| ARCHSTONE SMITH TRUST Item 1A Risk Factors The following factors could affect our future financial performance: We have restrictions on the sale of certain properties |
| A taxable sale of any of the properties acquired in the Smith Merger prior to January 1, 2022, could result in increased costs to us in light of the tax-related obligations made to the former Smith Partnership Unitholders |
| Under the shareholders’ agreement between Archstone-Smith, the Operating Trust, Robert H Smith and Robert P Kogod, we are restricted from transferring specified high-rise properties located in the Crystal City area of Arlington, Virginia until October 31, 2016, without the consent of Messrs |
| Smith and Kogod, which could result in our inability to sell these properties at an opportune time and at increased costs to us |
| However, we are permitted to transfer these properties in connection with a non-taxable sale or a sale of all of the properties in a single transaction or pursuant to a bona fide mortgage of any or all of such properties in order to secure a loan or other financing |
| 16 _________________________________________________________________ [90]Table of Contents We have similar restrictions with respect to the properties acquired from Oakwood Worldwide in 2005 |
| The restrictions last until the earlier of (a) such time as 99prca of the contributing partners have sold, redeemed or otherwise disposed of their A-1 Common Units in a taxable event and (b) the later to occur of (x) 10 years from the closing of the contribution of such properties and (y) the last to die of Howard Ruby and Ed Broida |
| We depend on our key personnel |
| Our success depends on our ability to attract and retain the services of executive officers, senior officers and company managers |
| There is substantial competition for qualified personnel in the real estate industry and the loss of several of our key personnel could have an adverse effect on us |
| Debt financing could adversely affect our performance |
| We are subject to risks associated with debt financing and preferred equity |
| These risks include the risks that we will not have sufficient cash flow from operations to meet required payments of principal and interest or to pay distributions on our securities at expected rates, that we will be unable to refinance current or future indebtedness, that the terms of any refinancing will not be as favorable as the terms of existing indebtedness, and that we will be unable to make necessary investments in new business initiatives due to lack of available funds |
| Increases in interest rates could increase interest expense, which would adversely affect net earnings and cash available for payment of obligations |
| If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender with a consequent loss of income and value to us |
| Additionally, our debt agreements contain customary covenants which, among other things, restrict our ability to incur additional indebtedness and, in certain instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions |
| These debt agreements also require us to maintain various financial ratios |
| Failure to comply with these covenants could result in a requirement to repay the indebtedness prior to its maturity, which could have an adverse effect on our operations and ability to make distributions to shareholders |
| Some of our debt instruments bear interest at variable rates |
| Increases in interest rates would increase our interest expense under these instruments and would increase the cost of refinancing these instruments and issuing new debt |
| As a result, higher interest rates would adversely affect cash flow and our ability to service our indebtedness |
| We had dlra5dtta3 billion in total debt outstanding as of December 31, 2005, of which dlra2dtta4 billion was secured by real estate assets and dlra1dtta4 billion was subject to variable interest rates, including dlra394dtta6 million outstanding on our short-term credit facilities |
| We may not have access to equity capital |
| A prolonged period in which we cannot effectively access the public equity markets may result in heavier reliance on alternative financing sources to undertake new investment activities |
| These alternative sources of financing may be more costly than raising funds in the public equity markets |
| Periodically, we receive alerts from government agencies that apartment communities could be the target of both domestic and foreign terrorism |
| Although we currently have insurance coverage for losses incurred in connection with terrorist-related activities, losses could exceed our coverage limits and have a material adverse affect on our operating results |
| We are subject to risks inherent in ownership of real estate |
| Real estate cash flows and values are affected by a number of factors, including changes in the general economic climate, local, regional or national conditions (such as an oversupply of communities or a reduction in rental demand in a specific area), the quality and philosophy of management, competition from other available properties and the ability to provide adequate property maintenance and insurance and to control operating costs |
| Real estate cash flows and values are also affected by such factors as government regulations, including zoning, 17 _________________________________________________________________ [91]Table of Contents usage and tax laws, interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental and other laws |
| Although we seek to minimize these risks through our market research and property management capabilities, they cannot be totally eliminated |
| We are subject to risks inherent in real estate development |
| We have developed or commenced development on a substantial number of apartment communities and expect to develop additional apartment communities in the future |
| Real estate development involves risks in addition to those involved in the ownership and operation of established communities, including the risks that financing, if needed, may not be available on favorable terms, construction may not be completed on schedule, contractors may default, estimates of the costs of developing apartment communities may prove to be inaccurate, the costs and availability of materials may be adversely affected by global supply and demand, and communities may not be leased or rented on profitable terms or in the time frame anticipated |
| Timely construction may be affected by local weather conditions, local moratoria on construction, local or national strikes and local or national shortages in materials, building supplies or energy and fuel for equipment |
| These risks may cause the development project to fail to perform as expected |
| Real estate investments are relatively illiquid and we may not be able to recover our investments |
| Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in economic or other market conditions |
| Our ability to dispose of assets in the future will depend on prevailing economic and market conditions |
| Furthermore, our mezzanine loans to real estate investors may not be recoverable if those investors are unable to monetize the underlying asset at underwritten amounts |
| Compliance with laws and regulatory requirements may be costly |
| We must comply with certain accessibility, environmental, building, and health and safety laws and regulations related to the ownership, operation, development and acquisition of apartments |
| Under those laws and regulations, we may be liable for, among other things, the costs of bringing our properties into compliance with the statutory and regulatory requirements |
| Non-compliance with certain of these laws and regulations may impose liability without regard to fault, and could give rise to actions brought against us by governmental entities and/or third parties who claim to be or have been damaged as a consequence of an apartment not being in compliance with the subject laws and regulations |
| As part of our due diligence procedures in connection with the acquisition of a property, whether it is an apartment community or land to be developed, we conduct an investigation of the property’s compliance with known laws and regulatory requirements with which we must comply once we acquire a property, which investigation includes performing a Phase I environmental assessment of the property and a Phase II assessment if recommended in the Phase I report |
| We cannot, however give any assurance that our investigations and these assessments have revealed all potential non-compliance issues or related liabilities |
| Costs associated with moisture infiltration and resulting mold remediation may be costly |
| As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold |
| We have implemented guidelines and procedures to address moisture infiltration and resulting mold issues if and when they arise |
| We believe that these measures will minimize the potential for any adverse effect on our residents |
| The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims |
| Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs |
| We can make no assurance that liabilities resulting from moisture infiltration and the presence of or exposure to mold will not have a future material impact on our financial results |
| We may not be able to pass on increased costs resulting from increases in real estate taxes, income taxes or other governmental requirements, such as the enactment of regulations relating to internal air quality, directly to our residents |
| Substantial increases in rents, as a result of those increased costs, may affect the ability of a resident to pay rent, causing increased vacancy |
| Archstone-Smith’s failure to qualify as a REIT would have adverse consequences |
| We believe that we have qualified for taxation as a REIT under the Internal Revenue Code and we plan to continue to meet the requirements for taxation as a REIT We cannot, however, guarantee that we will continue to qualify in the future as a REIT We cannot give any assurance that new legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements relating to Archstone-Smith’s qualification |
| If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates |
| Also, unless the Internal Revenue Service granted us relief, we would remain disqualified as a REIT for four years following the year in which we failed to qualify |
| In the event that we failed to qualify as a REIT, we would be required to pay significant income taxes and would have less money available for operations and distributions to shareholders |
| This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital |
| In order to maintain our qualification as a REIT under the Internal Revenue Code, our declaration of trust limits the ownership of our shares by any person or group of related persons to 9dtta8prca, unless special approval is granted by our Board |
| The Operating Trust intends to qualify as a partnership, but we cannot guarantee that the Operating Trust will qualify |
| The Operating Trust intends to qualify as a partnership for federal income tax purposes |
| However, the Operating Trust will be treated as an association taxable as a corporation for federal income tax purposes if it is deemed to be a publicly traded partnership, unless at least 90prca of its income is qualifying income as defined in the tax code |
| Qualifying income for the 90prca test generally includes passive income, such as real property rents, dividends and interest |
| The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90prca test are similar in most respects |
| We believe that the Operating Trust will meet this qualifying income test, but cannot guarantee that it will |
| If the Operating Trust were to be taxed as a corporation, it will incur substantial tax liabilities, Archstone-Smith would fail to qualify as a REIT for tax purposes and Archstone-Smith’s and the Operating Trust’s ability to raise additional capital would be impaired |
| We are subject to losses that may not be covered by insurance |
| There are certain types of losses (such as from war) that may be uninsurable or not economically insurable |
| Additionally, many of our communities in California are located in the general vicinity of active earthquake fault lines and many of our Southeast Florida assets are in coastal locations and subject to hurricanes |
| Although we maintain insurance to cover most reasonably likely risks, including earthquakes and hurricanes, if an uninsured loss or a loss in excess of insured limits occurs, we could lose both our invested capital in, and anticipated profits from, one or more communities |
| We may also be required to continue to repay mortgage indebtedness or other obligations related to such communities |
| The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims |
| We can make no assurance that liabilities resulting from moisture infiltration and the presence of or exposure to mold will not have a future material impact on our financial results |
| Should an uninsured loss arise against the company, we would be required to use our own funds to resolve the issue, including litigation costs |
| Any such loss could materially adversely affect our business, financial condition and results of operations |
| We have a concentration of investments in certain markets |