| ACADIA REALTY TRUST ITEM 1A RISK FACTORS If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer |
| Refer to the explanation of the qualifications and limitations on such forward-looking statements discussed elsewhere in this Form 10-K We rely on revenues derived from major tenants |
| We derive significant revenues from certain anchor tenants that occupy space in more than one center |
| We could be adversely affected in the event of the bankruptcy or insolvency of, or a downturn in the business of, any of our major tenants, or in the event that any such tenant does not renew its leases as they expire or renews at lower rental rates |
| Vacated anchor space not only would reduce rental revenues if not re-tenanted at the same rental rates but also could adversely affect the entire shopping center because of the loss of the departed anchor tenant’s customer drawing power |
| Loss of customer drawing power also can occur through the exercise of the right that most anchors have to vacate and prevent re-tenanting by paying rent for the balance of the lease term, or the departure of an anchor tenant that owns its own property |
| In addition, in the event that certain major tenants cease to occupy a property, such an action may result in a significant number of other tenants having the right to terminate their leases, or pay a reduced rent based on a percentage of the tenant’s sales, at the affected property, which could adversely affect the future income from such property |
| Tenants may seek the protection of the bankruptcy laws, which could result in the rejection and termination of their leases and thereby cause a reduction in the cash flow available for distribution by us |
| Such reduction could be material if a major tenant files bankruptcy |
| See the discussion of bankruptcy risks under Risk Factors |
| Limited control over joint venture investments |
| Our joint venture investments may involve risks not otherwise present for investments made solely by us, including the possibility that our joint venture partner might have different interests or goals than we do |
| Other risks of joint venture investments include impasse on decisions, such as a sale, because neither we nor a joint venture partner would have full control over the joint venture |
| Also, there is no limitation under our organizational documents as to the amount of funds that may be invested in joint ventures |
| Through our investments in joint ventures we have also invested in operating businesses that have operational risk in addition to the risks associated with real estate investments, including among other risks, human capital issues, adequate supply of product and material, and merchandising issues, During 2005, our investment in joint ventures provided Promote income |
| There can be no assurance that the joint ventures will continue to operate profitably and thus provide additional Promote income in the future |
| Under the terms of our Fund II joint venture, we are required to first offer to Fund II all of our opportunities to acquire retail shopping centers |
| Only if (i) our joint venture partner elects not to approve Fund II’s pursuit of an acquisition opportunity; (ii) the ownership of the acquisition opportunity by Fund II would create a material conflict of interest for us; (iii) we require the acquisition opportunity for a “like-kind” exchange; or (iv) the consideration payable for the acquisition opportunity is our Common Shares, OP Units or other securities, may we pursue the opportunity directly |
| As a result, we may not be able to make attractive acquisitions directly and may only receive a minority interest in such acquisitions through Fund II We operate through a partnership structure, which could have an adverse effect on our ability to manage our assets |
| Our primary property-owning vehicle is the Operating Partnership, of which we are the general partner |
| Our acquisition of properties through the Operating Partnership in exchange for interests in the Operating Partnership may permit certain tax deferral advantages to limited partners who contribute properties to the Operating Partnership |
| Since properties contributed to the Operating Partnership may have unrealized gain attributable to the difference between the fair market value and adjusted tax basis in such properties prior to contribution, the sale of such properties could cause adverse tax consequences to the limited partners who contributed such properties |
| Although we, as the general partner of the Operating Partnership, generally have no obligation to consider the tax consequences of our actions to any limited partner, there can be no assurance that the Operating Partnership will not acquire properties in the future subject to material restrictions designed to minimize the adverse tax consequences to the limited partners who contribute such properties |
| Such restrictions could result in significantly reduced flexibility to manage our assets |
| 12 ______________________________________________________________________ [77]Back to Contents There are risks relating to investments in real estate |
| Value of Real Estate is Dependent on Numerous Factors |
| Real property investments are subject to varying degrees of risk |
| Real estate values are affected by a number of factors, including: changes in the general economic climate, local conditions (such as an oversupply of space or a reduction in demand for real estate in an area), the quality and philosophy of management, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and to control variable operating costs |
| Shopping centers, in particular, may be affected by changing perceptions of retailers or shoppers regarding the safety, convenience and attractiveness of the shopping center and by the overall climate for the retail industry generally |
| Real estate values are also affected by such factors as government regulations, interest rate levels, the availability of financing and potential liability under, and changes in, environmental, zoning, tax and other laws |
| As substantially all of our income is derived from rental income from real property, our income and cash flow would be adversely affected if a significant number of our tenants were unable to meet their obligations, or if we were unable to lease on economically favorable terms a significant amount of space in our properties |
| In addition, certain significant expenditures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment |
| The bankruptcy of, or a downturn in the business of, any of our major tenants may adversely affect our cash flows and property values |
| The bankruptcy of, or a downturn in the business of, any of our major tenants causing them to reject their leases, or not renew their leases as they expire, or renew at lower rental rates may adversely affect our cash flows and property values |
| Furthermore, the impact of vacated anchor space and the potential reduction in customer traffic may adversely impact the balance of tenants at the center |
| Certain of our tenants have experienced financial difficulties and have filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code (“Chapter 11 Bankruptcy”) |
| Pursuant to bankruptcy law, tenants have the right to reject their leases |
| In the event the tenant exercises this right, the landlord generally has the right to file a claim for lost rent equal to the greater of either one year’s rent (including tenant expense reimbursements) for remaining terms greater than one year, or 15prca of the rent remaining under the balance of the lease term, but not to exceed three years rent |
| Actual amounts to be received in satisfaction of those claims will be subject to the tenant’s final plan of reorganization and the availability of funds to pay its creditors |
| Since January 1, 2003, there have been two significant tenant bankruptcies within our portfolio: On May 30, 2003, The Penn Traffic Company (“Penn Traffic”) filed for protection under Chapter 11 Bankruptcy |
| Penn Traffic operates in one location in our wholly-owned portfolio in 52cmam000 square feet |
| Rental revenues from this tenant at this location were dlra0dtta4 million for the year ended December 31, 2005 and dlra0dtta5 million for each of the years ended December 31, 2004 and 2003 |
| Penn Traffic also operated in a location occupying 55cmam000 square feet at a property in which we, through Fund I, hold a 22prca ownership interest |
| Our pro-rata share of rental revenues from the tenant at this location were dlra0, dlra22cmam000 and dlra147cmam000 for the years ended December 31, 2005, 2004 and 2003, respectively |
| Penn Traffic continues to operate in our wholly-owned location and has assumed this lease |
| Penn Traffic rejected the lease at the joint venture location on February 20, 2004 |
| On January 14, 2004, KB Toys (“KB”) filed for protection under Chapter 11 Bankruptcy |
| KB operated in five locations in our wholly-owned portfolio totaling approximately 41cmam000 square feet |
| Rental revenues from KB at these locations aggregated dlra0dtta3 million, $ 0dtta8 million and dlra0dtta7 million for the years ended December 31, 2005, 2004 and 2003, respectively |
| KB also operated in a location occupying 20cmam000 square feet at a property in which we hold a 22prca ownership interest through Fund I Our pro-rata share of rental revenues from the tenant at this location were dlra0, dlra37cmam000 and dlra87cmam000 for the years ended December 31, 2005, 2004 and 2003, respectively |
| We could be adversely affected by poor market conditions where properties are geographically concentrated |
| Our performance depends on the economic conditions in markets in which our properties are concentrated |
| We have significant exposure to the New York region, from which we derive 32prca of the annual base rents within our wholly-owned portfolio |
| Our operating results could be adversely affected if market conditions, such as an oversupply of space or a reduction in demand for real estate, in this area becomes more competitive relative to other geographic areas |
| Our ability to change our portfolio is limited because real estate investments are illiquid |
| Equity investments in real estate are relatively illiquid and, therefore, our ability to change our portfolio promptly in response to changed conditions will be limited |
| Our board of trustees may establish investment criteria or limitations as it deems appropriate, but currently does not limit the number of properties in which we may seek to invest or on the concentration of investments in any one geographic region |
| We could change our investment, disposition and financing policies without a vote of our shareholders |
| 13 ______________________________________________________________________ [78]Back to Contents Market interest rates could have an adverse effect on our share price |
| One of the factors that may influence the trading price of our Common Shares is the annual dividend rate on our Common Shares as a percentage of its market price |
| An increase in market interest rates may lead purchasers of our Common Shares to seek a higher annual dividend rate, which could adversely affect the market price of our Common Shares and our ability to raise additional equity in the public markets |
| We could become highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions |
| We have incurred, and expect to continue to incur, indebtedness in furtherance of our activities |
| Neither our Declaration of Trust nor any policy statement formally adopted by our board of trustees limits either the total amount of indebtedness or the specified percentage of indebtedness that we may incur |
| Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to make distributions |
| Certain loan agreements require us to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios |
| In addition, as of December 31, 2005, loans secured by five of our properties, totaling dlra44dtta5 million, are subject to cross-collateralization and cross-default provisions and two loans, aggregating dlra29dtta1 million, are also subject to cross-collateralization and cross-default provisions |
| Interest expense on our variable debt as of December 31, 2005 would increase by dlra0dtta2 million annually for a 100 basis point increase in interest rates |
| We may seek additional variable-rate financing if and when pricing and other commercial and financial terms warrant |
| As such, we would consider hedging against the interest rate risk related to such additional variable-rate debt through interest rate swaps and protection agreements, or other means |
| We enter into interest-rate hedging transactions, including interest rate swaps and cap agreements, with counterparties |
| There can be no guarantee that the financial condition of these counterparties will enable them to fulfill their obligations under these agreements |
| We may not be able to renew current leases and the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms |
| Upon the expiration of current leases for space located in our properties, we may not be able to re-let all or a portion of that space, or the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms |
| If we are unable to re-let promptly all or a substantial portion of the space located in our properties or if the rental rates we receive upon re-letting are significantly lower than current rates, our net income and ability to make expected distributions to our shareholders will be adversely affected due to the resulting reduction in rent receipts |
| There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of |