated revenue and net income of $997,000 and $318,000 for 2006,
$939,000 and $344,000 for 2005, $988,000 and $377,000 for 2004.

***Affordable Housing***

Certain of our Affordable Housing properties are governed by rent subsidies which contain provisions
governing certain aspects of the operations of these properties.  Among other matters, such provisions may
include a requirement to maintain a reserve fund for replacements, the renting of properties to qualifying
residents, and the requirement to make distributions in accordance with certain regulations.  Certain
approvals may be required to encumber properties having rental subsidies.

The rent subsidy program provides that HUD will make monthly housing assistance payments to our
subsidiary on behalf of persons who reside in approved properties and who meet the eligibility criteria.  The
amount of the total monthly rental and the subsidy is determined at least annually by HUD.  This arrangement
is evidenced by a contract between HUD and the applicable subsidiary.  Such contracts have scheduled
expiration dates between June 2007 and November 2019 for the properties that we own.  HUD may abate
subsidy payments if the applicable  subsidiary defaults on any obligations under such contracts and fails to
cure each default after receiving notice thereof.  Federal rent subsidies recognized in income were $6.0
million, $6.5 million and $6.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

***Legal Proceedings*****

We are subject to legal proceedings, lawsuits and other claims, including proceedings by government
authorities (collectively "Litigation").  Litigation is subject to uncertainties and outcomes are difficult to predict.
Consequently, we are unable to estimate ultimate aggregate monetary liability or financial impact with respect
to the Litigation matters described in the following paragraphs as of December 31, 2006, and no accruals
have been made for these matters other than those identified in the following paragraphs.  We believe that
other Litigation will not have a material adverse impact on us after final disposition.  However, because of
the uncertainties of litigation, one or more lawsuits could ultimately result in a material obligation.

***Pending Lawsuits*****

On or about April 14, 2002, Melanie and Kyle Kopp commenced an action against us in the Franklin
County, Ohio Court of Common Pleas seeking undetermined damages, injunctive relief and class action
certification.  This case arose out of our Suredeposit program.  This program allows cash short prospective
residents to purchase a bond in lieu of paying a security deposit.  The bond serves as a fund to pay those
resident obligations that would otherwise have been funded by the security deposit.  Plaintiffs allege that the
non-refundable premium paid for the bond is a disguised form of security deposit, which is otherwise required
to be refundable in accordance with Ohio's Landlord-Tenant Act.  Plaintiffs further allege that certain pet
deposits and other nonrefundable deposits required by us are similarly security deposits that must be
refundable in accordance with Ohio's Landlord-Tenant Act.  On or about January 15, 2004, the plaintiffs filed
a motion for class certification.  We subsequently filed a motion for summary judgment.  Both motions are
pending before the Court.  We intend to vigorously defend ourselves against these claims.

***Government Investigations***

On or about August 7, 2002, the Maryland Attorney General served us with a subpoena seeking
information concerning certain of our leasing practices in connection with our Maryland properties.  The
subpoena sought extensive information going back a number of years, including information about our
Suredeposit programs and certain non-refundable deposits.  The Maryland Attorney General completed its
review of the information we furnished and based upon that information contends that certain of our leasing
practices are in violation of Maryland's landlord tenant laws.  We have reached an out of court settlement with
the Maryland Attorney General for the purpose of resolving this matter and we have recorded an estimated
loss contingency for that purpose, which is included in "Accounts payable, accrued expenses and other
liabilities" in the Consolidated Balance Sheets and "General and administrative expense" in the Consolidated
Statements of Operations.

On or about December 22, 2003, the Montgomery County, Maryland Office of Landlord Tenant Affairs
commenced an investigation into possible violations of state and county Landlord-Tenant laws involving two
properties operated by us located in Montgomery County, Maryland.  The matters that were the subject of
this investigation were for the most part the same leasing practices being investigated by the Maryland
Attorney General. Although these Montgomery County charges were never formally withdrawn, we believe
that Montgomery County will not pursue these matters based upon our settlement with the Maryland Attorney
General.

Montgomery County recently commenced additional investigations concerning the charging of trash
fees.  We have reached an out of court settlement with Montgomery concerning this matter and we have
recorded an estimated loss contingency for that purpose which is included in "Accounts payable, accrued
expenses and other liabilities" in the Consolidated Balance Sheets and "General and administrative expense"
in the Consolidated Statements of Operations.

**11.	GUARANTEES**

We are a 49.0% partner in the joint venture partnership that owns Idlewylde Apartments, an 843-unit
multifamily community, located in Atlanta, Georgia. In connection with the $42.0 million mortgage loan
encumbering this property, we have guaranteed certain obligations of the partnership including environmental
indemnification obligations and typical non-recourse carveouts.  Although we have not recorded a liability for
a potential loss, we are required by GAAP to estimate the fair value of this guaranty.  We have estimated the
fair value of the guaranty to be $290,000, and this amount is included as an asset in "Investments in joint
ventures, net" and as a liability in "Accounts payable, accrued expenses and other liabilities" in the
accompanying Consolidated Balance Sheets.  In addition, we routinely guaranty mortgage debt of our wholly
owned subsidiaries.  In the normal course of business, we may enter into contractual arrangements under
which we may agree to indemnify the third party to such arrangement from any losses incurred relating to the
services they perform on behalf of AERC or for losses arising from certain events as defined within the
particular contract, which may 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 been material.

**12.	DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**

In the following disclosures, we determined estimated fair value by using available market information
and appropriate valuation methodologies.  Considerable judgment is necessary to interpret market data and
develop estimated fair values.  Accordingly, the estimates presented herein are not necessarily indicative of
the amounts we could realize on disposition of the financial instruments.  The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts.

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

Mortgages and notes payable with an aggregate carrying value of $498.6 million and $573.6 million
at December 31, 2006 and 2005, respectively, have an estimated aggregate fair value of approximately
$540.9 million and $597.1 million, respectively.  Estimated fair value is based on interest rates currently
available to us for issuance of debt with similar terms and remaining maturities.

We may, from time to time, enter into interest rate agreements to manage interest costs and risks
associated with changing rates.  We do not utilize these agreements for trading or speculative purposes.  See
"Derivative instruments and hedging activities" in Note 1 for further information.

Disclosure about the fair value of financial instruments is based on pertinent information available
to us as of December 31, 2006 and 2005.  Although we are not aware of any factors that would significantly
affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since these dates and current estimates of fair value may differ significantly
from the amounts presented herein.

**13.	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

The following summarizes our non-cash investing and financing activities which are not reflected in
the Consolidated Statements of Cash Flows:

|                                                                     | For the year ended
|-------------------------------------------------------------------- | ------------------
|                                                                     | December 31,      
|(In thousands)                                                       | 2006              
|Dividends declared but not paid                                      | $	2,934           
|Assumption of debt by purchaser of property                          | -                 
|Assumption of debt in connection with operating property acquisition | -                 
|Reclassification of original issuance costs related to redemption of |                   
|preferred shares                                                     | -                 
|Fixed asset replacement and other write-offs                         | 2,842             
|Net change in accounts payable related to recurring fixed asset      |                   
|additions                                                            | 859               
|Fixed asset adjustment for purchase of minority interest             | 137               
|Final fixed asset adjustment related to 2002 non-monetary joint      |                   
|venture exchange                                                     | 506               

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

***Treasury Shares***

On July 27, 2005, our Board of Directors ("Board") authorized the repurchase of up to $50.0 million
of our common shares.  On October 20, 2006, our Board expanded this authorization to include the
repurchase of our Class B Series ll Preferred Shares.  As of December 31, 2006, we had repurchased
2,803,925 common shares under this plan at a cost of $27.6 million and no preferred shares.

During the twelve months ended December 31, 2006, a total of 39,795 restricted shares had vested
and were issued from treasury shares.  Effective January 1, 2006, we adopted SFAS 123(R).  This Statement
requires that restricted shares are recorded as issued shares when they become vested.  In accordance with
previous guidance under GAAP, we had recorded restricted shares as issued shares when they were initially
granted.  As a result of the adoption of this Statement, the 144,582 restricted shares which were nonvested
at January 1, 2006, were recorded as though they were returned to treasury.  See Note 17 for additional
information related to the adoption of SFAS 123(R).

***Preferred Shares*****

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 are discussed below.

3,000,000 Class B Cumulative Preferred Shares, of which 400,000 have been designated
as Class B Series I Cumulative Preferred Shares and 232,000 have been designated as
8.7% Class B Series II Cumulative Redeemable Preferred Shares and are discussed below.

3,000,000 Noncumulative Preferred Shares.

*8.7% Class B Series II Cumulative Redeemable Preferred Shares*.  In December 2004, we issued
2,320,000 depositary shares, each representing 1/10th of a share of our 8.7% Class B Series II Cumulative
Redeemable Preferred Shares, for $58.0 million and incurred costs of approximately $1.2 million related to
the issuance.  The liquidation preference for each Class B Preferred Share is $250.00 (equivalent to $25.00
per depositary share), plus accrued and unpaid dividends.  Dividends on the Class B Preferred Shares are
cumulative from the date of issue and are payable quarterly.  Except in certain circumstances relating to the
preservation of our status as a REIT, the Class B Preferred Shares are not redeemable prior to December
15, 2009.  On and after December 15, 2009, the Class B Preferred Shares are redeemable for cash at our
option.  The net proceeds from this offering were used to redeem the outstanding 9.75% Class A Cumulative
Redeemable Preferred Shares as discussed below.

*9.75% Class A Cumulative Redeemable Preferred Shares*.   On January 6, 2005, we redeemed all
of our outstanding 9.75% Class A Cumulative Redeemable Preferred Shares at a cost of $56.6 million.  In
connection with the issuance of the 9.75% Class A Cumulative Redeemable Preferred Shares in July 1995,
we incurred issuance costs of $2.2 million which were recorded as a reduction in shareholders' equity.  In
accordance with GAAP, we recognized the $2.2 million of issuance costs as a reduction in net earnings to
arrive at net income applicable to common shares for the year ended December 31, 2005.

**Shareholder Rights Plan**

In January 1999, we adopted a Shareholder Rights Plan.  To implement the Plan, the Board of
Directors declared a distribution of one Right for each of our outstanding common shares.  Each Right entitles
the holder to purchase from us 1/1,000th of a Class B Series I Cumulative Preferred Share (a "Preferred
Share") at a purchase price of $40 per Right, subject to adjustment.  One one-thousandth of a Preferred
Share is intended to be approximately the economic equivalent of one common share.  The Rights will expire
on January 6, 2009, unless redeemed by us as described below.

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

If a person or group acquires 15.0% or more of our outstanding common shares, then each Right now
owned by the acquiring person or its affiliates will entitle its holder to purchase, at the Right's then-current
exercise price, fractional preferred shares that are approximately the economic equivalent of common shares
(or, in certain circumstances, common shares, cash, property or other securities) having a market value equal
to twice the then-current exercise price.  In addition, if, after the Rights become exercisable, we are acquired
in a merger or other business combination transaction with an acquiring person or its affiliates or sell 50.0%
or more of its assets or earnings power to an acquiring person or its affiliates, each Right will entitle its holder
to purchase, at the Right's then-current exercise price, a number of the acquiring common shares having a
market value of twice the Right's exercise price.  The Board of Directors may redeem the Rights, in whole,
but not in part, at a price of $.01 per Right.

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

**15.	EARNINGS PER SHARE**

Earnings per share ("EPS") has been computed pursuant to the provisions of SFAS No. 128.

There were 1.9 million, 2.0 million and 2.0 million options to purchase common shares outstanding
at December 31, 2006, 2005 and 2004, respectively.  None of the options were included in the calculation
of diluted earnings per share for the years presented as their inclusion would be antidilutive to the net loss
from continuing operations applicable to common shares.

The exchange of operating partnership minority interests into common shares was not included in
the computation of diluted EPS because we plan to settle these OP units in cash.

**16.	EMPLOYEE BENEFIT PLANS**

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

We sponsor a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code,
whereby eligible employees may elect to contribute up to 25.0% of their gross wages.  After one year of
participation, we match such contributions at a rate of 25.0% up to a maximum participant contribution of
6.0%.  We recorded expense in relation to this plan of approximately $148,000, $141,000, and $132,000 for
the years ended December 31, 2006, 2005 and 2004, respectively.

**Supplemental Executive Retirement Plan**

Our Supplemental Executive Retirement Plan (the "SERP") was adopted by the Board of Directors
on January 1, 1997.  This Plan was implemented to provide competitive retirement benefits for  officers and
to act as a retention incentive.  This non-qualified, unfunded, defined contribution plan extends to certain
named officers nominated by the Chief Executive Officer and approved by the Executive Compensation
Committee of the Board.  The SERP provides for us to make a contribution to the account of each of the
participating officers at the end of each plan year.  The contribution, which is a percentage of eligible earnings
(including base salary and payments under the Annual Incentive Plan), is set by the Committee at the
beginning of each SERP year.  Contributions will not be taxable to the participant (other than social security
and federal unemployment taxes once vested) until distribution.  The account balances earn interest each
year at a rate determined by the Executive Compensation Committee of the Board.  The Executive
Compensation Committee approves the interest rate at the beginning of each year.  The following table
summarizes the changes in SERP balances for the twelve months ended December 31, 2006, 2005, and
2004:

|                                        | Supplemental Executive Retirement Plan Benefit
|--------------------------------------- | ----------------------------------------------
|                                        | for the year ending December 31,              
|(In thousands)                          | 2006                                          
|                                        |                                               
|Balance at beginning of period          | $    1,035                                    
|Service cost                            | 99                                            
|Forfeiture of prior period service cost | (52)                                          
|Interest cost                           | 82                                            
|Balance at end of period                | $ 1,164                                       

******17.	EQUITY BASED AWARD PLANS**

**AERC Share Option Plan**

The AERC Share Option Plan expired September 30, 2003, and therefore no additional options will
be granted under this plan.  On December 31, 2006, there were 87,000 options outstanding and exercisable
under this plan.  These options will remain in effect according to the original terms and conditions of the plan.
This plan was provided as an incentive and non-qualified stock option plan under which 543,093 of our
common shares had been reserved for awards of share options to eligible key employees.  Options were
granted at per share prices not less than fair market value at the date of grant and must be exercised within
ten years thereof.

**Equity-Based Incentive Compensation Plan**

The Equity-Based Incentive Compensation Plan ("the Omnibus Equity Plan") expired February 20,
2005, and therefore no additional shares/awards will be granted under this plan.  On December 31, 2006,
there were 743,500 shares outstanding and 581,501 shares exercisable under this plan.  These awards will
remain in effect according to the original terms and conditions of the plan.  This plan provided key employees
equity or equity based incentives under which 1.4 million of our common shares had been reserved for
awards of share options and restricted shares.  Options were granted at per share prices not less than fair
market value at the date of grant and must be exercised within ten years thereof.

**Year 2001 Equity Incentive Plan**

Our Year 2001 Equity Incentive Plan (the "EIP") was adopted by the Board on December 8, 2000.
At our 2005 Annual Meeting of Shareholders held on May 4, 2005, our shareholders approved the Amended
and Restated 2001 Equity-Based Award Plan (the "Plan").  The Plan was amended to (i) allow for the shares
reserved for issuance to be listed on the New York Stock Exchange pursuant to the rules of the exchange,
(ii) allow us to grant options that qualify as incentive stock options under the Internal Revenue Code of 1986,
as amended, (iii) allow compensation attributable to equity based awards under the Plan to qualify as
"performance-based compensation", as defined in the Internal Revenue Code,  and (iv) increase the number
of common shares available for awards by 750,000 common shares.  The Plan provides for equity award
grants to our officers, employees, and directors.  Equity awards available under the Plan include stock
options, share appreciation rights, restricted shares, deferred shares, and other awards based on common
shares.  The aggregate number of common shares subject to awards under the Plan was increased to
2,250,000 from 1,500,000.  At December 31, 2006, there were 764,127 common shares available for awards
under the amended and restated Plan and 1,045,364, shares outstanding under this plan, of which 786,271
were exercisable.

**Options Granted to Outside Directors**

We have granted options to outside directors on a periodic basis since the initial public offering
("IPO").  The option awards are determined and approved by the Board of Directors.  Option awards vested
either one year from the date of grant or three years from the date of grant.  At December 31, 2006, there
were 45,000 options outstanding and exercisable that had been awarded to outside directors.

**Share-Based Compensation**

Our share-based compensation awards consist primarily of restricted shares.  We award share-based
compensation to our officers and employees as a performance incentive and to align individual goals with
those of the Company.  We grant share-based awards that vest either at the end of a specified service period,
or in equal increments during the service period on each anniversary of the grant date.  In accordance with
SFAS 123(R), we have elected to recognize compensation cost on these awards on a straight-line basis.
In addition to awards containing only service conditions, we issue certain grants in which the number of
shares that will ultimately vest and the date at which they will vest is dependant upon the achievement of
specified performance goals.  Compensation cost for awards with performance conditions is recognized
based on our best estimate of the number of awards that will vest and the period of time in which they will
vest.

During the twelve months ended December 31, 2006, we recognized total share-based compensation
cost of $928,000 in "General and administrative expense".  Additionally, we allocated an immaterial amount
of equity compensation expense to individual properties which is included in "Property operating and
maintenance expense" in the Consolidated Statements of Operations.

*Stock Options*.  We use the Black-Scholes option pricing model to estimate the fair value of share-based awards.  The weighted average Black-Scholes assumptions and fair value for the twelve months
ended December 31, 2006, 2005, and 2004 were as follows:

|                                    | For the twelve months
|----------------------------------- | ---------------------
|                                    | ended December 31,   
|                                    | 2006                 
|Expected volatility                 | 27.7%                
|Risk-free interest rate             | 4.6%                 
|Expected life of options (in years) | 6.0                  
|Dividend yield                      | 6.0%                 
|Grant-date fair value               | $ 1.85               

The expected volatility was based upon the historical volatility of our weekly share closing prices over
a period equal to the expected life of the options 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 the expected life of the
options.  We use the "simplified" method as allowed under the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 107 to derive the expected life of the options.  The dividend yield
was derived using our annual dividend rate as a percentage of the price of our shares on the date of grant.

The following table represents stock option activity for the twelve months ended December 31, 2006:



|                                   | Number of     | Weighted-Average | Weighted-Average       
|---------------------------------- | ------------- | ---------------- | -----------------------
|                                   | Stock Options | Exercise Price   | Remaining Contract Life
|Outstanding at beginning of period | 1,996,308     | $ 11.89          |                        
|Granted                            | 237,155       | $ 11.30          |                        
|Exercised                          | 236,599       | $   8.61         |                        
|Forfeited                          | 13,750        | $ 12.11          |                        
|Expired                            | 62,250        | $ 16.36          |                        
|Outstanding at end of period       | 1,920,864     | $ 12.08          | 5.0 years              
|Exercisable at end of period       | 1,499,772     | $ 12.51          | 4.3 years              

The aggregate intrinsic value of stock options outstanding and stock options exercisable at December
31, 2006, was $6.7 million and $5.3 million, respectively.  The aggregate intrinsic value of stock options
exercised during the twelve months ended December 31, 2006, 2005 and 2004 was $1.5 million, $98,000
and $64,000, respectively.  We generally issue shares from treasury upon the exercise of stock options.

*Restricted Shares.*Restricted shares generally have the same rights as our common shares, except
for transfer restrictions and forfeiture provisions.  Cash distributions paid during the period of restriction on
shares that are expected to vest are recorded as a charge to "Accumulated distributions in excess of
accumulated net income."  Cash distributions paid during the period of restriction on shares that are expected
to be forfeited are recorded as a charge to expense. Prior to January 1, 2006, restricted share awards were
recorded in shareholders' equity as deferred compensation on the grant date based upon the price of our
common shares on the grant date and amortized into expense over the requisite service period based on the
straight line method.  We generally issue restricted share awards from treasury shares.  Upon adoption of
SFAS 123(R), we returned the nonvested shares to treasury shares from unearned compensation at their
original cost, totaling $1.5 million.  We recorded an immaterial cumulative effect of a change in accounting
principle as a result of our change in policy from recognizing forfeitures as they occur to one where we
recognize cost after the application of an estimated forfeiture rate.  This amount was recorded in "General
and administrative expense" in the Consolidated Statements of Operations.  Accrued compensation cost of
$561,000 related to nonvested restricted shares at January 1, 2006 was transferred to additional paid in
capital from deferred compensation.

The following table represents restricted share activity for the twelve months ended December 31,
2006:

Number of
Weighted AverageShares
Grant-Date Fair ValueNonvested at beginning of period
144,582
$   8.96Granted
76,940
$ 11.64Vested
39,795
$   8.36Forfeited
10,218
$   9.71Nonvested at end of period
171,509
$ 10.26The weighted average grant-date fair value of restricted shares granted during the twelve months
ended December 31, 2006, 2005 and 2004 was $11.64, $9.72 and $8.35, respectively.  The total fair value
of restricted shares vested during the twelve months ended December 31, 2006, 2005 and 2004 was
$482,000, $139,000 and $359,000, respectively.  At December 31, 2006, there was $589,000 of
unrecognized compensation cost related to nonvested restricted share awards that we expect to recognize
over a weighted average period of 1.8 years.

**18.	DIRECTOR/EXECUTIVE COMPENSATION**

**Director's Deferred Compensation Plan**

The Directors' Deferred Compensation Plan was adopted by our Board of Directors on August 22,
1996.  The Plan was implemented to allow persons serving as Independent Directors the option of deferring
receipt of compensation otherwise payable to them for their services as Directors and to create an opportunity
for appreciation of the amount deferred based upon appreciation of our Common Shares.

Prior to January 1 of each year, any eligible Director may elect to defer all or a portion of the fees
otherwise payable to that Director for that year and such amount will be credited to a deferral account
maintained on behalf of the Director.  Fees for each period are credited to the deferral account as they are
earned.  Amounts credited to the deferral account are converted to "share units" which are valued based
upon the closing price of our common shares at the end of each reporting period.  Each deferral account is
increased when we pay a dividend on our commons shares by the number of share units that represent the
dividend paid per share multiplied by the number of share units in the account on the date of record for the
related dividend payment.  At the end of each reporting period, the total value of the deferred compensation
is adjusted for increases in share units and for changes in our common share price.  The total amount of
deferred compensation relating to this plan is included in "Accounts payable and accrued expenses" in the
Consolidated Balance Sheets.  Adjustments to the total value of the Plan are reflected in "General and
administrative expenses" in the Consolidated Statements of Operations.  Distributions of $64,000 and
$66,000 were made from this account during 2006 and 2005, respectively.  At December 31, 2006 and 2005,
deferred Director compensation totaled $1.4 million and $763,000, respectively.  The deferral account is
vested at all times.

**Executive Compensation and Employment Agreements**

We have a three year employment agreement with the Chairman, President and Chief Executive
Officer dated January 1, 1996, that is automatically extended 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 prior written notice.
Additionally, we have severance arrangements with certain other executive officers.

**Annual Incentive Plan**

Annual incentives emphasize pay for performance and serve as a key means of driving current
objectives and priorities.  Officers are rewarded for accomplishing our short-term financial objectives.  In 2006
and 2005, annual incentive opportunities for the officers were linked to Property Net Operating Income, as
defined.  Participants' awards are paid in a combination of cash and restricted shares.  For 2006, the officers
have earned an award of approximately $1.1 million which will be paid $835,000 in cash and $278,000 in
restricted shares, which will vest incrementally over a three-year period. The officer incentives earned for the
period ending December 31, 2005, were $429,000 in the aggregate of which $319,000 were delivered in cash
and the remaining $92,000 were delivered in the form of restricted shares that vest incrementally over a
three-year period.

**Long Term Incentive Plan**

On August 4, 2005, the Executive Compensation Committee of our Board of Directors (the
"Committee") established the terms of our long-term incentive compensation plan.  The plan is intended to
reward certain executives for the achievement of certain milestones linked to our strategic plan.

Awards under the plan are granted annually and associated with a three-year strategic benchmark
that will be determined by the Committee at the beginning of each three year measurement period.  Each
annual award will be in the form of a mixture of non-qualified stock options ("NQSOs") or share appreciation
rights ("SARs") and performance contingent restricted shares ("restricted shares").  The Committee, in its sole
discretion, may issue additional awards at the end of the three-year performance period if the overall
benchmark for that period is exceeded.

On February 28, 2006, the Committee approved the 2006 awards under the long-term incentive
compensation plan.  The award generally consists of 50.0% NQSOs and 50.0% restricted shares.  The
NQSOs will vest in thirds on December 31, 2006, 2007 and 2008.  The restricted shares vest at the end of
the three-year cycle based on the attainment of the three-year benchmark.  The vesting of no more than one-sixth of the original award of restricted shares may be accelerated at the end of each annual measurement
period based upon the achievement of interim strategic objectives as determined by the Committee.  Any of
these restricted shares that have not vested previously will vest at the end of the three-year period if the
overall objective is achieved, or will be forfeited if the overall objective is not achieved.  Additionally, on June
6, 2006, the Committee adjusted the long term incentive opportunity for the Chairman and CEO from 85.0%
of base salary to 125.0% of base salary.  At this time, an incremental award of restricted shares was issued
in accordance with this adjustment.  This award adheres to the vesting parameters outlined above.

**19.	SEGMENT REPORTING**

We have four reportable segments: (1) Acquisition/Disposition Multifamily Properties; (2) Same
Community Market-Rate ("Market-Rate") Multifamily Properties; (3) Affordable Housing Multifamily Properties;
and (4) Management and Service Operations.  We have identified these segments based upon how we make
decisions regarding resource allocation and performance assessment.  The Acquisition/Disposition properties
represent acquired or developed properties which have not yet reached stabilization (we consider a property
stabilized when its occupancy rate reaches 93.0% and we have owned the property for one year) and
properties that have been sold or are classified as held for sale in accordance with SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."  The Market-Rate Multifamily Properties are same
Community wholly owned conventional multifamily residential properties.  The Affordable Housing properties
are multifamily properties for which the rents are subsidized and certain aspects of the operations are
regulated by HUD pursuant to Section 8 of the National Housing Act of 1937.  The Management and Service
Operations provide management and advisory services to the Acquired, Market-Rate and Affordable Housing
properties, that we own or have an investment in, as well as to non-owned properties that we manage.
Additionally, this segment includes the results from our painting subsidiary, Merit Painting Services.  All of
our segments are located in the United States.

The accounting policies of the reportable segments are the same as those described in Note 1,
"Basis of Presentation and Significant Accounting Policies."  We evaluate the performance of our reportable
segments based on Net Operating Income ("NOI").  NOI is determined by deducting property operating and
maintenance expenses from total revenue, for the Acquisition/Disposition, Market-Rate and Affordable
Housing segments and deducting direct property management and service company expense, and painting
service expense from total revenue for the Management and Service Operations segment.  We consider NOI
to be an appropriate supplemental measure of our performance because it reflects the operating performance
of our real estate portfolio and management and service companies at the property and management and
service company level and is used to assess regional property level performance.  NOI should not be
considered (i) as an alternative to net income determined in accordance with GAAP, (ii) as an indicator of
financial performance, (iii) as 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.
Certain other real estate companies may define NOI in a different manner.

Segment information for the years ended December 31, 2006, 2005 and 2004 is as follows:

For the year ended December 31, 2006ManagementAcquisition/

Affordable
and Service
Total(In thousands)
Disposition
Market-Rate
Housing
Operations
ConsolidatedTotal segment revenue
$	6,614
$	117,054
$	9,406
$	20,556
$	153,630Elimination of intersegment revenue
-
(34)
(47)
(7,788)
(7,869)Consolidated revenue
6,614
117,020
9,359
12,768
145,761Equity in net income (loss) of joint ventures
-
(253)
(209)
-
(462)Operating (loss) income from discontinuedoperations
(2,494)
-
-
-
(2,494)*NOI
3,598
61,936
4,374
(1,295)
68,613Total assets
61,596
535,089
7,410
44,734
648,829* Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

|                                              | For the year ended December 31, 2005
|--------------------------------------------- | ------------------------------------
|                                              |                                     
|                                              | Acquisition/                        
|(In thousands)                                | Disposition                         
|                                              |                                     
|Total segment revenue                         | $	3,980                             
|Elimination of intersegment revenue           | -                                   
|Consolidated revenue                          | 3,980                               
|                                              |                                     
|Equity in net income (loss) of joint ventures | 4                                   
|                                              |                                     
|Operating income from discontinued operations | 2,319                               
|                                              |                                     
|*NOI                                          | 2,303                               
|                                              |                                     
|Total assets                                  | 102,963                             

* Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

|                                              | For the year ended December 31, 2004
|--------------------------------------------- | ------------------------------------
|                                              |                                     
|                                              | Acquisition/                        
|(In thousands)                                | Disposition                         
|                                              |                                     
|Total segment revenue                         | $	-                                 
|Elimination of intersegment revenue           | -                                   
|Consolidated revenue                          | -                                   
|                                              |                                     
|Equity in net income (loss) of joint ventures | 81                                  
|                                              |                                     
|Operating income from discontinued operations | 2,100                               
|                                              |                                     
|*NOI                                          | -                                   
|                                              |                                     
|Total assets                                  | 100,041                             

* Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

A reconciliation of total segment NOI to total consolidated net income for the years ended December
31, 2006, 2005 and 2005 is as follows:

|(In thousands)                             | 2006     | 2005     | 2004    
|------------------------------------------ | -------- | -------- | --------
|                                           |          |          |         
|Total NOI for reporting segments           | $	68,613 | $	64,645 | $	64,880
|Depreciation and amortization              | (31,517) | (31,306) | (28,044)
|General and administrative expense         | (9,840)  | (7,999)  | (7,771) 
|Interest income                            | 680      | 638      | 309     
|Interest expense (1)                       | (51,991) | (40,070) | (36,846)
|Gain on disposition of investment          | -        | 150      | -       
|Equity in net loss of joint ventures       | (462)    | (644)    | (923)   
|Minority interest in operating partnership | (61)     | (63)     | (63)    
|Income from discontinued operations:       |          |          |         
|Operating (loss) income                    | (2,494)  | 2,319    | 2,100   
|Gain on disposition of properties          | 54,093   | 48,536   | 9,682   
|Income from discontinued operations        | 51,599   | 50,855   | 11,782  
|Consolidated net income                    | $	27,021 | $	36,206 | $	3,324 



(1) 2006 includes $12.7 million of defeasance costs and deferred financing fees written off related to the prepayment of 14 mortgage loans.

**20.	SUBSEQUENT EVENTS**

**Debt**

In January 2007, we prepaid by defeasance a mortgage loan totaling $15.2 million.  We incurred
defeasance/prepayment extinguishment costs of approximately $1.6 million related to this transaction.  These
costs will be recognized in interest expense during the first quarter of 2007.

**Dividends**

On February 1, 2007, we paid a quarterly dividend of $0.17 per common share to shareholders of
record on January 12, 2007, which had been declared on December 13, 2006.

On January 22, 2007, we announced that a quarterly dividend of $0.54375 per Depositary Share on
our  8.70% Class B Series II Cumulative Redeemable Preferred Shares will be paid on March 15, 2007 to
shareholders of record on March 1, 2007.

**Property Sale**

On February 20, 2007, we completed the sale of a 120-unit congregate care property located in
Northeast Ohio.  The sales price was $5.2 million and we will recognize a gain of approximately $4.6 million
in the first quarter of 2007.

**21.	QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**

|                                              | 2006    
|--------------------------------------------- | --------
|                                              | First   
|(In thousands, except per share data)         | Quarter 
|                                              |         
|Revenue as reported in Form 10-Q's            | $	38,618
|Revenue of sold properties transferred to     |         
|discontinued operations                       | (2,927) 
|Revenue                                       | 35,691  
|Net (loss) income applicable to common shares | (8,885) 
|Basic and diluted earnings per share          | $	(.51) 

|                                              | 2005    
|--------------------------------------------- | --------
|                                              | First   
|(In thousands, except per share data)         | Quarter 
|                                              |         
|Revenue as reported in Form 10-Q's            | $	34,840
|Revenue of sold properties transferred        |         
|to discontinued operations                    | (2,875) 
|Revenue                                       | 31,965  
|Net (loss) income applicable to common shares | (6,843) 
|Basic and diluted earnings per share          | (.35)   

*****Index*****

**VALUATION AND QUALIFYING ACCOUNTS**

|Column A                        | Column B   | Column C   | Column D       | Column E    
|------------------------------- | ---------- | ---------- | -------------- | ------------
|                                |            | ADDITIONS  |                |             
|(In thousands)                  | Balance at | Charged to | Charged to     |             
|                                | Beginning  | Costs and  | Other Accounts | Deductions  
|DESCRIPTION                     | of Period  | Expenses   | Describe       | Describe    
|                                |            |            |                |             
|Year ended December 31, 2006:   |            |            |                |             
|Deducted from asset accounts:   |            |            |                |             
|Allowance for doubtful accounts | $	69       | $	2,153    | $	-            | $	(2,116)(1)
|Valuation allowance - deferred  |            |            |                |             
|tax asset                       | 4,178      | 119(2)     | -              | -           
|                                |            |            |                |             
|Year ended December 31, 2005:   |            |            |                |             
|Deducted from asset accounts:   |            |            |                |             
|Allowance for doubtful accounts | $	240      | $	2,028    | $	-            | $	(2,199)(1)
|Valuation allowance - deferred  |            |            |                |             
|tax asset                       | 3,803      | 375(2)     | -              | -           
|                                |            |            |                |             
|Year ended December 31, 2004:   |            |            |                |             
|Deducted from asset accounts:   |            |            |                |             
|Allowance for doubtful accounts | $	143      | $	1,891    | $	 -           | $	(1,794)(1)
|Valuation allowance - deferred  |            |            |                |             
|tax asset                       | 4,283      | (480)(2)   |                |             
|                                |            |            |                |             

(1) Uncollectible amounts reserved for or written off.

(2) Adjustments to the valuation allowance for deferred taxes are recorded to adjust deferred tax asset to net realizable value.

|***Index*********ASSOCIATED ESTATES REALTY CORPORATION
	SCHEDULE III**
|----------------------------------------------------------------------
|**REAL ESTATE AND ACCUMULATED DEPRECIATION**                          
|**December 31, 2006**                                                 
|****                                                                  
|                                                                      
|                                                                      
|******(In thousands)**                                                
|****                                                                  
|**Property**                                                          
|                                                                      
|RESIDENTIAL MULTIFAMILY PROPERTIES                                    
|**NORTHERN OHIO**                                                     
|Barrington                                                            
|Bay Club                                                              
|Country Club Apartments                                               
|Ellet                                                                 
|Gates Mills Club                                                      
|Hawthorne Hills Apartments                                            
|Mallard's Crossing                                                    
|North Pointe                                                          
|Puritas Place                                                         
|Riverview Towers                                                      
|Shaker Park Gardens II                                                
|State Road Apartments                                                 
|Statesman II                                                          
|Sutliff Apartments                                                    
|Tallmadge Acres                                                       
|The Cloisters                                                         
|Twinsburg Apartments                                                  
|The Woodlands                                                         
|Village at Avon                                                       
|Village Towers                                                        
|West High Apartments                                                  
|Westchester Townhouses                                                
|Western Reserve                                                       
|Westlake Townhouses                                                   
|Williamsburg at Greenwood Village (3)                                 
|                                                                      

|S-3ASSOCIATED ESTATES REALTY CORPORATION
					SCHEDULE III - Continued
|----------------------------------------------------------------------
|**REAL ESTATE AND ACCUMULATED DEPRECIATION**                          
|**December 31, 2006**                                                 
|****                                                                  
|                                                                      
|                                                                      
|******(In thousands)**                                                
|****                                                                  
|**Property**                                                          
|                                                                      
|                                                                      
|CENTRAL OHIO                                                          
|St. Andrews at Little Turtle                                          
|Bedford Commons                                                       
|Bradford at Easton                                                    
|Residence at Christopher Wren                                         
|Heathermoor                                                           
|Kensington Grove                                                      
|Lake Forest                                                           
|Muirwood Village at Bennell                                           
|Perimeter Lakes                                                       
|Saw Mill Village                                                      
|Sterling Park                                                         
|Residence at Turnberry                                                
|Wyndemere                                                             
|                                                                      
|SOUTHERN OHIO                                                         
|Remington Place                                                       
|                                                                      
|MICHIGAN                                                              
|Arbor Landings                                                        
|Aspen Lakes Apartments                                                
|Central Park Place                                                    
|Country Place Apartments                                              
|Clinton Place Apartments                                              
|Georgetown Park Apartments                                            
|Oaks and Woods at Hampton                                             
|The Landings at the Preserve                                          
|Spring Brook Apartments                                               
|Spring Valley Apartments                                              
|Summer Ridge                                                          
|                                                                      
|FLORIDA                                                               
|Cypress Shores                                                        
|Windsor Pines                                                         
|Courtney Chase (4)                                                    
|Vista Lago (5)                                                        
|                                                                      
|                                                                      

|S-4ASSOCIATED ESTATES REALTY CORPORATION
					SCHEDULE III - Continued
|----------------------------------------------------------------------
|**REAL ESTATE AND ACCUMULATED DEPRECIATION**                          
|**December 31, 2006**                                                 
|****                                                                  
|                                                                      
|                                                                      
|******(In thousands)**                                                
|****                                                                  
|**Property**                                                          
|                                                                      
|GEORGIA                                                               
|The Falls                                                             
|Morgan Place                                                          
|Cambridge at Buckhead (5)                                             
|                                                                      
|MARYLAND                                                              
|Reflections                                                           
|Annen Woods                                                           
|Hampton Point                                                         
|                                                                      
|TEXAS                                                                 
|Fleetwood                                                             
|                                                                      
|INDIANA                                                               
|Residence at White River                                              
|Waterstone Apartments                                                 
|Steeplechase                                                          
|                                                                      
|PENNSYLVANIA                                                          
|Chestnut Ridge                                                        
|                                                                      
|                                                                      
|                                                                      
|MANAGEMENT SERVICE COMPANIES                                          
|Land, Building & Improvements                                         
|Furniture, Fixture & Equipment                                        
|Construction in Progress                                              
|**GRAND TOTALS**                                                      

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

(2)	Improvements include both improvements made to the properties plus a purchase price adjustment for certain properties in which cash was paid to unrelated third parties to acquire their interests for those properties purchased
at the IPO.

(3)	This property secures our $14.0 million line of credit.  There were no borrowings outstanding at December 31, 2006.

(4)	This property secures our $17.0 million line of credit.  There were no borrowings outstanding at December 31, 2006.

(5)	These two properties were acquired during 2005 and recorded in accordance with SFAS 141, which required the recording of intangible assets as part of the purchase price.  We recorded intangible assets of $1.3 million for Vista
Lago and $688,000 for Cambridge at Buckhead.  These amounts are not included in the initial costs or historical costs shown.

|******S-5ASSOCIATED ESTATES REALTY CORPORATION
					SCHEDULE III - Continued**
|------------------------------------------------------------------------------
|**REAL ESTATE AND ACCUMULATED DEPRECIATION**                                  
|**December 31, 2006**                                                         
|****                                                                          
|                                                                              
|                                                                              
|******(In thousands)**                                                        
|****                                                                          
|**Property**                                                                  
|                                                                              
|JOINT VENTURE PROPERTIES                                                      
|                                                                              
|INVESTMENT IN WHICH AERC                                                      
|**HAS A 50% INTEREST**                                                        
|RESIDENTIAL MULTIFAMILY PROPERTY                                              
|**NORTHERN OHIO**                                                             
|Lakeshore Village                                                             
|                                                                              
|INVESTMENT IN WHICH AERC                                                      
|**HAS A 49% INTEREST**                                                        
|RESIDENTIAL MULTIFAMILY PROPERTIES                                            
|**GEORGIA**                                                                   
|Idlewylde                                                                     
|                                                                              
|Land, Building and Improvements                                               
|Furniture, Fixtures and Equipment                                             
|Construction in Progress                                                      
|**JOINT VENTURE GRAND TOTAL**                                                 
|                                                                              

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











The Aggregate Cost for Federal Income Tax purposes was approximately $845.6 million and $916.4
million at December 31, 2006 and 2005, respectively.

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

|(In thousands)               | 2006      | 2005     
|---------------------------- | --------- | ---------
|                             |           |          
|Balance, beginning of period | $	944,724 | $	958,450
|Disposal of fixed assets     | (80,938)  | (86,016) 
|New acquisition properties   | -         | 63,422   
|Improvements                 | 14,011    | 8,868    
|Balance, end of period       | $	877,797 | $	944,724

The changes in Accumulated Depreciation for the years ended December 31, are as follows:

|(In thousands)               | 2006      | 2005     
|---------------------------- | --------- | ---------
|                             |           |          
|Balance, beginning of period | $	298,788 | $	293,182
|Disposal of fixed assets     | (45,053)  | (28,367) 
|Depreciation for period      | 32,542    | 33,973   
|Balance, end of period       | $	286,277 | $	298,788