As filed with the Securities and Exchange Commission on November 24, 2020.

File No.          

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

 

APARTMENT INCOME REIT CORP.

(Exact name of registrant as specified in its charter)

 

Maryland
  84-1299717
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. Employer
Identification No.)

4582 South Ulster Street, Suite 1700

Denver, CO

  80237
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(303) 757-8101

With copies to:

 

Joseph A. Coco, Esq. and Blair T. Thetford, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
One Manhattan West
New York, New York 10001
(212) 735-3000 		 

P. Michelle Gasaway, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue, Suite 3400

Los Angeles, California 90071
(213) 687-5000

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class to be so registered

  

Name of each exchange on which each class is to be registered

Common Stock, par value $0.01 per share    New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐    Accelerated filer   ☐
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company   ☐
     Emerging growth company   ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 

APARTMENT INCOME REIT CORP.

INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10

The below information required to be included in this Form 10 is incorporated by reference to specifically-identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference herein.

Item 1. Business.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements,” “The Separation,” “Description of Financing and Material Indebtedness,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties,” “Our Relationship with Aimco Following the Separation” “U.S. Federal Income Tax Considerations,” and “Where You Can Find More Information.” Those sections are incorporated herein by reference.

Item 1A. Risk Factors.

The information required by this item is contained under the sections of the information statement entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Those sections are incorporated herein by reference.

Item 2. Financial Information.

The information required by this item is contained under the sections of the information statement entitled “Summary Historical Consolidated and Unaudited Pro Forma Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those sections are incorporated herein by reference.

Item 3. Properties.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business and Properties.” Those sections are incorporated herein by reference.

Item 4. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Security Ownership of Certain Beneficial Owners and Management.” Those sections are incorporated herein by reference.

Item 5. Directors and Executive Officers.

The information required by this item is contained under the section of the information statement entitled “Management.” That section is incorporated herein by reference.

Item 6. Executive Compensation.

The information required by this item is contained under the section of the information statement entitled “Management.” That section is incorporated herein by reference.

Item 7. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Our Relationship with Aimco Following the Separation.” Those sections are incorporated herein by reference.

Item 8. Legal Proceedings.

The information required by this item is contained under the section of the information statement entitled “Business and Properties—Legal Proceedings.” That section is incorporated herein by reference.

Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “The Separation,” “Dividend Policy,” “Management,” “Description of AIR’s Capital Stock,” and “Description of AIR OP Partnership Units and Summary of AIR OP Partnership Agreement.” Those sections are incorporated herein by reference.

Item 10. Recent Sales of Unregistered Securities.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “The Separation,” “Description of AIR’s Capital Stock,” and “Description of AIR OP Partnership Units and Summary of AIR OP Partnership Agreement.” Those sections are incorporated herein by reference.

Item 11. Description of Registrant’s Securities to be Registered.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “The Separation,” and “Description of AIR’s Capital Stock.” Those sections are incorporated herein by reference.

Item 12. Indemnification of Directors and Officers.

The information required by this item is contained under the section of the information statement entitled “Description of AIR’s Capital Stock— Limitation of Liability and Indemnification of Directors and Officers.” That section is incorporated herein by reference.

Item 13. Financial Statements and Supplementary Data.

The information required by this item is contained under the sections of the information statement entitled “Summary Historical Consolidated and Unaudited Pro Forma Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” and “Index to Financial Statements” (and the financial statements and related notes referenced therein). Those sections and the financial statements and related notes referenced therein are incorporated herein by reference.

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 15. Financial Statements and Exhibits.

 

  (a)

Financial Statements

The information required by this item is contained under the sections of the information statement entitled “Unaudited Pro Forma Consolidated Financial Statements” and “Index to Financial Statements” (and the financial statements and related notes referenced therein). Those sections and the financial statements and related notes referenced therein are incorporated herein by reference.

 

  (b)

Exhibits

See below.

The following documents are filed as exhibits hereto:

 

Exhibit
Number 		  

Exhibit Description

  2.1†*    Form of Separation and Distribution Agreement, by and among Apartment Investment Management Company, Aimco OP L.P., Apartment Income REIT Corp. and AIMCO Properties, L.P.
  3.1**    Form of Amended and Restated Articles of Incorporation of Apartment Income REIT Corp.
  3.2**    Form of Articles Supplementary for Class A Preferred Stock of Apartment Income REIT Corp.
  3.3**    Form of Articles Supplementary regarding Opt-Out from the Maryland Unsolicited Takeovers Act
  3.4**    Form of Amended and Restated Bylaws of Apartment Income REIT Corp.
10.1*    Form of Sixth Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P.
10.2†**    Form of Master Services Agreement, by and among Apartment Investment Management Company, Aimco OP L.P., Apartment Income REIT Corp. and AIMCO Properties, L.P.
10.3†**    Form of Employee Matters Agreement, by and among Apartment Investment Management Company, Aimco OP L.P., Apartment Income REIT Corp. and AIMCO Properties, L.P.
10.4†**    Form of Master Leasing Agreement, by and between AIMCO Properties, L.P. and Aimco Development Company, LLC
10.5†**    Form of Property Management Agreement, by and between James-Oxford Limited Partnership and AIR Property Management Company, LLC
10.6†*    Form of Mezzanine Note Agreement, by and among Aimco REIT Sub, LLC, AIMCO/Bethesda Holdings, Inc. and AIMCO Properties, L.P.
10.7*    Form of 5.2% Secured Mezzanine Note, made by Aimco REIT Sub, LLC (included in Exhibit 10.6)
10.8‡**    Form of Apartment Income REIT Corp. Severance Policy
10.9‡**    Form of Apartment Income REIT Corp. 2007 Stock Award and Incentive Plan
10.10‡**    Form of Restricted Stock Agreement (2007 Stock Award and Incentive Plan)
10.11‡**    Form of Non-Qualified Stock Option Agreement (2007 Stock Award and Incentive Plan)
10.12‡**    Form of Apartment Income REIT Corp. 2020 Employee Stock Purchase Plan
10.13‡**    Form of Apartment Income REIT Corp. 2020 Stock Award and Incentive Plan
10.14‡**    Form of Performance Restricted Stock Agreement (2020 Stock Award and Incentive Plan)
10.15‡**    Form of Restricted Stock Agreement (2020 Stock Award and Incentive Plan)

Exhibit
Number 		  

Exhibit Description

10.16‡**    Form of Non-Qualified Stock Option Agreement (2020 Stock Award and Incentive Plan)
10.17‡**    Form of LTIP Unit Agreement (2020 Stock Award and Incentive Plan)
10.18‡**    Form of Performance Vesting LTIP Unit Agreement (2020 Stock Award and Incentive Plan)
10.19‡**   

Form of Non-Qualified Stock Option Agreement (2020 Stock Award and Incentive Plan)

10.20‡**    Form of Performance Vesting LTIP II Unit Agreement (2020 Stock Award and Incentive Plan)
21.1*    List of Subsidiaries of Apartment Income REIT Corp.
99.1*    Preliminary Information Statement of Apartment Income REIT Corp., subject to completion, dated November 24, 2020
99.2*    Form of Notice of Internet Availability of Information Statement Materials

 

*

Filed herewith.

**

Previously filed.

‡

Management contract or compensatory plan or arrangement.

†

Certain schedules or similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The company agrees to furnish supplemental copies of any of the omitted schedules or attachments upon request by the Securities and Exchange Commission.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

APARTMENT INCOME REIT CORP.

By:

 

/s/ Terry Considine

 

Name: Terry Considine

 

Title: Chief Executive Officer

Date: November 24, 2020

Exhibit 2.1

 

 

SEPARATION AND DISTRIBUTION AGREEMENT

by and among

APARTMENT INVESTMENT AND MANAGEMENT COMPANY,

AIMCO OP L.P.,

APARTMENT INCOME REIT CORP.

and

AIMCO PROPERTIES, L.P.

dated as of

, 2020

 

TABLE OF CONTENTS

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1    Definitions      2  
Section 1.2    Interpretation      16  
ARTICLE II

 

THE RESTRUCTURING

 

Section 2.1    Transfers of Assets and Assumptions of Liabilities      18  
Section 2.2    DevCo Assets and SpinCo Assets      24  
Section 2.3    SpinCo Liabilities and DevCo Liabilities      25  
Section 2.4    Termination of Intercompany Agreements      26  
Section 2.5    Settlement of Intercompany Accounts      27  
Section 2.6    Replacement of Guarantees      27  
ARTICLE III

 

CERTAIN ACTIONS PRIOR TO THE DISTRIBUTION

 

Section 3.1    SEC and Other Securities Filings      28  
Section 3.2    NYSE Listing Application      28  
Section 3.3    Distribution Agent      28  
Section 3.4    Governmental Approvals and Consents      29  
Section 3.5    Ancillary Agreements      29  
Section 3.6    Governance Matters      29  
Section 3.7    Partnership Agreements      29  
Section 3.8    DevCo OP Distribution and Internal Distribution      29  
ARTICLE IV

 

THE DISTRIBUTION

 

Section 4.1    Distribution      30  
ARTICLE V

 

CONDITIONS

 

Section 5.1    Conditions Precedent to Consummation of the Distribution      32  
Section 5.2    Right Not to Close      33  

 

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ARTICLE VI

 

NO REPRESENTATIONS OR WARRANTIES

 

Section 6.1    Disclaimer of Representations and Warranties      34  
Section 6.2    As Is, Where Is      34  
ARTICLE VII

 

CERTAIN COVENANTS AND ADDITIONAL AGREEMENTS

 

Section 7.1    Insurance Policies      34  
Section 7.2    No Restrictions on Post-Distribution Competitive Activities; Corporate   
   Opportunities      37  
Section 7.3    Legal Names and Other Parties’ Trademarks      38  
Section 7.4    Preferred Stock Sale      39  
ARTICLE VIII

 

ACCESS TO INFORMATION; CONFIDENTIALITY; PRIVILEGE

 

Section 8.1    Agreement for Exchange of Information      40  
Section 8.2    Ownership of Information      41  
Section 8.3    Compensation for Providing Information      41  
Section 8.4    Retention of Records      41  
Section 8.5    Limitation of Liability      41  
Section 8.6    Production of Witnesses      41  
Section 8.7    Confidentiality      42  
Section 8.8    Privileged Matters      43  
Section 8.9    Financial Information Certifications      45  
ARTICLE IX

 

MUTUAL RELEASES; INDEMNIFICATION

 

Section 9.1    Release of Pre-Distribution Claims      45  
Section 9.2    Indemnification by SpinCo      47  
Section 9.3    Indemnification by DevCo      48  
Section 9.4    Procedures for Indemnification      48  
Section 9.5    Indemnification Obligations Net of Insurance Proceeds      52  
Section 9.6    Indemnification Obligations Net of Taxes      53  
Section 9.7    Contribution      54  
Section 9.8    Remedies Cumulative      54  
Section 9.9    Survival of Indemnities      54  
Section 9.10    Limitation of Liability      54  

 

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ARTICLE X

 

DISPUTE RESOLUTION

 

Section 10.1    Appointed Representative      54  
Section 10.2    Negotiation and Dispute Resolution      54  
ARTICLE XI

 

TAX MATTERS

 

Section 11.1    Tax Returns and Payments      58  
Section 11.2    Tax Covenants      59  
Section 11.3    Tax Indemnification      61  
Section 11.4    Tax Contests      62  
Section 11.5    Cooperation      62  
Section 11.6    Retention of Records; Access      63  
ARTICLE XII

 

TERMINATION

 

Section 12.1    Termination      63  
Section 12.2    Effect of Termination      63  
ARTICLE XIII

 

MISCELLANEOUS

 

Section 13.1    Further Assurances      64  
Section 13.2    Payment of Expenses      64  
Section 13.3    Amendments and Waivers      64  
Section 13.4    Entire Agreement      64  
Section 13.5    Survival of Agreements      64  
Section 13.6    Third-Party Beneficiaries      65  
Section 13.7    Notices      65  
Section 13.8    Counterparts; Electronic Delivery      65  
Section 13.9    Severability      66  
Section 13.10    Assignability; Binding Effect      66  
Section 13.11    Governing Law      66  
Section 13.12    Construction      66  
Section 13.13    Performance      67  
Section 13.14    Title and Headings      67  
Section 13.15    Exhibits and Schedules      67  

 

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SEPARATION AND DISTRIBUTION AGREEMENT

This SEPARATION AND DISTRIBUTION AGREEMENT (this “Agreement”) is entered into as of              , 2020, by and among Apartment Investment and Management Company, a Maryland corporation (“DevCo”), Aimco OP L.P., a Delaware limited partnership and a subsidiary of SpinCo OP (“DevCo OP”), Apartment Income REIT Corp., a Maryland corporation and a subsidiary of DevCo (“SpinCo”), and AIMCO Properties, L.P., a Delaware limited partnership and a subsidiary of SpinCo (“SpinCo OP”). DevCo, DevCo OP, SpinCo, and SpinCo OP are sometimes referred to herein individually as a “Party,” and collectively as the “Parties.” Capitalized terms used but not otherwise defined herein shall have the respective meanings set forth in Section 1.1.

RECITALS

WHEREAS, the DevCo Board has determined that it is advisable and in the best interests of DevCo and its stockholders to restructure the assets and liabilities of DevCo into two companies: (i) DevCo (together with DevCo OP) which, following consummation of the transactions contemplated herein, will own and conduct the DevCo Business; and (ii) SpinCo (together with SpinCo OP) which, following consummation of the transactions contemplated herein, will own and conduct the SpinCo Business;

WHEREAS, in furtherance thereof, the DevCo Board and the board of directors of SpinCo have approved certain transactions to occur prior to the Effective Time, including, the (i) transfer to and assumption by DevCo OP or its Subsidiaries of DevCo’s and SpinCo OP’s, and each of their applicable Subsidiaries’, respective direct or indirect right, title, and interest in and to all DevCo Assets and DevCo Liabilities in exchange for the DevCo OP Units, (ii) DevCo OP Distribution and (iii) Internal Distribution, all as more fully described and defined in this Agreement and the Ancillary Agreements (together with the other internal restructuring steps set forth in the Plan of Restructuring, the “Restructuring”);

WHEREAS, in furtherance thereof, the DevCo Board has approved the issuance of the SpinCo Preferred Stock to DevCo, to occur prior to the Effective Time, and entry into the Preferred Stock Sale Agreement, to occur following the Effective Time, as more fully described in this Agreement and the Ancillary Agreements;

WHEREAS, the DevCo Board, acting both on behalf of DevCo in its capacity as the sole stockholder of the general partner of SpinCo OP and on its own behalf, has also determined that it is advisable and in the best interests of DevCo and its stockholders and SpinCo OP and its limited partners to effect the Distribution following which, DevCo and SpinCo will be two independent, publicly traded companies;

WHEREAS, DevCo, acting as the sole member of DevCo OP GP, has determined that it is advisable and in the best interest of DevCo OP GP and DevCo to approve DevCo OP GP as the general partner of DevCo OP;

WHEREAS, DevCo OP has been organized solely for these purposes and has not engaged in activities except in preparation for the Restructuring and the Distribution;

 

1

WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the Restructuring and the Distribution and to set forth certain other agreements that will, following the Distribution, govern certain matters relating to the Restructuring and the Distribution and the relationship between DevCo and/or its Subsidiaries (including DevCo OP), on the one hand, and, SpinCo and/or its Subsidiaries (including SpinCo OP), on the other hand;

WHEREAS, the DevCo Board, in exploring and considering the transactions contemplated by this Agreement, endeavored to make SpinCo as simple and transparent as possible, and, accordingly, designed the transaction contemplated by this Agreement such that all assets and liabilities would generally be allocated to DevCo, other than those assets and liabilities intentionally allocated to SpinCo pursuant to the terms and conditions of this Agreement and the Ancillary Agreements, thereby creating SpinCo as a company with a simplified and pure-play business model; and

WHEREAS, it is the intention of the Parties that the SpinCo Distribution will be a taxable distribution under Section 301 of the Code.

NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1    Definitions. As used in this Agreement, the following terms shall have the meanings set forth or referenced in this Section 1.1:

“AAA Rules” has the meaning set forth in Section 10.2(a)(i).

“Access Period” has the meaning set forth in Section 8.1(a).

“Action” means any demand, claim, action, suit, countersuit, arbitration, litigation, inquiry, proceeding or investigation by or before any Governmental Authority or any arbitration or mediation tribunal or authority.

“Affiliate” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person; provided, however, that (a) the members of the DevCo Group and (b) the members of the SpinCo Group shall not be deemed Affiliates of each other following the Distribution. For this purpose, “control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of voting securities, by contract or otherwise.

“Agreement” has the meaning set forth in the preamble to this Agreement and includes all Exhibits and Schedules attached hereto or delivered pursuant hereto.

 

2

“AIMCO/Bethesda” means AIMCO/Bethesda Holdings, Inc., a Delaware corporation.

“AIMCO Benefit Arrangements” has the meaning set forth in the Employee Matters Agreement.

“Ancillary Agreements” has the meaning set forth in Section 3.5.

“Appointed Representative” has the meaning set forth in Section 10.1.

“Appropriate Member of the DevCo Group” has the meaning set forth in Section 9.3.

“Appropriate Member of the SpinCo Group” has the meaning set forth in Section 9.2.

“Asset” means all rights, properties or other assets, whether real, personal or mixed, tangible or intangible, of any kind, nature and description, whether accrued, contingent or otherwise, and wherever situated and whether or not carried or reflected, or required to be carried or reflected, on the books of any Person.

“Business Day” means a day other than a Saturday, a Sunday or a day on which banking institutions located in the State of Delaware, New York or Maryland are authorized or obligated by applicable Law or executive order to close.

“Chairperson” has the meaning set forth in Section 10.2(a)(iii).

“Code” means the Internal Revenue Code of 1986, as amended.

“Colorado Courts” has the meaning set forth in Section 10.2(a)(xi).

“Commercial Agreements” means, collectively, the Master Leasing Agreement (and the Initial Leases thereunder), the Master Services Agreement and the Property Management Agreements.

“Confidential Information” means all confidential and proprietary information concerning a Party or any member of such Party’s Group or their respective businesses that is either in the possession of the other Party or any member of such other Party’s Group (including confidential and proprietary information in their possession prior to the date hereof) or furnished by the first Party or any member of such Party’s Group or their respective representatives at any time pursuant to this Agreement, any Ancillary Agreement or otherwise (except to the extent that such information can be shown to have been (a) in the public domain or generally available to the public, other than as a result of a disclosure by such other Party or any member of such other Party’s Group or any of their respective representatives in violation of this Agreement, (b) later lawfully acquired from other sources by such other Party or any member of such other Party’s Group, which sources are not known by such other Party to be bound by a confidentiality obligation or other contractual, legal or fiduciary obligation of confidentiality with respect to such confidential and proprietary information, or (c) independently developed or generated without reference to or use of any proprietary or confidential information of the first Party or any member of such Party’s Group).

 

3

“Consent” means any consent, waiver or approval from, or notification requirement to, any Person other than a member of either Group.

“Contract” means any written, oral, implied or other contract, agreement, addenda, covenant, lease, license, guaranty, indemnity, representation, warranty, assignment, sales order, purchase order, power of attorney, instrument or other commitment, assurance, undertaking, understanding or arrangement that is binding on any Person or entity or any part of its property under applicable Law.

“Core SpinCo Properties” means the properties designated as such and set forth on Schedule 1.1(c).

“Deferred Asset” and “Deferred Liability” have the respective meanings set forth in Section 2.1(b)(ii).

“DevCo” has the meaning set forth in the preamble to this Agreement.

“DevCo Assets” has the meaning set forth in Section 2.2(a).

“DevCo Board” means the board of directors of DevCo.

“DevCo Business” means any business now or formerly conducted by DevCo and its present and former Affiliates, other than the SpinCo Business.

“DevCo Common Stock” means the common stock, par value $0.01 per share, of DevCo.

“DevCo Contracts” means any Contract listed or described in Schedule 2.2(a) and any other Contract that relates exclusively to the DevCo Business (it being understood and agreed that Contracts related to property management matters do not exclusively relate to the DevCo Business unless they exclusively relate to the DevCo Retained Properties).

“DevCo Credit Facility” means one or more credit facilities to be entered into by one or more members of the DevCo Group prior to the Effective Time.

“DevCo D&O Policies” has the meaning set forth in Section 7.1.

“DevCo Group” means DevCo, the DevCo Subsidiaries and each other Person that becomes a Subsidiary of DevCo after the Distribution.

“DevCo Guarantee” means any Guarantee issued, entered into or otherwise put in place by any member of the DevCo Group to support or facilitate, or otherwise in respect of, (a) the obligations of any member of the SpinCo Group or the SpinCo Business or (b) Contracts, commitments, Liabilities or permits of any member of the SpinCo Group or the SpinCo Business.

“DevCo Indemnitees” means each member of the DevCo Group and its Affiliates (other than any member of the SpinCo Group) and each of their respective current, former or future directors, officers, agents, managers, trustees, and employees (in each case, in such Person’s respective capacity as such) and their respective heirs, executors, administrators, successors and assigns.

 

4

“DevCo Liabilities” has the meaning set forth in Section 2.3(a).

“DevCo OP” has the meaning set forth in the preamble to this Agreement.

“DevCo OP Distribution” means the distribution by SpinCo OP of all of the DevCo OP Units, on a pro rata basis, to the SpinCo OP Record Holders of SpinCo OP Common Units.

“DevCo OP GP” means Aimco OP GP, LLC, a Delaware limited liability company.

“DevCo OP Information Statement” means the information statement filed as Exhibit 99.1 to the DevCo OP Registration Statement, and any related documentation to be provided to holders of SpinCo OP Common Units in connection with the Distribution, as amended from time to time by any amendments or supplements thereto.

“DevCo OP Registration Statement” has the meaning set forth in the defined term “Registration Statements.”

“DevCo OP Units” means the partnership common units in DevCo OP.

“DevCo Post-Closing Claims” has the meaning set forth in Section 7.1(b)(ii).

“DevCo Property Debt” means the Specified Construction Debt and any and all property level indebtedness for borrowed money with respect to the DevCo Retained Properties.

“DevCo Record Holders” means the holders of record of DevCo Common Stock at the close of business on the Record Date.

“DevCo Retained Properties” means, collectively, each of those certain real properties commonly known as (a) Royal Crest Estates (Warwick) (RI), Royal Crest Estates (Marlboro) (MA), Waterford Village (MA), Wexford Village (MA), Royal Crest Estates (Nashua) (NH), 1001 Brickell Bay Tower (FL), the Yacht Club at Brickell (adjacent to 1001 Brickell Bay Tower) (FL), Hamilton on the Bay (FL), The Bluffs at Pacifica (CA), St. George Villas (SC), Casa del Hermosa (CA), Casa del Sur (CA), Casa del Norte, (CA) and Casa del Mar (CA) (the Parkmerced Loan and the foregoing, collectively, the “DevCo Seed Properties”) and (b) AIMCO 118-122 West 23rd Street (NY), Hillmeade (TN), 1045 on the Park Apartment Homes (GA), Plantation Gardens (FL), Elm Creek (IL), Willow Bend (IL), Evanston Place (IL), Yorktown Apartments (IL), Hyde Park Tower (IL), 2200 Grace (IL), Bank Lofts (CO), Cedar Rim (WA), Pathfinder Village (CA), 2900 on First Apartments (WA), AIMCO 173 East 90th Street (NY) and AIMCO 237 Ninth Avenue (NY) (the properties set forth in clause (b), collectively, the “DevCo Other Properties”), in each case (clauses (a) and (b)), together with and including easements, whether as owner, mortgagee or holder of a Security Interest (other than, in the case of the DevCo Other Properties, the SpinCo Specified Security Interest) in such property, lessor, sublessor, lessee, sublessee or otherwise, and including all buildings or barges located thereon, and all associated parking areas, fixtures and all other improvements located thereon, and including all rights, benefits, privileges, tenements, hereditaments, covenants, conditions, restrictions, easements and other appurtenances on such property or otherwise appertaining to or benefitting such property and/or the improvements situated thereon, and including all mineral rights, development rights, air and water rights, subsurface rights, vested rights entitling, or

 

5

prospective rights which may entitle, the owner of such property to related easements, land use rights, viewshed rights, density credits, water, sewer, electrical and other utility service, credits and/or rebates, strips and gores and any land lying in the bed of any street, road, alley, open or proposed, adjoining such property, and all other rights of way and other appurtenances used or connected with the beneficial use or enjoyment of such property.

“DevCo Shared Pre-Closing Occurrence-Based Policies” has the meaning set forth in Section 7.1(b)(i).

“DevCo Subsidiaries” means DevCo OP, the other entities listed on Exhibit A hereto and any other entities that will be a Subsidiary of DevCo after giving effect to the transactions set forth in the Plan of Restructuring, any Subsidiary of any such entities and any direct or indirect Subsidiary of DevCo formed after the date of this Agreement and prior to the Distribution, in each case, that does not cease to be a subsidiary of DevCo as a result of the Plan of Restructuring.

“DevCo Tax Liabilities” has the meaning set forth in Section 11.1(a)(i).

“Dispute” has the meaning set forth in Section 10.2(a).

“Dispute Notice” has the meaning set forth in Section 10.2(a).

“Distribution” means the DevCo OP Distribution, the Internal Distribution and the SpinCo Distribution.

“Distribution Agent” means Computershare Trust Company, N.A.

“Distribution Date” means the date on which the Distribution occurs, such date to be determined by, or under the authority of, the DevCo Board, in its sole and absolute discretion.

“Effective Time” means 12:01 a.m. on the Distribution Date, or such other time agreed to by the Parties from time to time.

“Employee Matters Agreement” means the Employee Matters Agreement, substantially in the form of Exhibit 10.2 to the SpinCo Registration Statement and Exhibit 10.3 to the DevCo OP Registration Statement, to be entered into by DevCo, DevCo OP, SpinCo OP, and SpinCo prior to the Effective Time.

“Environmental Law” means any Law relating to pollution, protection or restoration of or prevention of harm to the environment or natural resources, including the use, handling, transportation, treatment, storage, disposal, Release or discharge of Hazardous Materials or the protection of or prevention of harm to human health and safety.

“Environmental Liabilities” means all Liabilities relating to, arising out of or resulting from any Hazardous Materials, Environmental Law or contract or agreement relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, response costs, natural resources damages, property damages, personal injury damages, costs of compliance with any product take-back requirements or with any settlement,

 

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judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses, interest, fines, penalties or other monetary sanctions in connection therewith.

“Escrow Account” has the meaning set forth in Section 9.4(h)(ii)(A).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Expense Amount” has the meaning set forth in Section 9.4(h)(ii).

“Expense Amount Accountant’s Letter” has the meaning set forth in Section 9.4(h)(ii)(A).

“Expense Amount Tax Opinion” has the meaning set forth in Section 9.4(h)(ii)(A).

“Final Determination” means the final resolution of liability for any Tax, which resolution may be for a specific issue or adjustment or for a taxable period, (a) by an acceptance on an IRS Form 870 or 870-AD (or any successor forms thereto), or by a comparable form or agreement pursuant to the laws of a state, local, or non-United States taxing jurisdiction, except that acceptance on an IRS Form 870 or 870-AD or comparable form or agreement will not constitute a Final Determination to the extent that such form or agreement reserves (whether by its terms or by operation of Law) the right of the taxpayer to file a claim for refund or the right of the Taxing Authority to assert a further deficiency in respect of such issue or adjustment or for such taxable period (as the case may be); (b) by a decision, judgment, decree, or other order of a court of competent jurisdiction which is or has become final and unappealable; (c) by a closing agreement or accepted offer in compromise pursuant to Sections 7121 or 7122 of the Code, or a comparable agreement pursuant to the laws of a state, local, or non-United States jurisdiction; (d) by any allowance of a refund or credit in respect of an overpayment of a Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) or, where such periods are undefined or indefinite, in accordance with ordinary course limitation periods, by the jurisdiction imposing such Tax; (e) by a final settlement resulting from a treaty-based competent authority determination; or (f) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the Parties.

“Governmental Approval” means any notice, report or other filing to be given to or made with, or any release, consent, substitution, approval, amendment, registration, permit or authorization from, any Governmental Authority.

“Governmental Authority” means any U.S. federal, state, local or non-U.S. court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.

“Group” means the DevCo Group or the SpinCo Group, as the context requires.

“Guarantee” means any guarantee (including guarantees of performance or payment under Contracts, commitments, Liabilities and permits), letter of credit or other credit or credit support arrangement or similar assurance, including surety bonds, bid bonds, advance payment bonds, performance bonds, payment bonds, retention and/or warranty bonds or other bonds or similar instruments.

 

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“Hazardous Materials” means any chemical, material, substance, waste, pollutant, emission, discharge, Release or contaminant that could result in Liability under, or that is prohibited, limited or regulated by or pursuant to, any Environmental Law, and any natural or artificial substance (whether solid, liquid or gas, noise, ion, vapor or electromagnetic) that could cause harm to human health or the environment, including petroleum, petroleum products and byproducts, asbestos and asbestos-containing materials, urea formaldehyde foam insulation, toxic mold, lead (including lead-based paint), electronic, medical or infectious wastes, polychlorinated biphenyls, radon gas, radioactive substances, chlorofluorocarbons and all other ozone-depleting substances.

“Indebtedness” of any specified Person means (a) all obligations of such specified Person for borrowed money or arising out of any extension of credit to or for the account of such specified Person (including reimbursement or payment obligations with respect to surety bonds, letters of credit, bankers’ acceptances and similar instruments), (b) all obligations of such specified Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such specified Person upon which interest charges are customarily paid, (d) all obligations of such specified Person under conditional sale or other title retention agreements relating to Assets purchased by such specified Person, (e) all obligations of such specified Person issued or assumed as the deferred purchase price of property or services, (f) all Liabilities secured by (or for which any Person to which any such Liability is owed has an existing right, contingent or otherwise, to be secured by) any mortgage, deed of trust, lien, pledge or other encumbrance on property owned or acquired by such specified Person (or upon any revenues, income or profits of such specified Person therefrom), whether or not the obligations secured thereby have been assumed by the specified Person or otherwise become Liabilities of the specified Person, (g) all capital lease obligations of such specified Person, (h) all securities or other similar instruments convertible or exchangeable into any of the foregoing, and (i) any Liability of others of a type described in any of the preceding clauses (a) through (h) in respect of which the specified Person has incurred, assumed or acquired a Liability by means of a Guarantee.

“Indemnifiable Loss” has the meaning set forth in Section 9.5.

“Indemnifying Party” has the meaning set forth in Section 9.4(a).

“Indemnitee” means any DevCo Indemnitee or any SpinCo Indemnitee.

“Indemnity Payment” has the meaning set forth in Section 9.5.

“Initial Leases” means the lease agreements with respect to the Initial MLA Real Properties between a member of the SpinCo Group, as landlord, and a member of the DevCo Group, as tenant.

“Initial MLA Real Properties” means that certain real property set forth on Schedule 1.1(a) which will be leased by a member of the SpinCo Group, as landlord, to a member of the DevCo Group, as tenant, pursuant to and in accordance with the terms of the Master Leasing Agreement.

 

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“Insurance Policies” means any insurance policies and insurance Contracts, including, without limitation, general liability, property and casualty, workers’ compensation, automobile, directors and officers liability, errors and omissions, employee dishonesty and fiduciary liability policies, whether, in each case, in the nature of primary, excess, umbrella or self-insurance coverage, together with all rights, benefits and privileges thereunder.

“Insurance Proceeds” means those monies (in each case, net of any out-of-pocket costs or expenses incurred in the collection thereof):

(a)    received by an insured Person from any insurer, insurance underwriter, mutual protection and indemnity club or other risk collective, excluding any proceeds received directly or indirectly (such as through reinsurance arrangements) from any captive insurance Subsidiary of the insured Person; or

(b)    paid on behalf of an insured Person by any insurer, insurance underwriter, mutual protection and indemnity club or other risk collective, excluding any such payment made directly or indirectly (such as through reinsurance arrangements) from any captive insurance Subsidiary of the insured Person, on behalf of the insured.

“Intellectual Property Agreements” means the IP Cross License.

“Intercompany Account” means any receivable, payable or loan between any member of the DevCo Group, on the one hand, and any member of the SpinCo Group, on the other hand, that exists prior to the Effective Time and is reflected in the records of the relevant members of the DevCo Group and the SpinCo Group, except for any such receivable, payable or loan that arises pursuant to this Agreement or any Ancillary Agreement.

“Intercompany Agreement” means any Contract between or among any member of the DevCo Group, on the one hand, and any member of the SpinCo Group, on the other hand, entered into prior to the Effective Time, but excluding any Contract (a) to which a Person other than any member of the DevCo Group or the SpinCo Group is also a party and (b) that arises pursuant to this Agreement or any Ancillary Agreement.

“Internal Distribution” means the internal distributions of all DevCo OP Units held by SpinCo and SpinCo OP GP to DevCo immediately following the DevCo OP Distribution.

“IP Cross License” means the IP Cross License to be entered into by DevCo, DevCo OP, SpinCo, and SpinCo OP prior to the Effective Time.

“IRS” means the Internal Revenue Service.

“Law” means any law, statute, ordinance, code, rule, regulation, order, writ, proclamation, judgment, injunction or decree of any Governmental Authority.

“Liabilities” means any and all Indebtedness, liabilities and obligations, whether accrued, fixed or contingent, mature or inchoate, known or unknown, reflected on a balance sheet or otherwise, including those arising under any Law, Action or any judgment of any Governmental Authority or any award of any arbitrator of any kind, and those arising under any Contract.

 

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“Losses” means any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, interest costs, Taxes, fines and expenses (including the costs and expenses of any and all Actions and demands, assessments, judgments, settlements and compromises relating thereto and attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder).

“Manager” means AIR Property Management Company, LLC, a Delaware limited liability company.

“Master Leasing Agreement” means the Master Leasing Agreement, substantially in the form of Exhibit 10.3 to the SpinCo Registration Statement and Exhibit 10.4 to the DevCo OP Registration Statement, to be entered into by certain members of the DevCo Group and certain members of the SpinCo Group prior to the Effective Time.

“Master Services Agreement” means the Master Services Agreement, substantially in the form of Exhibit 10.1 to the SpinCo Registration Statement and Exhibit 10.2 to the DevCo OP Registration Statement, to be entered into by DevCo, DevCo OP, SpinCo and SpinCo OP prior to the Effective Time.

“Nashua Transfer Agreement” means the [Membership Interest Purchase Agreement], to be entered into on or prior to the Distribution Date by SpinCo OP and DevCo OP.

“New SpinCo Contract” has the meaning set forth in Section 2.1(f)(i).

“Nonqualifying Income” means any amount that is treated as gross income for purposes of Section 856 of the Code and which is not Qualifying Income.

“NYSE” means the New York Stock Exchange.

“NYSE Listing Application” has the meaning set forth in Section 3.2(a).

“Other Party Marks” has the meaning set forth in Section 7.3(a).

“Partial Assignments and Releases” has the meaning set forth in Section 2.1(f)(i).

“Party” or “Parties” has the meaning set forth in the preamble to this Agreement.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, a union, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

“Plan of Restructuring” means the document delivered by DevCo to SpinCo that describes the detailed transaction steps to effect the internal restructuring to be undertaken prior to the Effective Time.

“Post-Closing Period” means any taxable year or other taxable period beginning after the Distribution Date.

 

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“Pre-Closing Period” means any taxable year or other taxable period that ends on or before the Distribution Date.

“Preferred Stock Sale Agreement” means a binding agreement entered into between DevCo and certain unrelated third parties prior to the Effective Time pursuant to which DevCo shall sell the SpinCo Preferred Stock to such third parties immediately following the SpinCo Distribution (the “Preferred Stock Sale”).

“Property Management Agreements” means, collectively, (a) the Property Management Agreement, substantially in the form of Exhibit 10.5 to the SpinCo Registration Statement and Exhibit 10.11 to the DevCo OP Registration Statement, relating to the DevCo Other Properties, to be entered into by Manager and James-Oxford Limited Partnership prior to the Effective Time, (b) the Property Management Agreement, substantially in the form of Exhibit 10.12 to the DevCo OP Registration Statement, relating to the Initial MLA Real Properties, to be entered into by Manager and Aimco Development Company, LLC, a Delaware limited liability company, prior to the Effective Time and (c) the Property Management Agreement, substantially in the form of Exhibit 10.10 to the DevCo OP Registration Statement, relating to a majority of the DevCo Seed Properties, to be entered into by Manager and DevCo OP prior to the Effective Time.

“Property Taxes” means any real, personal and intangible ad valorem property Taxes imposed or required to be withheld by any Taxing Authority, including any interest, additions or penalties applicable or related thereto.

“Proposed Damages Award” has the meaning set forth in Section 10.2(a)(v).

“Protected REIT” means any entity that (a) has elected to be taxed as a REIT, and (b) either (i) is an Indemnitee or (ii) owns a direct or indirect equity interest in any Indemnitee and is treated for purposes of Section 856 of the Code as owning all or a portion of the assets of such Indemnitee or as receiving all or a portion of the Indemnitee’s income.

“Qualifying Income” means gross income that is described in Section 856(c)(3) of the Code.

“Record Date” means the date determined by the DevCo Board, acting both on behalf of DevCo in its capacity as the sole stockholder of the general partner of SpinCo OP and on its own behalf, as the record date for determining holders of DevCo Common Stock entitled to receive shares of SpinCo Common Stock in the SpinCo Distribution and for determining holders of SpinCo OP Common Units entitled to receive DevCo OP Units in the DevCo OP Distribution.

“Record Holders” means the DevCo Record Holders and SpinCo OP Record Holders.

“Registration Statements” means (a) the registration statement on Form 10 of SpinCo with respect to the registration under Section 12(b) of the Exchange Act of the SpinCo Common Stock to be distributed in the Distribution, as amended from time to time by any amendments or supplements thereto (the “SpinCo Registration Statement”), and (b) the registration statement on Form 10 of DevCo OP with respect to the registration under Section 12(g) of the Exchange Act of the DevCo OP Units to be distributed in the Distribution, as amended from time to time by any amendments or supplements thereto (the “DevCo OP Registration Statement”).

 

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“REIT” means a “real estate investment trust” as defined in Sections 856 through and including 860 of the Code.

“REIT Qualification Ruling” has the meaning set forth in Section 9.4(h)(ii)(A).

“REIT Requirements” means the requirements imposed on REITs pursuant to Sections 856 through and including 860 of the Code.

“Release” means any release, spill, emission, discharge, leaking, pumping, pouring, dumping, injection, deposit, disposal, dispersal, leaching or migration of Hazardous Materials into the environment (including ambient air, surface water, groundwater and surface or subsurface strata).

“Release Document” has the meaning set forth in Section 9.4(h)(ii)(A).

“Representatives” has the meaning set forth in Section 8.7(a).

“Restructuring” has the meaning set forth in the recitals to this Agreement.

“SEC” means the United States Securities and Exchange Commission.

“Security Interest” means any mortgage, security interest, pledge, lien, charge, claim, option, indenture, right to acquire, right of first refusal, deed of trust, licenses to third parties, leases to third parties, security agreements, voting or other restriction, covenant, condition, encroachment, restriction on transfer, restriction or limitation on use of real or personal property or any other encumbrance of any nature whatsoever, imperfections in or failure of title or defect of title.

“Shared Contract” means each of the contracts set forth on Schedule 1.1(b) that relate to the operations or conduct of both the DevCo Business and the SpinCo Business.

“Solvent” means, (1) with respect to DevCo OP and SpinCo OP, as of the applicable time of determination, that, on a pro forma basis, (a) the fair value of the assets of each DevCo OP and SpinCo OP on a consolidated basis would exceed their respective stated liabilities, identified contingent liabilities and off-balance sheet liabilities on a consolidated basis, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that liability; (b) each of DevCo OP and SpinCo OP will be able to pay its respective debts as they become absolute, due and mature; and (c) each of DevCo OP and SpinCo OP will not have unreasonably small capital for the business in which it is engaged; and (2) with respect to DevCo and SpinCo, as of the applicable time of determination, that, on a pro forma basis (a) the fair value of the total assets of each of DevCo and SpinCo would exceed (i) their respective total liabilities plus (ii) the amount that would be needed to satisfy any

 

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preferential rights upon dissolution if DevCo and SpinCo, as applicable, were to be dissolved at the time of the SpinCo Distribution; (b) each of DevCo and SpinCo should be able to pay its respective indebtedness as such indebtedness becomes due in the usual course of business; and (c) each of DevCo and SpinCo should not have an unreasonably small amount of assets for the business in which it is engaged.

“Specified Construction Debt” means the liabilities, if any, related to, arising out of or resulting from any construction financing facilities related to Flamingo Point – North Tower entered into on or prior to the Distribution Date (if any).

“Specified DevCo Liabilities” has the meaning set forth in Section 2.3(a).

“Specified JO Common Units” means those certain common units in James Oxford LP to be retained by a member of the SpinCo Group in accordance with the Plan of Restructuring.

“Specified PM TRS Preferred Stock” means that certain preferred stock of AIR Property Management TRS, LLC with an initial liquidation preference of $[10,000] to be issued to members of the DevCo Group in accordance with the Plan of Restructuring.

“Specified Promissory Note” means those certain secured promissory notes in an aggregate principal amount of $534,000,000 issued by a subsidiary of DevCo OP to members of the SpinCo Group in accordance with the Plan of Restructuring.

“Specified SpinCo Assets” means (a) all right, title and interest of SpinCo and/or its applicable Subsidiaries in and to the Initial MLA Real Properties (including any associated and appurtenant rights and interests held by or granted to the fee owner of such real property, but excluding the interests and rights of DevCo and its Subsidiaries, as tenants, in and to the Initial MLA Real Properties under and pursuant to the Initial Leases), (b) all equity interests in the SpinCo and its Subsidiaries (other than the Specified PM TRS Preferred Stock), (c) the Specified Promissory Note and (d) any and all Assets set forth on Schedule 1.1(c).

“Specified SpinCo Liabilities” has the meaning set forth in Section 2.3(b).

“SpinCo” has the meaning set forth in the preamble to this Agreement.

“SpinCo Assets” has the meaning set forth in Section 2.2(b).

“SpinCo Business” means the business of owning and managing stabilized multi-family apartment buildings and maintaining a portfolio with property management operations as conducted by DevCo and its Subsidiaries (including SpinCo and its Subsidiaries) as of immediately prior to the Effective Time.

“SpinCo Business Contracts” has the meaning set forth in Section 2.1(f)(i).

“SpinCo Common Stock” means the common stock, par value $0.01 per share, of SpinCo.

 

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“SpinCo Credit Facility” means (a) the definitive agreements with respect to the amendment, amendment and restatement or modification, dated at or prior to the Effective Time, of that certain Second Amended and Restated Senior Secured Credit Agreement, dated as of June 30, 2017, among DevCo, SpinCo OP, and AIMCO/Bethesda as borrowers, the lenders party thereto from time to time and KeyBank National Association, as administrative agent, swing line lender and letter of credit issuer (the “Historical Credit Facility”) (and in the case of an amendment and/or modification without an amendment and restatement, the definitive documents with respect to the Historical Credit Facility) or (b) the definitive agreements with respect to the refinancing of the Historical Credit Facility, in each case (clauses (a) and (b)), to which certain members of the SpinCo Group are party.

“SpinCo Distribution” means the distribution by DevCo of all of the SpinCo Common Stock, on a pro rata basis, to the DevCo Record Holders of DevCo Common Stock.

“SpinCo Group” means SpinCo and each Person (other than any member of the DevCo Group) that is a direct or indirect Subsidiary of SpinCo (other than those constituting a Subsidiary pursuant to Section 2.1(b)) immediately after the Effective Time, and each Person that becomes a Subsidiary of SpinCo after the Effective Time.

“SpinCo Guarantee” means any Guarantee issued, entered into or otherwise put in place by any member of the SpinCo Group to support or facilitate, or otherwise in respect of, (a) the obligations of any member of the DevCo Group or the DevCo Business or (b) Contracts, commitments, Liabilities or permits of any member of the DevCo Group or the DevCo Business.

“SpinCo Indemnitees” means each member of the SpinCo Group and their Affiliates and each of their respective current, former or future directors, officers, agents, managers, trustees, and employees (in each case, in such Person’s respective capacity as such) and their respective heirs, executors, administrators, successors and assigns.

“SpinCo Information Statement” means the information statement filed as Exhibit 99.1 to the SpinCo Registration Statement, and any related documentation to be provided to holders of DevCo Common Stock in connection with the Distribution, as amended from time to time by any amendments or supplements thereto.

“SpinCo Liabilities” has the meaning set forth in Section 2.3(b).

“SpinCo Post-Closing Claims” has the meaning set forth in Section 7.1(b)(i).

“SpinCo OP” has the meaning set forth in the preamble to this Agreement.

“SpinCo OP GP” means AIMCO-GP, Inc., a Delaware corporation.

“SpinCo OP Record Holders” means the holders of record of SpinCo OP Common Units at the close of business on the Record Date.

“SpinCo OP Common Units” means the partnership common units in SpinCo OP and the Class I High Performance Partnership Units of SpinCo OP.

 

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“SpinCo Preferred Stock” means the Class A preferred stock of SpinCo with an initial aggregate liquidation preference of $2,000,000 to be issued to DevCo in accordance with the Plan of Restructuring and sold thereafter by DevCo to unrelated third parties pursuant to the Preferred Stock Sale.

“SpinCo Registration Statement” has the meaning set forth in the defined term “Registration Statements.”

“SpinCo REIT Subsidiary” means any Subsidiary of SpinCo that has or will elect to be treated as a REIT for U.S. federal income tax purposes.

“SpinCo Shared Pre-Closing Occurrence-Based Policies” has the meaning set forth in Section 7.1(b)(ii).

“SpinCo Specified Security Interest” means the security interest in the equity interests of James Oxford LP held by Aimco REIT Sub, LLC, granted pursuant to that certain pledge agreement, by Aimco REIT Sub, LLC in favor of SpinCo OP, as collateral agent for the benefit of SpinCo OP and AIMCO/Bethesda as holders of the notes.

“SpinCo Tax Liabilities” has the meaning set forth in Section 11.1(a)(iii)(A).

“Straddle Period” means any taxable period commencing on or prior to, and ending after, the Distribution Date.

“Subsidiary” means, with respect to any specified Person, any corporation, partnership, limited liability company, joint venture or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such specified Person or by any one or more of its subsidiaries, or by such specified Person and one or more of its Subsidiaries.

“Surviving Intercompany Agreements” has the meaning set forth in Section 2.4(b).

“Tax Advisor” means Tax counsel of recognized national standing or a “Big Four” accounting firm, in either case, with experience in the tax area involved in the Tax Dispute or issue.

“Tax Contest” means any audit, review, examination, dispute, suit, action, proposed assessment or other administrative or judicial proceeding with respect to Taxes.

“Tax Dispute” has the meaning set forth in Section 11.1(f).

“Tax Return” means any return, report, certificate, form, or similar statement or document (including any attachments thereto and any information return, amended tax return, claim for refund, or declaration of estimated tax) supplied to or filed with, or required to be supplied to or filed with, a Taxing Authority, or any bill for or notice related to ad valorem or other similar Taxes received from a Taxing Authority, in each case, in connection with the determination, assessment, or collection of any Tax or the administration of any Laws or administrative requirements relating to any Tax.

 

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“Taxes” means (a) any and all U.S. federal, state, local and foreign taxes, including income, alternative or add-on minimum, gross receipts, profits, lease, service, service use, wage, employment, workers compensation, business occupation, environmental, estimated, excise, sales, use, transfer, license, payroll, franchise, severance, stamp, occupation, windfall profits, withholding, social security, unemployment, disability, ad valorem, capital stock, paid in capital, recording, registration, property, real property gains, value added, business license, custom duties, built-in gains, prohibited transaction (as defined in Section 857(b)(6) of the Code), and other taxes, charges, fees, levies, imposts, duties or assessments of any kind whatsoever, imposed or required to be withheld by any Taxing Authority, including any interest, additions to Tax, or penalties applicable or related thereto and (b) any liability for the Taxes of any Person under Section 1.1502-6 of the Treasury Regulations (or similar provision of state or local law).

“Taxing Authority” means any Governmental Authority or other authority in connection with the determination, assessment or collection or any Tax or the administration of any Laws or administrative requirements related to any Tax.

“Third-Party Claim” has the meaning set forth in Section 9.4(b).

“Third-Party Consents” means any consents or approvals required from third parties to assign, convey or transfer the Shared Contracts to consummate the transactions contemplated by this Agreement and the Ancillary Agreements.

“Trademarks” means all United States and foreign trademarks, service marks, corporate names, trade names, domain names, social media addresses and handles, logos, slogans, trade dress and other similar designations of source or origin, whether registered or unregistered, together with the goodwill symbolized by any of the foregoing.

“Transactions” means the Restructuring, the Distribution and any other transactions contemplated by this Agreement or any Ancillary Agreement.

“Transfer Taxes” means all sales, use, privilege, transfer, documentary, stamp, recording and similar Taxes and fees (including any penalties, interest or additions thereto) imposed upon any Party in connection with the Transactions.

“Treasury Regulations” means the final and temporary (but not proposed) income Tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

Section 1.2    Interpretation. In this Agreement and the Ancillary Agreements, unless the context clearly indicates otherwise:

(a)    words used in the singular include the plural and words used in the plural include the singular;

 

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(b)    the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”;

(c)    the word “or” shall have the inclusive meaning represented by the phrase “and/or”;

(d)    relative to the determination of any period of time, “from” means “from and including,” “to” means “to but excluding” and “through” means “through and including”;

(e)    accounting terms used herein shall have the meanings historically ascribed to them by DevCo and its Subsidiaries in their internal accounting and financial policies and procedures in effect immediately prior to the date of this Agreement;

(f)    reference to any agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement;

(g)    reference to any Law means such Law (including any and all rules and regulations promulgated thereunder) as amended, modified, codified or reenacted, in whole or in part, and in effect at the time of determining compliance or applicability;

(h)    references to any Person include such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement; a reference to such Person’s “Affiliates” shall be deemed to mean such Person’s Affiliates following the Distribution and any reference to a third party shall be deemed to mean a Person who is not a Party or an Affiliate of a Party;

(i)    if there is any conflict between the provisions of the main body of this Agreement or an Ancillary Agreement and the Exhibits and Schedules hereto or thereto, the provisions of the main body of this Agreement or the Ancillary Agreement, as applicable, shall control unless explicitly stated otherwise in such Exhibit or Schedule;

(j)    if there is any conflict between the provisions of this Agreement and any Ancillary Agreement, the provisions of such Ancillary Agreement shall control (but only with respect to the subject matter thereof) unless explicitly stated otherwise therein; and

(k)    any portion of this Agreement or any Ancillary Agreement obligating a Party to take any action or refrain from taking any action, as the case may be, shall mean that such Party shall also be obligated to cause its relevant Subsidiaries to take such action or refrain from taking such action, as the case may be.

 

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ARTICLE II

THE RESTRUCTURING

Section 2.1    Transfers of Assets and Assumptions of Liabilities.

(a)    Transfers Prior to Effective Time. Subject to Section 2.1(b), and in accordance with the Plan of Restructuring, DevCo and SpinCo agree to take all actions necessary so that, prior to the Effective Time, the Parties shall complete the Restructuring in accordance with the Plan of Restructuring. As part of the Plan of Restructuring, and without limiting the other steps set forth in the Plan of Restructuring:

(i)    SpinCo OP shall, and shall cause its applicable Subsidiaries to, sell, assign, transfer, convey, and deliver to DevCo OP or its Subsidiaries, and DevCo OP and such DevCo Subsidiaries shall accept from SpinCo OP and its applicable Subsidiaries, to the extent not already owned by the DevCo Group, all of SpinCo OP’s and such Subsidiaries’ respective direct or indirect right, title, and interest in and to all DevCo Assets (other than the interests in AIMCO Royal Crest – Nashua, L.L.C.), in exchange for which DevCo OP shall issue the DevCo OP Units to SpinCo OP; and

(ii)    DevCo OP or its Subsidiaries shall accept and assume, to the extent the DevCo Group is not already liable therefor, all the DevCo Liabilities (other than the DevCo Liabilities of AIMCO Royal Crest – Nashua, L.L.C.) in accordance with their respective terms, regardless of when or where such DevCo Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the Effective Time, regardless of where or against whom such DevCo Liabilities are asserted or determined (including any DevCo Liabilities arising out of claims made by DevCo’s or SpinCo’s respective directors, officers, employees, agents, managers, trustees, Subsidiaries or Affiliates against any member of the DevCo Group or the SpinCo Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the DevCo Group or the SpinCo Group, or any of their respective directors, officers, employees, agents, managers, trustees, Subsidiaries or Affiliates.

(b)    Deferred Transfers and Assumptions.

(i)    Nothing in this Agreement or in any Ancillary Agreement will be deemed to require the transfer of any Assets or the assumption of any Liabilities that by their terms or by operation of Law cannot be transferred or assumed.

(ii)    To the extent that any transfer of Assets or assumption of Liabilities contemplated by this Agreement or any Ancillary Agreement is not consummated prior to the Effective Time as a result of an absence or non-satisfaction of any required Consent, Governmental Approval and/or other condition, including those set forth on Schedule 2.1(b)(ii), (such Assets or Liabilities, a “Deferred Asset” or a “Deferred Liability,” as applicable), the Parties will use reasonable efforts to effect such

 

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transfers or assumptions as promptly following the Effective Time as practicable. If and when the Consents, Governmental Approvals and/or other conditions, the absence or non-satisfaction of which gave rise to a Deferred Asset or Deferred Liability, are obtained or satisfied, the transfer or assumption of such Deferred Asset or Deferred Liability will be effected in accordance with and subject to the terms of this Agreement or the applicable Ancillary Agreement.

(iii)    From and after the Effective Time until such time as a Deferred Asset or Deferred Liability is transferred or assumed, as applicable, (A) the Party retaining such Deferred Asset will thereafter hold such Deferred Asset for the use and benefit of the Party entitled thereto (at the expense of the Party entitled thereto) and (B) the Party intended to assume such Deferred Liability will pay or reimburse the Party retaining such Deferred Liability for all amounts paid or incurred in connection with the retention of such Deferred Liability; it being agreed that the Party retaining such Deferred Asset or Deferred Liability will not be obligated, in connection with the foregoing clause (A) and clause (B), to expend any money unless the necessary funds are advanced or agreed in writing to be reimbursed by the Party entitled to such Deferred Asset or intended to assume such Deferred Liability. The Party retaining such Deferred Asset or Deferred Liability will use its reasonable efforts to notify the Party entitled to or intended to assume, as applicable, such Deferred Asset or Deferred Liability of the need for such expenditure. In addition, the Party retaining such Deferred Asset or Deferred Liability will, insofar as reasonably practicable and to the extent permitted by applicable Law, (A) treat such Deferred Asset or Deferred Liability in the ordinary course of business consistent with past practice, (B) promptly take such other actions as may be requested by the Party entitled to such Deferred Asset or by the Party intended to assume such Deferred Liability in order to place such Party in the same position as if the Deferred Asset or Deferred Liability had been transferred or assumed, as applicable, as contemplated hereby, and so that all the benefits and burdens relating to such Deferred Asset or Deferred Liability, including possession, use, risk of loss, potential for gain, and control over such Deferred Asset or Deferred Liability, are to inure from and after the Effective Time to such Party entitled to such Deferred Asset or intended to assume such Deferred Liability, and (C) hold itself out to third parties as agent or nominee on behalf of the Party entitled to such Deferred Asset or intended to assume such Deferred Liability.

(iv)    In furtherance of the foregoing, the Parties agree that, as of the Effective Time, each Party will be deemed to have acquired beneficial ownership of all of the Assets, together with all rights and privileges incident thereto, and will be deemed to have assumed all of the Liabilities, and all duties, obligations and responsibilities incident thereto, that such Party is entitled to acquire or intended to assume pursuant to the terms of this Agreement or the applicable Ancillary Agreement.

(v)    The Parties agree to treat, for all tax purposes, any Asset or Liability that is not transferred or assumed prior to the Effective Time and which is subject to the provisions of this Section 2.1(b), as (A) owned by the Party to which such Asset was intended to be transferred or by the Party which was intended to assume such Liability, as the case may be, from and after the Effective Time, (B) having not been

 

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owned by the Party retaining such Asset or Liability, as the case may be, at any time from and after the Effective Time, and (C) having been held by the Party retaining such Asset or Liability, as the case may be, only as agent or nominee on behalf of the other Party from and after the Effective Time until the date such Asset or Liability, as the case may be, is transferred to or assumed by such other Party. The Parties will not take any position inconsistent with the foregoing unless otherwise required by applicable Law (in which case, the Parties will provide indemnification for any Taxes attributable to the Asset or Liability during the period beginning at the Effective Time and ending on the date of the actual transfer).

(c)    Misallocated Assets; Mail & Other Communications; Payments.

(i)    In the event that, at any time from and after the Effective Time, either Party discovers that it or another member of its Group is the owner of, receives or otherwise comes to possess or benefit from any Asset (including the receipt of payments made pursuant to Contracts and proceeds from accounts receivable with respect to such Asset) that should have been allocated to a member of the other Group pursuant to this Agreement or any Ancillary Agreement (except in the case of any deliberate acquisition of Assets from a member of the other Group for value subsequent to the Effective Time), such Party shall, subject to Section 2.1(b), promptly transfer or cause to be transferred such Asset to such member of the other Group, and such member of the other Group shall accept such Asset for no further consideration other than that set forth in this Agreement or such Ancillary Agreement, as applicable (it being understood and agreed that any such transfers shall be made on a monthly basis). Prior to any such transfer, such Asset shall be held in accordance with Section 2.1(b).

(ii)    After the Effective Time, each Party (or any member of its Group and any of its or their respective then-Affiliates) may receive mail, packages and other communications properly belonging to another Party (or any member of its Group). Accordingly, at all times after the Effective Time, each Party (or any member of its Group and any of its or their respective then-Affiliates) is hereby authorized to receive and, to the extent reasonably necessary to identify the proper recipient in accordance with this Section 2.1(c)(ii), open all mail, packages and other communications received by such Party (or member of its Group or its or their then-Affiliate) that belongs to such other Party (or member of such other Party’s Group), and to the extent that they do not relate to the business of the receiving Party, the receiving Party shall as promptly as reasonably practicable deliver or cause to be delivered such mail, packages or other communications (or, in case the same also relates to the business of the receiving Party or another Party, copies thereof) to such other Party as provided for in Section 13.7 (it being understood and agreed that any such deliveries shall be made on a monthly basis); provided that, if a Party (or any member of its Group and any of its or their respective then-Affiliates) receives any claim or demand against any other Party (or any member of such other Party’s Group), or any notice or other communication regarding any Action involving any other Party (or any member of such other Party’s Group), such Party shall and shall cause the other members of its Group to, as promptly as practicable (and, in any event, use commercially reasonable efforts to do so within fifteen (15) days after receipt thereof) notify such other Party (including such other Party’s legal department) of the

 

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receipt of such claim, demand, notice or other communication, and shall promptly deliver such claim, demand, notice or other communication (or, in case the same also relates to the business of the receiving Party or another Party, copies thereof) to such other Party; provided, however, that the failure to provide such notice shall not constitute a breach of this Section 2.1(c)(ii) except to the extent that any such Party shall have been actually prejudiced as a result of such failure. The provisions of this Section 2.1(c)(ii) are not intended to, and shall not, be deemed to constitute an authorization by any Party or any other member of any Group (or any of their Affiliates from time to time) to permit the other to accept service of process on its behalf and no Party is or shall be deemed to be the agent of any other Party or any other member of any Group or any of their respective then-Affiliates for service of process purposes.

(iii)    After the Effective Time, DevCo and DevCo OP shall, and shall cause the other members of the DevCo Group and its and any of their respective then-Affiliates to, promptly pay or deliver to SpinCo and SpinCo OP (or their designee) any monies or checks that have been received by DevCo or DevCo OP (or another member of the DevCo Group or its or their respective then-Affiliates) after the Effective Time to the extent they are (or represent the proceeds of) a SpinCo Asset (it being understood and agreed that any such amounts shall be paid and delivered on a monthly basis).

(iv)    After the Effective Time, SpinCo and SpinCo OP shall, and shall cause the other members of the SpinCo Group and its and any of their respective then-Affiliates to, promptly pay or deliver to DevCo and DevCo OP (or their designee) any monies or checks that have been received by SpinCo or SpinCo OP (or another member of the SpinCo Group or its or their respective then-Affiliates) after the Effective Time to the extent they are (or represent the proceeds of) a DevCo Asset (it being understood and agreed that any such amounts shall be paid and delivered on a monthly basis).

(v)    After the Effective Time, if any Party identifies any Asset or Liability that its Group believes was, or was not, as the case may be, allocated pursuant to this Agreement or any Ancillary Agreement in accordance with the intention of the Transactions, the Parties agree to discuss such matter in good faith and, if the Parties mutually agree (in their sole and absolute discretion), then the Parties may determine to transfer such Asset or Liability to the party they mutually agree was the intended recipient in a mutually agreed manner.

(d)    Instruments of Transfer and Assumption. The Parties agree that (i) transfers of Assets that may be required by this Agreement or any Ancillary Agreement shall be effected by delivery by the transferor to the transferee, and, to the extent applicable, recordation in the appropriate official records, of (A) with respect to those Assets that constitute stock or other equity interests, certificates endorsed in blank or evidenced or accompanied by stock powers or other instruments of transfer endorsed in blank, against receipt and (B) with respect to all other Assets, such good and sufficient instruments of contribution, conveyance, assignment and transfer, in form and substance reasonably satisfactory to the Parties, as shall be necessary, in each case, to vest in the designated transferee all of the title and ownership interest of the transferor in and to any such Asset, and (ii) the assumptions of Liabilities required by this Agreement or any Ancillary Agreement shall be effected by delivery by the transferee to the

 

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transferor of such good and sufficient instruments of assumption, in form and substance reasonably satisfactory to the Parties, as shall be necessary, in each case, for the assumption by the transferee of such Liabilities.

(e)    Waiver of Bulk-Sale and Bulk-Transfer Laws. Each Party hereto and each member of their respective Group hereby waives compliance by each and every member of the other Party’s Group with the requirements and provisions of any “bulk-sale” or “bulk-transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any or all of the Assets to any member of the SpinCo Group or DevCo Group, as applicable.

(f)    Shared Contracts.

(i)    Prior to the Closing, DevCo shall, and shall cause its Subsidiaries (including members of the DevCo Group) to, use their respective reasonable best efforts to obtain from, and to cooperate in obtaining from, and shall, and shall cause its Subsidiaries (including members of the DevCo Group) to enter into, with each third party to a Shared Contract, either (A) a separate contract or agreement in a form reasonably acceptable to DevCo and SpinCo (a “New SpinCo Contract”) that allocates the rights and obligations of DevCo and its Subsidiaries under each Shared Contract as between the DevCo Business, on the one hand, and the SpinCo Business, on the other hand, and which are otherwise substantially similar in all material respects to such Shared Contract or (B) a contract or agreement in a form reasonably acceptable to DevCo and SpinCo effective as of the Effective Time (the “Partial Assignments and Releases”) that (x) assigns the rights and obligations under such Shared Contract solely to the extent related to the SpinCo Business and arising after the Effective Time to the SpinCo Group and (y) releases the DevCo Group from all liabilities or obligations with respect to the SpinCo Business that arise after the Effective Time. Any New SpinCo Contracts that relate to the SpinCo Business (the “SpinCo Business Contracts”) shall be entered into by one or more members of the SpinCo Group effective as of the Effective Time and shall allocate to SpinCo or other member of the SpinCo Group all rights and obligations of DevCo and its Subsidiaries (other than members of the SpinCo Group) under the applicable Shared Contract being replaced to the extent such rights and obligations relate to the SpinCo Business and arise after the Effective Time. All purchase commitments under the Shared Contracts shall be allocated under the SpinCo Business Contracts or the Partial Assignments and Releases as between the DevCo Business, on the one hand, and the SpinCo Business, on the other hand, in an equitable manner that is mutually and reasonably agreed to by the DevCo Group and the SpinCo Group. In connection with the entering into of New SpinCo Contracts, the Parties shall use their reasonable best efforts to ensure that members of the DevCo Group are released by the third party with respect to all liabilities and obligations relating to the SpinCo Business and arising after the Effective Time.

(ii)    In the event that any third party under a Shared Contract does not agree to enter into a New SpinCo Contract or Partial Assignment and Release consistent with this Section 2.1(f), the Parties shall in good faith seek mutually acceptable alternative arrangements for purposes of allocating rights and liabilities and obligations under such Shared Contract (provided that such arrangements shall not result in a breach

 

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or violation of such Shared Contract by any member of the DevCo Group). Such alternative arrangements may include a subcontracting, sublicensing or subleasing arrangement under which SpinCo and its Subsidiaries would, in compliance with Law, obtain the benefits under, and, to the extent first arising after the Effective Time, assume the obligations and bear the economic burdens associated with, such Shared Contract solely to the extent related to the SpinCo Business (or applicable portion thereof) or under which members of the DevCo Group would, upon the request of SpinCo, enforce for the benefit (and at the expense) of the SpinCo Group any and all of DevCo’s and its Subsidiaries’ rights against such third party under such Shared Contract solely to the extent related to the SpinCo Business (or applicable portion thereof), and the DevCo Group would promptly pay to the SpinCo Group when received all monies received by them (net of any applicable Taxes imposed on the DevCo Group) under such Shared Contract solely to the extent related to the SpinCo Business (or applicable portion thereof).

(iii)    With respect to Liabilities pursuant to, under or relating to a given Shared Contract relating to occurrences from and after the Effective Time, such Liabilities shall, unless otherwise allocated pursuant to this Agreement, be allocated between the DevCo Group and the SpinCo Group as follows:

(A)    If a Liability is incurred exclusively in respect of the SpinCo Business or exclusively in respect of the DevCo Business, such Liability shall be allocated to SpinCo or its applicable Subsidiary (in respect of the SpinCo Business) or DevCo or its applicable Subsidiary (in respect of the DevCo Business); and

(B)    If a Liability cannot be so allocated under clause (A) above, such Liability shall be allocated to the DevCo Group or the SpinCo Group, as the case may be, based on the relative proportions of total benefit received (over the term of the Shared Contract remaining as of the Effective Time, measured as of the date of the allocation) by the DevCo Business or the SpinCo Business under the relevant Shared Contract. Notwithstanding the foregoing, each of the DevCo Group and the SpinCo Group shall be responsible for any or all Liabilities arising from its (or its Subsidiary’s) breach of the relevant Shared Contract to which this Section 2.1(f) otherwise pertains.

(iv)    If DevCo or any of its Subsidiaries, on the one hand, or SpinCo or any of its Subsidiaries, on the other hand, receives any benefit or payment which under any Shared Contract was intended for the other, DevCo will cause the DevCo Group to use, and SpinCo will cause the SpinCo Group to use, their respective reasonable best efforts to deliver such benefit or payment to the other Party.

(v)    From the date hereof until the Effective Time, and during the twelve (12)-month period immediately following the Effective Time, DevCo and SpinCo shall use commercially reasonable efforts to cooperate to obtain the Third-Party Consents. DevCo shall have no Liability whatsoever for failure to obtain any Third-Party Consent, except to the extent that such failure results from a failure to use commercially reasonable efforts as required by this Section 2.1(f)(v).

 

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Section 2.2    DevCo Assets and SpinCo Assets.

(a)    For purposes of this Agreement, “DevCo Assets” shall mean, except as otherwise expressly provided in this Agreement:

(i)    all of the equity interests in the DevCo Subsidiaries other than the Specified JO Common Units;

(ii)    all DevCo Contracts, including the rights of the members of the DevCo Group party to this Agreement, the Ancillary Agreements and the Surviving Intercompany Agreements;

(iii)    all Assets relating to any AIMCO Benefit Arrangements to be retained by, or assigned, transferred, or otherwise conveyed to, any member of the DevCo Group pursuant to the Employee Matters Agreement;

(iv)    the Apartment Investment and Management Company name and any and all “Apartment Investment and Management Company” and “AIMCO” brands, related Trademarks and related Trademark applications and registrations, including those set forth on Schedule 2.2(a)(iv), and any and all derivations, abbreviations, translations, localizations and other variations of any of the foregoing and any confusingly similar Trademark and Trademark application and registration;

(v)    the Assets listed or described in Schedule 2.2(a);

(vi)    the DevCo Retained Properties and any Assets located on such properties;

(vii)    any and all cash and other current marketable securities in bank and investment accounts of the DevCo Group as of the Effective Time, including any cash and wires in transit to any such account; and

(viii)    any and all Assets directly or indirectly owned or held immediately prior to the Effective Time by DevCo or any of its Subsidiaries that are used exclusively in, or that exclusively relate to, the DevCo Business;

provided, however, that the DevCo Assets shall not include the Specified SpinCo Assets.

(b)    For the purposes of this Agreement, “SpinCo Assets” shall mean any and all Assets directly or indirectly owned or held immediately prior to the Effective Time by DevCo or any of its Subsidiaries (including any Asset that is not related to either the DevCo Business or the SpinCo Business (other than in a de minimis respect) (e.g., corporate or enterprise-wide Assets)) other than the DevCo Assets. For the avoidance of doubt, “SpinCo Assets” includes the Specified SpinCo Assets.

 

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Section 2.3    SpinCo Liabilities and DevCo Liabilities.

(a)    For the purposes of this Agreement, “DevCo Liabilities” shall mean, (without duplication) any and all Liabilities of DevCo and its Subsidiaries as of the Effective Time other than SpinCo Liabilities, including:

(i)    all Liabilities primarily relating to, arising out of or resulting from any Action related to the Transactions;

(ii)    all outbound cash and wires in transit as of the Effective Time from any bank or investment account of any member of the DevCo Group;

(iii)    all Liabilities to be assumed by, and the obligations of, any member of the DevCo Group pursuant to this Agreement or any Ancillary Agreement;

(iv)    all Liabilities arising under any new DevCo Credit Facility;

(v)    any and all Liabilities of any member of the DevCo Group relating to any surviving Intercompany Accounts;

(vi)    any and all Liabilities of any member of the DevCo Group pursuant to the Specified Promissory Note;

(vii)    all Liabilities in respect of the DevCo Property Debt;

(viii)    all Assets relating to any AIMCO Benefit Arrangements to be retained by, or assigned, transferred, or otherwise conveyed to, any member of the SpinCo Group pursuant to the Employee Matters Agreement;

(ix)    all Environmental Liabilities to the extent related to the DevCo Retained Properties;

(x)    those Liabilities set forth in Schedule 2.3(a)(x);

(xi)    all Liabilities relating to, arising out of or resulting from the actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent that such Liabilities are not Specified SpinCo Liabilities; and

(xii)    all DevCo Tax Liabilities;

(and “Specified DevCo Liabilities” shall mean the Liabilities set forth in clauses (i) through (xii) above).

(b)    For the purposes of this Agreement, “SpinCo Liabilities” shall mean, (without duplication), any and all Liabilities of DevCo and its Subsidiaries as of immediately prior to the Effective Time other than the Specified DevCo Liabilities that are:

 

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(i)    Liabilities related to the SpinCo Credit Facility and the credit agreement for the SpinCo Credit Facility and all property-level indebtedness for borrowed money other than the DevCo Property Debt;

(ii)    Liabilities to be assumed by, and the obligations of, any member of the SpinCo Group pursuant to this Agreement or any Ancillary Agreement;

(iii)    Liabilities in respect of the Specified PM TRS Preferred Stock;

(iv)    Liabilities of any member of the SpinCo Group relating to any surviving Intercompany Accounts;

(v)    Liabilities allocated to the SpinCo Group pursuant to the Employee Matters Agreement;

(vi)    outbound cash and wires in transit as of the Effective Time from any bank or investment account of any member of the SpinCo Group;

(vii)    all Environmental Liabilities related to the Initial MLA Real Properties and the Core SpinCo Properties;

(viii)    Liabilities set forth in Schedule 2.3(b)(viii); and

(ix)    Spinco Tax Liabilities;

(and “Specified SpinCo Liabilities” shall mean the Liabilities set forth in clauses (ii)-(ix) above).

Section 2.4    Termination of Intercompany Agreements.

(a)    Except as set forth in Section 2.4(b), DevCo, on behalf of itself and each of the other members of the DevCo Group, and SpinCo, on behalf of itself and each of the other members of the SpinCo Group, hereby terminate, effective as of the Effective Time, any and all Intercompany Agreements. No such terminated Intercompany Agreement will be of any further force or effect from and after the Effective Time and all Parties shall be released from all Liabilities thereunder other than the Liability to settle any Intercompany Accounts as provided in Section 2.5. Each Party shall take, or cause to be taken, any and all actions as may be reasonably necessary to effect the foregoing.

(b)    The provisions of Section 2.4(a) shall not apply to any of the following agreements (which agreements shall continue to be outstanding after the Effective Time and thereafter shall be deemed to be, for each relevant Party (or the member of such Party’s Group), an obligation to a third party and shall no longer be an Intercompany Agreement) (collectively, the “Surviving Intercompany Agreements”):

(i)    this Agreement and the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement or any Ancillary Agreement);

 

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(ii)    the agreements listed on Schedule 2.4(b)(ii); and

(iii)    any confidentiality or non-disclosure agreements among any members of either Group.

Section 2.5    Settlement of Intercompany Accounts. Each Intercompany Account representing Indebtedness (for the avoidance of doubt, excluding the Specified Promissory Note, the Specified PM TRS Preferred Stock and the SpinCo Preferred Stock) outstanding immediately prior to the Effective Time, will be satisfied and/or settled in full in cash or otherwise cancelled and terminated or extinguished by the relevant members of the DevCo Group and the SpinCo Group prior to the Effective Time, in each case, in the manner agreed to by the Parties. Each Intercompany Account representing an account payable outstanding immediately prior to the Effective Time, will survive and be paid in accordance with its terms; provided that if such account payable does not have a specified repayment term, such account payable shall be repaid within ninety (90) days of the Effective Time.

Section 2.6    Replacement of Guarantees.

(a)    The Parties shall cooperate and use their reasonable best efforts to arrange, effective at or prior to the Effective Time, at SpinCo’s cost and expense, the replacement of all DevCo Guarantees with alternate arrangements that do not require any credit support from any member of the DevCo Group, and shall use their reasonable best efforts to obtain from the beneficiaries of such DevCo Guarantees written releases indicating that each applicable member of the DevCo Group will, effective as of the Effective Time, have no further Liability with respect to such DevCo Guarantees. If, following the Effective Time, the Parties are unable to replace any DevCo Guarantee, (i) the Parties shall cooperate and continue to use their reasonable best efforts to replace such DevCo Guarantee with alternate arrangements that do not require any credit support from any member of the DevCo Group and (ii) SpinCo OP shall indemnify, defend and hold harmless each member of the DevCo Group against, and reimburse each member of the DevCo Group for, any Losses incurred following the Distribution with respect to such DevCo Guarantee, and SpinCo hereby irrevocably guarantees the due and punctual performance and observance by SpinCo OP of its obligations contained in this Section 2.6(a), subject, in each case, to all of the terms, provisions and conditions herein.

(b)    The Parties shall cooperate and use their reasonable best efforts to arrange, effective at or prior to the Effective Time, at DevCo’s cost and expense, the replacement of all SpinCo Guarantees with alternate arrangements that do not require any credit support from any member of the SpinCo Group, and shall use their reasonable best efforts to obtain from the beneficiaries of such SpinCo Guarantees written releases indicating that each applicable member of the SpinCo Group will, effective as of the Effective Time, have no further Liability with respect to such SpinCo Guarantees. If, following the Effective Time, the Parties are unable to replace any SpinCo Guarantee, (i) the Parties shall cooperate and continue to use their reasonable best efforts to replace such SpinCo Guarantee with alternate arrangements that do not require any credit support from any member of the SpinCo Group and (ii) DevCo OP shall indemnify, defend and hold harmless each member of the SpinCo Group against, and reimburse each member of the SpinCo Group for, any Losses incurred following the Distribution with respect to such SpinCo Guarantee, and DevCo hereby irrevocably guarantees the due and punctual performance and observance by DevCo OP of its obligations contained in this Section 2.6(b), subject, in each case, to all of the terms, provisions and conditions herein.

 

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ARTICLE III

CERTAIN ACTIONS PRIOR TO THE DISTRIBUTION

Section 3.1    SEC and Other Securities Filings.

(a)    Prior to the date of this Agreement, the Parties caused the Registration Statements to be prepared and filed with the SEC.

(b)    The Registration Statements were declared effective by the SEC on                         , 2020.

(c)    As soon as practicable after the date of this Agreement, DevCo shall cause the DevCo OP Information Statement and the SpinCo Information Statement to be mailed to the applicable Record Holders (or, alternatively, DevCo shall make available the DevCo OP Information Statement and the SpinCo Information Statement to the applicable Record Holders and cause to be mailed to the applicable Record Holders a notice of internet availability of the DevCo OP Information Statement and the SpinCo Information Statement and post such notice on its website, in each case in compliance with Rule 14a-16 promulgated by the SEC pursuant to the Exchange Act, as such rule may be amended from time to time).

(d)    The Parties shall cooperate in preparing, filing with the SEC and causing to become effective any other registration statements or amendments or supplements thereto that are necessary or appropriate in order to effect the Transactions, or to reflect the establishment of, or amendments to, any employee benefit plans contemplated hereby.

(e)    The Parties shall take all such action as may be necessary or appropriate under state and foreign securities or “blue sky” Laws in connection with the Transactions.

Section 3.2    NYSE Listing Application.

(a)    Prior to the date of this Agreement, the Parties caused an application for the listing on the NYSE of SpinCo Common Stock to be issued to the DevCo Record Holders in the Distribution (the “NYSE Listing Application”) to be prepared and filed.

(b)    Prior to the date of this Agreement, the Parties have caused the NYSE Listing Application to be approved, subject to official notice of issuance.

(c)    DevCo shall give the NYSE notice of the Record Date in compliance with Rule 10b-17 under the Exchange Act.

Section 3.3    Distribution Agent. At or prior to the Effective Time, DevCo shall, if requested by the Distribution Agent, enter into a distribution agent agreement and/or a paying agent agreement with the Distribution Agent.

 

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Section 3.4    Governmental Approvals and Consents. To the extent that any of the Transactions require any Governmental Approval or Consent which has not been obtained prior to the date of this Agreement, the Parties will use reasonable efforts to obtain, or cause to be obtained, such Governmental Approval or Consent prior to the Effective Time.

Section 3.5    Ancillary Agreements. Prior to the Effective Time, each Party shall execute and deliver, and shall cause each applicable member of its Group to execute and deliver, as applicable, the following agreements (collectively, the “Ancillary Agreements”): (a) the Plan of Restructuring and all agreements and instruments executed or delivered to effect the transactions described therein, including, without limitation, the Specified Promissory Note, the SpinCo Preferred Stock, the Specified PM TRS Preferred Stock and the Specified JO Common Units, (b) the Employee Matters Agreement, (c) the Commercial Agreements, (d) the Intellectual Property Agreements, (e) the Nashua Transfer Agreement and (f) such other written agreements, documents or instruments as the Parties may agree are reasonably necessary or desirable and which specifically state that they are Ancillary Agreements within the meaning of this Agreement.

Section 3.6    Governance Matters.

(a)    Articles of Incorporation and Bylaws. SpinCo has adopted the articles of amendment and restatement and the amended and restated bylaws of SpinCo, each substantially in the form filed by SpinCo with the SEC as an exhibit to the SpinCo Registration Statement, and SpinCo shall not take any action to modify its charter or bylaws prior to the Effective Time.

(b)    Officers and Directors. On or prior to the Distribution Date, the Parties shall take all necessary action so that, as of the Distribution Date, (i) the officers and directors of SpinCo will be as set forth in the SpinCo Information Statement and (ii) the officers and directors of DevCo will be as set forth in the DevCo OP Information Statement.

Section 3.7    Partnership Agreements. SpinCo OP shall, in its capacity as a limited partner in DevCo OP, and DevCo OP GP shall, in its capacity as the general partner of DevCo OP, and on behalf of and as attorney in fact for the other limited partners, enter into the amended and restated limited partnership agreement of DevCo OP, effective as of the Effective Time. SpinCo OP GP shall, in its capacity as the general partner of SpinCo OP, and on behalf of and as attorney in fact for the limited partners of SpinCo OP, enter into the Sixth Amended and Restated Limited Partnership Agreement of SpinCo OP, effective as of the Effective Time.

Section 3.8    DevCo OP Distribution and Internal Distribution. Prior to the SpinCo Distribution, in accordance with the Plan of Restructuring, the Parties shall cause the following to occur:

(a)    DevCo shall, or shall cause its applicable Subsidiary to, cause SpinCo OP to, and SpinCo OP shall, declare and effectuate the DevCo OP Distribution in accordance with the relevant provisions of Section 4.1;

(b)    SpinCo and SpinCo OP GP shall, declare and effectuate the Internal Distribution in accordance with the relevant terms of Section 4.1;

 

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(c)    The applicable member of the DevCo Group, acting in its capacity as the general partner of DevCo OP, shall consent to, and use reasonable efforts to cause, each of the SpinCo OP Record Holders who receives DevCo OP Units in the DevCo OP Distribution (other than SpinCo and SpinCo OP GP) and DevCo to be admitted as partners in DevCo OP, effective as of immediately following the Internal Distribution; and

(d)    In accordance with the Plan of Restructuring, SpinCo OP shall or shall cause its applicable Subsidiary to transfer all of the interests in AIMCO Royal Crest – Nashua, L.L.C. to DevCo OP immediately following the Internal Distribution for no consideration pursuant to the Nashua Transfer Agreement.

ARTICLE IV

THE DISTRIBUTION

Section 4.1    Distribution.

(a)    Subject to the terms and conditions set forth in this Agreement, including Section 4.1(c):

(i)    on or prior to the Distribution Date, DevCo shall, or shall cause its applicable Subsidiary to, deliver or otherwise make available to the Distribution Agent, for the benefit of the applicable Record Holders, such number of issued and outstanding shares of SpinCo Common Stock as is necessary to effect the SpinCo Distribution and the appropriate number of DevCo OP Units as is necessary to effect the DevCo OP Distribution and provide to the Distribution Agent all SpinCo Common Stock and DevCo OP Unit certificates (to the extent certificated) or book-entry authorizations (to the extent not certificated) and any information required in order to complete the Distribution;

(ii)    on the Distribution Date, DevCo will, or will cause its applicable Subsidiary to, direct the Distribution Agent to distribute, prior to the Effective Time, to each applicable Record Holder, one DevCo OP Unit for every one SpinCo OP Common Unit held by such Record Holder at the close of business on the Record Date. All such DevCo OP Units to be so distributed shall be distributed by way of direct registration in book-entry form. No certificates therefor shall be distributed. The DevCo OP Distribution shall be effective prior to the Effective Time;

(iii)    on the Distribution Date, DevCo and SpinCo will, or will cause their applicable Subsidiaries to, distribute prior to the Effective Time all of the DevCo OP Units received by SpinCo and SpinCo OP GP in the DevCo OP Distribution to DevCo. The Internal Distribution shall be effective prior to the Effective Time; and

(iv)    on the Distribution Date, DevCo will direct the Distribution Agent to distribute, effective as of the Effective Time, to each applicable Record Holder, (A) one share of SpinCo Common Stock for each share of DevCo Common Stock held by such Record Holder at the close of business on the Record Date, rounded down to the nearest whole number and (B) cash, if applicable, in lieu of fractional shares of SpinCo Common Stock, in an amount determined in accordance with Section 4.1(b) hereof. All

 

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such shares of SpinCo Common Stock to be so distributed shall be distributed as uncertificated shares registered in book-entry form through the direct registration system. No certificates therefor shall be distributed. Following the Distribution, DevCo shall cause the Distribution Agent to deliver an account statement to each holder of SpinCo Common Stock reflecting such holder’s ownership thereof. All of the shares of SpinCo Common Stock distributed in the Distribution will be validly issued, fully paid and non-assessable.

(b)    Notwithstanding anything herein to the contrary, no fractional shares of SpinCo Common Stock shall be issued in connection with the SpinCo Distribution, and any such fractional share interests to which a Record Holder would otherwise be entitled shall not entitle such Record Holder to vote or to any other rights as a stockholder of SpinCo. In lieu of any such fractional shares, each Record Holder who, but for the provisions of this section, would be entitled to receive a fractional share interest of SpinCo Common Stock pursuant to the SpinCo Distribution, shall be paid cash, without any interest thereon, as hereinafter provided. DevCo will direct the Distribution Agent to determine the number of whole shares and fractional shares of SpinCo Common Stock allocable to each Record Holder, to aggregate all such fractional shares into whole shares, to sell the whole shares obtained thereby in the open market at the then-prevailing prices on behalf of each Record Holder who otherwise would be entitled to receive fractional share interests and to distribute to each such Record Holder his, her or its ratable share of the total proceeds of such sale, after making appropriate deductions of the amounts required for U.S. federal income tax withholding purposes and after deducting any applicable transfer Taxes. The costs and expenses of such sale and distribution, including brokers fees and commissions will be paid by SpinCo. The sales of fractional shares shall occur as soon after the Effective Time as practicable and as determined by the Distribution Agent. None of DevCo, SpinCo or the Distribution Agent shall guarantee any minimum sale price for the fractional shares of DevCo Common Stock. Neither DevCo nor SpinCo shall pay any interest on the proceeds from the sale of fractional shares. The Distribution Agent shall have the sole discretion to select the broker-dealers through which to sell the aggregated fractional shares and to determine when, how and at what price to sell such shares. Neither the Distribution Agent nor the broker-dealers through which the aggregated fractional shares are sold shall be Affiliates of DevCo or SpinCo; and

(c)    Notwithstanding any other provision of this Agreement, DevCo, SpinCo OP, the Distribution Agent, or any Person that is a withholding agent under applicable Law shall be entitled to deduct and withhold from any consideration distributable or payable hereunder the amounts required to be deducted and withheld under the Code, or any provision of any U.S. federal, state, local or foreign Tax Law. Any amounts so withheld shall be paid over to the appropriate Taxing Authority in the manner prescribed by Law. To the extent that amounts are so deducted and withheld, such deducted and withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Persons in respect of which such deduction and withholding was made.

 

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ARTICLE V

CONDITIONS

Section 5.1    Conditions Precedent to Consummation of the Distribution. The Distribution shall not be effected unless and until the following conditions have been satisfied or waived by DevCo, in its sole and absolute discretion, at or before the Effective Time:

(a)    (x) the DevCo Board shall have declared the SpinCo Distribution, which declaration may be made or withheld in its sole and absolute discretion, (y) SpinCo OP GP, as general partner of SpinCo OP, shall have declared the DevCo OP Distribution and (z) SpinCo and its applicable Subsidiaries shall have declared the Internal Distribution;

(b)    the Registration Statements shall have been declared effective by the SEC, with no stop order in effect with respect thereto, and no proceedings for such purpose shall be pending before, or threatened by, the SEC;

(c)    DevCo shall have mailed the DevCo OP Information Statement and the SpinCo Information Statement (and such other information concerning SpinCo, DevCo OP, the Distribution and such other matters as the Parties shall determine and as may otherwise be required by Law) to the applicable Record Holders or shall have caused to be mailed the notice of internet availability of the DevCo OP Information Statement and the SpinCo Information Statement to the applicable Record Holders as contemplated by Section 3.1(c);

(d)    DevCo shall have received solvency opinions from an independent financial advisory firm, in form and substance reasonably acceptable to DevCo, substantially to the effect that DevCo, DevCo OP, SpinCo and SpinCo OP are Solvent pro forma for the Restructuring and Distribution;

(e)    SpinCo shall have received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance reasonably satisfactory to SpinCo, substantially to the effect that commencing with SpinCo’s taxable year ending December 31, 2020, SpinCo has been organized in conformity with the requirements for qualification as a REIT under the Code, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT;

(f)    DevCo shall have received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, in form and substance reasonably satisfactory to DevCo, substantially to the effect that, commencing with DevCo’s taxable year ended December 31, 1994, DevCo has been organized in conformity with the requirements for qualification as a REIT under the Code, and its actual method of operation has enabled, and its proposed method of operation will enable, it to meet the requirements for qualification and taxation as a REIT;

(g)    the NYSE shall have approved the NYSE Listing Application, subject to official notice of issuance;

(h)    DevCo shall have set a Record Date for the SpinCo Distribution and provided notice thereof to the NYSE, as provided in Section 3.2(c) and SpinCo OP GP, as general partner of SpinCo OP, shall have set the same Record Date for the DevCo OP Distribution;

 

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(i)    the Restructuring shall have been completed in accordance with the Plan of Restructuring;

(j)    the Preferred Stock Sale Agreement shall have been executed by the parties thereto;

(k)    the applicable members of the SpinCo Group shall have entered into definitive documentation with respect to the SpinCo Credit Facility;

(l)    no preliminary or permanent injunction or other order, decree or ruling issued by a Governmental Authority, and no statute (as interpreted through orders or rules of any Governmental Authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any Governmental Authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the Transactions;

(m)    no other event or development shall have occurred or failed to occur that, in the judgment of the DevCo Board, in its sole discretion, would make it inadvisable to effect the Distribution;

(n)    SpinCo shall have adopted the amended and restated articles of incorporation and amended and restated bylaws, as provided in Section 3.6(a);

(o)    the general partner of DevCo OP shall have adopted the amended and restated DevCo OP agreement of limited partnership, as provided in Section 3.7;

(p)    the general partner of SpinCo OP shall have adopted the Sixth Amended and Restated Limited Partnership Agreement of SpinCo OP, as provided in Section 3.7;

(q)    the Ancillary Agreements shall have been executed and delivered by each of the parties thereto and no party to any of the Ancillary Agreements will be in material breach of any such agreement;

(r)    all other actions and filings necessary or appropriate under applicable federal or state securities Laws and state “blue sky” Laws in connection with the Transactions shall have been taken; and

(s)    any material Governmental Approvals and Consents necessary to consummate the Transactions or any portion thereof shall have been obtained and be in full force and effect.

Section 5.2    Right Not to Close. Each of the conditions set forth in Section 5.1 is for the benefit of DevCo, and the DevCo Board may, in its sole and absolute discretion, determine whether to waive any condition, in whole or in part. Any determination made by the DevCo Board concerning the satisfaction or waiver of any or all of the conditions set forth in Section 5.1 will be conclusive and binding on the Parties. The satisfaction of the conditions set forth in

 

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Section 5.1 will not create any obligation on the part of DevCo to any other Person to effect any of the Transactions or in any way limit DevCo’s right to terminate this Agreement and the Ancillary Agreements as set forth in Section 12.1 or alter the consequences of any termination from those specified in Section 12.2.

ARTICLE VI

NO REPRESENTATIONS OR WARRANTIES

Section 6.1    Disclaimer of Representations and Warranties. EACH PARTY (ON BEHALF OF ITSELF AND EACH OTHER MEMBER OF ITS GROUP) UNDERSTANDS AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN, IN ANY ANCILLARY AGREEMENT OR IN ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS AGREEMENT OR ANY ANCILLARY AGREEMENT, NO PARTY IS REPRESENTING OR WARRANTING IN ANY WAY AS TO (A) THE ASSETS, BUSINESSES OR LIABILITIES CONTRIBUTED, TRANSFERRED, DISTRIBUTED OR ASSUMED AS CONTEMPLATED HEREBY OR THEREBY, (B) ANY CONSENTS OR GOVERNMENTAL APPROVALS REQUIRED IN CONNECTION HEREWITH OR THEREWITH, (C) THE VALUE OR FREEDOM FROM ANY SECURITY INTERESTS OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF ANY PARTY, (D) THE ABSENCE OF ANY DEFENSES OR RIGHT OF SETOFF OR FREEDOM FROM COUNTERCLAIM WITH RESPECT TO ANY ACTION OR OTHER ASSET, INCLUDING ACCOUNTS RECEIVABLE, OF ANY PARTY, OR (E) THE LEGAL SUFFICIENCY OF ANY CONTRIBUTION, DISTRIBUTION, ASSIGNMENT, DOCUMENT, CERTIFICATE OR INSTRUMENT DELIVERED HEREUNDER OR THEREUNDER TO CONVEY TITLE TO ANY ASSET UPON THE EXECUTION, DELIVERY AND FILING HEREOF OR THEREOF.

Section 6.2    As Is, Where Is. EACH PARTY (ON BEHALF OF ITSELF AND EACH OTHER MEMBER OF ITS GROUP) UNDERSTANDS AND AGREES THAT, EXCEPT AS OTHERWISE PROVIDED IN ANY ANCILLARY AGREEMENT, ALL ASSETS TRANSFERRED PURSUANT TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT ARE BEING TRANSFERRED “AS IS, WHERE IS.”

ARTICLE VII

CERTAIN COVENANTS AND ADDITIONAL AGREEMENTS

Section 7.1    Insurance Policies.

(a)    

(i)    From and after the Distribution Time, the SpinCo Group and the SpinCo Business shall cease to be insured by the DevCo Group’s Insurance Policies. The DevCo Group shall retain all rights to control its Insurance Policies, including the right to exhaust, settle, release, commute, buy back or otherwise resolve disputes with respect to any of its Insurance Policies notwithstanding whether any such Insurance Policies apply

 

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to any Liabilities of any member of the SpinCo Group. SpinCo and SpinCo OP shall be responsible for securing all Insurance Policies that it considers appropriate for the SpinCo Business and the operation thereof by the SpinCo Group. SpinCo and SpinCo OP agree to arrange for its own Insurance Policies with respect to the SpinCo Business and the SpinCo Group. SpinCo agrees, on behalf of itself and each member of the SpinCo Group, from and after the Distribution Time, not to seek through any means to benefit from and not to assert any right, claim or interest in, to or under, any Insurance Policies of any member of the DevCo Group, except as permitted under Section 7.1(b)(i).

(ii)    From and after the Distribution Time, the DevCo Group and the DevCo Business shall cease to be insured by the SpinCo Group’s Insurance Policies. The SpinCo Group shall retain all rights to control its Insurance Policies, including the right to exhaust, settle, release, commute, buy back or otherwise resolve disputes with respect to any of its Insurance Policies notwithstanding whether any such Insurance Policies apply to any Liabilities of any member of the DevCo Group. DevCo and DevCo OP shall be responsible for securing all Insurance Policies that it considers appropriate for the DevCo Business and the operation thereof by the DevCo Group. DevCo and DevCo Op agree to arrange for its own Insurance Policies with respect to the DevCo Business and the DevCo Group. DevCo agrees, on behalf of itself and each member of the DevCo Group, from and after the Distribution Time, not to seek through any means to benefit from and not to assert any right, claim or interest in, to or under, any Insurance Policies of any member of the SpinCo Group, except as permitted under Section 7.1(b)(ii).

(b)    

(i)    For any claim asserted against SpinCo or any SpinCo Subsidiary after the Distribution Time arising out of an occurrence taking place prior to the Distribution Time (“SpinCo Post-Closing Claims”), SpinCo and each SpinCo Subsidiary may access coverage under any occurrence-based third-party Insurance Policies of DevCo or its Subsidiaries (as applicable) in place prior to the Distribution Date under which SpinCo or any SpinCo Subsidiary is insured (the “DevCo Shared Pre-Closing Occurrence-Based Policies”), to the extent such insurance coverage exists and provides coverage, without cost to DevCo and its Subsidiaries, for such SpinCo Post-Closing Claim. DevCo and its Subsidiaries (as applicable) shall reasonably cooperate with SpinCo and the SpinCo and its Subsidiaries in connection with the tendering of such claims; provided, however, that: (A) SpinCo or the SpinCo and its Subsidiaries shall promptly notify DevCo of all such SpinCo Post-Closing Claims; (B) SpinCo and SpinCo OP shall be responsible for the satisfaction or payment of any applicable retention, deductible or retrospective premium with respect to any SpinCo Post-Closing Claim and shall reimburse to DevCo and its Subsidiaries all reasonable out-of-pocket costs and expenses incurred in connection with such claims. In the event that a SpinCo Post-Closing Claim relates to the same occurrence for which DevCo or its Subsidiaries is seeking coverage under DevCo Shared Pre-Closing Occurrence-Based Policies, and the limits under an applicable DevCo Shared Pre-Closing Occurrence-Based Policy are not sufficient to fund all covered claims of SpinCo or any SpinCo Subsidiary (as applicable) and DevCo or its Subsidiaries (as applicable), amounts due under such a DevCo Shared Pre-Closing Occurrence-Based Policy shall be paid to the respective Persons in proportion to the amounts that otherwise would be due were the limits of liability infinite.

 

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(ii)    For any claim asserted against DevCo or any DevCo Subsidiary after the Distribution Time arising out of an occurrence taking place prior to the Distribution Time (“DevCo Post-Closing Claims”), DevCo and each DevCo Subsidiary may access coverage under any occurrence-based third-party Insurance Policies of SpinCo or its Subsidiaries (as applicable) in place prior to the Distribution Date under which DevCo or any DevCo Subsidiary is insured (the “SpinCo Shared Pre-Closing Occurrence-Based Policies”), to the extent such insurance coverage exists and provides coverage, without cost to SpinCo and its Subsidiaries, for such DevCo Post-Closing Claim. SpinCo and its Subsidiaries (as applicable) shall reasonably cooperate with DevCo and the SpinCo and its Subsidiaries in connection with the tendering of such claims; provided, however, that: (A) DevCo or the DevCo Subsidiaries shall promptly notify SpinCo and SpinCo OP of all such DevCo Post-Closing Claims; (B) DevCo and DevCo OP shall be responsible for the satisfaction or payment of any applicable retention, deductible or retrospective premium with respect to any DevCo Post-Closing Claim and shall reimburse to SpinCo and its Subsidiaries all reasonable out-of-pocket costs and expenses incurred in connection with such claims. In the event that a DevCo Post-Closing Claim relates to the same occurrence for which SpinCo or its Subsidiaries is seeking coverage under SpinCo Shared Pre-Closing Occurrence-Based Policies, and the limits under an applicable SpinCo Shared Pre-Closing Occurrence-Based Policy are not sufficient to fund all covered claims of DevCo or any DevCo Subsidiary (as applicable) and SpinCo or its Subsidiaries (as applicable), amounts due under such a SpinCo Shared Pre-Closing Occurrence-Based Policy shall be paid to the respective Persons in proportion to the amounts that otherwise would be due were the limits of liability infinite.

(c)    In no event will a Party have any Liability whatsoever to any member of the other Party’s Group because any Insurance Policy is terminated or otherwise ceases to be in effect for any reason, is unavailable or inadequate to cover any Liability of any member of either Party’s Group for any reason whatsoever or is not renewed or extended. Furthermore, each Party, on behalf of its Group, releases each member of the other Party’s Group with respect to any Liabilities whatsoever as a result of the Insurance Policies and insurance practices of the other Party’s Group as in effect at any time prior to the Distribution Time, including as a result of (A) the level or scope of any insurance, (B) the creditworthiness of any insurance carrier, (C) the terms and conditions of any Insurance Policy or (D) the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim.

(d)     This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any member of the DevCo Group or the SpinCo Group in respect of any insurance policy or any other contract or policy of insurance.

(e)     The treatment of workers’ compensation claims asserted against (A) SpinCo or any SpinCo Subsidiary with respect to the DevCo Group’s Insurance Policies and (B) DevCo or any DevCo Subsidiary with respect to the SpinCo Group’s insurance policies shall be governed by this Section 7.1.

 

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Section 7.2    No Restrictions on Post-Distribution Competitive Activities; Corporate Opportunities.

(a)    Each of the Parties agrees that this Agreement shall not include any non-competition or other similar restrictive arrangements with respect to the range of business activities that may be conducted, or investments that may be made, by the Groups. Accordingly, each of the Parties acknowledges and agrees that nothing set forth in this Agreement shall be construed to create any explicit or implied restriction or other limitation on the ability of any Group to engage in any business or other activity that overlaps or competes with the business of the other Group, including investing in, owning, managing, redeveloping and developing apartment communities. Except as expressly provided herein, or in the Ancillary Agreements, each Group shall have the right to, and shall have no duty to abstain from exercising such right to, (i) engage or invest, directly or indirectly, in the same, similar or related business activities or lines of business as the other Group, (ii) make investments in the same or similar types of investments as the other Group, (iii) do business with any client, customer, vendor or lessor of any of the other Group or (iv) employ or otherwise engage any officer, director or employee of the other Group. Neither Party or Group, nor any officer or director thereof, shall be liable to the other Party or Group or its stockholders for breach of any fiduciary duty by reason of any such activities of such Party or Group or of any such Person’s participation therein.

(b)    Except as DevCo and each other member of the DevCo Group, on the one hand, and SpinCo and each other member of the SpinCo Group, on the other hand, may otherwise agree in writing, including the Ancillary Agreements, the Parties hereby acknowledge and agree that if any Person that is a member of a Group, including any officer or director thereof, acquires knowledge of a potential transaction or matter that may be a corporate opportunity for either or both Groups, neither the other Group nor its stockholders shall have an interest in, or expectation that, such corporate opportunity be offered to it or that it be offered an opportunity to participate therein, and any such interest, expectation, offer or opportunity to participate, and any other interest or expectation otherwise due to such Group with respect to such corporate opportunity, is hereby renounced by such Group on its behalf and on behalf of its stockholders. Accordingly, subject to Section 7.2(c) below, (i) neither Group nor any officer or director thereof will be under any obligation to present, communicate or offer any such corporate opportunity to the other Group and (ii) each Group has the right to hold any such corporate opportunity for its own account, or to direct, recommend, sell, assign or otherwise transfer such corporate opportunity to any Person or Persons other than the other Group, and, to the fullest extent permitted by Law, neither Group nor the officers or directors thereof shall have or be under any fiduciary duty, duty of loyalty or duty to act in good faith or in the best interests of the other Group and its stockholders and shall not be liable to the other Group and its stockholders for any breach or alleged breach thereof or for any derivation of personal economic gain by reason of the fact that such Group or any of its officers or directors pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to another Person, or such Group and its officers or directors does not present, offer or communicate information regarding the corporate opportunity to the other Group.

(c)    Except as DevCo and each other member of the DevCo Group, on the one hand, and SpinCo and each other member of the SpinCo Group, on the other hand, may

 

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otherwise agree in writing, including the Ancillary Agreements, the Parties hereby acknowledge and agree that in the event that a director or officer of either Group who is also a director or officer of the other Group acquires knowledge of a potential transaction or matter that may be a corporate opportunity or is offered a corporate opportunity, if (i) such Person acts in good faith and (ii) such knowledge of such potential transaction or matter was not obtained solely in connection with, or such corporate opportunity was not offered to such Person solely in, such Person’s capacity as director or officer of either Group, then (A) such director or officer, to the fullest extent permitted by Law, (1) shall be deemed to have fully satisfied and fulfilled such Person’s fiduciary duty to each Group and their stockholders with respect to such corporate opportunity, (2) shall not have or be under any fiduciary duty to either Group or their stockholders and shall not be liable to either Group or their stockholders for any breach or alleged breach thereof by reason of the fact that the other Group pursues or acquires the corporate opportunity for itself, or directs, recommends, sells, assigns or otherwise transfers the corporate opportunity to another Person, or either Group or such director or officer does not present, offer or communicate information regarding the corporate opportunity to the other Group, (3) shall be deemed to have acted in good faith and in a manner such Person reasonably believes to be in, and not opposed to, the best interests of each Group and its stockholders and (4) shall not have any duty of loyalty to the other Group and its stockholders or any duty not to derive any personal benefit therefrom and shall not be liable to the other Group or its stockholders for any breach or alleged breach thereof and (B) such potential transaction or matter that may be a corporate opportunity, or the corporate opportunity, shall belong to the applicable Group (and not to the other Group).

For the purposes of this Section 7.2, “corporate opportunities” of a Group shall include business opportunities that members of such Group are financially able to undertake, that are, by their nature, in a line of business of such Group, are of practical advantage to it and are ones in which any member of the Group has an interest or a reasonable expectancy, and in which, by embracing the opportunities, the self-interest of a Person or any of its officers or directors will be brought into conflict with that of such Group.

Section 7.3    Legal Names and Other Parties’ Trademarks.

(a)    Except as otherwise specifically provided in any Ancillary Agreement, as soon as reasonably practicable after the Distribution Date, but in any event within twelve (12) months thereafter, SpinCo shall change (and shall cause all of the other members of the SpinCo Group to change) its name and cause its certificate of incorporation (or equivalent organization documents) and any d/b/a, as applicable, to be amended to remove any reference to “AIMCO” and “Apartment Investment and Management Company”. Except as otherwise specifically provided in any Ancillary Agreement, as soon as reasonably practicable after the Distribution Date, but in any event within twelve (12) months thereafter, each Party shall cease (and shall cause all of the other members of its Group to cease): (i) making any use of any Trademarks that include (A) any of the Trademarks of the other Party or such other Party’s Affiliates, including, with respect to the SpinCo Group’s cessation of the use of Trademarks, “AIMCO”, “Apartment Investment and Management Company” or any other Trademark comprising or containing “AIMCO” and “Apartment Investment and Management Company” (B) any Trademarks confusingly similar thereto or dilutive thereof (with respect to each Party, such Trademarks of the other Party or any of such other Party’s Affiliates, the “Other Party Marks”), and (ii) holding

 

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themselves out as having any affiliation with the other Party or such other Party’s Affiliates; provided, however, that the foregoing shall not prohibit any Party or any member of a Party’s Group from (1) in the case of any member of the SpinCo Group, making factual and accurate reference in a non-prominent manner that it was formerly affiliated with DevCo or in the case of any member of the DevCo Group, making factual and accurate reference in a non-prominent manner that it was formerly affiliated with SpinCo, (2) making use of any Other Party Mark in a manner that would constitute “fair use” under applicable Law if any unaffiliated third party made such use or would otherwise be legally permissible for any unaffiliated third party without the consent of the Party owning such Other Party Mark, and (3) making references in internal historical and tax records. In furtherance of the foregoing, as soon as practicable, but in no event later than twelve (12) months following the Distribution Date, each Party shall (and cause all of the other members of its Group to) remove, strike over or otherwise obliterate all Other Party Marks from all of such Party’s and its Affiliates’ assets and other materials, including any vehicles, business cards, schedules, stationery, packaging materials, displays, signs, promotional materials, manuals, forms, websites, email, computer software and other materials and systems, to the extent publicly distributed or observable. Each Party hereby grants the other Party a non-exclusive, non-sublicensable, non-transferable license under its Trademarks to use such Trademarks solely as and for so long as permitted pursuant to the foregoing in this Section 7.3; provided that any use by any Party or any of such Party’s Affiliates of any of the Other Party Marks as permitted in this Section 7.3 is subject to their compliance with all quality control standards and related requirements and guidelines in effect for such Other Party Marks as of the Effective Time. Neither Party’s Group shall use the Other Party Marks in a manner that may reflect negatively on such Trademarks or on the other Party or its Group.

(b)    Notwithstanding the foregoing requirements of Section 7.3(a), if any Party or any member of such Party’s Group used reasonable efforts to comply with Section 7.3(a) but is unable, due to regulatory or other circumstance beyond its control, to effect a legal name change in compliance with applicable Law such that an Other Party Mark remains in such Party’s or its Group member’s legal name, then such Party or its relevant Group member will not be deemed to be in breach hereof as long as it continues to use reasonable efforts to effectuate such name change and does effectuate such name change within twelve (12) months after the Distribution Date, and, in such circumstances, such Party or Group member may continue to use such Other Party Mark that is in such Party’s or Group member’s legal name, but only to the extent necessary to identify such Party or Group member and only until such Party’s or Group member’s legal name can be changed to remove and eliminate such references.

(c)    Notwithstanding the foregoing requirements of Section 7.3(a), SpinCo and SpinCo OP shall not be required to change any name including the word “AIMCO” in any third-party contract or license, or in property records with respect to real or personal property, if an effort to change the name is commercially unreasonable; provided, however, that (i) SpinCo and SpinCo OP on a prospective basis from and after the Distribution Date shall change the name in any new or amended third-party contract or license or property record and (ii) SpinCo shall not advertise or make public any continued use of the “AIMCO” name permitted by this Section 7.3(c).

Section 7.4    Preferred Stock Sale. Immediately after the Effective Time and in accordance with the terms of the Preferred Stock Sale Agreement, the applicable members of the SpinCo Group and the DevCo Group shall cooperate and take any and all actions necessary to effect the Preferred Stock Sale.

 

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ARTICLE VIII

ACCESS TO INFORMATION; CONFIDENTIALITY; PRIVILEGE

Section 8.1    Agreement for Exchange of Information.

(a)    Subject to Section 8.1(b) and Section 8.8(f), for a period of seven (7) years (the “Access Period”) following the Distribution Date, as soon as reasonably practicable after written request (and using reasonable efforts to do so within five (5) Business Days): (i) DevCo and DevCop OP shall afford to any member of the SpinCo Group and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at the SpinCo Group’s expense, provide copies of, all books, records, Contracts, instruments, data, documents and other information in the possession or under the control of any member of the DevCo Group immediately following the Distribution Date that relates to any member of the SpinCo Group or the SpinCo Business, and (ii) SpinCo shall afford to any member of the DevCo Group and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at the DevCo Group’s expense, provide copies of, all books, records, Contracts, instruments, data, documents and other information in the possession or under the control of any member of the SpinCo Group immediately following the Distribution Date that relates to any member of the DevCo Group or the DevCo Business; provided, however, that in the event that SpinCo or SpinCo OP, or DevCo or DevCo OP, as applicable, determine that any such provision of or access to any information in response to a request under this Section 8.1(a) would be commercially detrimental in any material respect, violate any Law or agreement or waive any attorney-client privilege, the work product doctrine or other applicable privilege, the Parties shall take all reasonable measures to permit compliance with such request in a manner that avoids any such harm or consequence; provided, further, that to the extent specific information-sharing or knowledge-sharing provisions are contained in any of the Ancillary Agreements, such other provisions (and not this Section 8.1(a)) shall govern; provided, further, that the Access Period shall be extended with respect to requests (including requests for information subject to a legal hold) related to any third-party litigation or other dispute filed prior to the end of the Access Period until such litigation or dispute is finally resolved.

(b)    A request for information under Section 8.1(a) may be made: (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities Laws) by a Governmental Authority having jurisdiction over such requesting party, (ii) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, claims defense, regulatory filings, litigation or other similar requirements (other than in connection with any action, suit or proceeding in which any member of a Group is adverse to any member of the other Group), (iii) for use in compensation, benefit or welfare plan administration or other bona fide business purposes, or (iv) to comply with any obligations under this Agreement or any Ancillary Agreement.

 

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(c)    Without limiting the generality of Section 8.1(a), until the end of the first full fiscal year following the Distribution Date (and for a reasonable period of time thereafter as required for any party to prepare consolidated financial statements or complete a financial statement audit for the fiscal year during which the Distribution Date occurs), SpinCo and SpinCo OP shall use its reasonable efforts to cooperate with any requests from any member of the DevCo Group pursuant to Section 8.1(a), and DevCo and DevCo OP shall use its reasonable efforts to cooperate with any requests from any member of the SpinCo Group pursuant to Section 8.1(a), in each case, to enable the requesting party to meet its timetable for dissemination of its earnings releases and financial statements and to enable such requesting party’s auditors to timely complete their audit of the annual financial statements and review of the quarterly financial statements.

Section 8.2    Ownership of Information. Any information owned by any Person that is provided pursuant to Section 8.1(a) shall be deemed to remain the property of the providing Person. Unless specifically set forth herein, nothing contained in this Agreement shall be construed to grant or confer rights of license or otherwise to the requesting Person with respect to any such information.

Section 8.3    Compensation for Providing Information. A Person requesting information pursuant to Section 8.1(a) agrees to reimburse the providing Person for the reasonable expenses, if any, of gathering and copying such information, to the extent that such expenses are incurred for the benefit of the requesting Person.

Section 8.4    Retention of Records. To facilitate the exchange of information pursuant to this Article VIII after the Distribution Date, for a period of seven (7) years (or such longer period as may be applicable for particular categories of information under the policies and procedures of DevCo as in effect on the Distribution Date (as if the members of each Group were treated as Affiliates) following the Distribution Date, except as otherwise required (whether pursuant to Law, court order, legal hold or otherwise) or agreed in writing, the Parties agree to use reasonable efforts to retain, or cause to be retained, all information in the possession or control of them or any member of their Group on the Distribution Date in accordance with the policies and procedures of DevCo as in effect on the Distribution Date.

Section 8.5    Limitation of Liability. No Person required to provide information under this Article VIII shall have any Liability (a) if any historical information provided pursuant to this Article VIII is found to be inaccurate, in the absence of gross negligence or willful misconduct by such Person, or (b) if any information is lost or destroyed despite using reasonable efforts to comply with the provisions of Section 8.4.

Section 8.6    Production of Witnesses. At all times from and after the Distribution Date, upon reasonable request:

(a)    Each of SpinCo and SpinCo OP shall use reasonable efforts to make available, or cause to be made available, to any member of the DevCo Group, the directors, officers, employees, managers, trustees, and agents of any member of the SpinCo Group as witnesses to the extent that the same may reasonably be required by the requesting party (giving consideration to business demands of such directors, officers, employees, managers, trustees, and

 

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agents) in connection with any legal, administrative or other proceeding in which the requesting party may from time to time be involved, except in the case of any action, suit or proceeding in which any member of the SpinCo Group is adverse to any member of the DevCo Group; and

(b)    Each of DevCo and DevCo OP shall use reasonable efforts to make available, or cause to be made available, to any member of the SpinCo Group, the directors, officers, employees, managers, trustees, and agents of any member of the DevCo Group as witnesses to the extent that the same may reasonably be required by the requesting party (giving consideration to business demands of such directors, officers, employees, managers, trustees, and agents) in connection with any legal, administrative or other proceeding in which the requesting party may from time to time be involved, except in the case of any action, suit or proceeding in which any member of the DevCo Group is adverse to any member of the SpinCo Group.

(c)    The requesting Party shall bear all costs and expenses therewith.

Section 8.7    Confidentiality.

(a)    SpinCo (on behalf of itself and each other member of its Group), SpinCo OP, DevCo (on behalf of itself and each other member of its Group), and DevCo OP shall hold, and shall cause each of their respective Affiliates to hold, and each of the foregoing shall cause their respective directors, officers, employees, agents, consultants, managers, trustees, and advisors (“Representatives”) to hold, in strict confidence, and not disclose or release or use, without the prior written consent of such member of the other Group, for any purpose other than as expressly permitted pursuant to this Agreement or the Ancillary Agreements, any and all Confidential Information concerning any member of the other Group; provided that each Party and the members of its Group may disclose, or may permit disclosure of, such Confidential Information (i) to other members of their Group and their respective Representatives, auditors, attorneys, financial advisors, and bankers who have a need to know such information for purposes of performing services for a member of such Group and who are informed of their obligation to hold such information confidential to the same extent as is applicable to the Parties and in respect of whose failure to comply with such obligations, such Party will be responsible, (ii) if it or any of its Affiliates are required or compelled to disclose any such Confidential Information by judicial or administrative process or by other requirements of Law or stock exchange rule, or (iii) as necessary in order to permit such Party to prepare and disclose its financial statements, and in connection with any other disclosures required by Law or such applicable stock exchange. Notwithstanding the foregoing, in the event that any demand or request for disclosure of Confidential Information is made pursuant to the foregoing clause (ii) above, the Party requested to disclose Confidential Information concerning a member of the other Group, shall promptly notify such member of the other Group of the existence of such request or demand and, to the extent commercially practicable, shall provide such member of the other Group thirty (30) days (or such lesser period as is commercially practicable) to seek an appropriate protective order or other remedy, which the Parties will cooperate in obtaining. In the event that such appropriate protective order or other remedy is not obtained, the Party that is required to disclose Confidential Information about a member of the other Group shall furnish, or cause to be furnished, only that portion of the Confidential Information that is legally required to be disclosed and shall use reasonable efforts to ensure that confidential treatment is accorded such information.

 

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(b)    Notwithstanding anything to the contrary set forth herein, the Parties shall be deemed to have satisfied their obligations hereunder with respect to Confidential Information of any member of the other Group if they exercise the same degree of care (but no less than a reasonable degree of care) as they exercise to preserve confidentiality for their own similar Confidential Information.

(c)    Upon the written request of a Party or a member of its Group, the other Party shall take, and shall cause the applicable members of such other Party’s Group to take, reasonable steps to promptly destroy any copies of such Confidential Information (including any extracts therefrom), unless such delivery or destruction would violate any Law; provided that (i) the other Party shall not be obligated to destroy Confidential Information that is required by or relates to such other Party’s business or the business of any member of such other Party’s Group, (ii) such other Party’s legal department and/or outside counsel may keep one copy of the Confidential Information (in electronic or paper form) and (iii) with respect to such other Party’s Representatives who are accounting firms, brokers, securities firms or financial institutions, such firms may keep a copy or copies of the Confidential Information if required by policies and procedures implemented by such accounting firms, brokers, securities firms or financial institutions in order to comply with applicable Law, professional standards or bona fide document retention policy. In addition, the other Party and its Representatives may retain Confidential Information to the extent it is “backed-up” on its or their (as the case may be) electronic information management and communications systems or servers, so long as it is not available to an end user without the use of procedures for which end users are not typically trained, and cannot be expunged without considerable effort. Upon the written request of the requesting Person, the other Party shall, or shall cause another member of its Group to cause, its duly authorized officers to certify in writing to the requesting party that the requirements of the preceding sentence have been satisfied in full.

Section 8.8    Privileged Matters.

(a)    Pre-Distribution Services. The Parties recognize that legal and other professional services that have been and will be provided prior to the Effective Time have been and will be rendered for the collective benefit of each of the members of the DevCo Group and the SpinCo Group, and that each of the members of the DevCo Group and the SpinCo Group should be deemed to be the client with respect to such pre-Distribution services for the purposes of asserting all privileges that may be asserted under applicable Law.

(b)    Post-Distribution Services. The Parties recognize that legal and other professional services will be provided following the Effective Time that will be rendered solely for the benefit of the SpinCo Group or the DevCo Group, as the case may be. With respect to such post-Distribution services, the Parties agree as follows:

(i)    DevCo shall be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the DevCo Business, whether or not the privileged information is in the possession of or under the control of DevCo or SpinCo. DevCo shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the subject matter of any claims constituting DevCo Liabilities, now

 

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pending or which may be asserted in the future, in any lawsuits or other proceedings initiated by or against any member of the DevCo Group, whether or not the privileged information is in the possession of or under the control of DevCo or SpinCo; and

(ii)    SpinCo shall be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the SpinCo Business, whether or not the privileged information is in the possession of or under the control of DevCo or SpinCo. SpinCo shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the subject matter of any claims constituting SpinCo Liabilities, now pending or which may be asserted in the future, in any lawsuits or other proceedings initiated by or against any member of the SpinCo Group, whether or not the privileged information is in the possession of or under the control of DevCo or SpinCo.

(c)    The Parties agree that they shall have a shared privilege, with equal right to assert or waive, subject to the restrictions in this Section 8.8, with respect to all privileges not allocated pursuant to the terms of Section 8.8(b). Except as provided in Section 8.8(d), SpinCo and SpinCo OP may not waive, and shall cause each other member of the SpinCo Group not to waive, any privilege that could be asserted by a member of the DevCo Group under any applicable Law, and in which a member of the DevCo Group has a shared privilege, without the consent of DevCo, which consent shall not be unreasonably withheld, conditioned or delayed. Except as provided in Section 8.8(d), DevCo and DevCo OP may not waive, and shall cause each other member of the DevCo Group not to waive, any privilege that could be asserted by a member of the SpinCo Group under any applicable Law, and in which a member of the SpinCo Group has a shared privilege, without the consent of SpinCo, which consent shall not be unreasonably withheld, conditioned or delayed. If a dispute arises between or among SpinCo and DevCo, or any members of their respective Groups, regarding whether a privilege should be waived to protect or advance the interest of a Party, each Party agrees that it shall endeavor to minimize any prejudice to the rights of such other Party and shall not unreasonably withhold consent to any request for waiver by such Party. Each Party agrees that it will not withhold consent to waiver for any purpose except to protect its own legitimate interests or the legitimate interests of any other member of its Group.

(d)    Notwithstanding any of the other provisions of this Section 8.8, to the fullest extent permitted by Law, in the event of any litigation or dispute between or among the Parties and/or any members of their respective Groups, any Party or any members of the Party’s respective Group may waive a privilege which it shares with another Party or any member of the other Group, without obtaining the consent from the other Party or the other member(s) of a Party’s Group which shares the privilege; provided that such waiver of a shared privilege shall be effective only as to the use of information by the relevant Parties and/or the applicable members of their respective Groups in such litigation or dispute, and shall not operate as a waiver of the shared privilege with respect to any proceedings, disputes, or other matters involving third parties or with respect to any other actions. In the event of any such waiver, the Parties and the members of their respective Groups shall take all reasonable measures to ensure the confidentiality of the privileged information that is the subject of such waiver, including, as necessary, making any applications to an arbitral tribunal or court of law, as applicable, to preserve the confidentiality of such information; and any such privileged information shall

 

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otherwise be held confidential by the Parties and the members of their respective Groups and shall not be publicly disclosed. For the avoidance of doubt, this Section 8.8(d) provides the only circumstances, and the only conditions, under which a Party or a member of its respective Group may unilaterally waive any shared applicable legal privilege.

(e)    Upon receipt by either Party, or by any member of its Group, of any subpoena, discovery or other request which requires the production or disclosure of information which such Party knows is subject to a shared privilege or as to which a member of the other Group has the sole right hereunder to assert or waive a privilege, or if either Party obtains knowledge that any of its or any other member of its Group’s current or former directors, officers, agents, managers, trustees, or employees have received any subpoena, discovery or other requests which requires the production or disclosure of such privileged information, such Party shall promptly notify the other Party of the existence of the request and shall provide the other Party a reasonable opportunity to review the information and to assert any rights it or they may have under this Section 8.8 or otherwise to prevent the production or disclosure of such privileged information.

(f)    The access to information being granted pursuant to Section 8.1, the agreement to provide witnesses and individuals pursuant to Section 8.6 hereof, and the transfer of privileged information between and among the Parties and the members of their respective Groups pursuant to this Agreement shall not be deemed a waiver of any privilege that has been or may be asserted under this Agreement, any of the Ancillary Agreements or otherwise.

Section 8.9    Financial Information Certifications. The Parties agree to cooperate with each other in such manner as is necessary to enable the principal executive officer or officers, principal financial officer or officers and controller or controllers of each of the Parties to make the certifications required of them under Sections 302, 404 and 906 of the Sarbanes-Oxley Act of 2002.

ARTICLE IX

MUTUAL RELEASES; INDEMNIFICATION

Section 9.1    Release of Pre-Distribution Claims.

(a)    Except as provided in Section 9.1(d), effective as of the Effective Time, SpinCo does hereby, for itself and each other member of the SpinCo Group, release and forever discharge each DevCo Indemnitee, from any and all Liabilities whatsoever to any member of the SpinCo Group, whether at law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the Transactions.

(b)    Except as provided in Section 9.1(d), effective as of the Effective Time, DevCo does hereby, for itself and each other member of the DevCo Group, release and forever discharge each SpinCo Indemnitee from any and all Liabilities whatsoever to any member of the

 

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DevCo Group, whether at law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the Transactions.

(c)    Each Party is deemed expressly to, and each Party hereby expressly acknowledges and agrees that it does, understand provisions and principles of law such as Section 1542 of the Civil Code of the State of California (as well as any and all provisions, rights and benefits conferred by any Law of any state or territory of the United States, or principle of common law, which is similar or comparable to Section 1542), which Section provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR. The releases in Section 9.1(a) and Section 9.1(b) include a release of any rights and benefits with respect to such Liabilities that each Party and each member of such Party’s Group, and its successors and assigns, now has or in the future may have conferred upon them by virtue of any statute or common law principle which provides that a general release does not extend to claims which a Party does not know or suspect to exist in its favor at the time of executing the release, if knowledge of such claims would have affected such Party’s settlement with the obligor. Each Party hereby expressly understands and acknowledges that it is aware that factual matters now unknown to it may have given or may hereafter give rise to Liabilities that are presently unknown, unanticipated and unsuspected and that present losses may have been underestimated in amount, severity, or both, and further expressly agrees that this release has been negotiated and agreed upon in light of that understanding and awareness and each such Party nevertheless hereby intends to release the Persons described in Section 9.1(a) and Section 9.1(b) from the Liabilities described in Section 9.1(a) and Section 9.1(b), respectively.

(d)    Nothing contained in Section 9.1(a) or Section 9.1(b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in, or contemplated to continue pursuant to, this Agreement or any Ancillary Agreement. Without limiting the foregoing, nothing contained in Section 9.1(a) or Section 9.1(b) shall release any Person from:

(i)    any Liability, contingent or otherwise, assumed by, or allocated to, such Person in accordance with this Agreement or any Ancillary Agreement;

(ii)    any Liability that such Person may have with respect to indemnification or contribution pursuant to this Agreement or any Ancillary Agreement for claims brought by third Persons, which Liability shall be governed by the provisions of this Article IX and, if applicable, the appropriate provisions of the Ancillary Agreements;

(iii)    any unpaid accounts payable or receivable arising from or relating to the sale, provision, or receipt of goods, payment for goods, property or services purchased, obtained or used in the ordinary course of business by any member of the DevCo Group from any member of the SpinCo Group, or by any member of the SpinCo Group from any member of the DevCo Group from and after the Effective Time; or

 

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(iv)    any Liability the release of which would result in the release of any Person other than an Indemnitee; provided that the Parties agree not to bring suit, or permit any other member of their respective Group to bring suit, against any Indemnitee with respect to such Liability.

(e)    SpinCo shall not make, and shall not permit any other member of the SpinCo Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against any DevCo Indemnitee with respect to any Liabilities released pursuant to Section 9.1(a). DevCo shall not make, and shall not permit any member of the DevCo Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against any SpinCo Indemnitee with respect to any Liabilities released pursuant to Section 9.1(b).

Section 9.2    Indemnification by SpinCo. Except as provided in Section 9.4 and Section 9.5, SpinCo OP shall, and, in the case of Section 9.2(a) or Section 9.2(b), shall in addition cause each Appropriate Member of the SpinCo Group to, indemnify, defend and hold harmless, the DevCo Indemnitees from and against any and all Losses of the DevCo Indemnitees relating to, arising out of or resulting from any of the following (without duplication):

(a)    any SpinCo Liability (other than any SpinCo Tax Liability, which are addressed in Article XI), including the failure of any member of the SpinCo Group or any other Person to pay, perform or otherwise promptly discharge any SpinCo Liabilities (other than any SpinCo Tax Liability, which Liabilities are addressed in Article XI) in accordance with their respective terms, whether prior to, at or after the Effective Time;

(b)    any breach by any member of the SpinCo Group of any provision of this Agreement or of any of the Ancillary Agreements (other than the Commercial Agreements), subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and

(c)    any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to information contained or incorporated by reference in the Registration Statements, the DevCo OP Information Statement and the SpinCo Information Statement that relates solely to the SpinCo Business;

in each case, without regard to when or where the loss, claim, accident, occurrence, event or happening giving rise to the Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the Loss existed prior to, on or after the Effective Time or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after the Effective Time. As used in this Section 9.2, “Appropriate Member of the SpinCo

 

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Group” means the member or members of the SpinCo Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

Section 9.3    Indemnification by DevCo. Except as provided in Section 9.4 and Section 9.5, DevCo OP shall, and, in the case of Section 9.3(a) or Section 9.3(b), shall in addition cause each Appropriate Member of the DevCo Group to, indemnify, defend and hold harmless the SpinCo Indemnitees from and against any and all Losses of the SpinCo Indemnitees relating to, arising out of or resulting from any of the following (without duplication):

(a)    any DevCo Liability (other than any DevCo Tax Liability, which are addressed in Article XI), including the failure of any member of the DevCo Group or any other Person to pay, perform or otherwise promptly discharge any DevCo Liabilities(other than any SpinCo Tax Liability, which are addressed in Article XI) in accordance with their respective terms, whether prior to, at or after the Effective Time;

(b)    any breach by any member of the DevCo Group of any provision of this Agreement or of any of the Ancillary Agreements (other than the Commercial Agreements), subject to any limitations of liability provisions and other provisions applicable to any such breach set forth therein; and

(c)    any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained or incorporated by reference in the Registration Statements, the DevCo OP Information Statement and the SpinCo Information Statement, other than information that relates solely to the DevCo Business;

in each case, without regard to when or where the loss, claim, accident, occurrence, event or happening giving rise to the Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the Loss existed prior to, on or after the Effective Time or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after the Effective Time. As used in this Section 9.3, “Appropriate Member of the DevCo Group” means the member or members of the DevCo Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

Section 9.4    Procedures for Indemnification.

(a)    An Indemnitee shall give notice of any matter that such Indemnitee has determined has given or would reasonably be expected to give rise to a right of indemnification under this Agreement or any Ancillary Agreement (other than the Commercial Agreements) (other than a Third-Party Claim which shall be governed by Section 9.4(b)) to any Party that is or may be required pursuant to this Agreement or any Ancillary Agreement to make such indemnification (the “Indemnifying Party”) promptly (and in any event within fifteen (15) days)

 

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after making such a determination. Such notice shall state the amount of the Loss claimed, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement or the applicable Ancillary Agreement in respect of which such right of indemnification is claimed by such Indemnitee; provided, however, that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations except and solely to the extent the Indemnifying Party shall have been materially prejudiced as a result of such failure.

(b)    If a claim or demand is made against an Indemnitee by any Person who is not a Party to this Agreement or an Affiliate of a Party (a “Third-Party Claim”) as to which such Indemnitee is or reasonably expects to be entitled to indemnification pursuant to this Agreement, such Indemnitee shall notify the Indemnifying Party in writing, and in reasonable detail, of the Third-Party Claim promptly (and in any event within thirty (30) days) after receipt by such Indemnitee of written notice of the Third-Party Claim; provided, however, that the failure to provide notice of any such Third-Party Claim pursuant to this sentence shall not release the Indemnifying Party from any of its obligations except and solely to the extent the Indemnifying Party shall have been materially prejudiced as a result of such failure (except that the Indemnifying Party or Parties shall not be liable for any expenses incurred by the Indemnitee in defending such Third-Party Claim during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event within ten (10) days) after the Indemnitee’s receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third-Party Claim.

(c)    An Indemnifying Party shall be entitled (but shall not be required) to assume, control the defense of, and settle any Third-Party Claim, at such Indemnifying Party’s own cost and expense and by such Indemnifying Party’s own counsel, which counsel must be reasonably acceptable to the Indemnitee, if it gives written notice of its intention to do so (including a statement that the Indemnitee is entitled to indemnification under this Article IX) to the applicable Indemnitees within thirty (30) days of the receipt of notice from such Indemnitees of the Third-Party Claim (failure of the Indemnifying Party to respond within such thirty (30) day period shall be deemed to be an election by the Indemnifying Party not to assume the defense for such Third-Party Claim). After a notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third-Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise or settlement thereof, at its own expense and, in any event, shall reasonably cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party all witnesses and information in such Indemnitee’s possession or under such Indemnitee’s control relating thereto as are reasonably required by the Indemnifying Party; provided, however, that such access shall not require the Indemnitee to disclose any information the disclosure of which would, in the good faith judgment of the Indemnitee, result in the loss of any existing privilege with respect to such information or violate any applicable Law.

(d)    Notwithstanding anything to the contrary in this Section 9.4, in the event that (i) an Indemnifying Party elects not to assume the defense of a Third-Party Claim, (ii) there exists a conflict of interest or potential conflict of interest between the Indemnifying Party and the Indemnitee, (iii) any Third-Party Claim seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnitee, (iv) the Indemnitee’s exposure to

 

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Liability in connection with such Third-Party Claim is reasonably expected to exceed the Indemnifying Party’s exposure in respect of such Third-Party Claim taking into account the indemnification obligations hereunder, or (v) the Person making such Third-Party Claim is a Governmental Authority with regulatory authority over the Indemnitee or any of its material Assets, such Indemnitee shall be entitled to control the defense of such Third-Party Claim, at the Indemnifying Party’s expense, with counsel of such Indemnitee’s choosing (such counsel to be reasonably acceptable to the Indemnifying Party). If the Indemnitee is conducting the defense against any such Third-Party Claim, the Indemnifying Party shall reasonably cooperate with the Indemnitee in such defense and make available to the Indemnitee all witnesses and information in such Indemnifying Party’s possession or under such Indemnifying Party’s control relating thereto as are reasonably required by the Indemnitee; provided, however, that such access shall not require the Indemnifying Party to disclose any information the disclosure of which would, in the good faith judgment of the Indemnifying Party, result in the loss of any existing privilege with respect to such information or violate any applicable Law.

(e)    Unless the Indemnifying Party has failed to assume the defense of the Third-Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third-Party Claim without the consent of the Indemnifying Party (not to be unreasonably withheld, conditioned or delayed). If an Indemnifying Party has failed to assume the defense of the Third-Party Claim, it shall not be a defense to any obligation to pay any amount in respect of such Third-Party Claim that the Indemnifying Party was not consulted in the defense thereof, that such Indemnifying Party’s views or opinions as to the conduct of such defense were not accepted or adopted, that such Indemnifying Party does not approve of the quality or manner of the defense thereof or that such Third-Party Claim was incurred by reason of a settlement rather than by a judgment or other determination of liability.

(f)    In the case of a Third-Party Claim, no Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third-Party Claim without the consent (not to be unreasonably withheld, conditioned or delayed) of the Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other non-monetary relief to be entered, directly or indirectly, against any Indemnitee, does not release the Indemnitee from all liabilities and obligations with respect to such Third-Party Claim or includes an admission of guilt or liability on behalf of the Indemnitee.

(g)    Absent fraud or intentional misconduct by an Indemnifying Party, the indemnification provisions of this Article IX shall be the sole and exclusive remedy of an Indemnitee for any monetary or compensatory damages or Losses resulting from any breach of this Agreement or any Ancillary Agreement, and each Indemnitee expressly waives and relinquishes any and all rights, claims or remedies such Person may have with respect to the foregoing other than under this Article IX against any Indemnifying Party.

 

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(h)    Certain Tax Consequences.

(i)    Notwithstanding anything to the contrary in this Agreement, in the event that counsel or independent accountants for a Protected REIT determine that there exists a material risk that any indemnification payments due under this Agreement or under any Ancillary Agreement would be treated as Nonqualifying Income upon the payment of such amounts to the relevant Indemnitee, the amount paid to the Indemnitee pursuant to this Agreement in any tax year shall not exceed the maximum amount that can be paid to the Indemnitee in such year without causing the Protected REIT to fail to meet the REIT Requirements for any tax year, determined as if the payment of such amount were Nonqualifying Income as determined by such counsel or independent accountants to the Protected REIT and taking into account any other payments to the Indemnitee (and any other relevant entity, including the Protected REIT) during such tax year that do not constitute Qualifying Income, which determination shall be (i) made by independent accountants to the Indemnitee and (ii) submitted to and approved by the Indemnitee’s outside tax counsel.

(ii)    If the amount that an Indemnifying Party would otherwise be obligated to pay to the relevant Indemnitee for any tax year pursuant to this Agreement exceeds the amount payable for such tax year to such Indemnitee pursuant to the preceding sentence (such excess, the “Expense Amount”), then:

(A)    The Indemnifying Party shall place the Expense Amount into an escrow account (the “Escrow Account”) using an escrow agent and agreement reasonably acceptable to the Indemnitee and shall not release any portion thereof to the Indemnitee, and the Indemnitee shall not be entitled to any such amount, unless and until the Indemnitee delivers to the Indemnifying Party, at the sole option of the relevant Protected REIT, (i) an opinion (an “Expense Amount Tax Opinion”) of the Protected REIT’s tax counsel to the effect that such amount, if and to the extent paid, would not constitute Nonqualifying Income, (ii) a letter (an “Expense Amount Accountant’s Letter”) from the Protected REIT’s independent accountants indicating the maximum amount that can be paid at that time to the Indemnitee without causing the Protected REIT to fail to meet the REIT Requirements for any relevant taxable year, or (iii) a private letter ruling issued by the IRS to the Protected REIT indicating that the receipt of any Expense Amount hereunder will not cause the Protected REIT to fail to satisfy the REIT Requirements (a “REIT Qualification Ruling” and, collectively with an Expense Amount Tax Opinion and an Expense Amount Accountant’s Letter, a “Release Document”). The escrow agreement shall also provide that (x) the amount in the Escrow Account shall be treated as the property of the Indemnifying Party or the applicable Affiliate of the Indemnifying Party, unless it is released from such Escrow Account to the Indemnitee, (y) all income earned upon the amount in the Escrow Account shall be treated as the property of the Indemnifying Party or the applicable Affiliate of the Indemnifying Party and reported, as and to the extent required by applicable Law, by the escrow agent to the IRS, or any other taxing authority, on IRS Form 1099 or 1042S (or other appropriate form) as income earned by the Indemnifying Party or the applicable Affiliate of the Indemnifying

 

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Party whether or not said income has been distributed during such tax year, and (z) the amount in the Escrow Account shall be invested only as determined by the Indemnifying Party in its sole discretion;

(B)    Pending the delivery of a Release Document by the Indemnitee to the Indemnifying Party, the Indemnitee shall have the right, but not the obligation, to borrow the Expense Amount from the Escrow Account pursuant to a loan agreement reasonably acceptable to the Indemnitee that (i) requires the Indemnifying Party to lend the Indemnitee immediately available cash proceeds in an amount equal to the Expense Amount, and (ii) provides for (A) a reasonable interest rate and reasonable covenants, taking into account the credit standing and profile of the Indemnitee or any guarantor of the Indemnitee, including the Protected REIT, at the time of such loan, and (B) a fifteen (15) year maturity with no periodic amortization;

(C)    Any amount held in escrow pursuant to this Section 9.4 for five (5) years shall be released from such escrow to be used as determined by the Indemnifying Party in its sole and absolute discretion;

(D)    The Indemnitee shall bear all costs and expenses with respect to the escrow; and

(E)    The Indemnifying Party shall cooperate in good faith with the Indemnitee (including amending this Section 9.4(h) at the reasonable request of the Indemnitee) in order to (i) maximize the portion of the payments that may be made to the Indemnitee hereunder without causing the Protected REIT to fail to meet the REIT Requirements, (ii) improve the Indemnitee’s chances of securing a favorable REIT Qualification Ruling, or (iii) assist the Indemnitee in obtaining a favorable Expense Amount Tax Opinion or a favorable Expense Amount Accountant’s Letter. Such cooperation shall include, for example, agreeing to make payments hereunder to a taxable REIT subsidiary of the Indemnitee or an affiliate or designee of the Indemnitee. The Indemnitee shall reimburse the Indemnifying Party for all reasonable costs and expenses of such cooperation.

Section 9.5    Indemnification Obligations Net of Insurance Proceeds. The Parties intend that any Loss subject to indemnification or reimbursement pursuant to this Article IX (an “Indemnifiable Loss”) will be net of Insurance Proceeds that actually reduce the amount of the Loss. Accordingly, the amount which an Indemnifying Party is required to pay to any Indemnitee will be reduced by any Insurance Proceeds actually recovered by or on behalf of the Indemnitee in reduction of the related Loss. If an Indemnitee receives a payment (an “Indemnity Payment”) required by this Agreement from an Indemnifying Party in respect of any Loss and subsequently receives Insurance Proceeds, the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payments received over the amount of the Indemnity Payments that would have been due if the Insurance Proceeds recovery had been received, realized or recovered before the Indemnity Payments were made. The Indemnitee shall use and cause its Affiliates to use reasonable efforts to recover any Insurance Proceeds to which the Indemnitee is

 

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entitled with respect to any Indemnifiable Loss. The existence of a claim by an Indemnitee for insurance or against a third party in respect of any Indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained in this Article IX and otherwise determined to be due and owing by an Indemnifying Party; rather, the Indemnifying Party shall make payment in full of such amount so determined to be due and owing by it against a concurrent written assignment by the Indemnitee to the Indemnifying Party of the portion of the claim of the Indemnitee for such insurance or against such third party equal to the amount of such payment. The Indemnitee shall use and cause its Affiliates to use reasonable efforts to assist the Indemnifying Party in recovering or to recover on behalf of the Indemnifying Party, any Insurance Proceeds to which the Indemnifying Party is entitled with respect to any Indemnifiable Loss as a result of such assignment. The Indemnitee shall make available to the Indemnifying Party and its counsel all employees, books and records, communications, documents, items or matters within its knowledge, possession or control that are necessary, appropriate or reasonably deemed relevant by the Indemnifying Party with respect to the recovery of such Insurance Proceeds; provided, however, that nothing in this sentence shall be deemed to require a Party to make available books and records, communications, documents or items which (i) in such Party’s good faith judgment could result in a waiver of any privilege even if the Parties cooperated to protect such privilege as contemplated by this Agreement or (ii) such Party is not permitted to make available because of any Law or any confidentiality obligation to a third party, in which case such Party shall use reasonable efforts to seek a waiver of or other relief from such confidentiality restriction. Unless the Indemnifying Party has made payment in full of any Indemnifiable Loss, such Indemnifying Party shall use and cause its Affiliates to use reasonable efforts to recover any Insurance Proceeds to which it or such Affiliate is entitled with respect to any Indemnifiable Loss.

Section 9.6    Indemnification Obligations Net of Taxes. The Parties intend that any Indemnifiable Loss will be net of Taxes. Accordingly, the amount which an Indemnifying Party is required to pay to an Indemnitee will be adjusted to reflect any tax benefit to the Indemnitee from the underlying Loss and to reflect any Taxes imposed upon the Indemnitee as a result of the receipt of such payment. Such an adjustment will first be made at the time that the Indemnity Payment is made and will further be made, as appropriate, to take into account any change in the liability of the Indemnitee for Taxes that occurs in connection with the final resolution of an audit by a Taxing Authority. For purposes of this Section 9.6, the value of any tax benefit to the Indemnitee from the underlying Loss shall be an amount equal to the product of (a) the amount of any present or future deduction allowed or allowable to the Indemnitee by the Code, or other applicable Law, as a result of such Loss and (b) the highest statutory rate applicable under Section 11 of the Code, or other applicable Law. For all Tax purposes, DevCo and SpinCo agree to treat (i) any payment required by this Agreement (other than payments with respect to interest accruing after the Effective Time or payments required under any of the Commercial Agreements) as either a contribution by DevCo to SpinCo or a distribution by SpinCo to DevCo, as the case may be, occurring immediately prior to the Effective Time or as a payment of an assumed or retained Liability, and (ii) any payment of interest as taxable or deductible, as the case may be, to the party entitled under this Agreement to retain such payment or required under this Agreement to make such payment, in either case except as otherwise required by applicable Law.

 

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Section 9.7    Contribution. If the indemnification provided for in this Article IX is unavailable to an Indemnitee in respect of any Indemnifiable Loss, then the Indemnifying Party, in lieu of indemnifying such Indemnitee, shall contribute to the Losses paid or payable by such Indemnitee as a result of such Indemnifiable Loss in such proportion as is appropriate to reflect the relative fault of SpinCo and each other member of the SpinCo Group, on the one hand, and DevCo and each other member of the DevCo Group, on the other hand, in connection with the circumstances which resulted in such Indemnifiable Loss.

Section 9.8    Remedies Cumulative. The remedies provided in this Article IX shall be cumulative and, subject to the provisions of Article X, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.

Section 9.9    Survival of Indemnities. The rights and obligations of each of the Parties and their respective Indemnitees under this Article IX shall survive the Effective Time indefinitely, unless a specific survival or other applicable period is expressly set forth herein, and shall survive the sale or other transfer by any Party or any of its Subsidiaries of any Assets or businesses or the assignment by it of any Liabilities.

Section 9.10    Limitation of Liability. EXCEPT TO THE EXTENT SPECIFICALLY PROVIDED IN ANY ANCILLARY AGREEMENT, NEITHER DEVCO OR ANY MEMBER OF THE DEVCO GROUP, ON THE ONE HAND, NOR SPINCO OR ANY MEMBER OF THE SPINCO GROUP, ON THE OTHER HAND, SHALL BE LIABLE TO THE OTHER, WHETHER IN CONTRACT, IN TORT (INCLUDING NEGLIGENCE AND STRICT LIABILITY) OR OTHERWISE, FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL (INCLUDING LOST REVENUES OR PROFITS) (OTHER THAN CONSEQUENTIAL DAMAGES THAT ARE REASONABLY FORESEEABLE), PUNITIVE, EXEMPLARY, REMOTE, SPECULATIVE, SPECIAL, OR SIMILAR DAMAGES IN EXCESS OF COMPENSATORY DAMAGES OF THE OTHER ARISING IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY (OTHER THAN ANY SUCH LIABILITY WITH RESPECT TO A THIRD-PARTY CLAIM).

ARTICLE X

DISPUTE RESOLUTION

Section 10.1    Appointed Representative. On or before the Distribution Date, each Party shall appoint a representative who shall be responsible for administering the dispute resolution provisions in Section 10.2 (each, an “Appointed Representative”). Each Appointed Representative shall have the authority to resolve any Disputes on behalf of the Party appointing such representative.

Section 10.2    Negotiation and Dispute Resolution.

(a)    Any dispute, controversy or claim arising out of, in connection with, or in relation to the interpretation, performance, nonperformance, enforceability, validity, termination or breach of this Agreement or any Ancillary Agreement (other than the Commercial

 

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Agreements) or any of the Transactions, whether arising in contract or tort, between or among the Parties or any members of their respective Groups (each, a “Dispute” and, collectively, “Disputes”) shall first be referred by either Party or any of the members of their respective Groups for amicable negotiations by the Appointed Representatives by providing written notice of such Dispute in the manner provided by Section 13.7 below (“Dispute Notice”). All documents, communications and information disclosed in the course of such negotiations that are not otherwise independently discoverable shall not be offered or received as evidence or used for impeachment or for any other purpose, but shall be considered as to have been disclosed for settlement purposes.

(i)    If, for any reason, a Dispute is not resolved in writing by the Appointed Representatives within thirty (30) days of the date of delivery of the Dispute Notice, or if a party fails to appoint an Appointed Representative within the periods specified herein, such Dispute shall be submitted to final and binding arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules in effect at the time (the “AAA Rules”), except as modified herein:

(ii)    The seat of the arbitration shall be Denver, Colorado.

(iii)    The arbitration shall be conducted by three arbitrators. The claimant and respondent shall each appoint one arbitrator within thirty (30) days of receipt by respondent of the demand for arbitration. The two arbitrators so appointed shall appoint the third and presiding arbitrator (the “Chairperson”) within thirty (30) days of the appointment of the second arbitrator. If any Party fails to appoint an arbitrator, or if the two party-appointed arbitrators fail to appoint the Chairperson, within the time periods specified herein, then any such arbitrator shall, upon any party’s request, be appointed by the AAA in accordance with the AAA Rules.

(iv)    By electing to proceed under the AAA Rules, the parties to the Dispute confirm that any dispute, claim or controversy concerning the arbitrability of a Dispute or the jurisdiction of the arbitral tribunal, including whether arbitration has been waived, whether an assignee of this Agreement is bound to arbitrate, or as to the existence, scope, validity, interpretation or enforceability of the parties’ agreement to arbitrate, shall be determined by the arbitration tribunal.

(v)    Each party shall submit its claims according to the timetable established by the arbitral tribunal. With respect to each claim for monetary relief advanced in the arbitration and/or any claim under the indemnification provisions of Article IX, each side’s submissions shall specify the proposed monetary relief that it contends that the arbitral tribunal should award (in each case, the “Proposed Damages Award”), which Proposed Damages Award may be expressed as “zero”. Each side’s Proposed Damages Award shall also state whether pre- or post-award interest should be awarded, and if so, at what interest rate, and the date from which such interest (if any) should be calculated.

(vi)    As to each claim for monetary relief and/or any claim under the indemnification provisions of Article IX, there shall be only two Proposed Damages

 

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Awards (one for each side of the claim). Where there are more than two parties to the arbitration, the arbitral tribunal shall have power to make appropriate directions as to which parties shall comprise each “side” for purposes of submitting Proposed Damages Awards, in every instance to ensure a proper alignment of parties with respect to each such claim.

(vii)    In rendering its award, insofar as monetary relief and/or relief under the indemnification provisions of Article IX is claimed, the arbitral tribunal shall be limited to choosing, without modification, the Proposed Damages Award of one of the sides, according to its determination of which Proposed Damages Award most comports with its assessment of the case. The arbitral tribunal shall not award any monetary relief of any kind except as set forth in this paragraph, provided that this will not limit the power of the arbitral tribunal: (A) to award relief per paragraph (viii) hereof; (B) to apply any statute of limitation that it determines is applicable to any claim; (C) to dismiss or exclude any claim that it determines is: (1) precluded by any part of this Agreement, including without limitation the provisions of Articles VI and IX hereof or of any part of any Ancillary Agreement, and/or (2) beyond the scope of this Section 10.2; (D) to receive and determine dispositive motions in accordance with the AAA Rules; and/or (E) to apportion fees/costs per paragraph (ix) hereof.

(viii)    In addition to monetary relief, the arbitral tribunal shall be empowered to award equitable relief, including, but not limited to, an injunction and specific performance of any obligation under this Agreement; provided that a claim under the indemnification provisions of Article IX shall at all times be governed by the procedures set forth in paragraphs (v) through (vii) above.

(ix)    The arbitral tribunal shall award the prevailing party its attorneys’ fees and costs reasonably incurred in the arbitration, including the prevailing party’s share of the arbitrator fees and AAA administrative costs.

(x)    The Parties intend that this agreement to arbitrate shall be valid, enforceable and irrevocable, and any award rendered by the arbitration tribunal shall be final and binding on all the parties to the Dispute. The parties to the Dispute agree to comply with any award made in any such arbitration proceedings. Judgment upon any award may be entered in any court of competent jurisdiction, including any court having jurisdiction over any party or any of its assets.

(xi)    By agreeing to arbitration, the parties to the Dispute do not intend to deprive any court of its jurisdiction to issue a pre-arbitral injunction, pre-arbitral attachment, or other order in aid of arbitration proceedings and the enforcement of any award. Without prejudice to such provisional remedies as may be available under the jurisdiction of a court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal’s orders to that effect. In any such action brought in court for such provisional remedies or enforcement of any award, each of the parties to the Dispute irrevocably and unconditionally (A) consents and submits to

 

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the non-exclusive jurisdiction and venue of the Courts of the State of Colorado and the Federal Courts of the United States of America located within the State of Colorado (the “Colorado Courts”); (B) waives, to the fullest extent it may effectively do so, any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens or any right of objection to jurisdiction on account of its place of incorporation or domicile, which it may now or hereafter have to the bringing of any such action or proceeding in any Colorado Court; (C) consents to service of process in the manner provided by Section 13.7 below or in any other manner permitted by Law; and (D) WAIVES ANY RIGHT TO TRIAL BY JURY.

(xii)    This arbitration, and all prior, subsequent or concurrent judicial proceedings related thereto and permitted herein, shall be conducted pursuant to the Federal Arbitration Act, found at Title 9 of the U.S. Code. The parties to the Dispute intend that the arbitration tribunal shall apply the substantive Laws of the State of Delaware to any Dispute hereunder, without regard to any choice of law principles thereof that would mandate the application of the Laws of another jurisdiction.

(xiii)    In order to facilitate the comprehensive resolution of related disputes, all claims between any of the parties to the Dispute that arise under or in connection with this Agreement and the Ancillary Agreements may be brought in a single arbitration. Upon the request of any party to an arbitration proceeding constituted under this Agreement or the Ancillary Agreement(s), the arbitral tribunal shall consolidate such arbitration proceeding with any other arbitration proceeding relating to this Agreement and/or the Ancillary Agreement(s), if the arbitral tribunal determines that (i) there are issues of fact or law common to the proceedings so that a consolidated proceeding would be more efficient than separate proceedings, and (ii) no party to the Dispute would be unduly prejudiced as a result of such consolidation through undue delay or otherwise. In the event of different rulings on this question by the arbitral tribunal constituted hereunder and another arbitral tribunal constituted under this Agreement or the Ancillary Agreement(s), the ruling of the arbitral tribunal constituted first in time shall control, and such arbitral tribunal shall serve as the tribunal for any consolidated arbitration.

(xiv)    In the event of a Dispute, each party to the Dispute shall continue to perform its obligations under this Agreement or any Ancillary Agreement in good faith during the resolution of such Dispute as if such Dispute had not arisen, unless and until this Agreement or such Ancillary Agreement is terminated in accordance with the provisions hereof.

(xv)    Any arbitration hereunder shall be confidential, and the Parties and their agents agree not to disclose to any third party (i) the existence or status of the arbitration, (ii) all information made known and documents produced in the arbitration not otherwise in the public domain, and (iii) all awards arising from the arbitration, except and to the extent that disclosure is required by applicable Law or is required to protect or pursue a legal right, and in any such case, the party making such disclosure shall produce only those materials and information that are necessary and shall take reasonable steps to safeguard the confidentiality of the materials and information.

 

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(b)    The Parties agree that the provisions of this Section 10.2 bind themselves and any of the members of their respective Groups, and further agree to take all measures to lawfully cause the members of their respective Groups to abide and be bound by the terms of this Section 10.2.

ARTICLE XI

TAX MATTERS

Section 11.1    Tax Returns and Payments.

(a)    Liability for Taxes.

(i)    Except as otherwise provided in the Employee Matters Agreement and in Section 11.1(a)(iii), DevCo OP and its Subsidiaries shall assume all liability for any and all Taxes attributable to DevCo and each member of the DevCo Group, without regard to when such Taxes were accrued and including, for the avoidance of doubt, all Property Taxes with respect to DevCo Group Assets and all entity-level Taxes with respect to DevCo Group entities and all Property Taxes with respect to the DevCo Group Assets (the “DevCo Tax Liabilities”).

(ii)    Except as otherwise provided in the Employee Matters Agreement and in Section 11.1(a)(iii), SpinCo OP and its Subsidiaries shall assume all liability for any and all Taxes attributable to SpinCo and each member of the SpinCo Group, without regard to when such Taxes were accrued and including, for the avoidance of doubt, all Property Taxes and Transfer Taxes with respect to SpinCo Group Assets and all entity-level Taxes with respect to Spin Group entities.

(iii)    Notwithstanding the above,

(A)    SpinCo OP and its Subsidiaries shall assume (x) all Taxes of any member of the DevCo Group resulting from challenges to the intended Tax treatment of the Transactions set forth in Section 11.2(a)(i) and (y) all Transfer Taxes arising from the DevCo Retained Properties and any Assets located on such properties pursuant to the Transactions, including those listed or described in Schedule 11.1(a)(iii) (the Tax Liabilities described in this Section 11.1(a)(iii), together with the Tax liabilities described in Section 11.1(a)(ii), the “SpinCo Tax Liabilities”).

(b)    Refunds. DevCo Group shall be entitled to any refund of or credit for Taxes for which DevCo or its Subsidiaries are responsible under this Agreement, and SpinCo Group shall be entitled to any refund of or credit for Taxes for which SpinCo or its Subsidiaries are responsible under this Agreement. Refunds for any Straddle Period shall be equitably apportioned between DevCo OP and SpinCo OP in accordance with the provisions of this Agreement governing the Taxes with respect to such periods. A Party receiving a refund to which the other Party is entitled pursuant to this Agreement shall pay the amount to which such other Party is entitled within thirty (30) calendar days after the receipt of the refund.

(c)    Transfer Taxes and Property Tax Returns.

 

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(i)    SpinCo OP will prepare and file all Tax Returns and other documentation with respect to all Transfer Taxes described in Section 11.1(a)(iii).

(ii)    DevCo OP will prepare and file all Tax Returns for Property Taxes due on or after the Distribution Date for DevCo Retained Properties. SpinCo OP will prepare and file all Tax Returns for Property Taxes due on or after the Distribution Date for Assets held by a member of the SpinCo Group after the Distribution Date.

(d)    Filing of Other Tax Returns.

(i)    DevCo OP will have the sole and exclusive responsibility for the preparation and filing of all Tax Returns that any member of the DevCo Group is obligated to prepare and file.

(ii)    SpinCo OP shall have the sole and exclusive responsibility for the preparation and filing of all Tax Returns that any member of the SpinCo Group is obligated to file.

(e)    Amended Returns. Without the prior written consent of DevCo OP, which consent shall not be unreasonably withheld, conditioned, or delayed, SpinCo OP shall not, and shall not permit any member of the SpinCo Group to, file any amended Pre-Closing Period Tax Return or Straddle Period Tax Return that includes a SpinCo REIT Subsidiary.

(f)    Dispute Resolution. Subject to the final sentence of this Section 11.1(f), the Parties shall attempt in good faith to resolve any disagreement arising with respect to this Article XI, including any dispute in connection with a claim by a third party (a “Tax Dispute”). Either Party may give the other Party written notice of any Tax Dispute not resolved in the normal course of business. Subject to the final sentence of this Section 11.1(f), if the Parties cannot agree within thirty (30) Business Days following the date on which one Party gives such notice, then the Tax Dispute shall be referred to a Tax Advisor acceptable to each of the Parties to act as an arbitrator in order to resolve the Tax Dispute. If the Parties are unable to agree upon a Tax Advisor within fifteen (15) calendar days, the Tax Advisor selected by DevCo and the Tax Advisor selected by SpinCo shall jointly select a Tax Advisor that will resolve the Tax Dispute. Such Tax Advisor shall be empowered to resolve the Tax Dispute, including by engaging nationally recognized accountants and other experts. The Tax Advisor chosen to resolve the Tax Dispute shall furnish written notice to the Parties of its resolution of such Tax Dispute as soon as practicable, but in no event later than forty-five (45) Business Days after its acceptance of the matter for resolution. Any such resolution by the Tax Advisor will be conclusive and binding on the Parties. Each of DevCo OP and SpinCo OP shall bear fifty percent (50%) of the aggregate expenses of the Tax Advisor chosen to resolve the Tax Dispute.

Section 11.2    Tax Covenants.

(a)    Covenants of DevCo and SpinCo.

(i)    The Parties agree that: (A) all transaction steps comprising the Restructuring shall, for all Tax purposes in all respects, be treated as specified in the Plan

 

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of Restructuring, (B) the DevCo OP Distribution will be treated as a partnership division under Treasury Regulations Section 1.708-1(d), (C) the SpinCo Distribution will be treated as a taxable distribution under Section 301 of the Code and (D) the Parties and their respective Subsidiaries shall report the Restructuring, the DevCo OP Distribution, and the SpinCo Distribution for all Tax purposes in all respects consistently with such treatment, and shall not take any position on any Tax Return that is inconsistent with such treatment.

(ii)    Each Party shall report the value of the SpinCo Common Stock and SpinCo Assets on the Distribution Date as determined by DevCo for all Tax purposes in all respects, and shall not take any position on any Tax Return that is inconsistent with such value.

(b)    Covenants of DevCo.

(i)    DevCo and DevCo OP shall use their commercially reasonable efforts to cooperate with SpinCo and each SpinCo REIT Subsidiary, as necessary, to enable SpinCo and each SpinCo REIT Subsidiary to each qualify for taxation as a REIT and receive a customary legal opinion on the Distribution Date concerning SpinCo’s qualification and taxation as a REIT, including by providing information and representations to SpinCo or any of the SpinCo REIT Subsidiaries and their respective tax counsel with respect to the composition of DevCo’s income and assets, composition of the holders of stock of DevCo and DevCo’s organization, operation, and qualification as a REIT.

(ii)    DevCo and DevCo OP shall use reasonable best efforts to maintain DevCo’s REIT status for each of its taxable years ending on or before December 31, 2021, unless DevCo obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS, on which SpinCo and the SpinCo REIT Subsidiaries can rely, substantially to the effect that DevCo’s failure to maintain its REIT status will not prevent SpinCo or any SpinCo REIT Subsidiary from making a valid REIT election for any taxable year, or otherwise cause SpinCo or any SpinCo REIT Subsidiary to fail to qualify for taxation as a REIT for any taxable year, pursuant to Section 856(g)(3) of the Code.

(iii)    DevCo shall not liquidate, merge, combine or otherwise restructure or elect to be treated as other than a corporation for U.S. federal income tax purposes, without SpinCo’s consent, prior to the second (2nd) anniversary of the Distribution Date; provided, however, that DevCo may, at any point after December 31, 2020, combine or merge with or into any Person that (immediately before such merger or combination) is not a member of the DevCo Group.

(c)    Covenants of SpinCo.

(i)    SpinCo and each SpinCo REIT Subsidiary shall take all actions, and refrain from taking all actions, as are necessary to ensure that SpinCo and each SpinCo REIT Subsidiary will qualify for taxation as a REIT for U.S. federal income tax purposes for any and all Straddle Periods.

 

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(ii)    SpinCo and each SpinCo REIT Subsidiary shall accommodate all reasonable requests of DevCo with respect to maintenance of the REIT status of DevCo, any Subsidiary of DevCo that has or will elect to be treated as a REIT for U.S. federal income tax purposes, SpinCo, or a SpinCo REIT Subsidiary for any and all Straddle Periods.

(iii)    Members of the SpinCo Group shall not sell or otherwise dispose of any SpinCo Asset on or prior to December 31, 2020, if such disposition would cause any member of the DevCo Group to incur Tax attributable to a “prohibited transaction” under Section 857(b)(6) of the Code.

(iv)    Neither SpinCo nor any of the SpinCo REIT Subsidiaries shall liquidate, merge, combine or otherwise restructure or elect to be treated as other than a corporation for U.S. federal income tax purposes, without DevCo’s consent, prior to the second (2nd) anniversary of the Distribution Date; provided, however, that SpinCo or any of the SpinCo REIT Subsidiaries may, at any point after December 31, 2020, combine or merge with or into any Person that (immediately before such merger or combination) is not a member of the SpinCo Group.

Section 11.3    Tax Indemnification.

(a)    SpinCo OP shall pay or cause to be paid, shall be responsible for, and shall indemnify and hold harmless all members of the DevCo Group from and against:

(i)    all Taxes of any member of the DevCo Group attributable to a breach of any covenant in Section 11.2(a) or Section 11.2(c);

(ii)    all Taxes of any member of the DevCo Group assumed by SpinCo pursuant to Section 11.1(a).

(iii)    any accounting, legal, and other professional fees and court costs incurred in connection with, evaluating, or defending against any claims that result in any member of the DevCo Group becoming entitled to indemnification under this Section 11.3(a); and

(iv)    any Taxes incurred by the DevCo Group resulting from indemnification payments made pursuant to this Section 11.3(a).

(b)    DevCo OP shall pay or cause to be paid, shall be responsible for, and shall indemnify and hold harmless all members of the SpinCo Group from and against:

(i)    all Taxes of any member of the SpinCo Group attributable to a breach of any covenant in Section 11.2(a) or Section 11.2(b);

 

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(ii)    all Taxes of any member of the SpinCo Group assumed by DevCo pursuant to Section 11.1(a);

(iii)    any accounting, legal, and other professional fees and court costs incurred in connection with, evaluating, or defending against any claims that result in any member of the SpinCo Group becoming entitled to indemnification under this Section 11.3(b); and

(iv)    any Taxes incurred by the SpinCo Group resulting from indemnification payments made pursuant to this Section 11.3(b).

Furthermore, indemnification under this Section 11.3 shall follow the procedures described in Section 9.4, except to the extent such procedures conflict with anything described herein.

Section 11.4    Tax Contests.

(a)    Notice of Tax Contests. SpinCo and SpinCo OP shall promptly notify DevCo in writing upon receipt by SpinCo or any member of the SpinCo Group of a written communication from any Taxing Authority with respect to any Tax Contest concerning any Tax Return or otherwise concerning Taxes for which DevCo or DevCo OP may be liable under this Agreement or that impacts any portion of a Straddle Period or Pre-Closing Period. DevCo and DevCo OP shall promptly notify SpinCo in writing upon receipt by DevCo or any member of the DevCo Group of a written communication from any Taxing Authority with respect to any Tax Contest concerning any Tax Return or otherwise concerning Taxes for which SpinCo or SpinCo OP may be liable under this Agreement or that impacts any portion of a Post-Closing Period.

(b)    Control of Contest by DevCo. DevCo and DevCo OP shall have the sole responsibility and control over the handling of any Tax Contest, including the exclusive right to communicate with agents of the Taxing Authority, involving (A) any Pre-Closing Period Tax Return of SpinCo or any member of the SpinCo Group or otherwise relating to the SpinCo Assets or SpinCo Liabilities for a Pre-Closing Period or (B) any Straddle Period Tax Return of SpinCo or any member of the SpinCo Group or otherwise relating to the SpinCo Assets or SpinCo Liabilities for a Straddle Period. Upon SpinCo’s or SpinCo OP’s request, SpinCo and SpinCo OP shall be allowed to participate in, but not to control, at SpinCo’s or SpinCo OP”s expense, the handling of any such Tax Contest with respect to any item that may affect SpinCo’s or SpinCo OP’s liability for Taxes pursuant to this Agreement. DevCo or DevCo OP shall not settle or concede any such Tax Contest with respect to any item in excess of $50,000 for which SpinCo or SpinCo OP is liable hereunder without the prior written consent of SpinCo or SpinCo OP, as applicable, which consent shall not be unreasonably withheld, delayed, or conditioned.

Section 11.5    Cooperation. Each Party shall, and shall cause all of such Party’s Subsidiaries and, to the extent capable of so doing, Affiliates to, fully cooperate with the other Party in connection with the preparation and filing of any Tax Return, the conduct of any Tax Contest (including, where appropriate or necessary, providing a power of attorney) concerning any issues or any other matter contemplated under this Article XI, and use commercially reasonable efforts to mitigate the net economic impact of any Tax Contest. Each Party shall make its employees and facilities available on a mutually convenient basis to facilitate such cooperation.

 

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Section 11.6    Retention of Records; Access.

(a)    In General. The Parties shall and shall cause the other members of their Group to (i) retain records, documents, accounting data, and other information (including computer data) necessary for the preparation and filing of all Tax Returns in respect of Taxes of either the DevCo Group or the SpinCo Group for any taxable period, or for any Tax Contests relating to such Tax Returns and (ii) using commercially reasonable efforts to do so within five (5) Business Days, give to the other Party reasonable access to such records, documents, accounting data, and other information (including computer data) and to its personnel (insuring their cooperation) and premises, for the purpose of the review or audit of such Tax Returns to the extent relevant to an obligation or liability of a Party under this Agreement or for purposes of the preparation or filing of any such Tax Return, the conduct of any Tax Contest or any other matter reasonably and in good faith related to the Tax affairs of the requesting Party. The requesting party shall bear all reasonable out-of-pocket costs and expenses in connection therewith. At any time after the Distribution Date that DevCo or any member of the DevCo Group proposes to destroy such material or information, DevCo and DevCo OP shall first notify SpinCo and SpinCo OP in writing and SpinCo and SpinCo OP shall be entitled to receive such materials or information proposed to be destroyed. At any time after the Distribution Date that SpinCo or any member of the SpinCo Group proposes to destroy such material or information, SpinCo and SpinCo OP shall first notify DevCo and DevCo OP in writing and DevCo and DevCo OP shall be entitled to receive such materials or information proposed to be destroyed.

(b)    Continuation of Retention of Information, Access Obligations. The obligations set forth above in Section 11.6(a) shall continue until the longer of (i) the time of a Final Determination or (ii) expiration of all applicable statutes of limitations to which the records and information relate. For purposes of the preceding sentence, each Party shall assume that no applicable statute of limitations has expired unless such Party has received notification or otherwise has actual knowledge that such statute of limitations has expired.

ARTICLE XII

TERMINATION

Section 12.1    Termination. Upon written notice, this Agreement and each of the Ancillary Agreements may be terminated at any time prior to the Effective Time by and in the sole discretion of DevCo without the approval of SpinCo or any other party thereto.

Section 12.2    Effect of Termination. In the event of termination pursuant to Section 12.1, neither Party shall have any Liability of any kind to the other Party as a result of such termination.

 

63

ARTICLE XIII

MISCELLANEOUS

Section 13.1    Further Assurances. Subject to the limitations or other provisions of this Agreement, (a) each Party shall, and shall cause the other members of its Group to, use reasonable efforts (subject to, and in accordance with applicable Law) to take promptly, or cause to be taken promptly, all actions, and to do promptly, or cause to be done promptly, and to assist and cooperate with the other Party in doing, all things reasonably necessary, proper or advisable to consummate and make effective the Transactions and to carry out the intent and purposes of this Agreement, including using reasonable efforts to obtain satisfaction of the conditions precedent in Article V within its reasonable control and to perform all covenants and agreements herein applicable to such Party or any member of its Group, and (b) neither Party will, nor will either Party allow any other member of its Group to, without the prior written consent of the other Party, take any action which would reasonably be expected to prevent or materially impede, interfere with or delay any of the Transactions. Without limiting the generality of the foregoing, where the cooperation of third parties, such as insurers or trustees, would be necessary in order for a Party to completely fulfill its obligations under this Agreement, such Party shall use reasonable efforts to cause such third parties to provide such cooperation.

Section 13.2    Payment of Expenses. All costs and expenses incurred prior to the Distribution and directly related to the Transactions (other than in respect of Taxes, which shall be governed by Article XI) shall be paid by DevCo OP; notwithstanding the foregoing, the costs and expenses set forth on Schedule 13.2 shall be paid by SpinCo OP.

Section 13.3    Amendments and Waivers.

(a)    Subject to Section 12.1, this Agreement may not be amended except by an agreement in writing signed by both Parties.

(b)    Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the Party entitled to the benefit thereof and any such waiver shall be validly and sufficiently given for the purposes of this Agreement if it is in writing signed by an authorized representative of such Party. No delay or failure in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder are cumulative and not exclusive of any rights or remedies that either Party would otherwise have.

Section 13.4    Entire Agreement. This Agreement, the Ancillary Agreements and the Exhibits and Schedules referenced herein and therein and attached hereto or thereto, constitute the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersede all prior negotiations, agreements, commitments, writings, courses of dealing and understandings with respect to the subject matter hereof.

Section 13.5    Survival of Agreements. Except as otherwise expressly contemplated by this Agreement, all covenants and agreements of the Parties contained in this Agreement shall survive the Effective Time and remain in full force and effect in accordance with their applicable terms.

 

64

Section 13.6    Third-Party Beneficiaries. Except (a) as provided in Article IX relating to Indemnitees and for the release of any Person provided under Section 9.1, (b) as provided in Section 7.1 relating to insured persons and (c) as provided in Section 8.1(a), this Agreement is solely for the benefit of the Parties and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement.

Section 13.7    Notices. All notices, requests, permissions, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) five (5) Business Days following sending by registered or certified mail, postage prepaid, (b) when sent, if sent by facsimile or email of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient, (c) when delivered, if delivered personally to the intended recipient, and (d) one (1) Business Day following sending by overnight delivery via a national courier service and, in each case, addressed to a Party at the following address for such Party (as updated from time to time by notice in writing to the other Party):

(a)    If to DevCo or DevCo OP:

c/o Apartment Investment and Management Company

4582 S. Ulster St.

Suite 1700

Denver, CO 80237

Attention:

Email:

Facsimile:

(b)    If to SpinCo or SpinCo OP:

c/o Apartment Income REIT Corp.

4582 S. Ulster St.

Suite 1700

Denver, CO 80237

Attention:

Email:

Facsimile:

Section 13.8    Counterparts; Electronic Delivery. This Agreement may be executed in multiple counterparts, each of which when executed shall be deemed to be an original, but all of which together shall constitute one and the same agreement. Execution and delivery of this Agreement or any other documents pursuant to this Agreement by facsimile or other electronic means shall be deemed to be, and shall have the same legal effect as, execution by an original signature and delivery in person.

 

65

Section 13.9    Severability. If any term or other provision of this Agreement or the Exhibits and Schedules attached hereto is determined by a nonappealable decision by a court, administrative agency or arbitration tribunal to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the court, administrative agency or arbitration tribunal shall interpret this Agreement so as to affect the original intent of the Parties as closely as possible in an acceptable manner to the end that the Transactions are fulfilled to the fullest extent possible. If any sentence in this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only as broad as is enforceable.

Section 13.10    Assignability; Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns; provided, however, that the rights and obligations of each Party under this Agreement shall not be assignable, in whole or in part, directly or indirectly, whether by operation of law or otherwise, by such Party without the prior written consent of the other Party (such consent not to be unreasonably withheld, conditioned or delayed) and any attempt to assign any rights or obligations under this Agreement without such consent shall be null and void. Notwithstanding the foregoing, either Party may assign its rights and obligations under this Agreement to any of their respective Affiliates; provided that no such assignment shall release such assigning Party from any liability or obligation under this Agreement.

Section 13.11    Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the substantive Laws of the State of Delaware, without regard to any conflicts of law provisions thereof that would result in the application of the Laws of any other jurisdiction.

Section 13.12    Construction. This Agreement shall be construed as if jointly drafted by the Parties and no rule of construction or strict interpretation shall be applied against either Party. The Parties represent that this Agreement is entered into with full consideration of any and all rights which the Parties may have. The Parties have relied upon their own knowledge and judgment. The Parties have had access to independent legal advice, have conducted such investigations they thought appropriate, and have consulted with such other independent advisors as they deemed appropriate regarding this Agreement and their rights and asserted rights in connection therewith. The Parties are not relying upon any representations or statements made by the other Party, or such other Party’s employees, agents, representatives or attorneys, regarding this Agreement, except to the extent such representations are expressly set forth or incorporated in this Agreement. The Parties are not relying upon a legal duty, if one exists, on the part of the other Party (or such other Party’s employees, agents, representatives or attorneys) to disclose any information in connection with the execution of this Agreement or their preparation, it being expressly understood that neither Party shall ever assert any failure to disclose information on the part of the other Party as a ground for challenging this Agreement.

 

66

Section 13.13    Performance. Each Party shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such Party.

Section 13.14    Title and Headings. Titles and headings to Sections and Articles are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

Section 13.15    Exhibits and Schedules. The Exhibits and Schedules attached hereto are incorporated herein by reference and shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein.

[Signature Page Follows]

 

67

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective officers as of the date first set forth above.

 

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
By:  

 

  Name:
  Title:
AIMCO OP L.P.
By:  

 

  Name:
  Title:
APARTMENT INCOME REIT CORP.
By:  

 

  Name:
  Title:
AIMCO PROPERTIES, L.P.
By:  

 

  Name:
  Title:

[Signature Page to Separation and Distribution Agreement]

Exhibit 10.1

SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

OF

AIMCO PROPERTIES, L.P.

a Delaware limited partnership

 

 

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED

UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”),

OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,

TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH

REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP

AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM

AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT

THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE

EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER

APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.

TABLE OF CONTENTS

 

Article 1 DEFINED TERMS      1  
Article 2 ORGANIZATIONAL MATTERS      21  
  Section 2.1   

Organization

     21  
  Section 2.2   

Name

     21  
  Section 2.3   

Registered Office and Agent; Principal Office

     21  
  Section 2.4   

Power of Attorney

     22  
  Section 2.5   

Term

     23  
Article 3 PURPOSE      23  
  Section 3.1   

Purpose and Business

     23  
  Section 3.2   

Powers

     23  
  Section 3.3   

Partnership Only for Purposes Specified

     24  
  Section 3.4   

Representations and Warranties by the Parties

     24  
Article 4 CAPITAL CONTRIBUTIONS      26  
  Section 4.1   

Capital Contributions of the Partners

     26  
  Section 4.2   

Issuances of Additional Partnership Interests

     26  
  Section 4.3   

Additional Funds

     27  
  Section 4.4   

Stock Option Plans

     29  
  Section 4.5   

No Interest; No Return

     30  
Article 5 DISTRIBUTIONS      31  
  Section 5.1   

Requirement and Characterization of Distributions

     31  
  Section 5.2   

Distributions in Kind

     31  
  Section 5.3   

Amounts Withheld

     32  
  Section 5.4   

Distributions Upon Liquidation

     32  
  Section 5.5   

Restricted Distributions

     32  

Article 6 ALLOCATIONS      32  
  Section 6.1   

Timing and Amount of Allocations of Net Income and Net Loss

     32  
  Section 6.2   

General Allocations

     32  
  Section 6.3   

Additional Allocation Provisions

     33  
  Section 6.4   

Tax Allocations

     36  
Article 7 MANAGEMENT AND OPERATIONS OF BUSINESS      36  
  Section 7.1   

Management

     36  
  Section 7.2   

Certificate of Limited Partnership

     40  
  Section 7.3   

Restrictions on General Partner’s Authority

     40  
  Section 7.4   

Reimbursement of the General Partner

     42  
  Section 7.5   

Outside Activities of the Previous General Partner and the General Partner

     43  
  Section 7.6   

Contracts with Affiliates

     43  
  Section 7.7   

Indemnification

     44  
  Section 7.8   

Liability of the General Partner

     46  
  Section 7.9   

Other Matters Concerning the General Partner

     47  
  Section 7.10   

Title to Partnership Assets

     48  
  Section 7.11   

Reliance by Third Parties

     48  
Article 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS      49  
  Section 8.1   

Limitation of Liability

     49  
  Section 8.2   

Management of Business

     49  
  Section 8.3   

Outside Activities of Limited Partners

     49  
  Section 8.4   

Return of Capital

     49  
  Section 8.5   

Rights of Limited Partners Relating to the Partnership

     50  
  Section 8.6   

Redemption Rights of Qualifying Parties

     50  
  Section 8.7   

Partnership Right to Call Limited Partner Interests

     55  

 

ii

Article 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS      55  
  Section 9.1   

Records and Accounting

     55  
  Section 9.2   

Fiscal Year

     55  
  Section 9.3   

Reports

     56  
Article 10 TAX MATTERS      56  
  Section 10.1   

Preparation of Tax Returns

     56  
  Section 10.2   

Tax Elections

     56  
  Section 10.3   

Tax Matters Partner

     57  
  Section 10.4   

Partnership Representative

     58  
  Section 10.5   

Withholding for Taxes, Etc.

     60  
Article 11 TRANSFERS AND WITHDRAWALS      62  
  Section 11.1   

Transfer

     62  
  Section 11.2   

Transfer of General Partner’s Partnership Interest

     62  
  Section 11.3   

Limited Partners’ Rights to Transfer

     63  
  Section 11.4   

Substituted Limited Partners

     65  
  Section 11.5   

Assignees

     66  
  Section 11.6   

General Provisions

     66  
Article 12 ADMISSION OF PARTNERS      68  
  Section 12.1   

Admission of Successor General Partner

     68  
  Section 12.2   

Admission of Additional Limited Partners

     68  
  Section 12.3   

Amendment of Agreement and Certificate of Limited Partnership

     69  
  Section 12.4   

Admission of Initial Limited Partners

     69  
Article 13 DISSOLUTION, LIQUIDATION AND TERMINATION      69  
  Section 13.1   

Dissolution

     69  
  Section 13.2   

Winding Up

     70  

 

iii

  Section 13.3   

Deemed Distribution and Recontribution

     71  
  Section 13.4   

Rights of Limited Partners

     72  
  Section 13.5   

Notice of Dissolution

     72  
  Section 13.6   

Cancellation of Certificate of Limited Partnership

     72  
  Section 13.7   

Reasonable Time for Winding-Up

     72  
Article 14 PROCEDURES FOR ACTIONS AND CONSENTS OF PARTNERS; AMENDMENTS; MEETINGS      72  
  Section 14.1   

Procedures for Actions and Consents of Partners

     72  
  Section 14.2   

Amendments

     72  
  Section 14.3   

Meetings of the Partners

     73  
Article 15 GENERAL PROVISIONS      74  
  Section 15.1   

Addresses and Notice

     74  
  Section 15.2   

Titles and Captions

     74  
  Section 15.3   

Pronouns and Plurals

     74  
  Section 15.4   

Further Action

     74  
  Section 15.5   

Binding Effect

     74  
  Section 15.6   

Waiver

     74  
  Section 15.7   

Counterparts

     75  
  Section 15.8   

Applicable Law

     75  
  Section 15.9   

Entire Agreement

     75  
  Section 15.10   

Invalidity of Provisions

     75  
  Section 15.11   

Limitation to Preserve REIT Status

     75  
  Section 15.12   

No Partition

     76  
  Section 15.13   

No Third-Party Rights Created Hereby

     76  
Exhibit A PARTNERS AND PARTNERSHIP UNITS      A-1  
Exhibit B EXAMPLES REGARDING ADJUSTMENT FACTOR      B-1  

 

iv

Exhibit C LIST OF DESIGNATED PARTIES

     C-1  

Exhibit D NOTICE OF REDEMPTION

     D-1  

Exhibit E FORM OF UNIT CERTIFICATE

     E-1  

Exhibit F AMENDED AND RESTATED PARTNERSHIP UNIT DESIGNATION OF THE CLASS I HIGH PERFORMANCE PARTNERSHIP UNITS OF AIMCO PROPERTIES, L.P.

     F-1  

Exhibit G PARTNERSHIP UNIT DESIGNATION OF THE CLASS ONE PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     G-1  

Exhibit H PARTNERSHIP UNIT DESIGNATION OF THE CLASS TWO PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     H-1  

Exhibit I PARTNERSHIP UNIT DESIGNATION OF THE CLASS THREE PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     I-1  

Exhibit J PARTNERSHIP UNIT DESIGNATION OF THE CLASS FOUR PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     J-1  

Exhibit K PARTNERSHIP UNIT DESIGNATION OF THE CLASS SIX PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     K-1  

Exhibit L PARTNERSHIP UNIT DESIGNATION OF THE CLASS SEVEN PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     L-1  

Exhibit M [reserved]

     M-1  

Exhibit N PARTNERSHIP UNIT DESIGNATION OF THE CLASS NINE PARTNERSHIP PREFERRED UNITS OF AIMCO PROPERTIES, L.P.

     N-1  

Exhibit O [reserved]

     O-1  

Exhibit P PARTNERSHIP UNIT DESIGNATION OF THE LTIP UNITS OF AIMCO PROPERTIES, L.P.

     P-1  

 

 

v

SIXTH AMENDED AND RESTATED AGREEMENT OF

LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P.

THIS SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., as amended and restated as of [DATE OF SPIN-OFF] (the “Amendment Date”), is entered into by and among Apartment Income REIT Corp., a Maryland corporation (the “Previous General Partner”), REIT Sub 1, REIT Sub 2 (REIT Sub 1, together with REIT Sub 2 and the Previous General Partner (solely in respect of its status as a Limited Partner), the “Special Limited Partners”), AIMCO-GP, Inc., a Delaware corporation, and the other Limited Partners (as defined below).

WHEREAS, AIMCO-GP, Inc., in its capacity as the general partner, has obtained, to the extent required under the Fifth Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., Consent of the Limited Partners, and approved an amendment and restatement of the Agreement of Limited Partnership of AIMCO Properties, L.P. on the terms set forth herein; and

WHEREAS, the Preferred Return (as defined in the Fifth Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P.) was an amount equal to zero as of immediately prior to the effectiveness of the restatement of this Agreement on the Amendment Date.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

DEFINED TERMS

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

“Act” means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute.

“Actions” has the meaning set forth in Section 7.7 hereof.

“Additional Funds” has the meaning set forth in Section 4.3A hereof.

“Additional Limited Partner” means a Person who is admitted to the Partnership as a Limited Partner pursuant to Section 4.2 and Section 12.2 hereof and who is shown as such on the books and records of the Partnership.

“Adjusted Capital Account Deficit” means, with respect to any Holder, the deficit balance, if any, in such Holder’s Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:

(i)    decrease such deficit by any amounts that such Holder is obligated to restore pursuant to this Agreement or by operation of law upon liquidation of such Holder’s Partnership Interest or is deemed to be obligated to restore pursuant to the penultimate sentence of each of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and

(ii)    increase such deficit by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

The foregoing definition of “Adjusted Capital Account Deficit” is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

“Adjustment Factor” means 1.0; provided, however, that in the event that:

(i)    the Previous General Partner (a) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (b) splits or subdivides its outstanding REIT Shares or (c) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction, (i) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination (assuming for such purposes that such dividend, distribution, split, subdivision, reverse split or combination has occurred as of such time) and (ii) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination;

(ii)    the Previous General Partner distributes any rights, options or warrants to all holders of its REIT Shares to subscribe for or to purchase or to otherwise acquire REIT Shares (or other securities or rights convertible into, exchangeable for or exercisable for REIT Shares) at a price per share less than the Value of a REIT Share on the record date for such distribution (each a “Distributed Right”), then the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction (a) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date plus the maximum number of REIT Shares purchasable under such Distributed Rights and (b) the denominator of which shall be the number of REIT Shares issued and outstanding on the record date plus a fraction (1) the numerator of which is the maximum number of REIT Shares purchasable under such Distributed Rights times the minimum purchase price per REIT Share under such Distributed Rights and (2) the denominator of which is the Value of a REIT Share as of the record date; provided, however, that, if any such Distributed Rights expire or become no longer exercisable, then the Adjustment Factor shall be adjusted, effective retroactive to the date of distribution of the Distributed Rights, to reflect a reduced maximum number of REIT Shares or any change in the minimum purchase price for the purposes of the above fraction; and

 

2

(iii)    the Previous General Partner shall, by dividend or otherwise, distribute to all holders of its REIT Shares evidences of its indebtedness or assets (including securities, but excluding any dividend or distribution referred to in subsection (i) above), which evidences of indebtedness or assets relate to assets not received by the Previous General Partner, the General Partner and/or the Special Limited Partners pursuant to a pro rata distribution by the Partnership, then the Adjustment Factor shall be adjusted to equal the amount determined by multiplying the Adjustment Factor in effect immediately prior to the close of business on the date fixed for determination of shareholders entitled to receive such distribution by a fraction (i) the numerator shall be such Value of a REIT Share on the date fixed for such determination and (ii) the denominator shall be the Value of a REIT Share on the dates fixed for such determination less the then fair market value (as determined by the General Partner, whose determination shall be conclusive) of the portion of the evidences of indebtedness or assets so distributed applicable to one REIT Share.

Any adjustments to the Adjustment Factor shall become effective immediately after the effective date of such event, retroactive to the record date, if any, for such event. Notwithstanding the foregoing, in the event of any transaction described above with respect to REIT Shares that would otherwise require an adjustment to the Adjustment Factor, no such adjustment shall be made if the Partnership concurrently effects a similar and proportional transaction with respect to the Partnership Common Units. If the Previous General Partner makes an Elective Dividend, no adjustment to the Adjustment Factor shall be made if the Partnership concurrently makes a distribution to Holders of Partnership Common Units in an amount per Unit consisting of either (x) (i) a number of Partnership Common Units (or fraction thereof) equal to the aggregate number of REIT Shares paid as a dividend with respect to all REIT Shares, divided by the total number of REIT Shares outstanding as of the record date for such dividend, and (ii) cash in an amount equal to the aggregate amount of cash paid as a dividend with respect to all REIT Shares, divided by the total number of REIT Shares outstanding as of the record date for such dividend, or (y) cash in an amount equal to the aggregate value, as determined in good faith by the General Partner, of both the REIT Shares and the cash paid as a dividend with respect to all REIT Shares, divided by the total number of REIT Shares outstanding as of the record date for such dividend (the portion of such cash amount in clause (y) that is attributable to the value of the REIT Shares paid as a dividend is referred to herein as the “Elective Dividend Cash Payment”). For illustrative purposes, examples of adjustments to the Adjustment Factor are set forth on Exhibit B attached hereto.

“Affiliate” means, with respect to any Person, any Person directly or indirectly controlling or controlled by or under common control with such Person. For the purposes of this definition, “control” when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

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“Agreement” means this Sixth Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., as it may be amended, supplemented or restated from time to time.

“AIR Partners” means the Previous General Partner and its Subsidiaries, excluding the Partnership and its Subsidiaries.

“AIR Partners Sharing Percentage” means a percentage equal to 100% minus the Non-AIR Holders Sharing Percentage.

“Amendment Date” has the meaning set forth in the preamble hereto.

“Applicable Percentage” has the meaning set forth in Section 8.6B hereof.

“Appraisal” means, with respect to any assets, the written opinion of an independent third party experienced in the valuation of similar assets, selected by the General Partner in good faith. Such opinion may be in the form of an opinion by such independent third party that the value for such property or asset as set by the General Partner is fair, from a financial point of view, to the Partnership.

“Assignee” means a Person to whom one or more Partnership Common Units have been Transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 hereof.

“Available Cash” means, with respect to any period for which such calculation is being made,

(i)    the sum, without duplication, of:

(1)    the Partnership’s Net Income or Net Loss (as the case may be) for such period,

(2)    Depreciation and all other noncash charges to the extent deducted in determining Net Income or Net Loss for such period,

(3)    the amount of any reduction in reserves of the Partnership referred to in clause (ii)(6) below (including, without limitation, reductions resulting because the General Partner determines such amounts are no longer necessary),

(4)    the excess, if any, of the net cash proceeds from the sale, exchange, disposition, financing or refinancing of Partnership property for such period over the gain (or loss, as the case may be) recognized from such sale, exchange, disposition, financing or refinancing during such period (excluding Terminating Capital Transactions), and

(5)    all other cash received (including amounts previously accrued as Net Income and amounts of deferred income) or any net amounts borrowed by the Partnership for such period that was not included in determining Net Income or Net Loss for such period;

 

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(ii)    less the sum, without duplication, of:

(1)    all principal debt payments made during such period by the Partnership,

(2)    capital expenditures made by the Partnership during such period,

(3)    investments in any entity (including loans made thereto) to the extent that such investments are not otherwise described in clause (ii)(1) or clause (ii)(2) above,

(4)    all other expenditures and payments not deducted in determining Net Income or Net Loss for such period (including amounts paid in respect of expenses previously accrued),

(5)    any amount included in determining Net Income or Net Loss for such period that was not received by the Partnership during such period,

(6)    the amount of any increase in reserves (including, without limitation, working capital reserves) established during such period that the General Partner determines are necessary or appropriate in its sole and absolute discretion,

(7)    any amount distributed or paid in redemption of any Limited Partner Interest or Partnership Units including, without limitation, any Cash Amount paid, and

(8)    any Elective Dividend Cash Payment.

Notwithstanding the foregoing, Available Cash shall not include (a) any cash received or reductions in reserves, or take into account any disbursements made, or reserves established, after dissolution and the commencement of the liquidation and winding up of the Partnership or (b) any Capital Contributions, whenever received.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in Denver, Colorado, Los Angeles, California or New York, New York are authorized or required by law to close.

 

 

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“Capital Account” means, with respect to any Holder, the Capital Account maintained by the General Partner for such Holder on the Partnership’s books and records in accordance with the following provisions:

(a)    To each Holder’s Capital Account, there shall be added such Holder’s Capital Contributions, such Holder’s distributive share of Net Income and any items in the nature of income or gain that are specially allocated pursuant to Section 6.3 hereof, and the principal amount of any Partnership liabilities assumed by such Holder or that are secured by any property distributed to such Holder.

(b)    From each Holder’s Capital Account, there shall be subtracted the amount of cash and the Gross Asset Value of any property distributed to such Holder pursuant to any provision of this Agreement, such Holder’s distributive share of Net Losses and any items in the nature of expenses or losses that are specially allocated pursuant to Section 6.3 hereof, and the principal amount of any liabilities of such Holder assumed by the Partnership or that are secured by any property contributed by such Holder to the Partnership.

(c)    In the event any interest in the Partnership is Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent that it relates to the Transferred interest.

(d)    In determining the principal amount of any liability for purposes of subsections (a) and (b) hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations.

(e)    The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a manner consistent with such Regulations. If the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts are maintained in order to comply with such Regulations, the General

Partner may make such modification provided that such modification will not have a material effect on the amounts distributable to any Holder without such Holder’s Consent. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Holders and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q) and (ii) make any appropriate modifications in the event that unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b) or Section 1.704-2.

“Capital Contribution” means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any Contributed Property that such Partner contributes to the Partnership pursuant to Section 4.1, 4.2 or 4.3 hereof or is deemed to contribute pursuant to Section 4.4 hereof.

“Cash Amount” means the lesser of (a) an amount of cash equal to the product of (i) the Value of a REIT Share and (ii) the REIT Shares Amount determined as of the applicable Valuation Date or (b) in the case of a Declination followed by a Public Offering Funding, the Public Offering Funding Amount.

 

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“Certificate” means the Certificate of Limited Partnership of the Partnership filed in the office of the Secretary of State of the State of Delaware, as amended from time to time in accordance with the terms hereof and the Act.

“Charter” means the Articles of Amendment and Restatement of the Previous General Partner filed with the Maryland State Department of Assessments and Taxation on [DATE OF SPIN-OFF], as amended, supplemented or restated from time to time.

“Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time or any successor statute thereto, as interpreted by the applicable Regulations thereunder. Any reference herein to a specific Section or Sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

“Company Employee” means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Previous General Partner or any corporation that is then a Subsidiary of the Previous General Partner.

“Consent” means the consent to, approval of, or vote in favor of a proposed action by a Partner given in accordance with Article 14 hereof.

“Consent of the Limited Partners” means the Consent of a Majority in Interest of the Limited Partners, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and, except as otherwise provided in this Agreement, may be given or withheld by a Majority in Interest of the Limited Partners, in their reasonable discretion.

“Contributed Property” means each Property or other asset, in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership (or deemed contributed to the Partnership on termination and reconstitution thereof pursuant to Code Section 708).

“Controlled Entity” means, as to any Limited Partner, (a) any corporation more than fifty percent (50%) of the outstanding voting stock of which is owned by such Limited Partner or such Limited Partner’s Family Members, (b) any trust, whether or not revocable, of which such Limited Partner or such Limited Partner’s Family Members are the sole beneficiaries, (c) any partnership of which such Limited Partner is the managing partner and in which such Limited Partner or such Limited Partner’s Family Members hold partnership interests representing at least twenty-five percent (25%) of such partnership’s capital and profits and (d) any limited liability company of which such Limited Partner is the manager and in which such Limited Partner or such Limited Partner’s Family Members hold membership interests representing at least twenty-five percent (25%) of such limited liability company’s capital and profits.

“Controlling Person” means any Person, whatever his or her title, who performs executive or senior management functions for the General Partner or its Affiliates similar to those of directors, executive management and senior management, or any Person who either holds a two percent (2%) or more equity interest in the General Partner or its Affiliates, or has the power to direct or cause the direction of the General Partner or its Affiliates, whether through the ownership of voting securities, by contract or otherwise, or, in the absence of a specific role or title, any Person having the power to direct or cause the direction of the management-level

 

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employees and policies of the General Partner or its Affiliates. It is not intended that every Person who carries a title such as vice president, senior vice president, secretary or treasurer be included in the definition of “Controlling Person.”

“Cut-Off Date” means the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Debt” means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person’s interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (iv) lease obligations of such Person that, in accordance with generally accepted accounting principles, should be capitalized.

“Declination” has the meaning set forth in Section 8.6D hereof.

“Depreciation” means, for each Fiscal Year or other applicable period, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or period, Depreciation shall be in an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner.

“Designated Individual” has the meaning set forth in Section 10.4A hereof.

“Designated Parties” means the Persons designated on Exhibit C attached hereto. The General Partner may, in its sole and absolute discretion, amend Exhibit C to add Persons to be designated as Designated Parties.

“Distributed Right” has the meaning set forth in the definition of “Adjustment Factor.”

“Effective Date” means July 29, 1994.

“Elective Dividend” means a dividend paid by the Previous General Partner in which stockholders may elect to receive cash or REIT Shares.

“Elective Dividend Cash Payment” has the meaning set forth in the definition of “Adjustment Factor.”

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

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“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder.

“Family Members” means, as to a Person that is an individual, such Person’s spouse, ancestors, descendants (whether by blood or by adoption), brothers, sisters and inter vivos or testamentary trusts of which only such Person and his spouse, ancestors, descendants (whether by blood or by adoption), brothers and sisters are beneficiaries.

“Fiscal Year” means the fiscal year of the Partnership, which shall be the calendar year.

“Funding Debt” means any Debt incurred by or on behalf of the Previous General Partner, the General Partner or the Special Limited Partners for the purpose of providing funds to the Partnership.

“General Partner” means AIMCO-GP, Inc., a Delaware corporation, and its successors and assigns, as the general partner of the Partnership in their capacities as general partner of the Partnership.

“General Partner Interest” means the Partnership Interest held by the General Partner, which Partnership Interest is an interest as a general partner under the Act. A General Partner Interest may be expressed as a number of Partnership Common Units, Partnership Preferred Units or any other Partnership Units.

“General Partner Loan” has the meaning set forth in Section 4.3D hereof.

“Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:

(a)    The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset as determined by the General Partner and agreed to by the contributing Partner. In any case in which the General Partner and the contributing Partner are unable to agree as to the gross fair market value of any contributed asset or assets, such gross fair market value shall be determined by Appraisal.

(b)    The Gross Asset Values of all Partnership assets immediately prior to the occurrence of any event described in clause (i), clause (ii), clause (iii), clause (iv) or clause (v) hereof shall be adjusted to equal their respective gross fair market values, as determined by the General Partner using such reasonable method of valuation as it may adopt, as of the following times:

(i)    the acquisition of an interest in the Partnership (other than in connection with the execution of this Agreement but including, without limitation, acquisitions pursuant to Section 4.2 hereof or contributions or deemed contributions by the General Partner pursuant to Section 4.2 hereof) by a new or existing Partner in exchange for more than a de minimis Capital Contribution or in exchange for services provided to or for the benefit of the Partnership in a partner capacity or in anticipation of becoming a Partner, if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

 

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(ii)    the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership, if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(iii)    the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g);

(iv)    upon the admission of a successor General Partner pursuant to Section 12.1 hereof; and

(v)    at such other times as the General Partner shall reasonably determine necessary or advisable in order to comply with Regulations Sections 1.704-1(b) and 1.704-2.

(c)    The Gross Asset Value of any Partnership asset distributed to a Partner shall be the gross fair market value of such asset on the date of distribution as determined by the distributee and the General Partner provided that, if the distributee is the General Partner or if the distributee and the General Partner cannot agree on such a determination, such gross fair market value shall be determined by Appraisal.

(d)    The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to subsection (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection (d).

(e)    If the Gross Asset Value of a Partnership asset has been determined or adjusted pursuant to subsection (a), subsection (b) or subsection (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Losses.

“Holder” means either (a) a Partner or (b) an Assignee, owning a Partnership Unit, that is treated as a member of the Partnership for federal income tax purposes.

“Imputed Underpayment Amount” has the meaning set forth in Section 10.4D hereof.

“Incapacity” or “Incapacitated” means, (i) as to any Partner who is an individual, death, total physical disability or entry by a court of competent jurisdiction adjudicating such Partner incompetent to manage his or her person or his or her estate; (ii) as to any Partner that is a

 

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corporation or limited liability company, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any Partner that is a partnership, the dissolution and commencement of winding up of the partnership; (iv) as to any Partner that is an estate, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust that is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties, (f) any proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof, (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment, or (h) an appointment referred to in clause (g) above is not vacated within ninety (90) days after the expiration of any such stay.

“Indemnitee” means (i) any Person made a party to a proceeding by reason of its status as (A) the Previous General Partner or the General Partner or (B) a director of the Previous General Partner or the General Partner or an officer or employee of the Partnership or the Previous General Partner or the General Partner and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion.

“Independent Director” means a member of the Board of Directors of the Previous General Partner who is not a Company Employee or a Partnership Employee.

“Interest” means interest, original issue discount and other similar payments or amounts paid by the Partnership for the use or forbearance of money.

“IRS” means the Internal Revenue Service, which administers the internal revenue laws of the United States.

“Limited Partner” means the Special Limited Partners and any Person named as a Limited Partner in Exhibit A attached hereto, as such Exhibit A may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a Limited Partner in the Partnership.

 

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“Limited Partner Interest” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Limited Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Common Units, Partnership Preferred Units or other Partnership Units.

“Liquidating Event” has the meaning set forth in Section 13.1 hereof.

“Liquidator” has the meaning set forth in Section 13.2A hereof.

“Majority in Interest of the Limited Partners” means Limited Partners (other than (i) the Special Limited Partners and (ii) any Limited Partner fifty percent (50%) or more of whose equity is owned, directly or indirectly, by the (a) General Partner or (b) any REIT as to which the General Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2))) holding more than fifty percent (50%) of the outstanding Voting Units held by all Limited Partners (other than (i) the Special Limited Partners and (ii) any Limited Partner fifty percent (50%) or more of whose equity is owned, directly or indirectly, by (a) the General Partner or (b) any REIT as to which the General Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2))).

“Net Income” or “Net Loss” means, for each Fiscal Year of the Partnership, an amount equal to the Partnership’s taxable income or loss for such year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(a)    Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income (or Net Loss) pursuant to this definition of “Net Income” or “Net Loss” shall be added to (or subtracted from, as the case may be) such taxable income (or loss);

(b)    Any expenditure of the Partnership described in Code Section 705(a)(2)(B) or treated as a Code Section 705(a)(2)(B) expenditure pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income (or Net Loss) pursuant to this definition of “Net Income” or “Net Loss,” shall be subtracted from (or added to, as the case may be) such taxable income (or loss);

(c)    In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subsection (b) or subsection (c) of the definition of “Gross Asset Value,” the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss;

(d)    Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

 

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(e)    In lieu of the depreciation, amortization and other cost recovery deductions that would otherwise be taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year;

(f)    To the extent that an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner’s interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Net Income or Net Loss; and

(g)    Notwithstanding any other provision of this definition of “Net Income” or “Net Loss,” any item that is specially allocated pursuant to Section 6.3 hereof shall not be taken into account in computing Net Income or Net Loss. The amounts of the items of Partnership income, gain, loss or deduction available to be specially allocated pursuant to Section 6.3 hereof shall be determined by applying rules analogous to those set forth in this definition of “Net Income” or “Net Loss.”

“New LP Employee” means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of New LP of Previous Public Parent or any entity that is then a Subsidiary of New LP of Previous Public Parent.

“New LP of Previous Public Parent” means Aimco OP L.P.

“New Securities” means (i) any rights, options, warrants or convertible or exchangeable securities having the right to subscribe for or purchase REIT Shares or Preferred Shares, excluding Preferred Shares and grants under the Previous General Partner’s Stock Option Plans, or (ii) any Debt issued by the Previous General Partner that provides any of the rights described in clause (i).

“Non-AIR Holder” means any Holder other than any of the AIR Partners.

“Non-AIR Holders Sharing Percentage” means a percentage equal to 1%, multiplied by a fraction, (i) the numerator of which shall be the number of issued and outstanding Partnership Common Units held by Non-AIR Holders on the applicable record date or date of determination, and (ii) the denominator of which shall be the number of issued and outstanding Partnership Common Units held by Non-AIR Holders on the Amendment Date.

“Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).

“Nonrecourse Liability” has the meaning set forth in Regulations Section 1.752-1(a)(2).

“Notice of Redemption” means the Notice of Redemption substantially in the form of Exhibit D attached to this Agreement.

 

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“Optionee” means a Company Employee, Previous Public Parent Employee, Partnership Employee, New LP Employee, Independent Director or Previous Public Parent Director to whom a stock option is granted under the Previous General Partner’s Stock Option Plans.

“Original Limited Partners” means the Persons listed as the Limited Partners on Exhibit A originally attached to this Agreement, without regard to any amendment thereto, and does not include any Assignee or other transferee, including, without limitation, any Substituted Limited Partner succeeding to all or any part of the Partnership Interest of any such Person.

“Ownership Limit” means the applicable restriction on ownership of shares of the Previous General Partner imposed under the Charter.

“Partner” means the General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners.

“Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

“Partner Nonrecourse Debt” has the meaning set forth in Regulations Section 1.704-2(b)(4).

“Partner Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

“Partnership” means the limited partnership formed under the Act and pursuant to this Agreement, and any successor thereto.

“Partnership Audit Rules” means Subchapter C of Chapter 63 of Subtitle F of the Code, as modified by Section 1101 of the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, and any successor statutes thereto or the Treasury Regulations or other authoritative guidance promulgated thereunder.

“Partnership Common Unit” means a fractional share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2 hereof, but does not include any Partnership Preferred Unit or any other Partnership Unit specified in a Partnership Unit Designation as being other than a Partnership Common Unit; provided, however, that the General Partner Interest and the Limited Partner Interests shall have the differences in rights and privileges as specified in this Agreement. The ownership of Partnership Common Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by the form of certificate for Partnership Common Units attached hereto as Exhibit E.

“Partnership Employee” means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Partnership, or any entity that is then a Subsidiary of the Partnership.

 

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“Partnership Interest” means an ownership interest in the Partnership held by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Common Units, Partnership Preferred Units or other Partnership Units.

“Partnership Minimum Gain” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

“Partnership Preferred Unit” means a fractional share of the Partnership Interests that the General Partner has authorized pursuant to Section 4.2 hereof that has distribution rights, or rights upon liquidation, winding up and dissolution, that are superior or prior to the Partnership Common Units.

“Partnership Record Date” means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall generally be the same as the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such distribution.

“Partnership Representative” has the meaning set forth in Section 10.4A hereof.

“Partnership Subsidiary” means any partnership or limited liability company in any unbroken chain of partnerships or limited liability companies beginning with the Partnership if each of the partnerships or limited liability companies beginning with the Partnership if each of the partnerships or limited liability companies other than the last partnership or limited liability company in the unbroken chain then owns more than fifty percent (50%) of the capital or profits interests in one of the other partnerships or limited liability companies. “Partnership Subsidiary” shall also mean any corporation in which the Partnership and/or any Partnership Subsidiary owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock.

“Partnership Unit” shall mean a Partnership Common Unit, a Partnership Preferred Unit or any other fractional share of the Partnership Interests that the General Partner has authorized pursuant to Section 4.2 hereof.

“Partnership Unit Designation” shall have the meaning set forth in Section 4.2 hereof.

“Percentage Interest” means, as to each Partner, its interest in the Partnership Units as determined by dividing the Partnership Units owned by such Partner by the total number of Partnership Units then outstanding.

“Permitted Transfer” has the meaning set forth in Section 11.3A hereof.

“Person” means an individual or a corporation, partnership, trust, unincorporated organization, association, limited liability company or other entity.

 

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“Pledge” has the meaning set forth in Section 11.3A hereof.

“Preferred Return” means, with respect to each Partnership Common Unit on a specified Partnership Record Date, an amount equal to zero on the Amendment Date (or, if later, the date such Partnership Common Unit is issued), and increased cumulatively on each Partnership Record Date on which such Unit is outstanding by an amount equal to the cash dividends per REIT Share, if any, paid by the Previous General Partner to holders of REIT Shares for which the record date is on such Partnership Record Date or any other date subsequent to the immediately preceding Partnership Record Date, in each case, multiplied by the Adjustment Factor in effect on such date; provided, however, that for each Partnership Common Unit issued after the Amendment Date, the increase that shall occur in accordance with the foregoing on the first Partnership Record Date that occurs on or after the date on which such Partnership Common Unit was first issued shall be the foregoing amount, multiplied by a fraction, the numerator of which is the number of days that such Partnership Common Unit was outstanding up to and including such first Partnership Record Date, and the denominator of which is the total number of days in the period from but excluding the immediately preceding Partnership Record Date to and including such first Partnership Record Date. In the case of an Elective Dividend, the amount of the cash dividend per REIT Share shall be calculated by dividing the aggregate amount of cash paid to all stockholders by the total number of REIT Shares outstanding as of the record date for the Elective Dividend.

“Preferred Return Shortfall” means, for any Partnership Common Unit, and as of any specified date, the amount (if any) by which (i) the Preferred Return with respect to such Partnership Common Unit as of such specified date, exceeds (ii) the aggregate amount distributed with respect to such Partnership Common Unit after the Amendment Date and prior to such specified date pursuant to Section 5.1A, but excluding any Elective Dividend Cash Payment.

“Preferred Share” means a share of capital stock of the Previous General Partner now or hereafter authorized or reclassified that has dividend rights, or rights upon liquidation, winding up and dissolution, that are superior or prior to the REIT Shares.

“Previous General Partner” has the meaning set forth in the Preamble hereof.

“Previous General Partner’s Stock Option Plans” means any stock option or equity incentive or award plan adopted by the Previous General Partner.

“Previous Public Parent” means Apartment Investment and Management Company, a Maryland corporation.

“Previous Public Parent Director” means any member of the Board of Directors of the Previous Public Parent who is not a Previous Public Parent Employee or New LP Employee.

“Previous Public Parent Employee” means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Previous Public Parent or any Subsidiary of the Previous Public Parent.

“Primary Offering Notice” has the meaning set forth in Section 8.6F(4) hereof.

 

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“Properties” means any assets and property of the Partnership such as, but not limited to, interests in real property and personal property, including, without limitation, fee interests, interests in ground leases, interests in limited liability companies, joint ventures or partnerships, interests in mortgages, and Debt instruments as the Partnership may hold from time to time.

“Public Offering Funding” has the meaning set forth in Section 8.6D(2) hereof.

“Public Offering Funding Amount” means the dollar amount equal to (i) the product of (x) the number of Registrable Shares sold in a Public Offering Funding and (y) the public offering price per share of such Registrable Shares in such Public Offering Funding, less (ii) the aggregate underwriting discounts and commissions in such Public Offering Funding.

“Qualified Transferee” means an “accredited investor” as defined in Rule 501 promulgated under the Securities Act.

“Qualifying Party” means (a) an Original Limited Partner, (b) an Additional Limited Partner, (c) a Designated Party that is either a Substituted Limited Partner or an Assignee, (d) a Family Member, or a lending institution as the pledgee of a Pledge, who is the transferee in a Permitted Transfer or (e) with respect to any Notice of Redemption delivered to the General Partner within the time period set forth in Section 11.3A(4) hereof, a Substituted Limited Partner succeeding to all or part of the Limited Partner Interest of (i) an Original Limited Partner, (ii) an Additional Limited Partner, (iii) a Designated Party that is either a Substituted Limited Partner or an Assignee or (iv) a Family Member, or a lending institution who is the pledgee of a Pledge, who is the transferee in a Permitted Transfer.

“Redeemable Units” means those Partnership Common Units issued to the Original Limited Partners as of the Effective Date together with such additional Partnership Common Units that, after the Effective Date, may be issued to Additional Limited Partners pursuant to Section 4.2 hereof.

“Redemption” has the meaning set forth in Section 8.6A hereof.

“Registrable Shares” has the meaning set forth in Section 8.6D(2) hereof.

“Regulations” means the applicable income tax regulations under the Code, whether such regulations are in proposed, temporary or final form, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

“Regulatory Allocations” has the meaning set forth in Section 6.3B(7) hereof.

“REIT” means a real estate investment trust qualifying under Code Section 856.

“REIT Partner” means (a) a Partner that is, or has made an election to qualify as, a REIT, including each of the Special Limited Partners; (b) any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of any Partner that is, or has made an election to qualify as, a REIT and (c) any Partner, including, without limitation, the General Partner, that is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT.

 

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“REIT Payment” has the meaning set forth in Section 15.11 hereof.

“REIT Requirements” has the meaning set forth in Section 5.1 hereof.

“REIT Share” means a share of the Previous General Partner’s Class A Common Stock, par value $.01 per share. Where relevant in this Agreement, “REIT Shares” includes shares of the Previous General Partner’s Class A Common Stock, par value $.01 per share, issued upon conversion of Preferred Shares.

“REIT Shares Amount” means, with respect to any Tendered Units and as of any Valuation Date, a number of REIT Shares equal to the sum of (x) the product of (a) the number of Tendered Units, and (b) the Adjustment Factor, and (y) the quotient obtained by dividing (i) the aggregate Preferred Return Shortfall applicable to such Tendered Units by (ii) the Value of a REIT Share (all calculated as of such Valuation Date); provided, however, that, in the event that the Previous General Partner issues to all holders of REIT Shares as of a certain record date rights, options, warrants or convertible or exchangeable securities entitling the Previous General Partner’s shareholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the “Rights”), with the record date for such Rights issuance falling within the period starting on the date of the Notice of Redemption and ending on the day immediately preceding the Specified Redemption Date, which Rights will not be distributed before the relevant Specified Redemption Date, then the REIT Shares Amount shall also include such Rights that a holder of that number of REIT Shares would be entitled to receive, expressed, where relevant hereunder, in a number of REIT Shares determined by the Previous General Partner in good faith.

“REIT Sub 1” means AIR REIT Sub 1, LLC, a Delaware limited liability company that has elected to be treated as a corporation and will elect to be treated as a REIT for U.S. federal income tax purposes.

“REIT Sub 2” means AIR REIT Sub 2, LLC, a Delaware limited liability company that has elected to be treated as a corporation and will elect to be treated as a REIT for U.S. federal income tax purposes.

“Related Party” means, with respect to any Person, any other Person whose ownership of shares of the Previous General Partner’s capital stock would be attributed to the first such Person under Code Section 544 (as modified by Code Section 856(h)(1)(B)).

“Rights” has the meaning set forth in the definition of “REIT Shares Amount.”

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.

“Single Funding Notice” has the meaning set forth in Section 8.6D(3) hereof.

“Special Limited Partners” has the meaning set forth in the Preamble hereof.

 

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“Specified Redemption Date” means the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that no Specified Redemption Date shall occur during the first Twelve-Month Period; provided, further, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 8.6B hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Subsidiary” means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person; provided, however, that, with respect to the Partnership, “Subsidiary” means solely a partnership or limited liability company (taxed, for federal income tax purposes, as a partnership and not as an association or publicly traded partnership taxable as a corporation) of which the Partnership is a member unless the General Partner has received an unqualified opinion from independent counsel of recognized standing, or a ruling from the IRS, that the ownership of shares of stock of a corporation or other entity will not jeopardize any Special Limited Partner’s status as a REIT or the status of the General Partner or any other wholly owned subsidiary of a Special Limited Partner as a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)), in which event the term “Subsidiary” shall include the corporation or other entity which is the subject of such opinion or ruling.

“Substituted Limited Partner” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4 hereof.

“Tax Items” has the meaning set forth in Section 6.4A hereof.

“Tax Matters Partner” has the meaning set forth in Section 10.3A hereof.

“TEFRA Rules” means Subchapter C of Chapter 63 of the Code (Section 6221 et seq.) as in effect for any period to which the Partnership Audit Rules do not apply, and any Treasury Regulations or other guidance issued thereunder, and any similar state or local legislation, regulations or guidance.

“Tendered Units” has the meaning set forth in Section 8.6A hereof.

“Tendering Party” has the meaning set forth in Section 8.6A hereof.

“Terminating Capital Transaction” means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership.

 

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“Transfer,” when used with respect to a Partnership Unit, or all or any portion of a Partnership Interest, means any sale, assignment, bequest, conveyance, devise, gift (outright or in trust), Pledge, encumbrance, hypothecation, mortgage, exchange, transfer or other disposition or act of alienation, whether voluntary or involuntary or by operation of law; provided, however, that when the term is used in Article 11 hereof, “Transfer” does not include (a) any Redemption of Partnership Common Units by the Partnership, or acquisition of Tendered Units by the Previous General Partner, pursuant to Section 8.6 hereof or (b) any redemption of Partnership Units pursuant to any Partnership Unit Designation. The terms “Transferred” and “Transferring” have correlative meanings.

“Twelve-Month Period” means (a) as to an Original Limited Partner or any successor-in-interest that is a Qualifying Party, a twelve-month period ending on the day before the first (1st) anniversary of the Effective Date or on the day before a subsequent anniversary thereof and (b) as to any other Qualifying Party, a twelve-month period ending on the day before the first (1st) anniversary of such Qualifying Party’s becoming a Holder of Partnership Common Units or on the day before a subsequent anniversary thereof; provided, however, that the General Partner may, in its sole and absolute discretion, by written agreement with a Qualifying Party, shorten the first Twelve-Month Period to a period of less than twelve (12) months with respect to a Qualifying Party other than an Original Limited Partner or successor-in-interest.

“Unitholder” means the General Partner or any Holder of Partnership Units.

“Valuation Date” means the date of receipt by the General Partner of a Notice of Redemption or, if such date is not a Business Day, the immediately preceding Business Day.

“Value” means, on any Valuation Date with respect to a REIT Share, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the Valuation Date (except that, as provided in Section 4.4C hereof, the market price for the trading day immediately preceding the date of exercise of a stock option under the Previous General Partner’s Stock Option Plans shall be substituted for such average of daily market prices for purposes of Section 4.4 hereof). The market price for any such trading day shall be:

(i)    if the REIT Shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the REIT Shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

 

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(iii)    if the REIT Shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event that the REIT Shares Amount includes Rights (as defined in the definition of “REIT Shares Amount”) that a holder of REIT Shares would be entitled to receive, then the Value of such Rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.

“Voting Units” means Partnership Common Units, Class I High Performance Partnership Units and any other class of Partnership Units having the same voting or approval rights as Partnership Common Units.

ARTICLE 2

ORGANIZATIONAL MATTERS

Section 2.1    Organization. The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and subject to the conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.

Section 2.2    Name. The name of the Partnership is “AIMCO Properties, L.P.” The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership,” “L.P.,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Partners of such change in the next regular communication to the Partners.

Section 2.3    Registered Office and Agent; Principal Office. The address of the registered office of the Partnership in the State of Delaware is located at 251 Little Falls Drive, Wilmington, Delaware 19808, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office is Corporation Service Company. The principal office of the Partnership is located at 4582 South Ulster Street, Suite 1700, Denver, CO 80237, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable.

 

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Section 2.4    Power of Attorney.

A.    Each Limited Partner and each Assignee hereby irrevocably constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to:

(1)    execute, swear to, seal, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments, supplements or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability to the extent provided by applicable law) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the distribution or exchange of assets of the Partnership pursuant to the terms of this Agreement; (e) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, Article 12 or Article 13 hereof or the Capital Contribution of any Partner; and (f) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges relating to Partnership Interests; and

(2)    execute, swear to, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole and absolute discretion of the General Partner, to effectuate the terms or intent of this Agreement.

Nothing contained herein shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement.

B.    The foregoing power of attorney is hereby declared to be irrevocable and a special power coupled with an interest, in recognition of the fact that each of the Limited Partners and Assignees will be relying upon the power of the General Partner or the Liquidator to

 

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act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the Transfer of all or any portion of such Limited Partner’s or Assignee’s Partnership Units or Partnership Interest and shall extend to such Limited Partner’s or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or the Liquidator, acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner’s or the Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.

Section 2.5    Term. The term of the Partnership commenced on May 16, 1994, the date that the original Certificate was filed in the office of the Secretary of State of Delaware in accordance with the Act, and shall continue until the Partnership is dissolved pursuant to the provisions of Article 13 hereof or as otherwise provided by law.

ARTICLE 3

PURPOSE

Section 3.1    Purpose and Business. The purpose and nature of the Partnership is to conduct any business, enterprise or activity permitted by or under the Act, including, but not limited to, (i) to conduct the business of ownership, construction, development and operation of multifamily rental apartment communities, (ii) to enter into any partnership, joint venture, business trust arrangement, limited liability company or other similar arrangement to engage in any business permitted by or under the Act, or to own interests in any entity engaged in any business permitted by or under the Act, (iii) to conduct the business of providing property and asset management and brokerage services, whether directly or through one or more partnerships, joint ventures, subsidiaries, business trusts, limited liability companies or other similar arrangements, and (iv) to do anything necessary or incidental to the foregoing; provided, however, such business and arrangements and interests may be limited to and conducted in such a manner as to permit the Previous General Partner, in the sole and absolute discretion of the General Partner, at all times to be classified as a REIT.

Section 3.2    Powers.

A.    The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership.

B.    Notwithstanding any other provision in this Agreement, the General Partner may cause the Partnership not to take, or to refrain from taking, any action that, in the

 

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judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Previous General Partner to continue to qualify as a REIT, (ii) could subject the Previous General Partner to any additional taxes under Code Section 857 or Code Section 4981 or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Previous General Partner, the General Partner, their securities or the Partnership, unless such action (or inaction) under clause (i), clause (ii) or clause (iii) above shall have been specifically consented to by the Previous General Partner and the General Partner in writing.

Section 3.3    Partnership Only for Purposes Specified. The Partnership shall be a limited partnership only for the purposes specified in Section 3.1 hereof, and this Agreement shall not be deemed to create a company, venture or partnership between or among the Partners with respect to any activities whatsoever other than the activities within the purposes of the Partnership as specified in Section 3.1 hereof. Except as otherwise provided in this Agreement, no Partner shall have any authority to act for, bind, commit or assume any obligation or responsibility on behalf of the Partnership, its properties or any other Partner. No Partner, in its capacity as a Partner under this Agreement, shall be responsible or liable for any indebtedness or obligation of another Partner, nor shall the Partnership be responsible or liable for any indebtedness or obligation of any Partner, incurred either before or after the execution and delivery of this Agreement by such Partner, except as to those responsibilities, liabilities, indebtedness or obligations incurred pursuant to and as limited by the terms of this Agreement and the Act.

Section 3.4    Representations and Warranties by the Parties.

A.    Each Partner that is an individual (including, without limitation, each Additional Limited Partner or Substituted Limited Partner as a condition to becoming an Additional Limited Partner or a Substituted Limited Partner) represents and warrants to each other Partner(s) that (i) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any material agreement by which such Partner or any of such Partner’s property is bound, or any statute, regulation, order or other law to which such Partner is subject, (ii) such Partner is neither a “foreign person” within the meaning of Code Section 1445(f) nor a “foreign partner” within the meaning of Code Section 1446(e), (iii) such Partner does not own, directly or indirectly, (a) five percent (5%) or more of the total combined voting power of all classes of stock entitled to vote, or five percent (5%) or more of the total number of shares of all classes of stock, of any corporation that is a tenant of any of (I) the General Partner, the Special Limited Partners or any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner, (II) the Partnership or (III) any partnership, venture or limited liability company of which the General Partner, the Special Limited Partners, any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner or the Partnership is a member or (b) an interest of five percent (5%) or more in the assets or net profits of any tenant of any of (I) the General Partner, the Special Limited Partners or any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner, (II) the Partnership or (III) any partnership, venture, or limited liability company of which the General Partner, the Special Limited Partners, any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner or the Partnership is a member and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms.

 

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B.    Each Partner that is not an individual (including, without limitation, each Additional Limited Partner or Substituted Limited Partner as a condition to becoming an Additional Limited Partner or a Substituted Limited Partner) represents and warrants to each other Partner(s) that (i) all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including, without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, directors and/or shareholder(s), as the case may be, as required, (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its partnership or operating agreement, trust agreement, charter or bylaws, as the case may be, any material agreement by which such Partner or any of such Partner’s properties or any of its partners, members, beneficiaries, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, members, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (iii) such Partner is neither a “foreign person” within the meaning of Code Section 1445(f) nor a “foreign partner” within the meaning of Code Section 1446(e), (iv) such Partner does not own, directly or indirectly, (a) five percent (5%) or more of the total combined voting power of all classes of stock entitled to vote, or five percent (5%) or more of the total number of shares of all classes of stock, of any corporation that is a tenant of any of (I) the General Partner, the Special Limited Partners or any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner, (II) the Partnership or (III) any partnership, venture or limited liability company of which the General Partner, the Special Limited Partners, any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner or the Partnership is a member or (b) an interest of five percent (5%) or more in the assets or net profits of any tenant of any of (I) the General Partner, the Special Limited Partners or any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner, (II) the Partnership or (III) any partnership, venture or limited liability company for which the General Partner, the Special Limited Partners, any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to a Special Limited Partner or the Partnership is a member and (v) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms.

C.    Each Partner (including, without limitation, each Substituted Limited Partner as a condition to becoming a Substituted Limited Partner) represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds that it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment.

 

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D.    The representations and warranties contained in Sections 3.4A, 3.4B and 3.4C hereof shall survive the execution and delivery of this Agreement by each Partner (and, in the case of an Additional Limited Partner or a Substituted Limited Partner, the admission of such Additional Limited Partner or Substituted Limited Partner as a Limited Partner in the Partnership) and the dissolution, liquidation and termination of the Partnership.

E.    Each Partner (including, without limitation, each Substituted Limited Partner as a condition to becoming a Substituted Limited Partner) hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or the General Partner have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, that may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied.

ARTICLE 4

CAPITAL CONTRIBUTIONS

Section 4.1    Capital Contributions of the Partners. The Partners have heretofore made Capital Contributions to the Partnership. Each Partner owns Partnership Units in the amount set forth for such Partner on Exhibit A, as the same may be amended from time to time by the General Partner to the extent necessary to reflect accurately sales, exchanges or other Transfers, redemptions, Capital Contributions, the issuance of additional Partnership Units, or similar events having an effect on a Partner’s ownership of Partnership Units. Except as provided by law or in Section 4.2, 4.3 or 10.5 hereof, the Partners shall have no obligation or right to make any additional Capital Contributions or loans to the Partnership.

Section 4.2    Issuances of Additional Partnership Interests.

A.    General. The General Partner is hereby authorized to cause the Partnership to issue additional Partnership Interests, in the form of Partnership Units, for any Partnership purpose, at any time or from time to time, to the Partners (including the General Partner and the Special Limited Partners) or to other Persons, and to admit such Persons as Additional Limited Partners, for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion, all without the approval of any Limited Partners. Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units (i) upon the conversion, redemption or exchange of any Debt, Partnership Units or other securities issued by the Partnership, (ii) for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership, and (iii) in connection with any merger of any other Person into the Partnership if the applicable merger agreement provides that Persons are to receive Partnership Units in exchange for their interests in the Person merging into the Partnership. Subject to Delaware law, any additional Partnership Interests may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties as shall be determined by the General Partner, in its sole and absolute discretion without the approval of any

 

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Limited Partner, and set forth in a written document thereafter attached to and made an exhibit to this Agreement (each, a “Partnership Unit Designation”). Without limiting the generality of the foregoing, the General Partner shall have authority to specify (a) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (b) the right of each such class or series of Partnership Interests to share in Partnership distributions; (c) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; (d) the voting rights, if any, of each such class or series of Partnership Interests; and (e) the conversion, redemption or exchange rights applicable to each such class or series of Partnership Interests. Upon the issuance of any additional Partnership Interest, the General Partner shall amend Exhibit A as appropriate to reflect such issuance.

B.    Issuances to the General Partner or Special Limited Partners. No additional Partnership Units shall be issued to the General Partner or the Special Limited Partners unless (i) the additional Partnership Units are issued to all Partners in proportion to their respective Percentage Interests, (ii) (a) the additional Partnership Units are (x) Partnership Common Units issued in connection with an issuance of REIT Shares, or (y) Partnership Units (other than Partnership Common Units) issued in connection with an issuance of Preferred Shares, New Securities or other interests in the Previous General Partner (other than REIT Shares), which Preferred Shares, New Securities or other interests have designations, preferences and other rights, terms and provisions that are substantially the same as the designations, preferences and other rights, terms and provisions of the additional Partnership Units issued to the General Partner or the Special Limited Partners, and (b) the General Partner or the Special Limited Partners, as the case may be, contributes to the Partnership the cash proceeds or other consideration received in connection with the issuance of such REIT Shares, Preferred Shares, New Securities or other interests in the Previous General Partner, (iii) the additional Partnership Units are issued upon the conversion, redemption or exchange of Debt, Partnership Units or other securities issued by the Partnership, or (iv) the additional Partnership Units are issued pursuant to Section 4.4.

C.    No Preemptive Rights. No Person, including, without limitation, any Partner or Assignee, shall have any preemptive, preferential, participation or similar right or rights to subscribe for or acquire any Partnership Interest.

Section 4.3    Additional Funds.

A.    General. The General Partner may, at any time and from time to time, determine that the Partnership requires additional funds (“Additional Funds”) for the acquisition or development of additional Properties, for the redemption of Partnership Units or for such other purposes as the General Partner may determine. Additional Funds may be obtained by the Partnership, at the election of the General Partner, in any manner provided in, and in accordance with, the terms of this Section 4.3 without the approval of any Limited Partners.

B.    Additional Capital Contributions. The General Partner, on behalf of the Partnership, may obtain any Additional Funds by accepting Capital Contributions from any Partners or other Persons and issuing additional Partnership Units in consideration therefor.

 

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C.    Loans by Third Parties. The General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt to any Person (other than the Previous General Partner, the General Partner or the Special Limited Partners) upon such terms as the General Partner determines appropriate, including making such Debt convertible, redeemable or exchangeable for Partnership Units; provided, however, that the Partnership shall not incur any such Debt if (i) a breach, violation or default of such Debt would be deemed to occur by virtue of the Transfer of any Partnership Interest, or (ii) such Debt is recourse to any Partner (unless the Partner otherwise agrees).

D.    General Partner Loans. The General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt with the Previous General Partner, the General Partner or the Special Limited Partners (each, a “General Partner Loan”) if (i) such Debt is, to the extent permitted by law, on substantially the same terms and conditions (including interest rate, repayment schedule, and conversion, redemption, repurchase and exchange rights) as Funding Debt incurred by the Previous General Partner, the General Partner or the Special Limited Partners, the net proceeds of which are loaned to the Partnership to provide such Additional Funds, or (ii) such Debt is on terms and conditions no less favorable to the Partnership than would be available to the Partnership from any third party; provided, however, that the Partnership shall not incur any such Debt if (a) a breach, violation or default of such Debt would be deemed to occur by virtue of the Transfer of any Partnership Interest, or (b) such Debt is recourse to any Partner (unless the Partner otherwise agrees).

E.    Issuance of Securities by the Previous General Partner. The Previous General Partner shall not issue any additional REIT Shares, Preferred Shares or New Securities unless (i) the Previous General Partner contributes or is deemed to contribute the cash proceeds or other consideration received from the issuance of such additional REIT Shares, Preferred Shares or New Securities, as the case may be, and from the exercise of the rights contained in any such additional New Securities, to any or all of the General Partner and the Special Limited Partners, and (ii) it or they, as the case may be, contribute or is deemed to contribute such cash proceeds or other consideration to the Partnership in exchange for (x) in the case of an issuance of REIT Shares, Partnership Common Units, or (y) in the case of an issuance of Preferred Shares or New Securities, Partnership Units with designations, preferences and other rights, terms and provisions that are substantially the same as the designations, preferences and other rights, terms and provisions of such Preferred Shares or New Securities; provided, however, that notwithstanding the foregoing, the Previous General Partner may issue REIT Shares, Preferred Shares or New Securities (a) pursuant to Section 4.4 or Section 8.6B hereof, (b) pursuant to a dividend or distribution (including any stock split) of REIT Shares, Preferred Shares or New Securities to all of the holders of REIT Shares, Preferred Shares or New Securities, as the case may be, (c) upon a conversion, redemption or exchange of Preferred Shares, (d) upon a conversion, redemption, exchange or exercise of New Securities, or (e) in connection with an acquisition of a property or other asset to be owned, directly or indirectly, by the Previous General Partner if the General Partner determines that such acquisition is in the best interests of the Partnership. In the event of any issuance of additional REIT Shares, Preferred Shares or New Securities by the Previous General Partner, and the contribution or deemed contribution to the Partnership, by the General Partner or the Special Limited Partners, of the cash proceeds or other consideration received from such issuance, the Partnership shall pay the Previous General Partner’s expenses associated with such issuance, including any underwriting discounts or commissions.

 

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Section 4.4    Stock Option Plans.

A.    Options Granted to Company Employees, Previous Public Parent Employees, Independent Directors and Previous Public Parent Directors. If at any time or from time to time, in connection with the Previous General Partner’s Stock Option Plans, a stock option or other award granted to or held by a Company Employee, Previous Public Parent Employee, Independent Director or Previous Public Parent Director is duly exercised or with respect to awards other than stock options, vested:

(1)    The Special Limited Partners shall with respect to an exercised stock option, as soon as practicable after such exercise, make a Capital Contribution to the Partnership in an amount equal to the exercise price paid to the Previous General Partner by such exercising party in connection with the exercise of such stock option.

(2)    With respect to awards other than stock options, the Special Limited Partners shall issue such number of REIT Shares as are to be issued to the Company Employee, Previous Public Parent Employee, Independent Director or Previous Public Parent Director, as applicable, in accordance with the Stock Option Plan and, with respect to stock options and other awards, notwithstanding the amount of the Capital Contribution actually made pursuant to Section 4.4A(1) hereof, if applicable, the Special Limited Partners shall be deemed to have contributed to the Partnership as a Capital Contribution, in consideration of an additional Limited Partner Interest (expressed in and as additional Partnership Common Units), an amount equal to the Value of a REIT Share as of the date of exercise or vesting (as applicable) multiplied by the number of REIT Shares then being issued in connection with the exercise of such stock option or vesting with respect to other awards.

(3)    An equitable Percentage Interest adjustment shall be made in which the Special Limited Partners shall be treated as having made a cash contribution equal to the amount described in Section 4.4A(2) hereof.

B.    Options Granted to Partnership Employees or New LP Employees. If at any time or from time to time, in connection with the Previous General Partner’s Stock Option Plans, a stock option or other award granted to or held by a Partnership Employee or a New LP Employee is duly exercised or with respect to awards other than stock options, vested:

(1)    With respect to awards other than stock options, the Previous General Partner shall issue such number of REIT Shares as are to be issued to the Partnership Employee or New LP Employee, as applicable, in accordance with the Stock Option Plan and, with respect to stock options and other awards, the General Partner shall cause the Previous General Partner to sell (or shall be deemed to have sold such shares) to the Partnership, and the Partnership shall purchase from the Previous General Partner, the number of REIT Shares as to which such stock option is being exercised or other award is vesting. The purchase price per REIT Share for such sale of REIT Shares to the Partnership shall be the Value of a REIT Share as of the date of exercise of such stock option or date of vesting with respect to other awards.

 

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(2)    The Partnership shall sell to the Optionee (or if the Optionee is an employee of a Partnership Subsidiary, the Partnership shall sell to such Partnership Subsidiary, which in turn shall sell to the Optionee), for a cash price per share equal to the Value of a REIT Share at the time of the exercise, the number of REIT Shares equal to (a) the exercise price paid to the Previous General Partner by the exercising party in connection with the exercise of such stock option divided by (b) the Value of a REIT Share at the time of such exercise.

(3)    The Partnership shall transfer or be deemed to transfer to the Optionee (or if the Optionee is an employee of a Partnership Subsidiary, the Partnership shall transfer to such Partnership Subsidiary, which in turn shall transfer to the Optionee) at no additional cost, as additional compensation, the number of REIT Shares equal to the number of REIT Shares described in Section 4.4B(1) hereof less, with respect to stock options, the number of REIT Shares described in Section 4.4B(2) hereof.

(4)    The Special Limited Partners shall, as soon as practicable after such exercise or vesting, make or be deemed to make, a Capital Contribution to the Partnership of an amount equal to all proceeds received (from whatever source, but excluding any payment in respect of payroll taxes or other withholdings) by the Previous General Partner, the General Partner or the Special Limited Partners in connection with the exercise of such stock option or the vesting of such other award. An equitable Percentage Interest adjustment shall be made in which the Special Limited Partners shall be treated as having made a cash contribution equal to the amount described in Section 4.4B(1) hereof.

C.    Special Valuation Rule. For purposes of this Section 4.4, in determining the Value of a REIT Share, only the trading date immediately preceding the exercise of the relevant stock option or the vesting with respect to awards other than stock options under the Previous General Partner’s Stock Option Plans shall be considered.

D.    Future Stock Incentive Plans. Nothing in this Agreement shall be construed or applied to preclude or restrain the Previous General Partner, the General Partner or the Special Limited Partners from adopting, modifying or terminating stock incentive plans, in addition to the Previous General Partner’s Stock Option Plans, for the benefit of employees, directors or other business associates of the Previous General Partner, the General Partner, the Special Limited Partners, the Partnership or any of their Affiliates. The Limited Partners acknowledge and agree that, in the event that any such plan is adopted, modified or terminated by the Previous General Partner, the General Partner or the Special Limited Partners amendments to this Section 4.4 may become necessary or advisable and that any approval or consent to any such amendments requested by the Previous General Partner, the General Partner or the Special Limited Partners shall not be unreasonably withheld or delayed.

Section 4.5    No Interest; No Return. No Partner shall be entitled to interest on its Capital Contribution or on such Partner’s Capital Account. Except as provided herein or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution from the Partnership.

 

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ARTICLE 5

DISTRIBUTIONS

Section 5.1    Requirement and Characterization of Distributions. Subject to the terms of any Partnership Unit Designation, the General Partner shall cause the Partnership to distribute quarterly all, or such portion as the General Partner may in its sole and absolute discretion determine (provided such amount may not be less than the aggregate Preferred Return Shortfall of all Partnership Common Units held by all Non-AIR Holders), of Available Cash generated by the Partnership during such quarter to the Holders of Partnership Common Units as follows:

A.    First, to the Non-AIR Holders of Partnership Common Units as of the Partnership Record Date for such distribution, in accordance with the Preferred Return Shortfalls of their Partnership Common Units, until the aggregate Preferred Return Shortfall applicable to all Partnership Common Units held by the Non-AIR Holders is zero;

B.    Second, to the AIR Partners in accordance with the Preferred Return Shortfalls of their Partnership Common Units, until the aggregate Preferred Return Shortfall applicable to all Partnership Common Units held by the AIR Partners is zero; and

C.    Third, (i) the Non-AIR Holders Sharing Percentage to the Non-AIR Holders, and (ii) the AIR Partners Sharing Percentage to the AIR Partners, in each case, allocated among them based on their ownership of Partnership Common Units.

The General Partner in its sole and absolute discretion may distribute to the Unitholders Available Cash on a more frequent basis and provide for an appropriate record date. The General Partner shall take such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with the Previous General Partner’s qualification as a REIT, to cause the Partnership to distribute amounts sufficient to enable the AIR Partners to transfer funds to the Previous General Partner that, together with amounts received by the Previous General Partner from sources other than the Partnership, will allow the Previous General Partner to pay stockholder dividends that will (a) satisfy the requirements for qualifying as a REIT under the Code and Regulations (the “REIT Requirements”) and (b) avoid any federal income or excise tax liability of the Previous General Partner.

Section 5.2    Distributions in Kind. No right is given to any Non-AIR Holder to demand and receive property other than cash as provided in this Agreement. The General Partner may determine, in its sole and absolute discretion, to make a distribution in kind of Partnership assets (a) to all Unitholders, in which case such assets shall be distributed in such a fashion as to ensure that the fair market value is distributed and allocated in accordance with Articles 5, 6 and 10 hereof, or (b) only to AIR Partners and not to any Non-AIR Holders if, after giving effect to such distribution to AIR Partners, the net asset value of the Partnership, as reasonably determined by the General Partner in good faith, would exceed 200% of the sum of (i) the product of (x) the number of Partnership Common Units then held by Non-AIR Holders, (y) the Value of a REIT Share, and (z) the Adjustment Factor, and (ii) the aggregate liquidation preference of all outstanding Partnership Preferred Units (all calculated as of the date of such distribution).

 

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Section 5.3    Amounts Withheld. All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.5 hereof with respect to any allocation, payment or distribution to any Unitholder shall be treated as amounts paid or distributed to such Unitholder pursuant to Section 5.1 hereof for all purposes under this Agreement.

Section 5.4    Distributions Upon Liquidation. Notwithstanding the other provisions of this Article 5, net proceeds from a Terminating Capital Transaction, and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership, shall be distributed to the Unitholders in accordance with Section 13.2 hereof.

Section 5.5    Restricted Distributions. Notwithstanding any provision to the contrary contained in this Agreement, neither the Partnership nor the General Partner, on behalf of the Partnership, shall make a distribution to any Unitholder on account of its Partnership Interest or interest in Partnership Units if such distribution would violate Section 17-607 of the Act or other applicable law.

ARTICLE 6

ALLOCATIONS

Section 6.1    Timing and Amount of Allocations of Net Income and Net Loss. Subject to Section 11.6C hereof, Net Income and Net Loss of the Partnership shall be determined and allocated with respect to each Fiscal Year of the Partnership as of the end of each such year. Except as otherwise provided in this Article 6, and subject to Section 11.6C hereof, an allocation to a Unitholder of a share of Net Income or Net Loss shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Income or Net Loss.

Section 6.2    General Allocations. Subject to the terms of any Partnership Unit Designation, and except as otherwise provided in this Article 6 and subject to Section 11.6C hereof, all Net Income and Net Loss of the Partnership for any relevant Fiscal Year (or other taxable year or taxable period) will be allocated as follows:

A.    Net Income. Net Income shall be allocated in the following manner and order of priority:

(1)    First, to each Holder, in an amount that will cause such allocation, together with the amount of all previous allocations of Net Income pursuant to this Section 6.2A(1) after the Amendment Date, to be equal to the cumulative distributions received by such Holder with respect to its Partnership Common Units pursuant to (i) Section 5.1, and (ii) in connection with an Elective Dividend by the Previous General Partner (provided that any distribution described in this clause (ii) shall be limited to the Elective Dividend Cash Payment received by such Holder), for all taxable periods beginning on and after the Amendment Date;

 

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(2)    Second, any remaining Net Income to each Holder in proportion to, and to the extent that, the amount of cumulative Net Loss previously allocated to such Holder exceeds the cumulative amount of Net Income previously allocated to such Holder pursuant to this Section 6.2A(2), in each case after the Amendment Date; and

(3)    Third, with respect to all other Net Income, the Non-AIR Holders Sharing Percentage to the Non-AIR Holders, and the AIR Partners Sharing Percentage to the AIR Partners, on a pari passu basis.

B.    Net Loss. Net Loss shall be allocated, subject, however, to the limitation set forth in Section 6.2C, to the Non-AIR Holders in proportion to the Non-AIR Holders Sharing Percentage, and to the AIR Partners in proportion to the AIR Partners Sharing Percentage, on a pari passu basis.

C.    Net Loss Limitation. Any Net Loss allocated pursuant to Section 6.2B will not exceed the maximum amount of Net Loss that can be so allocated without causing any Holder to have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the event that any but not all of the Holders would have an Adjusted Capital Account Deficit as a consequence of an allocation of Net Loss pursuant to Section 6.2B, the limitation set forth in the immediately preceding sentence will be applied on a Holder-by-Holder basis so as to allocate the maximum permissible Net Loss to each Holder under Treasury Regulation Section 1.704-1(b)(2)(ii)(d).

D.    Liquidating Event. If a Liquidating Event occurs in a Partnership taxable year, Net Income and Net Loss (or, if necessary, separate items of income, gain, loss and deduction constituting such Net Income and Net Loss) for such taxable year and any prior taxable years (to the extent permitted by Section 761(c) of the Code) shall be allocated among the Holders in such amounts as will cause, to the greatest extent possible, the Capital Account of each Non-AIR Holder to equal the amount such Non-AIR Holder would be entitled to receive were such Holder to require the Partnership to redeem all of such Holder’s Partnership Common Units pursuant to Section 8.6. If the Gross Asset Values of the Partnership’s assets are adjusted in accordance with subparagraph (b) of the definition of “Gross Asset Value,” after items are allocated pursuant to Sections 6.2A(1) and (2) and Section 6.2B, such adjustments shall be allocated in accordance with this Section 6.2D.

Notwithstanding anything to the contrary in this Agreement, the Partnership Representative in its discretion is expressly authorized to take any action necessary or appropriate to comply with the Partnership Audit Procedures, and to appropriately allocate the burden of any assessments thereunder among the Partners (as determined in the sole good faith judgment of the General Partner).

Section 6.3    Additional Allocation Provisions. Notwithstanding the foregoing provisions of this Article 6:

A.    Intentionally Omitted.

B.    Regulatory Allocations.

 

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(1)    Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(f), notwithstanding the provisions of Section 6.2 hereof, or any other provision of this Article 6, if there is a net decrease in Partnership Minimum Gain during any Fiscal Year, each Holder of Partnership Common Units shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Holder’s share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Holder pursuant thereto. The items to be allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.3B(1) is intended to qualify as a “minimum gain chargeback” within the meaning of Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.

(2)    Partner Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(i)(4) or in Section 6.3B(1) hereof, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year, each Holder of Partnership Common Units who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Holder’s share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.7042(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each General Partner, Limited Partner and other Holder pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 6.3B(2) is intended to qualify as a “chargeback of partner nonrecourse debt minimum gain” within the meaning of Regulations Section 1.704-2(i) and shall be interpreted consistently therewith.

(3)    Nonrecourse Deductions and Partner Nonrecourse Deductions. Any Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Holders of Partnership Common Units in accordance with their Partnership Common Units. Any Partner Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Holder(s) who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable, in accordance with Regulations Section 1.704-2(i).

(4)    Qualified Income Offset. If any Holder of Partnership Common Units unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain shall be allocated, in accordance with Regulations Section 1.704-1(b)(2)(ii)(d), to such Holder in an amount and manner sufficient to eliminate, to the extent required by such Regulations, the Adjusted Capital Account Deficit of such Holder as quickly as possible, provided that an allocation pursuant to this Section 6.3B(4) shall be made if and only to the extent that such Holder would have an Adjusted Capital Account Deficit after

 

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all other allocations provided in this Article 6 have been tentatively made as if this Section 6.3B(4) were not in the Agreement. It is intended that this Section 6.3B(4) qualify and be construed as a “qualified income offset” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

(5)    Gross Income Allocation. In the event that any Holder of Partnership Common Units has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (1) the amount (if any) that such Holder is obligated to restore to the Partnership upon complete liquidation of such Holder’s Partnership Interest (including, the Holder’s interest in outstanding Partnership Preferred Units and other Partnership Units) and (2) the amount that such Holder is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Holder shall be specially allocated items of Partnership income and gain in the amount of such excess to eliminate such deficit as quickly as possible, provided that an allocation pursuant to this Section 6.3B(5) shall be made if and only to the extent that such Holder would have a deficit Capital Account in excess of such sum after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.3B(5) and Section 6.3B(4) hereof were not in the Agreement.

(6)    Section 754 Adjustment. To the extent that an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2) (iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Holder of Partnership Common Units in complete liquidation of its interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Holders in accordance with their Partnership Common Units in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Holders to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.

(7)    Curative Allocations. The allocations set forth in Sections 6.3B(1), (2), (3), (4), (5) and (6) hereof (the “Regulatory Allocations”) are intended to comply with certain regulatory requirements, including the requirements of Regulations Sections 1.704-1(b) and 1.704-2. Notwithstanding the provisions of Section 6.1 hereof, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Holders of Partnership Common Units so that to the extent possible without violating the requirements giving rise to the Regulatory Allocations, the net amount of such allocations of other items and the Regulatory Allocations to each Holder of a Partnership Common Unit shall be equal to the net amount that would have been allocated to each such Holder if the Regulatory Allocations had not occurred.

C.    Allocation of Excess Nonrecourse Liabilities. For purposes of determining a Holder’s proportional share of the “excess nonrecourse liabilities” of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), each Holder’s interest in Partnership profits shall be such Holder’s share of Partnership Common Units.

 

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Section 6.4    Tax Allocations.

A.    In General. Except as otherwise provided in this Section 6.4, for income tax purposes under the Code and the Regulations each Partnership item of income, gain, loss and deduction (collectively, “Tax Items”) shall be allocated among the Holders of Partnership Common Units in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Sections 6.2 and 6.3 hereof.

B.    Allocations Respecting Section 704(c) Revaluations. Notwithstanding Section 6.4A hereof, Tax Items with respect to Property that is contributed to the Partnership with a Gross Asset Value that varies from its basis in the hands of the contributing Partner immediately preceding the date of contribution shall be allocated among the Holders of Partnership Common Units for income tax purposes pursuant to Regulations promulgated under Code Section 704(c) so as to take into account such variation. The Partnership shall account for such variation under any method approved under Code Section 704(c) and the applicable Regulations as chosen by the General Partner, including, without limitation, the “traditional method” as described in Regulations Section 1.704-3(b). In the event that the Gross Asset Value of any partnership asset is adjusted pursuant to subsection (b) of the definition of “Gross Asset Value” (provided in Article 1 hereof), subsequent allocations of Tax Items with respect to such asset shall take account of the variation, if any, between the adjusted basis of such asset and its Gross Asset Value in the same manner as under Code Section 704(c) and the applicable Regulations.

ARTICLE 7

MANAGEMENT AND OPERATIONS OF BUSINESS

Section 7.1    Management.

A.    Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Partners with or without cause, except with the Consent of the General Partner. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to the other provisions hereof including Section 7.3, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation:

(1)    the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing

 

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money to permit the Partnership to make distributions to its Partners in such amounts as will permit each Special Limited Partner (so long as such Special Limited Partner qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Code Section 4981) and to make distributions to its shareholders sufficient to permit such Special Limited Partner to maintain REIT status or otherwise to satisfy the REIT Requirements), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by deed to secure debt, mortgage, deed of trust or other lien or encumbrance on the Partnership’s assets) and the incurring of any obligations that it deems necessary for the conduct of the activities of the Partnership;

(2)    the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

(3)    the acquisition, sale, transfer, exchange or other disposition of any assets of the Partnership (including, but not limited to, the exercise or grant of any conversion, option, privilege or subscription right or any other right available in connection with any assets at any time held by the Partnership) or the merger, consolidation, reorganization or other combination of the Partnership with or into another entity;

(4)    the mortgage, pledge, encumbrance or hypothecation of any assets of the Partnership, the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms that it sees fit, including, without limitation, the financing of the operations and activities of the General Partner, the Partnership or any of the Partnership’s Subsidiaries, the lending of funds to other Persons (including, without limitation, the Partnership’s Subsidiaries) and the repayment of obligations of the Partnership, its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to and equity investments in the Partnership’s Subsidiaries;

(5)    the management, operation, leasing, landscaping, repair, alteration, demolition, replacement or improvement of any Property, including, without limitation, any Contributed Property, or other asset of the Partnership or any Subsidiary;

(6)    the negotiation, execution and performance of any contracts, leases, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership’s operations or the implementation of the General Partner’s powers under this Agreement, including contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership’s assets;

(7)    the distribution of Partnership cash or other Partnership assets in accordance with this Agreement, the holding, management, investment and reinvestment of cash and other assets of the Partnership, and the collection and receipt of revenues, rents and income of the Partnership;

 

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(8)    the selection and dismissal of employees of the Partnership or the General Partner (including, without limitation, employees having titles or offices such as “president,” “vice president,” “secretary” and “treasurer”), and agents, outside attorneys, accountants, consultants and contractors of the Partnership or the General Partner and the determination of their compensation and other terms of employment or hiring;

(9)    the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate;

(10)    the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, limited liability companies, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, any Subsidiary and any other Person in which it has an equity investment from time to time); provided, however, that, as long as any Special Limited Partner has determined to continue to qualify as a REIT, the General Partner may not engage in any such formation, acquisition or contribution that would cause such Special Limited Partner to fail to qualify as a REIT or the General Partner or another wholly owned subsidiary of a Special Limited Partner to fail to qualify as a “qualified REIT subsidiary” within the meaning of Code Section 856(i)(2);

(11)    the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment, of any claim, cause of action, liability, debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(12)    the undertaking of any action in connection with the Partnership’s direct or indirect investment in any Subsidiary or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons);

(13)    the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as it may adopt; provided that such methods are otherwise consistent with the requirements of this Agreement;

(14)    the enforcement of any rights against any Partner pursuant to representations, warranties, covenants and indemnities relating to such Partner’s contribution of property or assets to the Partnership;

 

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(15)    the exercise, directly or indirectly, through any attorney- in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership;

(16)    the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person;

(17)    the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest, pursuant to contractual or other arrangements with such Person;

(18)    the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner enumerated in this Agreement;

(19)    the issuance of additional Partnership Units, as appropriate and in the General Partner’s sole and absolute discretion, in connection with Capital Contributions by Additional Limited Partners and additional Capital Contributions by Partners pursuant to Article 4 hereof; and

(20)    an election to dissolve the Partnership pursuant to Section 13.1C hereof.

B.    Each of the Limited Partners agrees that, except as provided in Section 7.3 hereof, the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement (except as provided in Section 7.3 hereof), the Act or any applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.

C.    At all times from and after the date hereof, the General Partner may cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the Properties of the Partnership and (ii) liability insurance for the Indemnitees hereunder.

D.    At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain working capital and other reserves in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time.

 

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E.    In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner (including the General Partner) of any action taken by it. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner pursuant to its authority under this Agreement so long as the action or inaction is taken in good faith.

Section 7.2    Certificate of Limited Partnership. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, the District of Columbia or any other jurisdiction, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability to the extent provided by applicable law) in the State of Delaware and any other state, or the District of Columbia or other jurisdiction, in which the Partnership may elect to do business or own property.

Section 7.3    Restrictions on General Partner’s Authority.

A.    The General Partner may not take any action in contravention of this Agreement, including, without limitation:

(1)    take any action that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement;

(2)    possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose, except as otherwise provided in this Agreement;

(3)    admit a Person as a Partner, except as otherwise provided in this Agreement;

(4)    perform any act that would subject a Limited Partner to liability as a general partner in any jurisdiction or any other liability, except as provided herein or under the Act; or

(5)    enter into any contract, mortgage, loan or other agreement that prohibits or restricts, or has the effect of prohibiting or restricting, the ability of (a) the General Partner, the Previous General Partner or the Partnership from satisfying its obligations under Section 8.6 hereof in full or (b) a Limited Partner from exercising its rights under Section 8.6 hereof to effect a Redemption in full, except, in either case, with the written consent of such Limited Partner affected by the prohibition or restriction.

 

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B.    The General Partner shall not, without the prior Consent of the Limited Partners, undertake, on behalf of the Partnership, any of the following actions or enter into any transaction that would have the effect of such transactions:

(1)    except as provided in Section 7.3C hereof, amend, modify or terminate this Agreement other than to reflect the admission, substitution, termination or withdrawal of Partners pursuant to Article 11 or Article 12 hereof;

(2)    make a general assignment for the benefit of creditors or appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of the Partnership;

(3)    institute any proceeding for bankruptcy on behalf of the Partnership; or

(4)    subject to the rights of Transfer provided in Sections 11.1C and 11.2 hereof, approve or acquiesce to the Transfer of the Partnership Interest of the General Partner, or admit into the Partnership any additional or successor General Partners.

C.    Notwithstanding Section 7.3B hereof, the General Partner shall have the power, without the Consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes:

(1)    to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners;

(2)    to reflect the admission, substitution or withdrawal of Partners or the termination of the Partnership in accordance with this Agreement, and to amend Exhibits A and C in connection with such admission, substitution or withdrawal;

(3)    to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement;

(4)    to satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;

(5)     (a) to reflect such changes as are reasonably necessary (i) for the General Partner or any other wholly owned subsidiary of a Special Limited Partner, as the case may be, to maintain its status as a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) or (ii) for any Special Limited Partner to maintain its status as a REIT or to satisfy the REIT Requirements; (b) to reflect the Transfer of all or

 

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any part of a Partnership Interest among the General Partner, the Special Limited Partners or any “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to any Special Limited Partner;

(6)    to modify the manner in which Capital Accounts are computed (but only to the extent set forth in the definition of “Capital Account” or contemplated by the Code or the Regulations); and

(7)    the issuance of additional Partnership Interests in accordance with Section 4.2.

The General Partner will provide notice to the Limited Partners when any action under this Section 7.3C is taken.

D.    Notwithstanding Sections 7.3B and 7.3C hereof, this Agreement shall not be amended, and no action may be taken by the General Partner, without the Consent of each Partner adversely affected, if such amendment or action would (i) convert a Limited Partner Interest in the Partnership into a General Partner Interest (except as a result of the General Partner acquiring such Partnership Interest), (ii) modify the limited liability of a Limited Partner, (iii) alter the rights of any Partner to receive the distributions to which such Partner is entitled, pursuant to Article 5 or Section 13.2A(4) hereof, or alter the allocations specified in Article 6 hereof (except, in any case, as permitted pursuant to Sections 4.2 and 7.3C hereof), (iv) alter or modify the Redemption rights, Cash Amount or REIT Shares Amount as set forth in Sections 8.6 and 11.2 hereof, or amend or modify any related definitions, or (v) amend this Section 7.3D; provided, however, that the Consent of each Partner adversely affected shall not be required for any amendment or action that affects all Partners holding the same class or series of Partnership Units on a uniform or pro rata basis. Further, no amendment may alter the restrictions on the General Partner’s authority set forth elsewhere in this Section 7.3 without the Consent specified therein. Any such amendment or action consented to by any Partner shall be effective as to that Partner, notwithstanding the absence of such consent by any other Partner.

Section 7.4    Reimbursement of the General Partner.

A.    The General Partner shall not be compensated for its services as general partner of the Partnership except as provided in elsewhere in this Agreement (including the provisions of Articles 5 and 6 hereof regarding distributions, payments and allocations to which it may be entitled in its capacity as the General Partner).

B.    Subject to Sections 7.4C and 15.11 hereof, the Partnership shall be liable for, and shall reimburse the General Partner on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all sums expended in connection with the Partnership’s business, including, without limitation, (i) expenses relating to the ownership of interests in and management and operation of, or for the benefit of, the Partnership, (ii) compensation of officers and employees, including, without limitation, payments under future compensation plans of the General Partner that may provide for stock units, or other phantom stock, pursuant to which employees of the General Partner will receive payments based upon dividends on or the value of REIT Shares, (iii) director fees and expenses; (iv) all costs and

 

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expenses of the General Partner being a public company, including costs of filings with the SEC, reports and other distributions to its shareholders and (v) income taxes or other similar types of costs, including but not limited to franchise taxes or related fees (in lieu of reimbursement, the Partnership may instead (in whole or in part) specially allocate income as necessary to reimburse the General Partner in full); provided, however, that the amount of any reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it on behalf of the Partnership as permitted pursuant to Section 7.5 hereof. Such reimbursements shall be in addition to any reimbursement of the General Partner as a result of indemnification pursuant to Section 7.7 hereof.

C.    To the extent practicable, Partnership expenses shall be billed directly to and paid by the Partnership and, subject to Section 15.11 hereof, reimbursements to the General Partner or any of its Affiliates by the Partnership pursuant to this Section 7.4 shall be treated as “guaranteed payments” within the meaning of Code Section 707(c).

Section 7.5    Outside Activities of the Previous General Partner and the General Partner. Neither the General Partner nor the Previous General Partner shall directly or indirectly enter into or conduct any business, other than in connection with (a) the ownership, acquisition and disposition of Partnership Interests as General Partner, (b) the management of the business of the Partnership, (c) the operation of the Previous General Partner as a reporting company with a class (or classes) of securities registered under the Exchange Act, (d) each Special Limited Partner’s operations as a REIT, (e) the offering, sale, syndication, private placement or public offering of stock, bonds, securities or other interests, (f) financing or refinancing of any type, (g) the qualification of the General Partner or any other wholly owned subsidiary of a Special Limited Partner as a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)), (h) the acquisition, ownership, financing, operation, management and disposition of assets held directly by a Special Limited Partner, any of the AIR Partners or any of their Subsidiaries, excluding the Partnership, and (i) such activities as are incidental thereto. Nothing contained herein shall be deemed to prohibit the General Partner or the Previous General Partner from executing guarantees of Partnership debt for which it would otherwise be liable in its capacity as General Partner. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests.

Section 7.6    Contracts with Affiliates.

A.    The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.

B.    Except as provided in Section 7.5 hereof and subject to Section 3.1 hereof, the Partnership may transfer assets to joint ventures, limited liability companies, partnerships, corporations, business trusts or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes to be advisable.

 

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C.    Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable.

D.    The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt on behalf of the Partnership employee benefit plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership or any of the Partnership’s Subsidiaries.

E.    The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable.

Section 7.7    Indemnification.

A.    To the fullest extent permitted by applicable law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorney’s fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership (“Actions”) as set forth in this Agreement in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise; provided, however, that the Partnership shall not indemnify an Indemnitee (i) for willful misconduct or a knowing violation of the law or (ii) for any transaction for which such Indemnitee received an improper personal benefit in violation or breach of any provision of this Agreement. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. It is the intention of this Section 7.7A that the Partnership indemnify each Indemnitee to the fullest extent permitted by law. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.7A. The termination of any proceeding by conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent by an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, does not create a presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.7A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds to enable the Partnership to fund its obligations under this Section 7.7.

 

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B.    To the fullest extent permitted by law, expenses incurred by an Indemnitee who is a party to a proceeding or otherwise subject to or the focus of or is involved in any Action shall be paid or reimbursed by the Partnership as incurred by the Indemnitee in advance of the final disposition of the Action upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 7.7B has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met.

C.    The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee unless otherwise provided in a written agreement with such Indemnitee or in the writing pursuant to which such Indemnitee is indemnified.

D.    The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of any of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

E.    Any liabilities which an Indemnitee incurs as a result of acting on behalf of the Partnership or the General Partner (whether as a fiduciary or otherwise) in connection with the operation, administration or maintenance of an employee benefit plan or any related trust or funding mechanism (whether such liabilities are in the form of excise taxes assessed by the IRS, penalties assessed by the Department of Labor, restitutions to such a plan or trust or other funding mechanism or to a participant or beneficiary of such plan, trust or other funding mechanism, or otherwise) shall be treated as liabilities or judgments or fines under this Section 7.7, unless such liabilities arise as a result of (i) such Indemnitee’s intentional misconduct or knowing violation of the law, or (ii) any transaction in which such Indemnitee received a personal benefit in violation or breach of any provision of this Agreement or applicable law.

F.    In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

G.    An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

H.    The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7

 

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or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership’s liability to any Indemnitee under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

I.    It is the intent of the Partners that any amounts paid by the Partnership to the General Partner pursuant to this Section 7.7 shall be treated as “guaranteed payments” within the meaning of Code Section 707(c).

Section 7.8    Liability of the General Partner.

A.    Notwithstanding anything to the contrary set forth in this Agreement, neither the General Partner nor any of its directors or officers shall be liable or accountable in damages or otherwise to the Partnership, any Partners or any Assignees for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or of any act or omission if the General Partner or such director or officer acted in good faith.

B.    The Limited Partners expressly acknowledge that the General Partner is acting for the benefit of the Partnership, the Limited Partners and the General Partner’s shareholders collectively and that the General Partner is under no obligation to give priority to the separate interests of the Limited Partners or the General Partner’s shareholders (including, without limitation, the tax consequences to Limited Partners, Assignees or the General Partner’s shareholders) in deciding whether to cause the Partnership to take (or decline to take) any actions.

C.    Subject to its obligations and duties as General Partner set forth in Section 7.1A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its employees or agents (subject to the supervision and control of the General Partner). The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith.

D.    Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner’s, and its officers’ and directors’, liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

E.    Notwithstanding anything herein to the contrary, except for fraud, willful misconduct or gross negligence, or pursuant to any express indemnities given to the Partnership by any Partner pursuant to any other written instrument, no Partner shall have any personal liability whatsoever, to the Partnership or to the other Partner(s), for the debts or liabilities of the Partnership or the Partnership’s obligations hereunder, and the full recourse of the other

 

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Partner(s) shall be limited to the interest of that Partner in the Partnership. To the fullest extent permitted by law, no officer, director or shareholder of the General Partner shall be liable to the Partnership for money damages except for (i) active and deliberate dishonesty established by a non-appealable final judgment or (ii) actual receipt of an improper benefit or profit in money, property or services. Without limitation of the foregoing, and except for fraud, willful misconduct or gross negligence, or pursuant to any such express indemnity, no property or assets of any Partner, other than its interest in the Partnership, shall be subject to levy, execution or other enforcement procedures for the satisfaction of any judgment (or other judicial process) in favor of any other Partner(s) and arising out of, or in connection with, this Agreement. This Agreement is executed by the officers of the General Partner solely as officers of the same and not in their own individual capacities.

F.    To the extent that, at law or in equity, the General Partner has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or the Limited Partners, the General Partner shall not be liable to the Partnership or to any other Partner for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of the General Partner otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of such General Partner.

Section 7.9    Other Matters Concerning the General Partner.

A.    The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.

B.    The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

C.    The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty that is permitted or required to be done by the General Partner hereunder.

D.    Notwithstanding any other provision of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of each Special Limited Partner to continue to qualify as a REIT, (ii) for each Special Limited Partner otherwise to satisfy the REIT Requirements, (iii) to avoid the Special Limited Partners incurring any taxes

 

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under Code Section 857 or Code Section 4981 or (iv) for the General Partner or any wholly owned subsidiary of a Special Limited Partner, as the case may be, to continue to qualify as a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)), is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

Section 7.10    Title to Partnership Assets. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively with other Partners or Persons, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held.

Section 7.11    Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without the consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expediency of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

 

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ARTICLE 8

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

Section 8.1    Limitation of Liability. The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement (including, without limitation, Section 10.5 hereof) or under the Act.

Section 8.2    Management of Business. No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, member, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operations, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, member, employee, partner, agent, representative, or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

Section 8.3    Outside Activities of Limited Partners. Subject to any agreements entered into pursuant to Section 7.6D hereof and any other agreements entered into by a Limited Partner or its Affiliates with the General Partner, the Partnership or a Subsidiary (including, without limitation, any employment agreement), any Limited Partner and any Assignee, officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct or indirect competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. Subject to such agreements, none of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any other Person (other than the General Partner, to the extent expressly provided herein), and such Person shall have no obligation pursuant to this Agreement, subject to Section 7.6D hereof and any other agreements entered into by a Limited Partner or its Affiliates with the General Partner, the Partnership or a Subsidiary, to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character that, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person.

Section 8.4    Return of Capital. Except pursuant to the rights of Redemption set forth in Section 8.6 hereof, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided in Article 6 hereof or otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions or as to profits, losses or distributions.

 

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Section 8.5    Rights of Limited Partners Relating to the Partnership.

A.    In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5C hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner’s own expense:

(1)    to obtain a copy of (i) the most recent annual and quarterly reports filed with the SEC by the Previous General Partner or the General Partner pursuant to the Exchange Act and (ii) each report or other written communication sent to the shareholders of the Previous General Partner;

(2)    to obtain a copy of the Partnership’s federal, state and local income tax returns for each Fiscal Year;

(3)    to obtain a current list of the name and last known business, residence or mailing address of each Partner;

(4)    to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and

(5)    to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and that each Partner has agreed to contribute in the future, and the date on which each became a Partner.

B.    The Partnership shall notify any Limited Partner that is a Qualifying Party, on request, of the then current Adjustment Factor or any change made to the Adjustment Factor.

C.    Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or the General Partner or (ii) the Partnership or the General Partner is required by law or by agreements with unaffiliated third parties to keep confidential.

Section 8.6    Redemption Rights of Qualifying Parties.

A.    After the first Twelve-Month Period, a Qualifying Party, but no other Limited Partner or Assignee, shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Redeemable Units held by such Tendering Party (such Redeemable Units being hereafter “Tendered Units”) in exchange (a “Redemption”) for REIT Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall

 

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be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”). A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the Partnership Record Date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem Tendered Units for cash, the Cash Amount shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

B.    If the Partnership elects to redeem Tendered Units for REIT Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such REIT Shares to the Tendering Party pursuant to the terms set forth in this Section 8.6B, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for REIT Shares. The percentage of the Tendered Units tendered for Redemption by the Tendering Party for which the Partnership elects to cause the Previous General Partner to issue REIT Shares (rather than cash) is referred to as the “Applicable Percentage.” In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Qualifying Parties over another nor discriminates against a group or class of Qualifying Parties. If the Partnership elects to redeem any number of Tendered Units for REIT Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of REIT Shares equal to the product of the REIT Shares Amount and the Applicable Percentage. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The product of the Applicable Percentage and the REIT Shares Amount, if applicable, shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and accessible REIT Shares and, if applicable, Rights, free of any pledge, lien, encumbrance or restriction, other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 8.6B, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such REIT Shares are issued pursuant to this Section 8.6B, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such REIT Shares and Rights for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date.

 

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REIT Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 8.6B may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

C.    Notwithstanding the provisions of Section 8.6A and 8.6B hereof, the Tendering Parties (i) where the Redemption would consist of less than all the Partnership Common Units held by Partners other than the General Partner and the Special Limited Partners, shall not be entitled to elect or effect a Redemption to the extent that the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under this Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 8.6C, it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in REIT Shares otherwise issuable by the Previous General Partner under Section 8.6B hereof.

D.    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for REIT Shares pursuant to Section 8.6B hereof following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Partner on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of REIT Shares (“Registrable Shares”) equal to the REIT Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding a Partnership Interest (or an interest therein) and having Redemption rights pursuant to this Section 8.6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Partnership Common Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Partnership Common Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 8.6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the current Twelve-Month Period; provided, however, that the Previous General Partner shall not be required to acquire Partnership Common Units pursuant to this Section 8.6D more than twice within a Twelve-Month Period.

 

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Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

E.    Notwithstanding the provisions of Section 8.6B hereof, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for the REIT Shares Amount if such exchange would be prohibited under the Charter.

F.    Notwithstanding anything herein to the contrary (but subject to Section 8.6C hereof), with respect to any Redemption pursuant to this Section 8.6:

(1)    All Partnership Common Units acquired by the Previous General Partner pursuant to Section 8.6B hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine. Any Partnership Common Units so contributed to the General Partner shall automatically, and without further action required, be converted into and deemed to be a General Partner Interest comprised of the same number of Partnership Common Units. Any Partnership Common Units so contributed to the Special Limited Partners shall remain outstanding.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Redeemable Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Redeemable Units, all of the Redeemable Units held by such Tendering Party.

(3)    Each Tendering Party (a) may effect a Redemption only once in each fiscal quarter of a Twelve-Month Period and (b) may not effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to Section 8.6B hereof, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 8.6E hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

 

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(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 hereof) all Redeemable Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Redeemable Units for all purposes of this Agreement, until such Redeemable Units are either paid for by the Partnership pursuant to Section 8.6A hereof or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to Section 8.6B hereof on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to Section 8.6B hereof, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 8.6F, all Partnership Common Units beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

G.    In connection with an exercise of Redemption rights pursuant to this Section 8.6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional REIT Shares prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 8.6G(1) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own REIT Shares in violation of the Ownership Limit.

 

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Section 8.7    Partnership Right to Call Limited Partner Interests. Notwithstanding any other provision of this Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to Section 8.6 hereof for the amount of Partnership Common Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 8.7. Such notice given by the General Partner to a Limited Partner pursuant to this Section 8.7 shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 8.7, (a) any Limited Partner (whether or not otherwise a Qualifying Party) may, in the General Partner’s sole and absolute discretion, be treated as a Qualifying Party that is a Tendering Party and (b) the provisions of Sections 8.6C(i), 8.6F(2), 8.6F(3) and 8.6F(5) hereof shall not apply, but the remainder of Section 8.6 hereof shall apply, mutatis mutandis.

ARTICLE 9

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 9.1    Records and Accounting.

A.    The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership’s business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 8.5A or Section 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form for, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time.

B.    The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or on such other basis as the General Partner determines to be necessary or appropriate. To the extent permitted by sound accounting practices and principles, the Partnership, the General Partner and the Previous General Partner may operate with integrated or consolidated accounting records, operations and principles.

Section 9.2    Fiscal Year. The Fiscal Year of the Partnership shall be the calendar year.

 

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Section 9.3    Reports.

A.    As soon as practicable, but in no event later than one hundred five (105) days after the close of each Fiscal Year, the General Partner shall cause to be made available to each Limited Partner, of record as of the close of the Fiscal Year, an annual report containing financial statements of the Partnership, or of the Previous General Partner if such statements are prepared solely on a consolidated basis with the Previous General Partner, for such Fiscal Year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner. Such report shall be deemed to be made available to all Limited Partners if it has been filed with the SEC.

B.    As soon as practicable, but in no event later than one hundred five (105) days after the close of each calendar quarter (except the last calendar quarter of each year), the General Partner shall cause to be made available to each Limited Partner, of record as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the Previous General Partner if such statements are prepared solely on a consolidated basis with the Previous General Partner, and such other information as may be required by applicable law or regulation or as the General Partner determines to be appropriate. At the request of any Limited Partner, the General Partner shall provide access to the books, records and workpapers upon which the reports required by this Section 9.3 are based, to the extent required by the Act. Such report shall be deemed to be made available to all Limited Partners if it has been filed with the SEC.

ARTICLE 10

TAX MATTERS

Section 10.1    Preparation of Tax Returns. The General Partner shall arrange for the preparation and timely filing of all returns with respect to Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable effort to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. The Limited Partners shall promptly provide the General Partner with such information relating to the Contributed Properties, including tax basis and other relevant information, as may be reasonably requested by the General Partner from time to time.

Section 10.2    Tax Elections.

A.    Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code, including, but not limited to, the election under Code Section 754 and the election to use the “recurring item” method of accounting provided under Code Section 461(h) with respect to property taxes imposed on the Partnership’s Properties; provided, however, that, if the “recurring item” method of accounting is elected with respect to such property taxes, the Partnership shall pay the applicable property taxes prior to the date provided in Code Section 461(h) for purposes of determining economic performance. The General Partner shall have the right to seek to revoke

 

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any such election (including, without limitation, any election under Code Sections 461(h) and 754) upon the General Partner’s determination in its sole and absolute discretion that such revocation is in the best interests of the Partners.

B.    The General Partner is expressly authorized to make any elections, including applicable safe harbor elections, in connection with the issuance of Partnership Interests for services that it deems to be in the best interest of the Partnership. Furthermore, the General Partner is authorized to amend this Agreement as it deems necessary to provide that (1) the Partnership is authorized and directed to elect applicable safe harbor elections, and (2) the Partnership and each of its Partners (including any person to whom a Partnership Interest is transferred in connection with the performance of services) agrees to comply with all requirements of the safe harbor with respect to all Partnership Interests transferred in connection with the performance of services while the election remains effective. Finally, the amendments relating to the safe harbor elections in connection with the issuance of Partnership Interests for services are legally binding on all Partners of the Partnership, and to the extent that it is determined that such amendments are not legally binding on all Partners, then each Partner in the Partnership that transfers a Partnership Interest in connection with the performance of services agrees to execute a document containing provisions that are legally binding on that Partner stating that (X) the Partnership is authorized and directed to elect the safe harbor, and (Y) the Partner agrees to comply with all requirements of the safe harbor with respect to all Partnership Interests transferred in connection with the performance of services while the election remains effective.

Section 10.3    Tax Matters Partner.

A.    The General Partner is hereby designated as the “tax matters partner” of the Partnership, as such term is defined in Section 6231 of the TEFRA Rules with respect to all taxable years to which the TEFRA Rules apply (the “Tax Matters Partner”). The Tax Matters Partner shall receive no compensation for its services. All third-party costs and expenses incurred by the Tax Matters Partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership in addition to any reimbursement pursuant to Section 7.4 hereof. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the Tax Matters Partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. At the request of any Limited Partner, the General Partner agrees to consult with such Limited Partner with respect to the preparation and filing of any returns and with respect to any subsequent audit or litigation relating to such returns; provided, however, that the filing of such returns shall be in the sole and absolute discretion of the General Partner.

B.    The Tax Matters Partner is authorized, but not required:

(1)    to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial proceedings being referred to as “judicial review”), and in the settlement agreement the Tax Matters Partner may expressly state that such agreement shall bind all Partners, except that such

 

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settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the Tax Matters Partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a “notice partner” (as defined in Code Section 6231) or a member of a “notice group” (as defined in Code Section 6223(b)(2));

(2)    in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a “final adjustment”) is mailed to the Tax Matters Partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the United States Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Partnership’s principal place of business is located;

(3)    to intervene in any action brought by any other Partner for judicial review of a final adjustment;

(4)    to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request;

(5)    to enter into an agreement with the IRS to extend the period for assessing any tax that is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and

(6)    to take any other action on behalf of the Partners in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.

The taking of any action and the incurring of any expense by the Tax Matters Partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the Tax Matters Partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 hereof shall be fully applicable to the Tax Matters Partner in its capacity as such. The provisions of this Section 10.3 are not applicable to any taxable years subject to the Partnership Audit Rules.

Section 10.4    Partnership Representative.

A.    The General Partner is hereby designated to serve as the “partnership representative” with respect to the Partnership, as provided in Section 6223(a) of the Partnership Audit Rules (the “Partnership Representative”). For each taxable year in which the Partnership Representative is an entity, the Partnership shall appoint the “designated individual” identified by the Partnership Representative to act on behalf of the Partnership Representative in accordance with the applicable Treasury Regulations (the “Designated Individual”). Each Partner expressly consents to such designations and agrees that it will execute, acknowledge, deliver, file and record at the appropriate public offices such documents as may be necessary or appropriate to evidence such consent.

 

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B.    The Partnership Representative shall have the sole authority to act on behalf of the Partnership in connection with and make all relevant decisions regarding application of the Partnership Audit Rules, including, but not limited to, any elections under the Partnership Audit Rules or any decisions to settle, compromise, challenge, litigate or otherwise alter the defense of any proceeding before the IRS.

C.    The Partners agree to cooperate in good faith to timely provide information requested by the Partnership Representative as needed to comply with the Partnership Audit Rules, including, without limitation, to make any elections available to the Partnership under the Partnership Audit Rules. Each Partner agrees that, upon request of the Partnership, such Partner shall take such actions as may be necessary or desirable (as determined by the Partnership Representative) to (i) allow the Partnership to comply with the provisions of Section 6226 of the Partnership Audit Rules so that any “partnership adjustments” (as defined in Section 6241(2) of the Partnership Audit Rules) are taken into account by the Partners and former Partners rather than the Partnership; (ii) use the provisions of Section 6225(c) of the Partnership Audit Rules including, but not limited to, filing amended tax returns with respect to any “reviewed year” (within the meaning of Section 6225(d)(1) of the Partnership Audit Rules) or using the alternative procedure to filing amended returns to reduce the amount of any partnership adjustment otherwise required to be taken into account by the Partnership or (iii) otherwise allow the Partnership and its Partners to address and respond to any matters arising under the Partnership Audit Rules.

D.    Notwithstanding other provisions of this Agreement to the contrary, if any partnership adjustment is determined with respect to the Partnership, the Partnership Representative may cause the Partnership to elect pursuant to Section 6226 of the Partnership Audit Rules to have such adjustment passed through to the Partners for the year to which the adjustment relates (i.e., the “reviewed year” within the meaning of Section 6225(d)(1) of the Partnership Audit Rules). In the event that the Partnership Representative has not caused the Partnership to so elect pursuant to Section 6226 of the Partnership Audit Rules, then any “imputed underpayment” (as determined in accordance with Section 6225 of the Partnership Audit Rules) or partnership adjustment that does not give rise to an “imputed underpayment” shall be apportioned among the Partners of the Partnership for the taxable year in which the adjustment is finalized in such manner as may be necessary (as determined by the Partnership Representative in good faith) so that, to the maximum extent possible, the tax and economic consequences of the imputed underpayment or other partnership adjustment and any associated interest and penalties (any such amount, an “Imputed Underpayment Amount”) are borne by the Partners based upon their interests in the Partnership for the reviewed year. Imputed Underpayment Amounts also shall include any imputed underpayment within the meaning of Section 6225 of the Partnership Audit Rules paid (or payable) by any entity treated as a partnership for U.S. federal income tax purposes in which the Partnership holds (or has held) a direct or indirect interest other than through entities treated as corporations for U.S. federal income tax purposes to the extent that the Partnership bears the economic burden of such amounts, whether by law or contract.

E.    Each Partner agrees to indemnify and hold harmless the Partnership from and against any liability with respect to such Partner’s share of any tax deficiency paid or payable by the Partnership that is allocable to the Partner as determined in accordance with the

 

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second to last sentence of paragraph D above with respect to an audited or reviewed taxable year for which such Partner was a partner in the Partnership. The obligations set forth in this paragraph E shall survive the termination of any Partner’s interest in the Partnership, the termination of this Agreement and/or the termination, dissolution, liquidation or winding up of the Partnership, and shall remain binding on each Partner for the period of time necessary to resolve with the IRS (or any other applicable taxing authority) all income tax matters relating to the Partnership and for Partners to satisfy their indemnification obligations, if any, pursuant to this Section 10.4. Any obligation of a Partner pursuant to this paragraph E shall be implemented through adjustments to distributions otherwise payable to such Partner as determined in accordance with Article 5; provided, however, that, at the written request of the Partnership Representative, each Partner or former Partner may be required to contribute to the Partnership such Partner’s Imputed Underpayment Amount imposed on and paid by the Partnership; provided further, that if a Partner or former Partner individually directly pays, pursuant to the Partnership Audit Rules, any such Imputed Underpayment Amount, then such payment shall reduce any offset to distribution or required capital contribution of such Partner or former Partner. Any amount withheld from distributions pursuant to this paragraph E shall be treated as an amount distributed to such Partner or former Partner for all purposes under this Agreement.

F.    All expenses incurred by the Partnership Representative or Designated Individual in connection with its duties as partnership representative or designated individual, as applicable, shall be expenses of the Partnership (including, for the avoidance of doubt, any costs and expenses incurred in connection with any claims asserted against the Partnership Representative or Designated Individual, as applicable, except, in the case of the Partnership Representative, to the extent the Partnership Representative is determined to have performed its duties in the manner described in the final sentence of this paragraph F, and the Partnership shall reimburse the Partnership Representative or Designated Individual, as applicable, for all such costs and expenses). Nothing herein shall be construed to restrict the Partnership Representative or Designated Individual from engaging lawyers, accountants, tax advisers, or other professional advisers or experts to assist the Partnership Representative or Designated Individual in discharging its duties hereunder. Neither the Partnership Representative nor the Designated Individual shall be liable to the Partnership, any Partner or any Affiliate thereof for any costs or losses to any persons, any diminution in value or any liability whatsoever arising as a result of the performance of its duties pursuant to this Section 10.4; provided, however, that the Partnership Representative may be so liable if it or the Designated Individual has engaged in (i) willful breach of any provision of this Section 10.4 or (ii) fraud, willful misconduct or gross negligence, in each case, with respect to its performance of its duties pursuant to this Section 10.4.

Section 10.5    Withholding for Taxes, Etc.

A.    Withholding. Each Limited Partner hereby authorizes the Partnership to withhold from such Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines, in its sole discretion, that the Partnership is, or may in the future be, required to withhold or pay with respect to any amount distributable, allocable or payable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Code Section 1441, Code Section 1442, Code Section 1445 or Code Section 1446. Amounts withheld by the General Partner may be estimated

 

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by the General Partner, in its sole discretion, based on its expectations of future transactions involving the Partnership that may give rise to taxes of such Limited Partner. The General Partner may withhold amounts for taxes (including estimated or projected taxes) from cash or other distributions otherwise payable to a Limited Partner, or from any REIT Shares or Cash Amount otherwise payable to a Limited Partner in connection with a Redemption.

B.    Certain Tax Payments. Each Limited Partner hereby authorizes the Partnership to pay on behalf of or with respect to such Limited Partner any amount of federal, state, local or foreign taxes that the General Partner determines, in its sole discretion, that the Partnership is required to pay with respect to any amount distributable, allocable or payable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be paid by the Partnership pursuant to Code Section 1441, Code Section 1442, Code Section 1445 or Code Section 1446. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution that would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the Available Funds of the Partnership that would, but for such payment, be distributed to the Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner’s Partnership Interest to secure such Limited Partner’s obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5B. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5B within fifteen (15) days after the notice from the General Partner specified above, then the General Partner may, in its sole and absolute discretion, either (x) elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner (including, without limitation, the right to receive distributions), or (y) cause the Partnership to redeem from such Limited Partner a number of Partnership Common Units (or fraction thereof) equal to the quotient obtained by dividing (i) the aggregate amount owed by such Limited Partner to the Partnership pursuant to this Section 10.5B, by (ii) the product of (1) the Adjustment Factor in effect as of date of redemption specified by the General Partner, and (2) the Value of a REIT Share (assuming for such purpose that the Valuation Date is the date of redemption specified by the General Partner). If the General Partner elects to cause the Partnership to redeem any Limited Partner’s Partnership Common Units pursuant to clause (y) above, it shall promptly so notify such Limited Partner in writing of the date of such redemption and the number of Partnership Common Units so redeemed. Any amounts payable by a Limited Partner under this Section 10.5B shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder, or to assist the Partnership in effecting any redemption of such Limited Partner’s Partnership Common Units as specified in clause (y) above.

 

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ARTICLE 11

TRANSFERS AND WITHDRAWALS

Section 11.1    Transfer.

A.    No part of the interest of a Partner shall be subject to the claims of any creditor, to any spouse for alimony or support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered except as may be specifically provided for in this Agreement.

B.    No Partnership Interest shall be Transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any Transfer or purported Transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void ab initio.

C.    Notwithstanding the other provisions of this Article 11 (other than Section 11.6D hereof), the Partnership Interests of the General Partner and the Special Limited Partners may be Transferred, in whole or in part, at any time or from time to time, to or among the General Partner, the Special Limited Partners, and any other Person that is, at the time of such Transfer, a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) with respect to any Special Limited Partner. Any transferee of the entire General Partner Interest pursuant to this Section 11.1C shall automatically become, without further action or Consent of any Limited Partners, the sole general partner of the Partnership, subject to all the rights, privileges, duties and obligations under this Agreement and the Act relating to a general partner. Any transferee of a Limited Partner Interest pursuant to this Section 11.1C shall automatically become, without further action or Consent of any Limited Partners, a Substituted Limited Partner. Upon any Transfer permitted by this Section 11.1C, the transferor Partner shall be relieved of all its obligations under this Agreement. The provisions of Section 11.2B (other than the last sentence thereof), 11.3, 11.4A and 11.5 hereof shall not apply to any Transfer permitted by this Section 11.1C.

Section 11.2    Transfer of General Partner’s Partnership Interest.

A.    The General Partner may not Transfer any of its General Partner Interest or withdraw from the Partnership except as provided in Sections 11.2B and 11.2C hereof.

B.    The General Partner shall not withdraw from the Partnership and shall not Transfer all or any portion of its interest in the Partnership (whether by sale, disposition, statutory merger or consolidation, liquidation or otherwise) without the Consent of the Limited Partners, which Consent may be given or withheld in the sole and absolute discretion of the Limited Partners. Upon any Transfer of such a Partnership Interest pursuant to the Consent of the Limited Partners and otherwise in accordance with the provisions of this Section 11.2B, the transferee shall become a successor General Partner for all purposes herein, and shall be vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of

 

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such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership Interest so acquired. It is a condition to any Transfer otherwise permitted hereunder that the transferee assumes, by operation of law or express agreement, all of the obligations of the transferor General Partner under this Agreement with respect to such Transferred Partnership Interest, and such Transfer shall relieve the transferor General Partner of its obligations under this Agreement without the Consent of the Limited Partners. In the event that the General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, or otherwise dissolves or terminates, or upon the bankruptcy of the General Partner, a Majority in Interest of the Limited Partners may elect to continue the Partnership business by selecting a successor General Partner in accordance with the Act.

C.    The General Partner may merge with another entity if immediately after such merger substantially all of the assets of the surviving entity, other than the General Partner Interest held by the General Partner, are contributed to the Partnership as a Capital Contribution in exchange for Partnership Units.

Section 11.3    Limited Partners’ Rights to Transfer.

A.    General. Prior to the end of the first Twelve-Month Period, no Limited Partner shall Transfer all or any portion of its Partnership Interest to any transferee without the Consent of the General Partner, which Consent may be withheld in its sole and absolute discretion; provided, however, that any Limited Partner may, at any time, without the consent of the General Partner, (i) Transfer all or part of its Partnership Interest to any Designated Party, any Family Member, any Controlled Entity or any Affiliate, provided that the transferee is, in any such case, a Qualified Transferee, or (ii) pledge (a “Pledge”) all or any portion of its Partnership Interest to a lending institution, that is not an Affiliate of such Limited Partner, as collateral or security for a bona fide loan or other extension of credit, and Transfer such pledged Partnership Interest to such lending institution in connection with the exercise of remedies under such loan or extension or credit (any Transfer or Pledge permitted by this proviso is hereinafter referred to as a “Permitted Transfer”). After such first Twelve-Month Period, each Limited Partner, and each transferee of Partnership Units or Assignee pursuant to a Permitted Transfer, shall have the right to Transfer all or any portion of its Partnership Interest to any Person, subject to the provisions of Section 11.6 hereof and to satisfaction of each of the following conditions:

(1)    General Partner Right of First Refusal. The transferring Partner shall give written notice of the proposed Transfer to the General Partner, which notice shall state (i) the identity of the proposed transferee and (ii) the amount and type of consideration proposed to be received for the Transferred Partnership Units. The General Partner shall have ten (10) Business Days upon which to give the Transferring Partner notice of its election to acquire the Partnership Units on the proposed terms. If it so elects, it shall purchase the Partnership Units on such terms within ten (10) Business Days after giving notice of such election; provided, however, that in the event that the proposed terms involve a purchase for cash, the General Partner may at its election deliver in lieu of all or any portion of such cash a note payable to the Transferring Partner at a date as soon as reasonably practicable, but in no event later than one hundred eighty (180) days after such purchase, and bearing interest at an annual rate equal to the total dividends declared with respect to one (1) REIT Share for the four (4) preceding fiscal

 

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quarters of the General Partner, divided by the Value as of the closing of such purchase; provided, further, that such closing may be deferred to the extent necessary to effect compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, and any other applicable requirements of law. If it does not so elect, the Transferring Partner may Transfer such Partnership Units to a third party, on terms no more favorable to the transferee than the proposed terms, subject to the other conditions of this Section 11.3.

(2)    Qualified Transferee. Any Transfer of a Partnership Interest shall be made only to a single Qualified Transferee; provided, however, that, for such purposes, all Qualified Transferees that are Affiliates, or that comprise investment accounts or funds managed by a single Qualified Transferee and its Affiliates, shall be considered together to be a single Qualified Transferee; provided, further, that each Transfer meeting the minimum Transfer restriction of Section 11.3A(3) hereof may be to a separate Qualified Transferee.

(3)    Minimum Transfer Restriction. Any Transferring Partner must Transfer not less than the lesser of (i) the greater of five hundred (500) Partnership Units or one-third (1/3) of the number of Partnership Units owned by such Partner as of the Effective Date or (ii) all of the remaining Partnership Units owned by such Transferring Partner; provided, however, that, for purposes of determining compliance with the foregoing restriction, all Partnership Units owned by Affiliates of a Limited Partner shall be considered to be owned by such Limited Partner.

(4)    Transferee Agreement to Effect a Redemption. Any proposed transferee shall deliver to the General Partner a written agreement reasonably satisfactory to the General Partner to the effect that the transferee will, within six (6) months after consummation of a Partnership Common Units Transfer, tender its Partnership Common Units for Redemption in accordance with the terms of the Redemption rights provided in Section 8.6 hereof.

(5)    No Further Transfers. The transferee (other than a Designated Party) shall not be permitted to effect any further Transfer of the Partnership Units, other than to the General Partner.

(6)    Exception for Permitted Transfers. The conditions of Sections 11.3A(1) through 11.3A(5) hereof shall not apply in the case of a Permitted Transfer.

It is a condition to any Transfer otherwise permitted hereunder (whether or not such Transfer is effected during or after the first Twelve-Month Period) that the transferee assumes by operation of law or express agreement all of the obligations of the transferor Limited Partner under this Agreement with respect to such Transferred Partnership Interest, and no such Transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor Partner are assumed by a successor corporation by operation of law) shall relieve the transferor Partner of its obligations under this Agreement without the approval of the General Partner, in its sole and absolute discretion. Notwithstanding the foregoing, any transferee of any

 

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Transferred Partnership Interest shall be subject to any and all ownership limitations (including, without limitation, the Ownership Limit) contained in the Charter that may limit or restrict such transferee’s ability to exercise its Redemption rights, including, without limitation, the Ownership Limit. Any transferee, whether or not admitted as a Substituted Limited Partner, shall take subject to the obligations of the transferor hereunder. Unless admitted as a Substituted Limited Partner, no transferee, whether by a voluntary Transfer, by operation of law or otherwise, shall have any rights hereunder, other than the rights of an Assignee as provided in Section 11.5 hereof.

B.    Incapacity. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner’s estate shall have all the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate, and such power as the Incapacitated Limited Partner possessed to Transfer all or any part of its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.

C.    Opinion of Counsel. In connection with any Transfer of a Limited Partner Interest, the General Partner shall have the right to receive an opinion of counsel reasonably satisfactory to it to the effect that the proposed Transfer may be effected without registration under the Securities Act and will not otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Interests Transferred. If, in the opinion of such counsel, such Transfer would require the filing of a registration statement under the Securities Act or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Units, the General Partner may prohibit any Transfer otherwise permitted under this Section 11.3 by a Limited Partner of Partnership Interests.

D.    Adverse Tax Consequences. No Transfer by a Limited Partner of its Partnership Interests (including any Redemption, any other acquisition of Partnership Units by the General Partner or any acquisition of Partnership Units by the Partnership) may be made to any person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation, or (ii) such Transfer is effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Code Section 7704. Upon any Transfer by a Limited Partner of its Partnership Interests, such Limited Partner shall (a) provide the Partnership and the transferee receiving such an interest an affidavit satisfying the requirements of Section 1446(f)(2) of the Code stating, under penalty of perjury, (i) the transferor Limited Partner’s United States taxpayer identification number and (ii) that such Limited Partner is not a “foreign person” within the meaning of Code Section 1446, and (b) provide the Partnership with such other information and assistance as the Partnership may request to ensure that the Company is not subject to withholding under Section 1446 of the Code.

Section 11.4    Substituted Limited Partners.

A.    No Limited Partner shall have the right to substitute a transferee (including any Designated Party or other transferees pursuant to Transfers permitted by

 

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Section 11.3 hereof) as a Limited Partner in its place. A transferee (including, but not limited to, any Designated Party) of the interest of a Limited Partner may be admitted as a Substituted Limited Partner only with the Consent of the General Partner, which Consent may be given or withheld by the General Partner in its sole and absolute discretion. The failure or refusal by the General Partner to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or the General Partner. Subject to the foregoing, an Assignee shall not be admitted as a Substituted Limited Partner until and unless it furnishes to the General Partner (i) evidence of acceptance, in form and substance satisfactory to the General Partner, of all the terms, conditions and applicable obligations of this Agreement, (ii) a counterpart signature page to this Agreement executed by such Assignee and (iii) such other documents and instruments as may be required or advisable, in the sole and absolute discretion of the General Partner, to effect such Assignee’s admission as a Substituted Limited Partner.

B.    A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement.

C.    Upon the admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address and number of Partnership Units of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and number of Partnership Units of the predecessor of such Substituted Limited Partner.

Section 11.5    Assignees. If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 hereof as a Substituted Limited Partner, as described in Section 11.4 hereof, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be entitled to all the rights of an assignee of a limited partnership interest under the Act, including the right to receive distributions from the Partnership and the share of Net Income, Net Losses and other items of income, gain, loss, deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee and the rights to Transfer the Partnership Units provided in this Article 11, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement (other than as expressly provided in Section 8.6 hereof with respect to a Qualifying Party that becomes a Tendering Party), and shall not be entitled to effect a Consent or vote with respect to such Partnership Units on any matter presented to the Limited Partners for approval (such right to Consent or vote, to the extent provided in this Agreement or under the Act, fully remaining with the transferor Limited Partner). In the event that any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units.

Section 11.6    General Provisions.

A.    No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of such Limited Partner’s Partnership Units in accordance with this Article 11, with respect to which the transferee becomes a Substituted Limited Partner, or pursuant to a redemption (or acquisition by the Previous General Partner) of all of its Partnership Units pursuant to a Redemption under Section 8.6 hereof and/or pursuant to any Partnership Unit Designation.

 

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B.    Any Limited Partner who shall Transfer all of its Partnership Units in a Transfer (i) permitted pursuant to this Article 11 where such transferee was admitted as a Substituted Limited Partner, (ii) pursuant to the exercise of its rights to effect a redemption of all of its Partnership Units pursuant to a Redemption under Section 8.6 hereof and/or pursuant to any Partnership Unit Designation or (iii) to the Previous General Partner or the General Partner, whether or not pursuant to Section 8.6B hereof, shall cease to be a Limited Partner.

C.    If any Partnership Unit is Transferred in compliance with the provisions of this Article 11, or is redeemed by the Partnership, or acquired by the Previous General Partner pursuant to Section 8.6 hereof, on any day other than the first day of a Fiscal Year, then Net Income, Net Loss, each item thereof and all other items of income, gain, loss, deduction and credit attributable to such Partnership Unit for such Fiscal Year shall be allocated to the transferor Partner or the Tendering Party, as the case may be, and, in the case of a Transfer or assignment other than a Redemption, to the transferee Partner (including, without limitation, the General Partner and the Special Limited Partners as transferees of the Previous General Partner in the case of an acquisition of Partnership Common Units pursuant to Section 8.6 hereof), by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using the “interim closing of the books” method or another permissible method selected by the General Partner. All distributions of Available Cash attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such Transfer, assignment or Redemption shall be made to the transferor Partner or the Tendering Party, as the case may be, and, in the case of a Transfer other than a Redemption, all distributions of Available Cash thereafter attributable to such Partnership Unit shall be made to the transferee Partner.

D.    In addition to any other restrictions on Transfer herein contained, in no event may any Transfer or assignment of a Partnership Interest by any Partner (including any Redemption, any acquisition of Partnership Units by the Previous General Partner or any other acquisition of Partnership Units by the Partnership) be made (i) to any person or entity who lacks the legal right, power or capacity to own a Partnership Interest; (ii) in violation of applicable law; (iii) of any component portion of a Partnership Interest, such as the Capital Account, or rights to distributions, separate and apart from all other components of a Partnership Interest; (iv) in the event that such Transfer would cause either (a) any Special Limited Partner to cease to comply with the REIT Requirements or (b) the General Partner or any other wholly owned subsidiary of a Special Limited Partner to cease to qualify as a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)); (v) if such Transfer would, in the opinion of counsel to the Partnership or the General Partner, cause a termination of the Partnership for federal or state income tax purposes (except as a result of the Redemption (or acquisition by the Previous General Partner) of all Partnership Common Units held by all Limited Partners other than the Special Limited Partners); (vi) if such Transfer would, in the opinion of legal counsel to the Partnership, cause the Partnership to cease to be classified as a partnership for federal income tax purposes (except as a result of the Redemption (or acquisition by the Previous General Partner) of all Partnership Common Units held by all Limited Partners other than the Special Limited Partners); (vii) if such Transfer would cause the Partnership to become, with respect to any

 

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employee benefit plan subject to Title I of ERISA, a “party-in-interest” (as defined in ERISA Section 3(14)) or a “disqualified person” (as defined in Code Section 4975(c)); (viii) if such Transfer would, in the opinion of legal counsel to the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (ix) if such Transfer requires the registration of such Partnership Interest pursuant to any applicable federal or state securities laws; (x) if such Transfer causes the Partnership to become a “publicly traded partnership,” as such term is defined in Code Section 469(k)(2) or Code 7704(b); or (xi) if such Transfer subjects the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or ERISA, each as amended.

ARTICLE 12

ADMISSION OF PARTNERS

Section 12.1    Admission of Successor General Partner. A successor to all of the General Partner’s General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to such Transfer. Any such successor shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission.

Section 12.2    Admission of Additional Limited Partners.

A.    After the admission to the Partnership of an Original Limited Partner on the date hereof, a Person (other than an existing Partner) who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance, in form and substance satisfactory to the General Partner, of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof, (ii) a counterpart signature page to this Agreement executed by such Person and (iii) such other documents or instruments as may be required in the sole and absolute discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner.

B.    Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner’s sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission.

C.    If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Fiscal Year, then Net Income, Net Losses, each item thereof and all other items of income, gain, loss, deduction and credit allocable among Partners and

 

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Assignees for such Fiscal Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Fiscal Year in accordance with Code Section 706(d), using the “interim closing of the books” method or another permissible method selected by the General Partner. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner, in accordance with the principles described in Section 11.6C hereof. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all the Partners and Assignees including such Additional Limited Partner.

Section 12.3    Amendment of Agreement and Certificate of Limited Partnership. For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof.

Section 12.4    Admission of Initial Limited Partners. The Persons listed on Exhibit A as limited partners of the Partnership shall be admitted to the Partnership as Limited Partners upon their execution and delivery of this Agreement.

ARTICLE 13

DISSOLUTION, LIQUIDATION AND TERMINATION

Section 13.1    Dissolution. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership without dissolution. However, the Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following (each a “Liquidating Event”):

A.    the expiration of its term as provided in Section 2.5 hereof;

B.    an event of withdrawal, as defined in the Act (including, without limitation, bankruptcy), of the sole General Partner unless, within ninety (90) days after the withdrawal, a “majority in interest” (as such phrase is used in Section 17-801(3) of the Act) of the remaining Partners agree in writing, in their sole and absolute discretion, to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner:

C.    an election to dissolve the Partnership made by the General Partner in its sole and absolute discretion, with or without the Consent of the Limited Partners;

D.    entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act;

 

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E.    the occurrence of a Terminating Capital Transaction;

F.    the Redemption (or acquisition by a Special Limited Partner and/or the General Partner) of all Partnership Common Units other than Partnership Common Units held by the General Partner or a Special Limited Partner that holds all of the interests in the General Partner; or

G.    the Redemption (or acquisition by the General Partner) of all Partnership Common Units other than Partnership Common Units held by the General Partner.

Section 13.2    Winding Up.

A.    Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Partners. After the occurrence of a Liquidating Event, no Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General Partner (or, in the event that there is no remaining General Partner or the General Partner has dissolved, become bankrupt within the meaning of the Act or ceased to operate, any Person elected by a Majority in Interest of the Limited Partners (the General Partner or such other Person being referred to herein as the “Liquidator”)) shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property, and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of stock in the Previous General Partner) shall be applied and distributed in the following order:

(1)    First, to the satisfaction of all of the Partnership’s debts and liabilities to creditors other than the Partners and their Assignees (whether by payment or the making of reasonable provision for payment thereof);

(2)    Second, to the satisfaction of all of the Partnership’s debts and liabilities to the General Partner (whether by payment or the making of reasonable provision for payment thereof), including, but not limited to, amounts due as reimbursements under Section 7.4 hereof;

(3)    Third, to the satisfaction of all of the Partnership’s debts and liabilities to the other Partners and any Assignees (whether by payment or the making of reasonable provision for payment thereof); and

(4)    Subject to the terms of any Partnership Unit Designation, the balance, if any, to the General Partner, the Limited Partners and any Assignees in accordance with and in proportion to their positive Capital Account balances, after giving effect to all contributions, distributions and allocations for all periods.

The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13.

 

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B.    Notwithstanding the provisions of Section 13.2A hereof that require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

C.    In the event that the Partnership is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the Partners and Assignees that have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2) to the extent of, and in proportion to, positive Capital Account balances. If any Partner has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. In the sole and absolute discretion of the General Partner or the Liquidator, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to this Article 13 may be withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2A hereof as soon as practicable.

Section 13.3    Deemed Distribution and Recontribution. Notwithstanding any other provision of this Article 13, in the event that the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership’s Property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged and the Partnership’s affairs shall not be wound up. Instead, for federal income tax purposes the Partnership shall be deemed to have distributed the Property in kind to the Partners and the Assignees, who shall be deemed to have assumed and taken such Property subject to all Partnership liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the Partners and the Assignees shall be deemed to have recontributed the Partnership Property in kind to the Partnership, which shall be deemed to have assumed and taken such Property subject to all such liabilities; provided, however, that nothing in this Section 13.3 shall be deemed to have constituted any Assignee as a Substituted Limited Partner without compliance with the provisions of Section 11.4 hereof.

 

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Section 13.4    Rights of Limited Partners. Except as otherwise provided in this Agreement, (a) each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contribution, (b) no Limited Partner shall have the right or power to demand or receive property other than cash from the Partnership and (c) no Limited Partner shall have priority over any other Limited Partner as to the return of its Capital Contributions, distributions or allocations.

Section 13.5    Notice of Dissolution. In the event that a Liquidating Event occurs or an event occurs that would, but for an election or objection by one or more Partners pursuant to Section 13.1 hereof, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners and, in the General Partner’s sole and absolute discretion or as required by the Act, to all other parties with whom the Partnership regularly conducts business (as determined in the sole and absolute discretion of the General Partner), and the General Partner may, or, if required by the Act, shall, publish notice thereof in a newspaper of general circulation in each place in which the Partnership regularly conducts business (as determined in the sole and absolute discretion of the General Partner).

Section 13.6    Cancellation of Certificate of Limited Partnership. Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed with the State of Delaware, all qualifications of the Partnership as a foreign limited partnership or association in jurisdictions other than the State of Delaware shall be cancelled, and such other actions as may be necessary to terminate the Partnership shall be taken.

Section 13.7    Reasonable Time for Winding-Up. A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation.

ARTICLE 14

PROCEDURES FOR ACTIONS AND CONSENTS

OF PARTNERS; AMENDMENTS; MEETINGS

Section 14.1    Procedures for Actions and Consents of Partners. The actions requiring consent or approval of Limited Partners pursuant to this Agreement, including Section 7.3 hereof, or otherwise pursuant to applicable law, are subject to the procedures set forth in this Article 14.

Section 14.2    Amendments. Amendments to this Agreement may be proposed by the General Partner or by a Majority in Interest of the Limited Partners. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written consent of the Limited Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that the General Partner may deem appropriate. For purposes of obtaining a written consent, the General Partner may

 

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require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a consent that is consistent with the General Partner’s recommendation with respect to the proposal; provided, however, that an action shall become effective at such time as requisite consents are received even if prior to such specified time.

Section 14.3    Meetings of the Partners.

A.    Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by a Majority in Interest of the Limited Partners. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 14.3B hereof.

B.    Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement for the action in question). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

C.    Each Limited Partner may authorize any Person or Persons to act for it by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or its attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy (or there is receipt of a proxy authorizing a later date). Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership’s receipt of written notice of such revocation from the Limited Partner executing such proxy.

D.    Each meeting of Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate in its sole and absolute discretion. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the General Partner’s shareholders and may be held at the same time as, and as part of, the meetings of the General Partner’s shareholders.

 

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ARTICLE 15

GENERAL PROVISIONS

Section 15.1    Addresses and Notice. Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication (including by telecopy, facsimile, or commercial courier service) to the Partner or Assignee at the address set forth in Exhibit A or such other address of which the Partner shall notify the General Partner in writing.

Section 15.2    Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” or “Sections” are to Articles and Sections of this Agreement.

Section 15.3    Pronouns and Plurals. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

Section 15.4    Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

Section 15.5    Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 15.6    Waiver.

A.    No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

B.    The restrictions, conditions and other limitations on the rights and benefits of the Limited Partners contained in this Agreement, and the duties, covenants and other requirements of performance or notice by the Limited Partners, are for the benefit of the Partnership and, except for an obligation to pay money to the Partnership, may be waived or relinquished by the General Partner, in its sole and absolute discretion, on behalf of the Partnership in one or more instances from time to time and at any time; provided, however, that any such waiver or relinquishment may not be made if it would have the effect of (i) creating liability for any other Limited Partner, (ii) causing the Partnership to cease to qualify as a limited partnership, (iii) reducing the amount of cash otherwise distributable to the Limited Partners, (iv) resulting in the classification of the Partnership as an association or publicly traded partnership taxable as a corporation or (v) violating the Securities Act, the Exchange Act or any state “blue sky” or other securities laws; provided, further, that any waiver relating to compliance with the Ownership Limit or other restrictions in the Charter shall be made and shall be effective only as provided in the Charter.

 

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Section 15.7    Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.

Section 15.8    Applicable Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. In the event of a conflict between any provision of this Agreement and any non-mandatory provision of the Act, the provisions of this Agreement shall control and take precedence.

Section 15.9    Entire Agreement. This Agreement contains all of the understandings and agreements between and among the Partners with respect to the subject matter of this Agreement and the rights, interests and obligations of the Partners with respect to the Partnership.

Section 15.10    Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

Section 15.11    Limitation to Preserve REIT Status. Notwithstanding anything else in this Agreement, to the extent that the amount paid, credited, distributed or reimbursed by the Partnership to any REIT Partner or its officers, directors, employees or agents, whether as a reimbursement, fee, expense or indemnity (a “REIT Payment”), would constitute gross income to the REIT Partner (or, if the REIT Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT, to such REIT) for purposes of Code Section 856(c)(2) or Code Section 856(c)(3), then, notwithstanding any other provision of this Agreement, the amount of such REIT Payments, as selected by the General Partner in its discretion from among items of potential distribution, reimbursement, fees, expenses and indemnities, shall be reduced for any Fiscal Year so that the REIT Payments, as so reduced, for or with respect to such REIT Partner shall not exceed the lesser of:

(1)    an amount equal to the excess, if any, of (a) four and nine-tenths percent (4.9%) of the REIT Partner’s (or, if the REIT Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT, such REIT’s) total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (I) of Code Section 856(c)(2) over (b) the amount of gross income (within the meaning of Code Section 856(c)(2)) derived by the REIT Partner (or, if the REIT Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT, by such REIT) from sources other than those described in subsections (A) through (I) of Code Section 856(c)(2) (but not including the amount of any REIT Payments); or

(2)    an amount equal to the excess, if any, of (a) twenty-four percent (24%) of the REIT Partner’s (or, if the REIT Partner is a “qualified REIT subsidiary”

 

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(within the meaning of Code Section 856(i)(2)) of a REIT, such REIT’s) total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subsections (A) through (I) of Code Section 856(c)(3) over (b) the amount of gross income (within the meaning of Code Section 856(c)(3)) derived by the REIT Partner (or, if the REIT Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT, by such REIT) from sources other than those described in subsections (A) through (I) of Code Section 856(c)(3) (but not including the amount of any REIT Payments);

provided, however, that REIT Payments in excess of the amounts set forth in clauses (i) and (ii) above may be made if the General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts shall not adversely affect the REIT Partner’s (or, if the REIT Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT, such REIT’s) ability to qualify as a REIT. To the extent that REIT Payments may not be made in a Fiscal Year as a consequence of the limitations set forth in this Section 15.11, such REIT Payments shall carry over and shall be treated as arising in the following Fiscal Year. The purpose of the limitations contained in this Section 15.11 is to prevent any REIT Partner (or, if the REIT Partner is a “qualified REIT subsidiary” (within the meaning of Code Section 856(i)(2)) of a REIT, such REIT) from failing to qualify as a REIT under the Code by reason of such REIT Partner’s share of items, including distributions, reimbursements, fees, expenses or indemnities, receivable directly or indirectly from the Partnership, and this Section 15.11 shall be interpreted and applied to effectuate such purpose.

Section 15.12    No Partition. No Partner nor any successor-in-interest to a Partner shall have the right while this Agreement remains in effect to have any property of the Partnership partitioned, or to file a complaint or institute any proceeding at law or in equity to have such property of the Partnership partitioned, and each Partner, on behalf of itself and its successors and assigns hereby waives any such right. It is the intention of the Partners that the rights of the parties hereto and their successors-in-interest to Partnership property, as among themselves, shall be governed by the terms of this Agreement, and that the rights of the Partners and their successors-in-interest shall be subject to the limitations and restrictions as set forth in this Agreement.

Section 15.13    No Third-Party Rights Created Hereby. The provisions of this Agreement are solely for the purpose of defining the interests of the Partners, inter se; and no other person, firm or entity (i.e., a party who is not a signatory hereto or a permitted successor to such signatory hereto) shall have any right, power, title or interest by way of subrogation or otherwise, in and to the rights, powers, title and provisions of this Agreement. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans to the Partnership or to pursue any other right or remedy hereunder or at law or in equity. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may any such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or any of the Partners.

[the next page is the signature page]

 

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IN WITNESS WHEREOF, this Agreement has been executed as of the date first written above.

 

PREVIOUS GENERAL PARTNER:
APARTMENT INCOME REIT CORP.
By:                                                              
       Name:
       Title:

 

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GENERAL PARTNER:
AIMCO-GP, INC.
By:                                                              
       Name:
       Title:

 

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SPECIAL LIMITED PARTNERS:
AIR REIT SUB 1, LLC
By:                                                              
       Name:
       Title:
AIR REIT SUB 1, LLC
By:                                                              
       Name:
       Title:
APARTMENT INCOME REIT CORP.
By:                                                              
       Name:
       Title:

 

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LIMITED PARTNERS:
By: AIMCO-GP, INC.                        
       as attorney-in-fact
By:                                                       
       Name:
       Title:

 

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EXHIBIT A

PARTNERS AND PARTNERSHIP UNITS

Exhibit A, the list of Partners and Partnership Units, is maintained by the General Partner and omitted from this copy of the Agreement.

 

A-1

EXHIBIT B

EXAMPLES REGARDING ADJUSTMENT FACTOR

For purposes of the following examples, it is assumed that (a) the Adjustment Factor in effect on June 30, 1995 is 1.0 and (b) on July 1, 1995 (the “Partnership Record Date” for purposes of these examples), prior to the events described in the examples, there are 100 REIT Shares issued and outstanding.

Example 1

On the Partnership Record Date, the Previous General Partner declares a dividend on its outstanding REIT Shares in REIT Shares. The amount of the dividend is one REIT Share paid in respect of each REIT Share owned. Pursuant to Paragraph (i) of the definition of “Adjustment Factor,” the Adjustment Factor shall be adjusted on the Partnership Record Date, effective immediately after the stock dividend is declared, as follows:

1.0 * 200 OVER 100 = 2.0

Accordingly, the Adjustment Factor after the stock dividend is declared is 2.0.

Example 2

On the Partnership Record Date, the Previous General Partner distributes options to purchase REIT Shares to all holders of its REIT Shares. The amount of the distribution is one option to acquire one REIT Share in respect of each REIT Share owned. The strike price is $4.00 a share. The Value of a REIT Share on the Partnership Record Date is $5.00 per share. Pursuant to Paragraph (ii) of the definition of “Adjustment Factor,” the Adjustment Factor shall be adjusted on the Partnership Record Date, effective immediately after the options are distributed, as follows:

1.0 * {(100 + 100)} OVER {(100 + {100 * $4.00} OVER {$5.00})} = 1.1111

Accordingly, the Adjustment Factor after the options are distributed is 1.1111. If the options expire or become no longer exercisable, then the retroactive adjustment specified in Paragraph (ii) of the definition of “Adjustment Factor” shall apply.

Example 3

On the Partnership Record Date, the Previous General Partner distributes assets to all holders of its REIT Shares. The amount of the distribution is one asset with a fair market value (as determined by the General Partner) of $1.00 in respect of each REIT Share owned. It is also assumed that the assets do not relate to assets received by the Previous General Partner or the General Partner pursuant to a pro rata distribution by the Partnership. The Value of a REIT Share on the Partnership Record Date is $5.00 a share. Pursuant to Paragraph (iii) of the definition of “Adjustment Factor,” the Adjustment Factor shall be adjusted on the Partnership Record Date, effective immediately after the assets are distributed, as follows:

1.0 * {$5.00} OVER {$5.00 - $1.00} = 1.25

Accordingly, the Adjustment Factor after the assets are distributed is 1.25.

 

B-1

EXHIBIT C

LIST OF DESIGNATED PARTIES

Terry Considine

Peter K. Kompaniez

Robert P. Lacy

Michael & Verona Sollinger

Patrick Stucker

Stonegate Funding Company

Steven F. Goldstone

Donaldson C. Pillsbury

Christopher Crowley

Richard D. Spizzini

Henry L. King

Alfonso G. Canales

Thomas J. Flynn

Carl E. Yasharian

Margot A. Mathoni

David B. Pall

Thomas E. Woodruff

Glen H. & Joyce E. Rosmann

Warren H. Leland

Amerett L. Donahoe

Daniel E. Landon

Conrad F. Fingerson

Dwight E. Lowell, II

Alfred V. & Lois E. Gangnes

Edward S. Stone

Sycamore Realty Trust, V

E. Oran Brigham

Donald Ravitch

Brian Conboy

Alan B. Grebene

Charles A. Cahill, III

Harold F. & Lucille J. Goodman

Timothy J. Tucker

 

C-1

EXHIBIT D

NOTICE OF REDEMPTION

 

To:

AIMCO-GP, Inc.

  

c/o Apartment Income REIT Corp.

  

4582 South Ulster Street

  

Suite 1700

  

Denver, Colorado 80237

The undersigned Limited Partner or Assignee hereby tenders for Redemption _______ Partnership Common Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as amended (the “Agreement”), and the Redemption rights referred to therein. All capitalized terms used herein and not otherwise defined shall have the same meaning ascribed to them respectively in the Agreement. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Partnership Common Units for REIT Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to the Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Partnership Common Units;

(b)    undertakes (i) to surrender such Partnership Common Units and any certificate therefor at the closing of the Redemption and (ii) to furnish to the Previous General Partner, prior to the Specified Redemption Date, the documentation, instruments and information required under Section 8.6G of the Agreement;

(c)    directs that the certificate representing the REIT Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of such Redemption be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee is a Qualifying Party;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Partnership Common Units, free and clear of the rights or interests of any other person or entity;

(iii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Partnership Common Units as provided herein;

(iv)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender; and

(e)    acknowledges that he will continue to own such Partnership Common Units until and unless such Redemption transaction closes.

 

D-1

Dated:                                     

 

  Name of Limited Partner or Assignee:
                                                                               
                                                                               
  (Signature of Limited Partner or Assignee)
                                                                               
  (Street Address)
                                                                               
  (City) (State) (Zip Code)

Issue check payable to or Certificates in the name of:                                                                      

Please insert social security or identifying number:                                                                                  

 

D-2

EXHIBIT E

FORM OF UNIT CERTIFICATE

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], 2020, A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number                 

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that

                                                                                                                                                                                                     

is the owner of

                                                                                                                                                                                                     

FULLY PAID PARTNERSHIP COMMON UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Partnership Common Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership, as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

By                                                 

 

E-1

For Value Received,                                                   hereby sells, assigns and transfers unto

  

 

      

 

Partnership Common Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Partnership Common Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                         

By:                                                      

Name:

 

E-2

EXHIBIT F

AMENDED AND RESTATED PARTNERSHIP UNIT DESIGNATION OF

THE CLASS I HIGH PERFORMANCE PARTNERSHIP UNITS OF

AIMCO PROPERTIES, L.P.

WHEREAS, AIMCO-GP, Inc., in its capacity as the general partner, has approved an amendment and restatement of the Partnership Unit Designation of the Class I High Performance Partnership Units (the “Original HP Unit Designation”) of AIMCO Properties, L.P. on the terms set forth herein.

1.    Number of Units and Designation.

A class of Partnership Units is hereby designated as “Class I High Performance Partnership Units,” and the number of Partnership Units constituting such class, as of the date hereof, is                 , which reflects the effect of the previously completed adjustment as of the Class I High Performance Valuation Date (as defined in the Original HP Partnership Unit Designation and in accordance with Section 3 thereof) (the “Completed Class I High Performance Valuation Date”).

2.    Definitions.

For purposes of this Partnership Unit Designation, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement.

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Class I High Performance Cash Amount” shall mean, as of any date, the lesser of (i) an amount of cash equal to the product of the amount that a Holder would receive in respect of each Class I High Performance Partnership Unit if the Partnership sold all of its properties at their fair market value (which may be determined by reference to the Value of a REIT Share), paid all of its debts and distributed the remaining proceeds to the Partners as provided in Section 13.2 of the Agreement, determined as of the applicable Valuation Date, or (ii) in the case of a Declination followed by a Public Offering Funding, the Public Offering Funding Amount.

“Class I High Performance Partnership Unit” shall mean a Partnership Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit.

“Determination Date” shall mean (i) when used with respect to any dividend or other distribution, the date fixed for the determination of the holders of the securities entitled to receive such dividend or distribution, or, if a dividend or distribution is paid or made without fixing such a date, the date of such dividend or distribution, and (ii) when used with respect to any split, subdivision, reverse stock split, combination or reclassification of securities, the date upon which such split, subdivision, reverse stock split, combination or reclassification becomes effective.

 

F-1

“Ex-Date” shall mean (i) when used with respect to any dividend or distribution, the first date on which the securities on which the dividend or distribution is payable trade regular way on the relevant exchange or in the relevant market without the right to receive such dividend or distribution, and (ii) when used with respect to any split, subdivision, reverse stock split, combination or reclassification of securities, the first date on which the securities trade regular way on such exchange or in such market to reflect such split, subdivision, reverse stock split, combination or reclassification becoming effective.

“Extraordinary Distribution” shall mean the distribution by the Previous General Partner, by dividend or otherwise, to all holders of its REIT Shares of evidences of its indebtedness or assets (including securities) other than cash or REIT Shares.

“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Value” shall have the meaning set forth in the Agreement, except that Value shall be determined by reference to the average of the daily market prices for twenty (20) consecutive trading days rather than ten (10) consecutive trading days.

3.    [Reserved]

4.    Distributions.

The Holders of Class I High Performance Partnership Units are entitled to receive distributions (other than distributions upon liquidation) if, as, when and in the same amounts and of the same type as may be paid to Holders of Partnership Common Units as if each Holder of Class I High Performance Partnership Units held an equal number of Partnership Common Units originally issued on the Completed Class I High Performance Valuation Date.

5.    Allocations.

(a)    Net Income and Net Loss shall be allocated to each of the Holders of Class I High Performance Partnership Units as if each such Holder was the Holder of an equal number of Partnership Common Units originally issued on the Completed Class I High Performance Valuation Date.

(b)    In the event that the Partnership disposes of all or substantially all of its assets in a transaction that will lead to a liquidation of the Partnership pursuant to Article XIII of the Agreement, then, notwithstanding Section 6.3.C of the Agreement, each Holder of Class I High Performance Partnership Units shall be specifically allocated items of Partnership income and gain in an amount sufficient to cause the Capital Account of such Holder to be equal to that of a Holder of an equal number of Partnership Common Units.

6.    Redemption.

Subject to the applicable requirements of Federal securities laws and any securities exchange or quotation system rules or regulations, each Holder of Class I High Performance Partnership Units shall have the redemption rights of Qualifying Parties set forth in Section 8.6 of the Agreement, except that (i) all references therein to “Redeemable Units” or “Partnership

 

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Common Units” shall be deemed to be references to Class I High Performance Partnership Units, (ii) the first Twelve-Month Period applicable to all Class I High Performance Partnership Units shall be deemed to have passed, (iii) all references therein to “Cash Amount” shall be deemed to be references to the Class I High Performance Cash Amount, and (iv) in the event that the Previous General Partner elects to acquire Class I High Performance Partnership Units that have been tendered for Redemption, the Previous General Partner shall acquire each such Class I High Performance Partnership Unit in exchange for a number of REIT Shares equal to the quotient obtained by dividing the Class I High Performance Cash Amount by the Value of a REIT Share, determined as of the applicable Valuation Date. Notwithstanding anything to the contrary herein, a Holder of Class I High Performance Partnership Units shall not have the right to redeem Class High Performance Partnership Units if the issuance of REIT Shares in exchange for such Class I High Performance Partnership Units would require shareholder approval (which has not been obtained) under the applicable rules of a securities exchange on which the REIT Shares are then listed.

7.    Status of Reacquired Units.

All Class I High Performance Partnership Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

8.    Restrictions on Ownership and Transfer.

The restrictions on Transfer set forth in Sections 11.1B and 11.3A of the Agreement shall not apply to Transfers of Class I High Performance Partnership Units which may be Transferred (i) by SMP I, L.L.C., a Delaware limited liability company (“SMP”) to (a) any Person who is a member (a “Member”) of SMP immediately prior to such transfer, (b) a Family Member of a Member, (c) a Controlled Entity of a Member, (c) any Person with respect to whom the Member constitutes a Controlled Entity, (d) upon the death of a Member, by will or by the laws of descent and distribution to any Qualified Transferee, and (ii) by any other Person to (a) a Family Member of a such Person, (b) a Controlled Entity of such Person, (c) any other Person with respect to whom such Person constitutes a Controlled Entity, (d) upon the death of such Person, by will or by the laws of descent and distribution to any Qualified Transferee.

9.    Adjustments.

(a)     [intentionally omitted]

(b)    In the event that, on or after January 1, 1998, the Previous General Partner (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) splits or subdivides its outstanding REIT Shares, (iii) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, or (iv) otherwise reclassifies its outstanding REIT Shares, then, for purposes of determining the AIMCO Total Return, each price of a REIT Share determined as of a date on or after the Ex-Date for such transaction shall be adjusted by multiplying such price by a fraction (x) the numerator of which shall be the number of REIT Shares issued and outstanding on the Determination Date for such dividend,

 

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distribution, split, subdivision, reverse stock split, combination or reclassification (assuming for such purposes that such dividend, distribution, split, subdivision, reverse split or combination has occurred as of such time) and (y) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the Determination Date for such dividend, distribution, split, subdivision, reverse stock split, combination or reclassification. The General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of the relevant valuation period that would unfairly distort the Value of a REIT Share, including, without limitation, a stock dividend, split subdivision, reverse stock split, or share combination.

(c)    The General Partner shall have authority to appropriately adjust the Value of a REIT Share if any other transaction or circumstance occurs or arises that would have an inequitable result.

10.    General.

The ownership of Class I High Performance Partnership Units may (but need not, in the sole and absolute discretion of the General Partner) be evidenced by one or more certificates. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of, Class I High Performance Partnership Units.

 

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EXHIBIT G

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS ONE PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.    Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class One Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be Ninety Thousand (90,000).

2.    Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Units, cash in an amount equal to the product of the number of Tendered Units, multiplied by 91.43 (which is the quotient obtained by dividing $8 by 8.75%).

“Class One Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

“Distribution Payment Date” shall have the meaning set forth of Section 3(a) of this Partnership Unit Designation.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

 

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“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(3) of this Partnership Unit Designation.

“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

 

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“Redemption” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“REIT Shares Amount” shall mean, with respect to any Tendered Units, a number of REIT Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a REIT Share as of the fifth (5th) Business Day prior to the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 6 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Tendered Units” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

3.    Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class One Partnership Preferred Units, as to the payment of distributions and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class One Partnership Preferred Units (the Partnership Units referred to in this paragraph being hereinafter referred to, collectively, as “Senior Partnership Units”);

 

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(b)    on a parity with the Class One Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class One Partnership Preferred Units if (i) such class or series of Partnership Units shall be Class G Partnership Preferred Units or (ii) the holders of such class or series of Partnership Units and the Class One Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class One Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class One Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

4.    Quarterly Cash Distributions.

(a)    Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner, quarterly cash distributions at the rate of $2.00 per Preferred Unit. Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly period that such Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on the February 1, May 1, August 1 or November 1, as the case may be, immediately preceding each Distribution Payment Date. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

 

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(b)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(c)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

(d)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

5.    Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to effectively enable them to receive a liquidation preference (the “Liquidation Preference”) per Preferred Unit equal to the sum of (i) 91.93 (which is the quotient obtained by dividing $8 by 8.75%), plus (ii) any accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders will not be entitled to any further payment or allocation. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership.

 

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(b)    If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following certain allocations made by the Partnership, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

6.    Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such Qualifying Party (such Preferred Units being hereafter “Tendered Units”) in exchange (a “Redemption”) for REIT Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for REIT Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such REIT Shares to the Tendering Party pursuant to the terms set forth in this Section 6, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for REIT Shares. In making such election to cause the Previous General Partner to acquire Tendered

 

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Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Tendering Parties over another nor discriminates against a group or class of Tendering Parties. If the Partnership elects to redeem any number of Tendered Units for REIT Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of REIT Shares equal to the REIT Shares Amount for such number of the Tendered Units. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The REIT Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and accessible REIT Shares, free of any pledge, lien, encumbrance or restriction, other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such REIT Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such REIT Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. REIT Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suite 1700, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

 

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(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for REIT Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of REIT Shares (“Registrable Shares”) equal to the REIT Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Preferred Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for the REIT Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to

 

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any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine. Any Preferred Units so contributed to the General Partner shall automatically, and without further action required, be converted into and deemed to be a General Partner Interest comprised of an equal number of Partnership Common Units. Any Preferred Units so contributed to the Special Limited Partners shall be converted into Partnership Common Units.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

(4)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(5)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(6)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

 

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(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional REIT Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares or any other class of shares of the Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 6(i)(a) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own REIT Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

(j)    On or after the Specific Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver REIT Shares for the Preferred Units evidenced thereby. From and after the Specific Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or REIT Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties (i) shall not be entitled to elect or effect a Redemption where the Redemption would consist of less than all the Preferred Units held by Partners and, to the extent that the aggregate Percentage Interests of the Limited Partners would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in REIT Shares otherwise issuable by the Previous General Partner hereunder.

 

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(l)    Notwithstanding any other provision of the Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a Limited Partner pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 6(l), (a) any Limited Partner (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

7.    Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

8.    General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Class One Partnership Preferred Units.

9.    Allocations of Income and Loss.

For each taxable year, (i) each holder of Preferred Units will be allocated net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership. Upon liquidation, dissolution or winding up of the Partnership, the holders of Preferred Units will be allocated income and gain sufficient to enable them to realize the Liquidation Preference in full.

10.    Voting Rights.

Except as otherwise required by applicable law or in the Agreement, the holders of the Preferred Units will have the same voting rights as holders of the Partnership Common Units. So long as any Preferred Units are outstanding, in addition to any other vote or consent of partners

 

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required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of the Partnership Unit Designation of the Preferred Units that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership units, including, without limitation, any Partnership units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units will not be deemed to have a material adverse effect on the rights or preferences of the holders of Preferred Units. The Partnership shall give the holders of the Preferred Units at least twenty-one (21) days’ advance notice of the proposed issuance of any Senior Partnership Units. With respect to the exercise of the above described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

11.    Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer applicable to Common Units, as set forth in the Agreement.

 

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ANNEX I

TO EXHIBIT G

NOTICE OF REDEMPTION

 

To:

AIMCO Properties, L.P.

  

c/o AIMCO-GP, Inc.

  

4582 South Ulster Street

  

Suite 1700

  

Denver, Colorado 80237

  

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class One Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class One Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class One Partnership Preferred Units for REIT Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to the Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class One Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class One Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to the Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional REIT Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own REIT Shares in violation of the Ownership Limit.

 

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(c)    directs that the certificate representing the REIT Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                                 

 

  Name of Limited Partner or Assignee:
                                                                       
                                                                       
  (Signature of Limited Partner or Assignee)
                                                                       
  (Street Address)
                                                                       
  (City) (State) (Zip Code)

Issue check payable to or Certificates in the name of:                                                                                       

Please insert social security or identifying number:                                                                                                  

 

  Signature Guaranteed by:
                                                                       

 

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NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS ONE PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT G

FORM OF UNIT CERTIFICATE

OF

CLASS ONE PARTNERSHIP PREFERRED UNITS

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number                     

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                                                                                              is the owner of                                                                                                                                                                                                 

CLASS ONE PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class One Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

 

By  

 

 

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ASSIGNMENT

For Value Received,                                                           hereby sells, assigns and transfers unto                                                                                                                                                                                   Class One Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class One Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                     

 

By:  

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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EXHIBIT H

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS TWO PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.    Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class Two Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be Ten Million (10,000,000).

2.    Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Units, cash in an amount equal to the product of (i) the number of Tendered Units, multiplied by (ii) the Liquidation Preference for a Preferred Unit.

“Class Two Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

“Common Shares” shall mean the shares of Class A Common Stock of the Previous General Partner.

“Common Shares Amount” shall mean, with respect to any Tendered Units, a number of Common Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a Common Share calculated as of the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

 

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“Distribution Payment Date” shall have the meaning set forth in Section 4(a) of this Partnership Unit Designation.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

 

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“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Preferred Shares” shall mean shares of the Class I Cumulative Preferred Stock of the Previous General Partner.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(4) of this Partnership Unit Designation.

“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Redemption” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 5 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) hereof.

“Tendered Units” shall have the meaning set forth in Section 6(b) hereof.

3.    Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class Two Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or

 

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winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class Two Partnership Preferred Units (the Partnership Units referred to in this paragraph being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class Two Partnership Preferred Units, as to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class Two Partnership Preferred Units if (i) such class or series of Partnership Units shall be Class G Partnership Preferred Units or Class One Partnership Preferred Units or (ii) the holders of such class or series of Partnership Units and the Class Two Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class Two Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class Two Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

4.    Quarterly Cash Distributions.

(a)    Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner, quarterly cash distributions at the rate of $0.50 per Preferred Unit; provided, however, that at any time and from time to time on or after March 1, 2005, the Partnership may adjust the quarterly cash distribution rate on the Preferred Units to equal 25% of the lower of (i) two percent (2%) plus the annual interest rate then applicable to U.S. Treasury notes with a maturity of five years and (ii) the annual dividend rate on the class or series of preferred stock most recently issued by the Previous General Partner that (x) is not convertible into another security of the Previous General Partner at the option of the holder and (y) ranks on a parity with its Class H Cumulative Preferred Stock. Such adjustment shall become effective upon the date the Partnership issues a notice to such effect to the holders of the Preferred Units. Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly period that such

 

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Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on the February 1, May 1, August 1 or November 1, as the case may be, immediately preceding each Distribution Payment Date. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

(b)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(c)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, the Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

(d)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

 

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5.    Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to effectively enable them to receive a liquidation preference (the “Liquidation Preference”) of (i) $25 per Preferred Unit, plus (ii) accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders shall not be entitled to any further payment or allocation. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Units upon the liquidation, dissolution or winding up of the Partnership.

(b)    If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Partnership Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following certain allocations made by the Partnership, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

6.    Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such Qualifying Party (any Preferred Units tendered for Redemption being hereafter “Tendered

 

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Units”) in exchange (a “Redemption”) for Common Shares or Preferred Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for Common Shares or Preferred Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such Common Shares or Preferred Shares to the Tendering Party pursuant to the terms set forth in this Section 6, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for Common Shares or Preferred Shares. In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Tendering Parties over another nor discriminates against a group or class of Tendering Parties. If the Partnership elects to redeem any number of Tendered Units for Common Shares or Preferred Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for (i) a number of Common Shares equal to the Common Shares Amount for such number of Tendered Units, (ii) if (x) the Notice of Redemption for such Tendered Units is received by the General Partner after the second (2nd) anniversary of the Tendering Party becoming a holder of such Preferred Units and (y) the Preferred Shares are then listed on the New York Stock Exchange or another national securities exchange, a number of Preferred Shares equal to such number of Tendered Units, or (iii) any combination of (i) and (ii). The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The Common Shares or Preferred Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and non-assessable shares, free of any pledge, lien, encumbrance or restriction other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such Common Shares or Preferred Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such Common Shares or Preferred Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. Common Shares or Preferred Shares issued upon an acquisition of

 

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the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suite 1700, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for Common Shares or Preferred Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of Common Shares or Preferred Shares (“Registrable Shares”) equal to the Common Shares or Preferred Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Preferred Units to be made subject thereon in writing to the General Partner within ten

 

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(10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for the Common Shares or Preferred Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    Each Tendering Party (a) may effect a Redemption only once in each fiscal quarter of a Twelve-Month Period and (b) may not effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in this Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

 

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(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of Common Shares or Preferred Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own Common Shares or Preferred Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional Common Shares, Preferred Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of Common Shares or Preferred Shares or any other class of shares of the

 

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Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 6(i)(a) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own Common Shares or Preferred Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

(j)    On or after the Specific Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver Common Shares or Preferred Shares for the Preferred Units evidenced thereby. From and after the Specific Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or Common Shares or Preferred Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties (i) shall not be entitled to elect or effect a Redemption where the Redemption would consist of less than all the Preferred Units held by Partners and, to the extent that the aggregate Percentage Interests of the Limited Partners would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in Common Shares or Preferred Shares otherwise issuable by the Previous General Partner hereunder.

(l)    Notwithstanding any other provision of the Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a Limited Partner pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 6(l), (a) any Limited Partner (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

 

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7.    Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

8.    General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Preferred Units.

9.    Allocations of Income and Loss.

For each taxable year, (i) each holder of Preferred Units will be allocated net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership. Upon liquidation, dissolution or winding up of the Partnership, the holders of Preferred Units will be allocated income and gain sufficient to enable them to realize the Liquidation Preference in full.

10.    Voting Rights.

Except as otherwise required by applicable law or in the Agreement, the holders of the Preferred Units will have the same voting rights as holders of the Partnership Common Units. As long as any Preferred Units are outstanding, in addition to any other vote or consent of partners required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of the Partnership Unit Designation of the Preferred Units that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership Units, including, without limitation, any Partnership Units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units, will not be deemed to have a material adverse effect on the rights or preferences of the holders of Preferred Units. With respect to the exercise of the above-described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

11.    Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer applicable to Common Units, as set forth in the Agreement.

 

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ANNEX I

TO EXHIBIT H

NOTICE OF REDEMPTION

 

To:

AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street

Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class Two Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class Two Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class Two Partnership Preferred Units for Common Shares or Preferred Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to the Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class Two Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class Two Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to the Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of Common Shares or Preferred Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own Common Shares or Preferred Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional Common Shares or Preferred Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of Common Shares or Preferred Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the

 

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Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own Common Shares or Preferred Shares in violation of the Ownership Limit.

(c)    directs that the certificate representing the Common Shares or Preferred Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                                             

 

Name of Limited Partner or Assignee:

 

 

(Signature of Limited Partner or Assignee)

 

(Street Address)

 

(City) (State) (Zip Code)

Issue check payable to or Certificates in the name

of:                                                                                                          

Please insert social security or identifying

number:                                                                                                          

 

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Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS TWO PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT H

FORM OF UNIT CERTIFICATE

OF

CLASS TWO PARTNERSHIP PREFERRED UNITS

[THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION,] THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], AS IT MAY BE AMENDED AND/OR SUPPLEMENTED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number                         

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                       

is the owner of                                                                                                                      

CLASS TWO PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class Two Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

By                                                                      

 

 

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ASSIGNMENT

For Value Received,                                                                       hereby sells, assigns and transfers unto                                                                       Class Two Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class Two Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                     

 

By:  

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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EXHIBIT I

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS THREE PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.    Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class Three Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be three million (3,000,000).

2.    Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Unit, cash in an amount equal to the Liquidation Preference of such Tendered Unit.

“Class Three Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

“Distribution Payment Date” shall have the meaning set forth of Section 4(b) of this Partnership Unit Designation.

“Distribution Rate” shall mean 9.5%, subject to adjustment as provided in Section 4(a) of this Partnership Unit Designation.

“Dividend Yield” shall mean, as of any calculation date and with respect to any class or series of capital stock, the quotient obtained by dividing (i) the aggregate dollar amount of dividends payable on one share of such class or series of capital stock, in accordance with its terms, for the 12 month period ending on the dividend payment date immediately preceding such calculation date, by (ii) the Market Value of one share of such stock as of such calculation date.

 

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“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

 

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“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Previous General Partner” shall mean Apartment Income REIT Corp., a Maryland corporation.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(4) of this Partnership Unit Designation.

“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Qualifying Preferred Stock” shall mean any class or series of non-convertible perpetual preferred stock that (i) has been issued by a corporation that has elected to be taxed as a REIT, (ii) has a fixed rate of distributions or dividends, (iii) has a fixed liquidation preference (and which entitles the holder thereof to no payments other than the payment of distributions at a fixed rate and the payment of a fixed liquidation preference), (iv) is listed on the New York Stock Exchange, (v) cannot be redeemed at the option of the issuer for the first five years after issuance of such class or series of preferred stock and that, at the Reset Date (or, if applicable, as of the date the calculation of the Weighted Average of Preferred Stock Dividend Yields is being made for purposes hereof in respect of such Reset Date) cannot be so redeemed and (vi) is issued by an issuer the unsecured debt of which has an average rating from Moody’s Investors Services, Inc., Standard & Poor’s Rating Services or Duff & Phelps Credit Rating Co. in a category that is one rating category below the average rating, as of such date, of the Previous General Partner’s unsecured debt.

“Redemption” shall have the meaning set forth in Section 6(b)(i) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“REIT Shares Amount” shall mean, with respect to any Tendered Units, a number of REIT Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a REIT Share as of the fifth (5th) Business Day prior to the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Reset Date” shall mean December 21, 2004 and every fifth anniversary of such date that occurs thereafter.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the

 

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Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 6 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Tendered Units” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Weighted Average of Preferred Stock Dividend Yields” shall mean, as of any date of calculation, the average of the Dividend Yields, as of such date, of each Qualifying Preferred Stock (other than a Qualifying Preferred Stock issued by the Previous General Partner) that has been outstanding during the entire year immediately preceding the date of calculation. Each such class of Qualifying Preferred Stock (except Qualifying Preferred Stock of the Previous General Partner) shall be weighted for its total market value.

3.    Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class Three Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class Three Partnership Preferred Units (the Partnership Units referred to in this paragraph being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class Three Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class Three Partnership Preferred Units if (i) such class or series of Partnership Units shall be Class G Partnership Preferred Units, Class One Partnership Preferred Units or Class Two Partnership Preferred Units or (ii) the holders of such class or series of Partnership Units and the Class Three Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or

 

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liquidation preferences, without preference or priority one over the other (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class Three Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class Three Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

4.    Quarterly Cash Distributions.

(a)    The “Quarterly Distribution Amount,” as of any date, shall be equal to (i) the Distribution Rate then in effect, multiplied by (ii) $25, and divided by (iii) four. Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner, quarterly cash distributions in an amount per Preferred Unit equal to the Quarterly Distribution Amount in effect as of the date such distribution is declared by the General Partner, and no more. On each Reset Date, the Distribution Rate thereafter in effect shall be adjusted by the General Partner to equal the lesser of (i) the Distribution Rate in effect immediately prior to such Reset Date or (ii) the Dividend Yield of the class of Qualifying Preferred Stock most recently issued by the Previous General Partner or, if there is no class of Qualifying Preferred Stock of the Previous General Partner outstanding as of any Reset Date, the Weighted Average of Preferred Stock Dividend Yields, calculated as of the end of the calendar quarter immediately preceding such Reset Date; provided, further, that if for any reason there are no classes of Qualifying Preferred Stock of the type described in the definition of “Weighted Average of Preferred Stock Dividend Yields” outstanding on any Reset Date and the reference to the Weighted Average of Preferred Stock Dividend Yields would otherwise be determinative of the calculation of the adjusted Distribution Rate on such Reset Date, the adjusted Distribution Rate for the succeeding five (5) year period shall be the Distribution Rate in effect immediately prior to such Reset Date. Upon any such adjustment of the Distribution Rate, the General Partner shall send a notice describing such adjustment to the holders of the Preferred Units at their respective addresses, as set forth on Exhibit A to the Agreement.

(b)    Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly period that such Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on the February 1, May 1, August 1 or November 1, as the case may be, immediately preceding each Distribution Payment Date. If the

 

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Preferred Units are issued other than on a record date for the payment of distributions to the holders of Preferred Units, the Quarterly Distribution Amount shall, for any quarter in which the Distribution Rate changes on any Reset Date, be appropriately prorated based on the portions of such quarter during which the different Distribution Rates were in effect, on the basis of twelve 30-day months and a 360-day year. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

(c)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(d)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

(e)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

 

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5.    Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to the extent necessary to enable them to receive a liquidation preference (the “Liquidation Preference”) per Preferred Unit equal to the sum of (i) $25 plus (ii) any accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders will not be entitled to any further payment or allocation. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership.

(b)    If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following appropriate allocations of Partnership income, gain, deduction and loss, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to the extent necessary to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

6.    Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such

 

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Qualifying Party (such Preferred Units being hereafter “Tendered Units”) in exchange (a “Redemption”) for REIT Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for REIT Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such REIT Shares to the Tendering Party pursuant to the terms set forth in this Section 6 in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for Federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for REIT Shares. In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Tendering Parties over another nor discriminates against a group or class of Tendering Parties. If the Partnership elects to redeem any number of Tendered Units for REIT Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of REIT Shares equal to the REIT Shares Amount for such number of the Tendered Units. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The REIT Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and accessible REIT Shares, free of any pledge, lien, encumbrance or restriction, other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such REIT Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such REIT Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. REIT Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of

 

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Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suite 1700, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for REIT Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of REIT Shares (“Registrable Shares”) equal to the REIT Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Preferred Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

 

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Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for REIT Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine. Any Preferred Units so contributed to the General Partner shall automatically, and without further action required, be converted into and deemed to be a General Partner Interest comprised of an equal number of Partnership Common Units. Any Preferred Units so contributed to the Special Limited Partners shall be converted into Partnership Common Units.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    No Tendering Party may (a) effect a Redemption more than once in any fiscal quarter of a Twelve-Month Period or (b) effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

 

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(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional REIT Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares or any other class of shares of the Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 6(i)(a) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own REIT Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

 

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(j)    On or after the Specific Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver REIT Shares for the Preferred Units evidenced thereby. From and after the Specific Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or REIT Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties (i) shall not be entitled to elect or effect a Redemption where the Redemption would consist of less than all the Preferred Units held by Partners and, to the extent that the aggregate Percentage Interests of the Limited Partners would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in REIT Shares otherwise issuable by the Previous General Partner hereunder.

(l)    Notwithstanding any other provision of the Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a Limited Partner pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 6(l), (a) any Limited Partner (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

7.    Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

 

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8.    General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Class Three Partnership Preferred Units.

9.    Allocations of Income and Loss.

Subject to the terms of Section 5 hereof, for each taxable year, (i) each holder of Preferred Units will be allocated, to the extent possible, net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership.

10.    Voting Rights.

Except as otherwise required by applicable law or in the Agreement, the holders of the Preferred Units will have the same voting rights as holders of the Partnership Common Units. As long as my Preferred Units are outstanding, in addition to any other vote or consent of partners required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of the Partnership Unit Designation of the Preferred Units that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership units, including, without limitation, any Partnership units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units, will not be deemed to have a material adverse effect on the rights or preferences of the holders of Preferred Units. With respect to the exercise of the above described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

11.    Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer as are, and the holders of Preferred Units shall be entitled to the same rights of transfer as are, applicable to Common Units as set forth in the Agreement.

 

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ANNEX I

TO EXHIBIT I

NOTICE OF REDEMPTION

To: AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street

Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class Three Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class Three Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class Three Partnership Preferred Units for REIT Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class Three Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class Three Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional REIT Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own REIT Shares in violation of the Ownership Limit.

 

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(c)    directs that the certificate representing the REIT Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                                                      

 

Name of Limited Partner or Assignee:

 

 

(Signature of Limited Partner or Assignee)

 

(Street Address)

 

(City) (State) (Zip Code)

Issue check payable to or Certificates in the name

of:                                                                                      

Please insert social security or identifying

number:                                                                                      

 

Signature Guaranteed by:

 

 

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NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS THREE PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT I

FORM OF UNIT CERTIFICATE

OF

CLASS THREE PARTNERSHIP PREFERRED UNITS

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], AS IT MAY BE AMENDED AND/OR SUPPLEMENTED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number                         

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                                                                                            

is the owner of                                                                                                                                                                                                 

CLASS THREE PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class Three Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

By                                                          

 

 

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ASSIGNMENT

For Value Received,                                                           hereby sells, assigns and transfers unto                                                           Class Three Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class Three Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                                          

 

By:  

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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EXHIBIT J

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS FOUR PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.    Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class Four Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be 5,100,000.

2.    Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Adjustment Factor” means 1.0; provided, however, that in the event that:

(i)    the Previous General Partner (a) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (b) splits or subdivides its outstanding REIT Shares or (c) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction, (i) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination (assuming for such purposes that such dividend, distribution, split, subdivision, reverse split or combination has occurred as of such time) and (ii) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination;

(ii)    the Previous General Partner distributes any rights, options or warrants to all holders of its REIT Shares to subscribe for or to purchase or to otherwise acquire REIT Shares (or other securities or rights convertible into, exchangeable for or exercisable for REIT Shares) at a price per share less than the Value of a REIT Share on the record date for such distribution (each a “Distributed Right”), then the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction (a) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date plus the maximum number of REIT Shares purchasable under such Distributed Rights and (b) the denominator of which shall be the number of REIT Shares issued and outstanding on the record date plus a fraction (1) the numerator of which is the maximum number of REIT Shares purchasable under such

 

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Distributed Rights times the minimum purchase price per REIT Share under such Distributed Rights and (2) the denominator of which is the Value of a REIT Share as of the record date; provided, however, that, if any such Distributed Rights expire or become no longer exercisable, then the Adjustment Factor shall be adjusted, effective retroactive to the date of distribution of the Distributed Rights, to reflect a reduced maximum number of REIT Shares or any change in the minimum purchase price for the purposes of the above fraction; and

(iii)    the Previous General Partner shall, by dividend or otherwise, distribute to all holders of its REIT Shares evidences of its indebtedness or assets (including securities, but excluding any dividend or distribution referred to in subsection (i) above), which evidences of indebtedness or assets relate to assets not received by the Previous General Partner, the General Partner and/or the Special Limited Partners pursuant to a pro rata distribution by the Partnership, then the Adjustment Factor shall be adjusted to equal the amount determined by multiplying the Adjustment Factor in effect immediately prior to the close of business on the date fixed for determination of shareholders entitled to receive such distribution by a fraction (i) the numerator shall be such Value of a REIT Share on the date fixed for such determination and (ii) the denominator shall be the Value of a REIT Share on the dates fixed for such determination less the then fair market value (as determined by the General Partner, whose determination shall be conclusive) of the portion of the evidences of indebtedness or assets so distributed applicable to one REIT Share.

Any adjustments to the Adjustment Factor shall become effective immediately after the effective date of such event, retroactive to the record date, if any, for such event. Other than with respect to the Spin-Off Adjustment, all references to “Previous General Partner” (including in the definition of “REIT Shares”) with respect to occurrences prior to [Spin-Off Date], 2020 shall refer instead to the Previous Public Parent (i.e., Apartment Investment and Management Company). In respect of the distribution of shares of common stock of Apartment Income REIT Corp. to holders of shares of common stock of Apartment Investment and Management Company (the “Spin-Off”), the Adjustment Factor shall be adjusted (the “Spin-Off Adjustment”) to equal the amount determined by multiplying the Adjustment Factor in effect immediately prior to the Spin-Off by a fraction (i) the numerator of which shall be the Value of a REIT Share (with the reference to “Previous General Partner” in the definition of “REIT Share” deemed to be to the Previous Public Parent) after the end of trading on the last trading day prior to the Spin-Off and (ii) the denominator of which shall be the Value of a REIT Share (with the reference to “Previous General Partner” in the definition of “REIT Share” deemed to be to the Previous Public Parent) after the end of trading on the last trading day prior to the Spin-Off less the then fair market value (as determined by the General Partner, whose determination shall be conclusive) of a share of common stock of the Previous Public Parent after giving effect to the Spin-Off.

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Units, cash in an amount equal to the sum of (x) the product of (i) the number of Tendered Units, multiplied by (ii) the Liquidation Preference for a Preferred Unit, plus, (y) if positive, the product of (i) the number of Tendered Units, multiplied by (ii) the Liquidation Preference for a Preferred Unit (excluding any accumulated, accrued or unpaid distributions), multiplied by (iii) the quotient obtained by dividing (a) the amount by which the Market Value of a Common Share, calculated as of the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units, exceeds $45, by (b) $45.

“Class Four Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

 

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“Common Shares” shall mean the shares of Class A Common Stock of the Previous General Partner.

“Common Shares Amount” shall mean, with respect to any Tendered Units, a number of Common Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a Common Share calculated as of the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Conversion Price” shall mean, as of any date, the quotient obtained by dividing $45 by the Adjustment Factor in effect as of such date.

“Current Market Price” of a share of any Equity Stock shall mean the closing price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, on such day, in either case as reported on the principal national securities exchange on which such securities are listed or admitted for trading, or, if such security is not quoted on any national securities exchange, on the Nasdaq National Market or if such security is not quoted on the Nasdaq National Market, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by Nasdaq or, if bid and asked prices for each security on such day shall not have been reported through Nasdaq, the average of the bid and asked prices on such day as furnished by any New York Stock Exchange or National Association of Securities Dealers, Inc. member firm regularly making a market in such security selected for such purpose by the Chief Executive Officer of the General Partner or the Board of Directors of the General Partner or if any class or series of securities are not publicly traded, the fair value of the shares of such class as determined reasonably and in good faith by the Board of Directors of the General Partner.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

“Distribution Payment Date” shall have the meaning set forth in Section 4(a) of this Partnership Unit Designation.

“Equity Stock” shall mean one or more shares of any class of capital stock of the Previous General Partner.

“Internal Rate of Return” shall mean, as of any determination date, the effective discount rate under which the present value of the Inflows associated with an outstanding Class Four Partnership Preferred Unit equals $25. For purposes of calculation of Internal Rate of Return, “Inflows” shall mean (a) all distributions (whether paid in cash or property) that have been received in respect of such unit, (b) the cash payment in respect of distributions payable on such unit pursuant to Section 7(b)(iii) hereof if such unit were converted to Partnership Common Units on the determination date, and (c) the amount by which the Market Value of a REIT Share, as of the determination date, exceeds the Conversion Price then in effect. For purposes of calculating the amounts of any Inflows, all distributions received in property shall be deemed to have a value equal to the Market Value of such distributions as of the date such distribution is

 

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received. Neither the fact of any transfer of any units of the Class Four Partnership Preferred Units nor the amount of any consideration received by the holder thereof or paid by any successor holder in connection with any transfer shall affect the calculation of Internal Rate of Return.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days (or twenty (20) consecutive Trading Days for purposes of calculating “Internal Rate of Return”) immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

 

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“Parity Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(4) of this Partnership Unit Designation.

“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Redemption” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 5 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) hereof.

“Tendered Units” shall have the meaning set forth in Section 6(b) hereof.

“Trading Day” shall mean, when used with respect to the Closing Price of a share of any Equity Stock, (i) if the Equity Stock is listed or admitted to trading on the NYSE, a day on which the NYSE is open for the transaction of business, (ii) if the Equity Stock is not listed or admitted to trading on the NYSE but is listed or admitted to trading on another national securities exchange or automated quotation system, a day on which the principal national securities exchange or automated quotation system, as the case may be, on which the Equity Stock is listed

 

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or admitted to trading is open for the transaction of business, or (iii) if the Equity Stock is not listed or admitted to trading on any national securities exchange or automated quotation system, any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.

“Transfer Agent” shall mean such transfer agent as may be designated by the Partnership or its designee as the transfer agent for the Class Four Partnership Preferred Units; provided, that if the Partnership has not designated a transfer agent then the Partnership shall act as the transfer agent for the Class Four Partnership Preferred Units.

3.    Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class Four Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class Four Partnership Preferred Units (the Partnership Units referred to in this paragraph being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class Four Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class Four Partnership Preferred Units if (i) such class or series of Partnership Units shall be Class G Partnership Preferred Units, Class One Partnership Preferred Units, Class Two Partnership Preferred Units or Class Three Partnership Preferred Units, or (ii) the holders of such class or series of Partnership Units and the Class Four Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class Four Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class Four Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

 

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4.    Quarterly Cash Distributions.

(a)    Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner, quarterly cash distributions at the rate of $0.50 per Preferred Unit. Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly period that such Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on February 1, May 1, August 1 or November 1, as the case may be, immediately preceding each Distribution Payment Date. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

(b)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(c)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, the Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

 

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(d)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

5.    Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to effectively enable them to receive a liquidation preference (the “Liquidation Preference”) of (i) $25 per Preferred Unit, plus (ii) accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders shall not be entitled to any further allocation of income or gain. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Units upon the liquidation, dissolution or winding up of the Partnership.

(b)    If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Partnership Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following certain allocations made by the Partnership, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

6.    Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred

 

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Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such Qualifying Party (any Preferred Units tendered for Redemption being hereafter “Tendered Units”) in exchange (a “Redemption”) for Common Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for Common Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such Common Shares to the Tendering Party pursuant to the terms set forth in this Section 6, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for Common Shares. In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Tendering Parties over another nor discriminates against a group or class of Tendering Parties. If the Partnership elects to redeem any number of Tendered Units for Common Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of Common Shares equal to the Common Shares Amount for such number of Tendered Units. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The Common Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and non-assessable shares, free of any pledge, lien, encumbrance or restriction other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such Common Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of

 

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such Common Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. Common Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suite 1700, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for Common Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of Common Shares (“Registrable Shares”) equal to the Common Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the

 

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number of Preferred Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for the Common Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    Each Tendering Party (a) may effect a Redemption only once in each fiscal quarter of a Twelve-Month Period and (b) may not effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

 

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(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of Common Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own Common Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional Common Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of Common Shares or any other class of shares of the Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in

 

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the affidavit required by Section 6(i)(a) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own Common Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

(j)    On or after the Specific Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver Common Shares for the Preferred Units evidenced thereby. From and after the Specific Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or Common Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties (i) shall not be entitled to elect or effect a Redemption where the Redemption would consist of less than all the Preferred Units held by Partners and, to the extent that the aggregate Percentage Interests of the Limited Partners would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in Common Shares otherwise issuable by the Previous General Partner hereunder.

(l)    Notwithstanding any other provision of the Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a Limited Partner pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 6(l), (a) any Limited Partner (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

7.    Conversion.

(a)     (i) Subject to and upon compliance with the provisions of this Section 7, a holder of Class Four Partnership Preferred Units shall have the right, at such holder’s option, to

 

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convert such units, in whole or in part, into the number of Partnership Common Units per Class Four Partnership Preferred Unit obtained by dividing the Liquidation Preference (excluding any accumulated, accrued and unpaid distributions) per Class Four Partnership Preferred Unit by the Conversion Price in effect at the time and on the date provided for in subparagraph (b)(iv) of this Section 7. In order to exercise the conversion right, the holder of each Class Four Partnership Preferred Unit to be converted shall surrender the certificate representing such unit, duly endorsed or assigned to the Partnership or in blank, at the office of the Transfer Agent, accompanied by written notice to the Partnership that the holder thereof elects to convert such Class Four Partnership Preferred Unit.

(ii)    With respect to any Class Four Partnership Preferred Units that have been issued and outstanding for at least two (2) years, if, as of any date, the Internal Rate of Return exceeds 12.5%, then the Partnership shall have the right, but not the obligation, to cause such Class Four Partnership Preferred Units to be converted, in whole or in part, into the number of Partnership Common Units per Class Four Partnership Preferred Unit obtained by dividing the Liquidation Preference (excluding any accumulated, accrued and unpaid distributions) per Class Four Partnership Preferred Unit by the Conversion Price in effect at the time and on the date provided for in subparagraph (b)(iv) of this Section 7. In order to exercise the conversion right, the Partnership shall send notice of such conversion to each holder of record of Class Four Partnership Preferred Units no later than five Business Days after a date on which the Internal Rate of Return exceeds 12.5%. Such notice shall be provided by facsimile or, if facsimile is not available, then by first class mail, postage prepaid, at such holders’ address as the same appears on the records of the Partnership. Any notice which was transmitted or mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date received by the holder. Each such notice shall state, as appropriate: (1) the date of conversion, which date may be any date within one business day following the date on which the notice is transmitted or mailed; (2) the number of units of Class Four Partnership Preferred Units to be converted and, if fewer than all such units held by such holder are to be converted, the number of such units to be converted; and (3) the then current Conversion Price. Upon receiving such notice of conversion, each such holder shall promptly surrender the certificates representing such Class Four Partnership Preferred Units as are being converted on the conversion date, duly endorsed or assigned to the Partnership or in blank, at the office of the Transfer Agent; provided, however, that the failure to so surrender any such certificates shall not in any way affect the validity of the conversion of the underlying Class Four Partnership Preferred Units into Partnership Common Units.

(b)     (i) Unless the Partnership Common Units issuable on conversion are to be issued in the same name as the name in which such Class Four Partnership Preferred Units are registered, each such unit surrendered following conversion shall be accompanied by instruments of transfer, in form satisfactory to the Partnership, duly executed by the holder or such holder’s duly authorized representative, and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Partnership demonstrating that such taxes have been paid).

(ii)    A holder of Class Four Partnership Preferred Units shall, as of the date of the conversion of such units to Partnership Common Units, be entitled to receive a cash payment in respect of any distributions (whether or not earned or declared) that are accumulated,

 

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accrued and unpaid thereon as of the time of such conversion, provided, however, that payment in respect of any distributions on such units that has been declared but for which the Distribution Payment Date has not yet been reached shall be payable as of such Distribution Payment Date. Except as provided above, the Partnership shall make no payment or allowance for unpaid distributions, whether or not in arrears, on converted units.

(iii)    As promptly as practicable after the surrender of certificates for Class Four Partnership Preferred Units as aforesaid, and in any event no later than three business days after the date of such surrender, the Partnership shall issue and deliver at such office to such holder, or send on such holders’ written order, a certificate or certificates for the number of full Partnership Common Units issuable upon the conversion of such Class Four Partnership Preferred Units in accordance with the provisions of this Section 7, and any fractional interest in respect of a Partnership Common Unit arising upon such conversion shall be settled as provided in paragraph (c) of this Section 7.

(iv)    Each conversion shall be deemed to have been effected (x) in the case of a conversion pursuant to subparagraph (a)(i) of this Section 7 immediately prior to the close of business on the date on which the certificates for Class Four Partnership Preferred Units shall have been surrendered and such notice received by the Partnership as provided in subparagraph (a)(i) of this Section 7, and (y) in the case of a conversion pursuant to subparagraph (a)(ii) of this Section 7, immediately prior to the close of business on the date identified as the conversion date in the notice of conversion sent by the Partnership pursuant to subparagraph (a)(ii) of this Section 7; and, in the case of (x) or (y), the person or persons in whose name or names any certificate or certificates for Partnership Common Units shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the units represented thereby at such time on such date, and such conversion shall be at the Conversion Price in effect at such time on such date, unless the transfer books of the Partnership shall be closed on that date, in which event such person or persons shall be deemed to become such holder or holders of record at the close of business on the next succeeding day on which such transfer books are open, but such conversion shall be at the Conversion Price in effect on the date in the notice of conversion sent by the Partnership as aforesaid.

(c)    No fractional Partnership Common Units or scrip representing fractions of a Partnership Common Unit shall be issued upon conversion of the Class Four Partnership Preferred Units. Instead of any fractional interest in a Partnership Common Unit that would otherwise be deliverable upon the conversion of Class Four Partnership Preferred Units, the Partnership shall pay to the holder of such units an amount of cash equal to the product of (i) such fraction and (ii) the value of a REIT Share as of the date of conversion. If more than one of any holder’s units shall be converted at one time, the number of full Partnership Common Units issuable upon conversion thereof shall be computed on the basis of the aggregate number of Class Four Partnership Preferred Units so converted.

(d)    If the Partnership shall be a party to any transaction (including with limitation a merger, consolidation, statutory exchange, sale of all or substantially all of the Partnership’s assets or recapitalization of the Partnership Common Units, but excluding any transaction as to which a charge in the Adjustment Factor would be effected) (each of the foregoing being referred to herein as a “Transaction”), in each case, as a result of which

 

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Partnership Common Units shall be converted into the right to receive securities or other property (including cash or any combination thereof), each Class Four Partnership Preferred Unit which is not converted into the right to receive securities or other property in connection with such Transaction shall thereupon be convertible into the kind and amount of securities and other property (including cash or any combination thereof) receivable upon such consummation by a holder of that number of Partnership Common Units into which Class Four Partnership Preferred Units were convertible immediately prior to such Transaction. The Partnership shall not be a party to any transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (d), and it shall not consent or agree to the occurrence of any Transaction until the Partnership has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Class Four Partnership Preferred Units that will contain provisions enabling the holders of the Class Four Partnership Preferred Units that remain outstanding after such Transaction to convert into the consideration received by holders of Partnership Common Units at the Conversion Price in effect immediately prior to such Transaction. The provisions of this Paragraph (d) shall apply to successive Transactions.

(e)    Whenever the Conversion Price is adjusted as herein provided (whether pursuant to paragraph (d) of this Section 7 or as a result of a change in the Adjustment Factor), the General Partner shall promptly file with the Transfer Agent an officer’s certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the General Partner shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each holder of Class Four Partnership Preferred Units at such holder’s address as shown on the records of the Partnership.

(f)    In any case in which an adjustment to the Adjustment Factor shall become effective immediately after the effective date of an event, retroactive to the record date, if any, for such event, the Partnership may defer until the occurrence of such event (A) issuing to the holder of any Class Four Partnership Preferred Units converted after such record date and before the occurrence of such event the additional Partnership Common Units issuable upon such conversion by reason of the adjustment required by such event over and above the Partnership Common Units issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of any fraction pursuant to Section 7(c).

(g)    There shall be no adjustment of the Conversion Price in case of the issuance of any unit of the Partnership except as specifically set forth in the definition of “Adjustment Factor” or in this Section 7. In addition, notwithstanding any other provision contained in the definition of “Adjustment Factor” or in this Section 7, there shall be no adjustment of the Conversion Price upon the payment of any cash distributions on any units of the Partnership.

(h)    If the Partnership shall take any action affecting the Partnership Common Units, other than action described in the definition of “Adjustment Factor” or in this Section 7 that, in the opinion of the General Partner would materially adversely affect the conversion rights of the holders of Class Four Partnership Preferred Units, the Conversion Price for the Class Four

 

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Partnership Preferred Units may be adjusted, to the extent permitted by law in such manner, if any, and at such time as the General Partner, in its sole discretion, may determine to be equitable under the circumstances.

(i)    The Partnership will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Partnership Common Units or other securities or property on conversion of Class Four Partnership Preferred Units pursuant hereto; provided, however, that the Partnership shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Partnership Common Units or other securities or property in a name other than that of the holder of the Class Four Partnership Preferred Units to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Partnership the amount of any such tax or established, to the reasonable satisfaction of the Partnership, that such tax has been paid.

(j)    In addition to any other adjustment required hereby, to the extent permitted by law, the Partnership from time to time may decrease the Conversion Price by any amount, permanently or for a period of at least twenty Business Days, if the decrease is irrevocable during the period.

(k)    For purposes of the definition of “Twelve-Month Period” in the Agreement, any holder of Class Four Partnership Preferred Units that have been converted to Partnership Common Units shall be deemed to have acquired such Partnership Common Units when such Class Four Partnership Units were acquired.

8.    Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

9.    General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Preferred Units.

10.    Allocations of Income and Loss.

For each taxable year, each holder of Preferred Units will be allocated a portion of the Net Income and Net Loss of the Partnership equal to the portion of the Net Income and Net Loss of the Partnership that would be allocated to such holder pursuant to Article 6 of the Agreement if such holder held a number of Partnership Common Units equal to (i) the number of Preferred Units held by such holder, multiplied by (ii) 0.625. Upon liquidation, dissolution or winding up of the Partnership, the Partnership shall endeavor to allocate income and gain to the holders of the Preferred Units such that the Capital Accounts related to the Preferred Units are equal to their Liquidation Preference.

 

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11.    Voting Rights.

Except as otherwise required by applicable law or in the Agreement, the holders of the Preferred Units will have the same voting rights as holders of the Partnership Common Units. As long as any Preferred Units are outstanding, in addition to any other vote or consent of partners required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of the Partnership Unit Designation of the Preferred Units that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership Units, including, without limitation, any Partnership Units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units, will not be deemed to materially and adversely affect the rights

or preferences of the holders of Preferred Units. With respect to the exercise of the above-described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

12.    Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer applicable to Common Units, as set forth in the Agreement.

 

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ANNEX I

TO EXHIBIT J

NOTICE OF REDEMPTION

 

To:

AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street, Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class Four Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class Four Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class Four Partnership Preferred Units for Common Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to the Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class Four Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class Four Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to the Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of Common Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own Common Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional Common Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of Common Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own Common Shares in violation of the Ownership Limit.

 

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(c)    directs that the certificate representing the Common Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                                         

 

Name of Limited Partner or Assignee:

 

 

(Signature of Limited Partner or Assignee)

 

(Street Address)

 

(City) (State) (Zip Code)

Issue check payable to or Certificates in the name

of:                                                                                  

Please insert social security or identifying

number:                                                                                  

 

Signature Guaranteed by:

 

 

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NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS FOUR PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT J

FORM OF UNIT CERTIFICATE

OF

CLASS FOUR PARTNERSHIP PREFERRED UNITS

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION,] THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number                     

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                                                                    

is the owner of                                                                                                                                                                    

CLASS FOUR PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class Four Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

By                                                                  

 

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ASSIGNMENT

For Value Received,                                                           hereby sells, assigns and transfers unto                                                           Class Four Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class Four Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                                          

 

By:  

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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EXHIBIT K

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS SIX PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.    Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class Six Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be 900,000.

2.    Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Adjustment Factor” means 1.0; provided, however, that in the event that:

(i)    the Previous General Partner (a) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (b) splits or subdivides its outstanding REIT Shares or (c) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction, (i) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination (assuming for such purposes that such dividend, distribution, split, subdivision, reverse split or combination has occurred as of such time) and (ii) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, split, subdivision, reverse split or combination;

(ii)    the Previous General Partner distributes any rights, options or warrants to all holders of its REIT Shares to subscribe for or to purchase or to otherwise acquire REIT Shares (or other securities or rights convertible into, exchangeable for or exercisable for REIT Shares) at a price per share less than the Value of a REIT Share on the record date for such distribution (each a “Distributed Right”), then the Adjustment Factor shall be adjusted by multiplying the Adjustment Factor previously in effect by a fraction (a) the numerator of which shall be the number of REIT Shares issued and outstanding on the record date plus the maximum number of REIT Shares purchasable under such

 

K-1

Distributed Rights and (b) the denominator of which shall be the number of REIT Shares issued and outstanding on the record date plus a fraction (1) the numerator of which is the maximum number of REIT Shares purchasable under such Distributed Rights times the minimum purchase price per REIT Share under such Distributed Rights and (2) the denominator of which is the Value of a REIT Share as of the record date; provided, however, that, if any such Distributed Rights expire or become no longer exercisable, then the Adjustment Factor shall be adjusted, effective retroactive to the date of distribution of the Distributed Rights, to reflect a reduced maximum number of REIT Shares or any change in the minimum purchase price for the purposes of the above fraction; and

(iii)    the Previous General Partner shall, by dividend or otherwise, distribute to all holders of its REIT Shares evidences of its indebtedness or assets (including securities, but excluding any dividend or distribution referred to in subsection (i) above), which evidences of indebtedness or assets relate to assets not received by the Previous General Partner, the General Partner and/or the Special Limited Partners pursuant to a pro rata distribution by the Partnership, then the Adjustment Factor shall be adjusted to equal the amount determined by multiplying the Adjustment Factor in effect immediately prior to the close of business on the date fixed for determination of shareholders entitled to receive such distribution by a fraction (i) the numerator shall be such Value of a REIT Share on the date fixed for such determination and (ii) the denominator shall be the Value of a REIT Share on the dates fixed for such determination less the then fair market value (as determined by the General Partner, whose determination shall be conclusive) of the portion of the evidences of indebtedness or assets so distributed applicable to one REIT Share.

Any adjustments to the Adjustment Factor shall become effective immediately after the effective date of such event, retroactive to the record date, if any, for such event. Other than with respect to the Spin-Off Adjustment, all references to “Previous General Partner” (including in the definition of “REIT Shares”) with respect to occurrences prior to [Spin-Off Date], 2020 shall refer instead to the Previous Public Parent (i.e., Apartment Investment and Management Company). In respect of the distribution of shares of common stock of Apartment Income REIT Corp. to holders of shares of common stock of Apartment Investment and Management Company (the “Spin-Off”), the Adjustment Factor shall be adjusted (the “Spin-Off Adjustment”) to equal the amount determined by multiplying the Adjustment Factor in effect immediately prior to the Spin-Off by a fraction (i) the numerator of which shall be the Value of a REIT Share (with the reference to “Previous General Partner” in the definition of “REIT Share” deemed to be to the Previous Public Parent) after the end of trading on the last trading day prior to the Spin-Off and (ii) the denominator of which shall be the Value of a REIT Share (with the reference to “Previous General Partner” in the definition of “REIT Share” deemed to be to the Previous Public Parent) after the end of trading on the last trading day prior to the Spin-Off less the then fair market value (as determined by the General Partner, whose determination shall be conclusive) of a share of common stock of the Previous Public Parent after giving effect to the Spin-Off.

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Units, cash in an amount equal to the sum of (x) the product of (i) the number of Tendered Units, multiplied by (ii) the Liquidation Preference for a Preferred Unit, plus, (y) if positive, the product of (i) the number of Tendered Units, multiplied by (ii) the Liquidation Preference for a Preferred Unit (excluding any accumulated, accrued or unpaid distributions), multiplied by (iii) the quotient obtained by dividing (a) the amount by which the Market Value of a Common Share, calculated as of the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units, exceeds $50, by (b) $50.

“Class Six Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

 

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“Common Shares” shall mean the shares of Class A Common Stock of the Previous General Partner.

“Common Shares Amount” shall mean, with respect to any Tendered Units, a number of Common Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a Common Share calculated as of the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Conversion Price” shall mean, as of any date, the quotient obtained by dividing $50 by the Adjustment Factor in effect as of such date.

“Current Market Price” of a share of any Equity Stock shall mean the closing price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, on such day, in either case as reported on the principal national securities exchange on which such securities are listed or admitted for trading, or, if such security is not quoted on any national securities exchange, on the Nasdaq National Market or if such security is not quoted on the Nasdaq National Market, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by Nasdaq or, if bid and asked prices for each security on such day shall not have been reported through Nasdaq, the average of the bid and asked prices on such day as furnished by any New York Stock Exchange or National Association of Securities Dealers, Inc. member firm regularly making a market in such security selected for such purpose by the Chief Executive Officer of the General Partner or the Board of Directors of the General Partner or if any class or series of securities are not publicly traded, the fair value of the shares of such class as determined reasonably and in good faith by the Board of Directors of the General Partner.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

“Distribution Payment Date” shall have the meaning set forth in Section 4(a) of this Partnership Unit Designation.

“Equity Stock” shall mean one or more shares of any class of capital stock of the Previous General Partner.

“Internal Rate of Return” shall mean, as of any determination date, the effective discount rate under which the present value of the Inflows associated with an outstanding Class Six Partnership Preferred Unit equals $25. For purposes of calculation of Internal Rate of Return, “Inflows” shall mean (a) all distributions (whether paid in cash or property) that have been received in respect of such unit, (b) the cash payment in respect of distributions payable on such unit pursuant to Section 7(b)(iii) hereof if such unit were converted to Partnership Common Units on the determination date, and (c) the amount by which the Market Value of a REIT Share, as of the determination date, exceeds the Conversion Price then in effect. For purposes of calculating the amounts of any Inflows, all distributions received in property shall be deemed to have a value equal to the Market Value of such distributions as of the date such distribution is

 

K-3

received. Neither the fact of any transfer of any units of the Class Six Partnership Preferred Units nor the amount of any consideration received by the holder thereof or paid by any successor holder in connection with any transfer shall affect the calculation of Internal Rate of Return.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days (or twenty (20) consecutive Trading Days for purposes of calculating “Internal Rate of Return”) immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

 

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“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(4) of this Partnership Unit Designation.

“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Redemption” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 5 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) hereof.

“Tendered Units” shall have the meaning set forth in Section 6(b) hereof.

“Trading Day” shall mean, when used with respect to the Closing Price of a share of any Equity Stock, (i) if the Equity Stock is listed or admitted to trading on the NYSE, a day on which the NYSE is open for the transaction of business, (ii) if the Equity Stock is not listed or admitted to trading on the NYSE but is listed or admitted to trading on another national securities exchange or automated quotation system, a day on which the principal national securities exchange or automated quotation system, as the case may be, on which the Equity Stock is listed

 

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or admitted to trading is open for the transaction of business, or (iii) if the Equity Stock is not listed or admitted to trading on any national securities exchange or automated quotation system, any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.

“Transfer Agent” shall mean such transfer agent as may be designated by the Partnership or its designee as the transfer agent for the Class Six Partnership Preferred Units; provided, that if the Partnership has not designated a transfer agent then the Partnership shall act as the transfer agent for the Class Six Partnership Preferred Units.

 

  3.

Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class Six Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class Six Partnership Preferred Units (the Partnership Units referred to in this paragraph being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class Six Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class Six Partnership Preferred Units if (i) such class or series of Partnership Units shall be Class G Partnership Preferred Units, Class One Partnership Preferred Units, Class Two Partnership Preferred Units, Class Three Partnership Preferred Units or Class Four Partnership Preferred Units or (ii) the holders of such class or series of Partnership Units and the Class Six Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class Six Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of Partnership Units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class Six Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the Partnership Units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

 

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  4.

Quarterly Cash Distributions.

(a)    Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner, quarterly cash distributions at the rate of $0.53125 per Preferred Unit. Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly period that such Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on February 1, May 1, August 1 or November 1, as the case may be, immediately preceding each Distribution Payment Date. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

(b)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(c)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, the Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

 

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(d)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

 

  5.

Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to effectively enable them to receive a liquidation preference (the “Liquidation Preference”) of (i) $25 per Preferred Unit, plus (ii) accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders shall not be entitled to any further allocation of income or gain. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Units upon the liquidation, dissolution or winding up of the Partnership.

(b)    If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Partnership Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following certain allocations made by the Partnership, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

 

  6.

Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred

 

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Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such Qualifying Party (any Preferred Units tendered for Redemption being hereafter “Tendered Units”) in exchange (a “Redemption”) for Common Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for Common Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such Common Shares to the Tendering Party pursuant to the terms set forth in this Section 6, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for Common Shares. In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Tendering Parties over another nor discriminates against a group or class of Tendering Parties. If the Partnership elects to redeem any number of Tendered Units for Common Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of Common Shares equal to the Common Shares Amount for such number of Tendered Units. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The Common Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and non-assessable shares, free of any pledge, lien, encumbrance or restriction other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such Common Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of

 

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such Common Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. Common Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suite 1700, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for Common Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of Common Shares (“Registrable Shares”) equal to the Common Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the

 

K-10

number of Preferred Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for the Common Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    Each Tendering Party (a) may effect a Redemption only once in each fiscal quarter of a Twelve-Month Period and (b) may not effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

 

K-11

(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of Common Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own Common Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional Common Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of Common Shares or any other class of shares of the Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in

 

K-12

the affidavit required by Section 6(i)(a) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own Common Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

(j)    On or after the Specific Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver Common Shares for the Preferred Units evidenced thereby. From and after the Specific Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or Common Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties (i) shall not be entitled to elect or effect a Redemption where the Redemption would consist of less than all the Preferred Units held by Partners and, to the extent that the aggregate Percentage Interests of the Limited Partners would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in Common Shares otherwise issuable by the Previous General Partner hereunder.

(l)    Notwithstanding any other provision of the Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a Limited Partner pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 6(l), (a) any Limited Partner (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

 

  7.

Conversion.

(a)     (i) Subject to and upon compliance with the provisions of this Section 7, a holder of Class Six Partnership Preferred Units shall have the right, at such holder’s option, to

 

K-13

convert such units, in whole or in part, into the number of Partnership Common Units per Class Six Partnership Preferred Unit obtained by dividing the Liquidation Preference (excluding any accumulated, accrued and unpaid distributions) per Class Six Partnership Preferred Unit by the Conversion Price in effect at the time and on the date provided for in subparagraph (b)(iv) of this Section 7. In order to exercise the conversion right, the holder of each Class Six Partnership Preferred Unit to be converted shall surrender the certificate representing such unit, duly endorsed or assigned to the Partnership or in blank, at the office of the Transfer Agent, accompanied by written notice to the Partnership that the holder thereof elects to convert such Class Six Partnership Preferred Unit.

(ii)    With respect to any Class Six Partnership Preferred Units that have been issued and outstanding for at least three (3) years, if, as of any date, the Internal Rate of Return exceeds 12.5%, then the Partnership shall have the right, but not the obligation, to cause such Class Six Partnership Preferred Units to be converted, in whole or in part, into the number of Partnership Common Units per Class Six Partnership Preferred Unit obtained by dividing the Liquidation Preference (excluding any accumulated, accrued and unpaid distributions) per Class Six Partnership Preferred Unit by the Conversion Price in effect at the time and on the date provided for in subparagraph (b)(iv) of this Section 7. In order to exercise the conversion right, the Partnership shall send notice of such conversion to each holder of record of Class Six Partnership Preferred Units no later than five Business Days after a date on which the Internal Rate of Return exceeds 12.5%. Such notice shall be provided by facsimile or, if facsimile is not available, then by first class mail, postage prepaid, at such holders’ address as the same appears on the records of the Partnership. Any notice which was transmitted or mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date received by the holder. Each such notice shall state, as appropriate: (1) the date of conversion, which date may be any date within one business day following the date on which the notice is transmitted or mailed; (2) the number of units of Class Six Partnership Preferred Units to be converted and, if fewer than all such units held by such holder are to be converted, the number of such units to be converted; and (3) the then current Conversion Price. Upon receiving such notice of conversion, each such holder shall promptly surrender the certificates representing such Class Six Partnership Preferred Units as are being converted on the conversion date, duly endorsed or assigned to the Partnership or in blank, at the office of the Transfer Agent; provided, however, that the failure to so surrender any such certificates shall not in any way affect the validity of the conversion of the underlying Class Six Partnership Preferred Units into Partnership Common Units.

(b)     (i) Unless the Partnership Common Units issuable on conversion are to be issued in the same name as the name in which such Class Six Partnership Preferred Units are registered, each such unit surrendered following conversion shall be accompanied by instruments of transfer, in form satisfactory to the Partnership, duly executed by the holder or such holder’s duly authorized representative, and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Partnership demonstrating that such taxes have been paid).

(ii)    A holder of Class Six Partnership Preferred Units shall, as of the date of the conversion of such units to Partnership Common Units, be entitled to receive a cash payment in respect of any distributions (whether or not earned or declared) that are accumulated, accrued and unpaid thereon as of the time of such conversion, provided, however, that payment

 

K-14

in respect of any distributions on such units that has been declared but for which the Distribution Payment Date has not yet been reached shall be payable as of such Distribution Payment Date. Except as provided above, the Partnership shall make no payment or allowance for unpaid distributions, whether or not in arrears, on converted units.

(iii)    As promptly as practicable after the surrender of certificates for Class Six Partnership Preferred Units as aforesaid, and in any event no later than three business days after the date of such surrender, the Partnership shall issue and deliver at such office to such holder, or send on such holders’ written order, a certificate or certificates for the number of full Partnership Common Units issuable upon the conversion of such Class Six Partnership Preferred Units in accordance with the provisions of this Section 7, and any fractional interest in respect of a Partnership Common Unit arising upon such conversion shall be settled as provided in paragraph (c) of this Section 7.

(iv)    Each conversion shall be deemed to have been effected (x) in the case of a conversion pursuant to subparagraph (a)(i) of this Section 7 immediately prior to the close of business on the date on which the certificates for Class Six Partnership Preferred Units shall have been surrendered and such notice received by the Partnership as provided in subparagraph (a)(i) of this Section 7, and (y) in the case of a conversion pursuant to subparagraph (a)(ii) of this Section 7, immediately prior to the close of business on the date identified as the conversion date in the notice of conversion sent by the Partnership pursuant to subparagraph (a)(ii) of this Section 7; and, in the case of (x) or (y), the person or persons in whose name or names any certificate or certificates for Partnership Common Units shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the units represented thereby at such time on such date, and such conversion shall be at the Conversion Price in effect at such time on such date, unless the transfer books of the Partnership shall be closed on that date, in which event such person or persons shall be deemed to become such holder or holders of record at the close of business on the next succeeding day on which such transfer books are open, but such conversion shall be at the Conversion Price in effect on the date in the notice of conversion sent by the Partnership as aforesaid.

(v)     No fractional Partnership Common Units or scrip representing fractions of a Partnership Common Unit shall be issued upon conversion of the Class Six Partnership Preferred Units. Instead of any fractional interest in a Partnership Common Unit that would otherwise be deliverable upon the conversion of Class Six Partnership Preferred Units, the Partnership shall pay to the holder of such units an amount of cash equal to the product of (i) such fraction and (ii) the value of a REIT Share as of the date of conversion. If more than one of any holder’s units shall be converted at one time, the number of full Partnership Common Units issuable upon conversion thereof shall be computed on the basis of the aggregate number of Class Six Partnership Preferred Units so converted.

(c)    If the Partnership shall be a party to any transaction (including with limitation a merger, consolidation, statutory exchange, sale of all or substantially all of the Partnership’s assets or recapitalization of the Partnership Common Units, but excluding any transaction as to which a charge in the Adjustment Factor would be effected) (each of the foregoing being referred to herein as a “Transaction”), in each case, as a result of which Partnership Common Units shall be converted into the right to receive securities or other

 

K-15

property (including cash or any combination thereof), each Class Six Partnership Preferred Unit which is not converted into the right to receive securities or other property in connection with such Transaction shall thereupon be convertible into the kind and amount of securities and other property (including cash or any combination thereof) receivable upon such consummation by a holder of that number of Partnership Common Units into which Class Six Partnership Preferred Units were convertible immediately prior to such Transaction. The Partnership shall not be a party to any transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (d), and it shall not consent or agree to the occurrence of any Transaction until the Partnership has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Class Six Partnership Preferred Units that will contain provisions enabling the holders of the Class Six Partnership Preferred Units that remain outstanding after such Transaction to convert into the consideration received by holders of Partnership Common Units at the Conversion Price in effect immediately prior to such Transaction. The provisions of this Paragraph (d) shall apply to successive Transactions.

(d)    Whenever the Conversion Price is adjusted as herein provided (whether pursuant to paragraph (d) of this Section 7 or as a result of a change in the Adjustment Factor), the General Partner shall promptly file with the Transfer Agent an officer’s certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the General Partner shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each holder of Class Six Partnership Preferred Units at such holder’s address as shown on the records of the Partnership.

(e)    In any case in which an adjustment to the Adjustment Factor shall become effective immediately after the effective date of an event, retroactive to the record date, if any, for such event, the Partnership may defer until the occurrence of such event (A) issuing to the holder of any Class Six Partnership Preferred Units converted after such record date and before the occurrence of such event the additional Partnership Common Units issuable upon such conversion by reason of the adjustment required by such event over and above the Partnership Common Units issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of any fraction pursuant to Section 7(c).

(f)    There shall be no adjustment of the Conversion Price in case of the issuance of any unit of the Partnership except as specifically set forth in the definition of “Adjustment Factor” or in this Section 7. In addition, notwithstanding any other provision contained in the definition of “Adjustment Factor” or in this Section 7, there shall be no adjustment of the Conversion Price upon the payment of any cash distributions on any units of the Partnership.

(g)    If the Partnership shall take any action affecting the Partnership Common Units, other than action described in the definition of “Adjustment Factor” or in this Section 7 that, in the opinion of the General Partner would materially adversely affect the conversion rights of the holders of Class Six Partnership Preferred Units, the Conversion Price for the Class Six Partnership Preferred Units may be adjusted, to the extent permitted by law in such manner, if any, and at such time as the General Partner, in its sole discretion, may determine to be equitable under the circumstances.

 

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(h)    The Partnership will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Partnership Common Units or other securities or property on conversion of Class Six Partnership Preferred Units pursuant hereto; provided, however, that the Partnership shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Partnership Common Units or other securities or property in a name other than that of the holder of the Class Six Partnership Preferred Units to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Partnership the amount of any such tax or established, to the reasonable satisfaction of the Partnership, that such tax has been paid.

(i)    In addition to any other adjustment required hereby, to the extent permitted by law, the Partnership from time to time may decrease the Conversion Price by any amount, permanently or for a period of at least twenty Business Days, if the decrease is irrevocable during the period.

(j)    For purposes of the definition of “Twelve-Month Period” in the Agreement, any holder of Class Six Partnership Preferred Units that have been converted to Partnership Common Units shall be deemed to have acquired such Partnership Common Units when such Class Six Partnership Units were acquired.

 

  8.

Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

 

  9.

General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Preferred Units.

 

  10.

Allocations of Income and Loss.

For each taxable year, each holder of Preferred Units will be allocated a portion of the Net Income and Net Loss of the Partnership equal to the portion of the Net Income and Net Loss of the Partnership that would be allocated to such holder pursuant to Article 6 of the Agreement if such holder held a number of Partnership Common Units equal to (i) the number of Preferred Units held by such holder, multiplied by (ii) 0.5. Upon liquidation, dissolution or winding up of the Partnership, the Partnership shall endeavor to allocate income and gain to the holders of the Preferred Units such that the Capital Accounts related to the Preferred Units are equal to their Liquidation Preference.

 

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  11.

Voting Rights.

Except as otherwise required by applicable law or in the Agreement, the holders of the Preferred Units will have the same voting rights as holders of the Partnership Common Units. As long as any Preferred Units are outstanding, in addition to any other vote or consent of partners required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of the Partnership Unit Designation of the Preferred Units that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership Units, including, without limitation, any Partnership Units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units, will not be deemed to materially and adversely affect the rights or preferences of the holders of Preferred Units. With respect to the exercise of the above-described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

 

  12.

Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer applicable to Common Units, as set forth in the Agreement.

 

K-18

ANNEX I

TO EXHIBIT K

NOTICE OF REDEMPTION

 

To:

AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street

Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class Six Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class Six Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class Six Partnership Preferred Units for Common Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to the Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class Six Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class Six Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to the Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of Common Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own Common Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional Common Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of Common Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own Common Shares in violation of the Ownership Limit.

 

K-I-1

(c)    directs that the certificate representing the Common Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                         

 

Name of Limited Partner or Assignee:

 

 

(Signature of Limited Partner or Assignee)

 

(Street Address)

 

(City) (State) (Zip Code)

Issue check payable to or Certificates in the name

of:                                                                                          

Please insert social security or identifying

number:                                                                                          

 

Signature Guaranteed by:

 

 

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NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS SIX PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT K

FORM OF UNIT CERTIFICATE

OF

CLASS SIX PARTNERSHIP PREFERRED UNITS

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number             

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                                                

is the owner of                                                                                                                                                    

CLASS SIX PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class Six Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

 

By

 

 

 

K-II-1

ASSIGNMENT

For Value Received,                                                       hereby sells, assigns and transfers unto                                                                                                                                                      Class Six Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class Six Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                 

 

By:

 

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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EXHIBIT L

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS SEVEN PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

 

  1.

Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class Seven Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be three million (3,000,000).

 

  2.

Definitions.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Unit, cash in an amount equal to the Liquidation Preference of such Tendered Unit.

“Class Seven Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

“Distribution Payment Date” shall have the meaning set forth of Section 4(b) of this Partnership Unit Designation.

“Distribution Rate” shall mean 9.5%, subject to adjustment as provided in Section 4(a) of this Partnership Unit Designation.

“Dividend Yield” shall mean, as of any calculation date and with respect to any class or series of capital stock, the quotient obtained by dividing (i) the aggregate dollar amount of dividends payable on one share of such class or series of capital stock, in accordance with its terms, for the 12 month period ending on the dividend payment date immediately preceding such calculation date, by (ii) the Market Value of one share of such stock as of such calculation date.

 

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“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

 

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“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Previous General Partner” shall mean Apartment Income REIT Corp., a Maryland corporation.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(4) of this Partnership Unit Designation.

“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Qualifying Preferred Stock” shall mean any class or series of non-convertible perpetual preferred stock that (i) has been issued by a corporation that has elected to be taxed as a REIT, (ii) has a fixed rate of distributions or dividends, (iii) has a fixed liquidation preference (and which entitles the holder thereof to no payments other than the payment of distributions at a fixed rate and the payment of a fixed liquidation preference), (iv) is listed on the New York Stock Exchange, (v) cannot be redeemed at the option of the issuer for the first five years after issuance of such class or series of preferred stock and that, at the Reset Date (or, if applicable, as of the date the calculation of the Weighted Average of Preferred Stock Dividend Yields is being made for purposes hereof in respect of such Reset Date) cannot be so redeemed and (vi) is issued by an issuer the unsecured debt of which has an average rating from Moody’s Investors Services, Inc., Standard & Poor’s Rating Services or Duff & Phelps Credit Rating Co. in a category that is one rating category below the average rating, as of such date, of the Previous General Partner’s unsecured debt.

“Redemption” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“REIT Shares Amount” shall mean, with respect to any Tendered Units, a number of REIT Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a REIT Share as of the fifth (5th) Business Day prior to the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Reset Date” shall mean November 9, 2005 and every fifth anniversary of such date that occurs thereafter.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the

 

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Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 6 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Tendered Units” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Weighted Average of Preferred Stock Dividend Yields” shall mean, as of any date of calculation, the average of the Dividend Yields, as of such date, of each Qualifying Preferred Stock (other than a Qualifying Preferred Stock issued by the Previous General Partner) that has been outstanding during the entire year immediately preceding the date of calculation. Each such class of Qualifying Preferred Stock (except Qualifying Preferred Stock of the Previous General Partner) shall be weighted for its total market value.

3.    Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class Seven Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class Seven Partnership Preferred Units (the partnership units being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class Seven Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class Seven Partnership Preferred Units (i) if such class or series of partnership units shall be Class G Partnership Preferred Units, Class One Partnership Preferred Units, Class Two Partnership Preferred Units, Class Three Partnership Preferred Units, Class Four Partnership Preferred Units or Class Six Partnership Preferred Units or (ii) if the holders of such class or series of partnership units and the Class Seven Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other

 

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denomination or liquidation preferences, without preference or priority one over the other (the partnership units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class Seven Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, (i) if such class or series of partnership units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) if the holders of Class Seven Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the partnership units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

4.    Quarterly Cash Distributions.

(a)    The “Quarterly Distribution Amount,” as of any date, shall be equal to (i) the Distribution Rate then in effect, multiplied by (ii) $25, and divided by (iii) four. Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner, quarterly cash distributions in an amount per Preferred Unit equal to the Quarterly Distribution Amount in effect as of the date such distribution is declared by the General Partner, and no more. On each Reset Date, the Distribution Rate thereafter in effect shall be adjusted by the General Partner to equal the lesser of (i) the Distribution Rate in effect immediately prior to such Reset Date or (ii) the Dividend Yield of the class of Qualifying Preferred Stock most recently issued by the Previous General Partner or, if there is no class of Qualifying Preferred Stock of the Previous General Partner outstanding as of any Reset Date, the Weighted Average of Preferred Stock Dividend Yields, calculated as of the end of the calendar quarter immediately preceding such Reset Date; provided, further, that if for any reason there are no classes of Qualifying Preferred Stock of the type described in the definition of “Weighted Average of Preferred Stock Dividend Yields” outstanding on any Reset Date and the reference to the Weighted Average of Preferred Stock Dividend Yields would otherwise be determinative of the calculation of the adjusted Distribution Rate on such Reset Date, the adjusted Distribution Rate for the succeeding five (5) year period shall be the Distribution Rate in effect immediately prior to such Reset Date. Upon any such adjustment of the Distribution Rate, the General Partner shall send a notice describing such adjustment to the holders of the Preferred Units at their respective addresses, as set forth on Exhibit A to the Agreement.

(b)    Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly period that such Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on the February 1, May 1, August 1 or

 

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November 1, as the case may be, immediately preceding each Distribution Payment Date. If the Preferred Units are issued other than on a record date for the payment of distributions to the holders of Preferred Units, the Quarterly Distribution Amount shall, for any quarter in which the Distribution Rate changes on any Reset Date, be appropriately prorated based on the portions of such quarter during which the different Distribution Rates were in effect, on the basis of twelve 30-day months and a 360-day year. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

(c)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(d)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

(e)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

 

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5.    Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to the extent necessary to enable them to receive a liquidation preference (the “Liquidation Preference”) per Preferred Unit equal to the sum of (i) $25 plus (ii) any accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders will not be entitled to any further payment or allocation. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership.

(b)    If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following appropriate allocations of Partnership income, gain, deduction and loss, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to the extent necessary to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

6.    Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such

 

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Qualifying Party (such Preferred Units being hereafter “Tendered Units”) in exchange (a “Redemption”) for REIT Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for REIT Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such REIT Shares to the Tendering Party pursuant to the terms set forth in this Section 6, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for Federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for REIT Shares. In making such election to cause the Previous General Partner to acquire Tendered Units, the Partnership shall act in a fair, equitable and reasonable manner that neither prefers one group or class of Tendering Parties over another nor discriminates against a group or class of Tendering Parties. If the Partnership elects to redeem any number of Tendered Units for REIT Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for a number of REIT Shares equal to the REIT Shares Amount for such number of the Tendered Units. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The REIT Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and accessible REIT Shares, free of any pledge, lien, encumbrance or restriction, other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any REIT Shares owned or held by such Person, whether or not such REIT Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such REIT Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. REIT Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of

 

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Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suites 1100, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for REIT Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of REIT Shares (“Registrable Shares”) equal to the REIT Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Preferred Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

 

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Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for REIT Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine. Any Preferred Units so contributed to the General Partner shall automatically, and without further action required, be converted into and deemed to be a General Partner Interest comprised of an equal number of Partnership Common Units. Any Preferred Units so contributed to the Special Limited Partners shall be converted into Partnership Common Units.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    No Tendering Party may (a) effect a Redemption more than once in any fiscal quarter of a Twelve-Month Period or (b) effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its shareholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

 

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(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the REIT Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a shareholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional REIT Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares or any other class of shares of the Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 6(i)(1) or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own REIT Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

 

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(j)    On or after the Specific Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver REIT Shares for the Preferred Units evidenced thereby. From and after the Specific Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or REIT Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties (i) shall not be entitled to elect or effect a Redemption where the Redemption would consist of less than all the Preferred Units held by Partners and, to the extent that the aggregate Percentage Interests of the Limited Partners would be reduced, as a result of the Redemption, to less than one percent (1%) and (ii) shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in REIT Shares otherwise issuable by the Previous General Partner hereunder.

(l)    Notwithstanding any other provision of the Agreement, on and after the date on which the aggregate Percentage Interests of the Limited Partners (other than the Special Limited Partners) are less than one percent (1%), the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Limited Partner Interests (other than the Special Limited Partners’ Limited Partner Interest) by treating any Limited Partner as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such Limited Partner that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a Limited Partner pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such Limited Partner. For purposes of this Section 6(l), (a) any Limited Partner (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

7.    Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

 

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8.    General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Class Seven Partnership Preferred Units.

9.    Allocations of Income and Loss.

Subject to the terms of Section 5 hereof, for each taxable year, (i) each holder of Preferred Units will be allocated, to the extent possible, net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership.

10.    Voting Rights.

Except as otherwise required by applicable law or in the Agreement, the holders of the Preferred Units will have the same voting rights as holders of the Partnership Common Units. As long as any Preferred Units are outstanding, in addition to any other vote or consent of partners required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of the Partnership Unit Designation of the Preferred Units that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership units, including, without limitation, any Partnership units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units, will not be deemed to have a material adverse effect on the rights or preferences of the holders of Preferred Units. With respect to the exercise of the above described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

11.    Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer as are, and the holders of Preferred Units shall be entitled to the same rights of transfer as are, applicable to Common Units as set forth in the Agreement.

 

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ANNEX I

TO EXHIBIT L

NOTICE OF REDEMPTION

 

To:

AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street

Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class Seven Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class Seven Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class Seven Partnership Preferred Units for REIT Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class Seven Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class Seven Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional REIT Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own REIT Shares in violation of the Ownership Limit.

 

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(c)    directs that the certificate representing the REIT Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                                                              

 

Name of Limited Partner or Assignee:

 

 

(Signature of Limited Partner or Assignee)

 

(Street Address)

 

(City) (State) (Zip Code)

Issue check payable to or Certificates in the name

of:                                                                                       

Please insert social security or identifying

number:                                                                                                       

 

Signature Guaranteed by:

 

 

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NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS SEVEN PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT L

FORM OF UNIT CERTIFICATE

OF

CLASS SEVEN PARTNERSHIP PREFERRED UNITS

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], AS IT MAY BE AMENDED AND/OR SUPPLEMENTED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number                 

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                           

is the owner of                                                                                                                                

CLASS SEVEN PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class Seven Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

 

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IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

 

By  

 

ASSIGNMENT

For Value Received,                                                                           hereby sells, assigns and transfers unto                                                                                                                                                                                                           Class Seven Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class Seven Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                 

 

By:  

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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EXHIBIT M

[RESERVED]

 

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EXHIBIT N

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS NINE PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.    Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class Nine Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be one million (1,000,000).

2.    Definitions.

Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more Preferred Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Cash Amount” shall mean, with respect to any Tendered Unit, cash in an amount equal to the Liquidation Preference of such Tendered Unit.

“Class Nine Partnership Preferred Unit” or “Preferred Unit” shall mean a Partnership Preferred Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation.

“Conversion Ratio” shall mean, as of any date, the quotient obtained by dividing the Liquidation Preference by the Market Value of a REIT Share as of such date.

“Cut-Off Date” shall mean the fifth (5th) Business Day after the General Partner’s receipt of a Notice of Redemption.

“Declination” shall have the meaning set forth in Section 6(f) of this Partnership Unit Designation.

“Distribution Payment Date” shall have the meaning set forth of Section 4(b) of this Partnership Unit Designation.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

 

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“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Partnership Unit Designation.

“Market Value” shall mean, as of any calculation date and with respect to any share of stock, the average of the daily market prices for ten (10) consecutive trading days immediately preceding the calculation date. The market price for any such trading day shall be:

(i)    if the shares are listed or admitted to trading on any securities exchange, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system,

(ii)    if the shares are not listed or admitted to trading on any securities exchange, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or

(iii)    if the shares are not listed or admitted to trading on any securities exchange, and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after the commencement of such ten day period that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Notice of Redemption” shall mean a Notice of Redemption in the form of Annex I to this Partnership Unit Designation.

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Previous General Partner” shall mean Apartment Income REIT Corp., a Maryland corporation.

“Primary Offering Notice” shall have the meaning set forth in Section 6(h)(4) of this Partnership Unit Designation.

 

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“Public Offering Funding” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“Redemption” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Registrable Shares” shall have the meaning set forth in Section 6(f)(2) of this Partnership Unit Designation.

“REIT Shares” shall mean a share of the Previous General Partner’s Class A Common Stock.

“REIT Shares Amount” shall mean, with respect to any Tendered Units, a number of REIT Shares equal to the quotient obtained by dividing (i) the Cash Amount for such Tendered Units, by (ii) the Market Value of a REIT Share as of the fifth (5th) Business Day prior to the date of receipt by the General Partner of a Notice of Redemption for such Tendered Units.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“Shares” shall mean REIT Shares.

“Single Funding Notice” shall have the meaning set forth in Section 6(f)(3) of this Partnership Unit Designation.

“Specified Redemption Date” shall mean, with respect to any Redemption, the later of (a) the tenth (10th) Business Day after the receipt by the General Partner of a Notice of Redemption or (b) in the case of a Declination followed by a Public Offering Funding, the Business Day next following the date of the closing of the Public Offering Funding; provided, however, that the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Previous General Partner pursuant to Section 6 hereof, on any Specified Redemption Date, may be deferred, in the General Partner’s sole and absolute discretion, for such time (but in any event not more than one hundred fifty (150) days in the aggregate) as may reasonably be required to effect, as applicable, (i) a Public Offering Funding or other necessary funding arrangements, (ii) compliance with the Securities Act or other law (including, but not limited to, (a) state “blue sky” or other securities laws and (b) the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and (iii) satisfaction or waiver of other commercially reasonable and customary closing conditions and requirements for a transaction of such nature.

“Tendering Party” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Tendered Units” shall have the meaning set forth in Section 6(b) of this Partnership Unit Designation.

“Transaction” shall have the meaning set forth in Section 7(d) of this Partnership Unit Designation.

 

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3.    Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class Nine Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class Nine Partnership Preferred Units (the partnership units being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class Nine Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class Nine Partnership Preferred Units (i) if such class or series of partnership units shall be Class One Partnership Preferred Units, Class Two Partnership Preferred Units, Class Three Partnership Preferred Units, or Class Four Partnership Preferred Units, or (ii) if the holders of such class or series of partnership units and the Class Nine Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority one over the other (the partnership units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class Nine Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, (i) if such class or series of partnership units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) if the holders of Class Nine Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units (the partnership units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

4.    Quarterly Cash Distributions.

(a)    Holders of Preferred Units will be entitled to receive, when and as declared by the General Partner out of Available Cash, quarterly cash distributions in an amount per Preferred Unit equal to $0.375, and no more.

(b)    Any such distributions will be cumulative from the date of original issue, whether or not in any distribution period or periods such distributions have been declared, and shall be payable quarterly on February 15, May 15, August 15 and November 15 of each year (or, if not a Business Day, the next succeeding Business Day) (each a “Distribution Payment Date”), commencing on the first such date occurring after the date of original issue. If the Preferred Units are issued on any day other than a Distribution Payment Date, the first distribution payable on such Preferred Units will be prorated for the portion of the quarterly

 

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period that such Preferred Units are outstanding on the basis of twelve 30-day months and a 360-day year. Distributions will be payable in arrears to holders of record as they appear on the records of the Partnership at the close of business on the February 1, May 1, August 1 or November 1, as the case may be, immediately preceding each Distribution Payment Date. Holders of Preferred Units will not be entitled to receive any distributions in excess of cumulative distributions on the Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Preferred Units that may be in arrears. Holders of any Preferred Units that are issued after the date of original issuance will be entitled to receive the same distributions as holders of any Preferred Units issued on the date of original issuance.

(c)    When distributions are not paid in full upon the Preferred Units or any Parity Partnership Units, or a sum sufficient for such payment is not set apart, all distributions declared upon the Preferred Units and any Parity Partnership Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Preferred Units and accumulated and unpaid on such Parity Partnership Units. Except as set forth in the preceding sentence, unless distributions on the Preferred Units equal to the full amount of accumulated and unpaid distributions have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, for all past distribution periods, no distributions shall be declared or paid or set apart for payment by the Partnership with respect to any Parity Partnership Units.

(d)    Unless full cumulative distributions (including all accumulated, accrued and unpaid distributions) on the Preferred Units have been declared and paid, or declared and set apart for payment, for all past distribution periods, no distributions (other than distributions paid in Junior Partnership Units or options, warrants or rights to subscribe for or purchase Junior Partnership Units) may be declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property may be declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (except for a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee incentive or benefit plan of the Partnership or any affiliate thereof, including, without limitation, Previous General Partner and its affiliates) for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Junior Partnership Units), directly or indirectly, by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property be paid or distributed to or for the benefit of holders of Junior Partnership Units.

(e)    Notwithstanding the foregoing provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary to maintain the Previous General Partner’s qualification as a REIT.

 

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5.    Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, before any allocation of income or gain by the Partnership shall be made to or set apart for the holders of any Junior Partnership Units, to the extent possible, the holders of Preferred Units shall be entitled to be allocated income and gain to the extent necessary to enable them to receive a liquidation preference (the “Liquidation Preference”) per Preferred Unit equal to the sum of (i) $25 plus (ii) any accumulated, accrued and unpaid distributions (whether or not earned or declared) to the date of final distribution to such holders; but such holders will not be entitled to any further payment or allocation. Until all holders of the Preferred Units have been paid the Liquidation Preference in full, no allocation of income or gain will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership.

(b)    If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, distributable among the holders of Preferred Units shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any Parity Partnership Units, then following appropriate allocations of Partnership income, gain, deduction and loss, such assets, or the proceeds thereof, shall be distributed among the holders of Preferred Units and any such Parity Partnership Units ratably in the same proportion as the respective amounts that would be payable on such Preferred Units and any such Parity Partnership Units if all amounts payable thereon were paid in full.

(c)    A voluntary or involuntary liquidation, dissolution or winding up of the Partnership will not include a consolidation or merger of the Partnership with one or more partnerships, corporations or other entities, or a sale or transfer of all or substantially all of the Partnership’s assets.

(d)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, after all allocations shall have been made in full to the holders of Preferred Units and any Parity Partnership Units to the extent necessary to enable them to receive their respective liquidation preferences, any Junior Partnership Units shall be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

6.    Redemption.

(a)    Except as set forth in Section 6(l) hereof, the Preferred Units may not be redeemed at the option of the Partnership, and will not be required to be redeemed or repurchased by the Partnership or the Previous General Partner except if a holder of a Preferred Unit effects a Redemption, as provided for in Section 6(b) hereof. The Partnership or the Previous General Partner may purchase Preferred Units from time to time in the open market, by tender or exchange offer, in privately negotiated purchases or otherwise.

(b)    On or after the first (1st) anniversary of becoming a holder of Preferred Units, a Qualifying Party shall have the right (subject to the terms and conditions set forth herein) to require the Partnership to redeem all or a portion of the Preferred Units held by such

 

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Qualifying Party (such Preferred Units being hereafter “Tendered Units”) in exchange (a “Redemption”) for Shares issuable on, or the Cash Amount payable on, the Specified Redemption Date, as determined by the Partnership in its sole discretion. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Qualifying Party when exercising the Redemption right (the “Tendering Party”).

(c)    If the Partnership elects to redeem Tendered Units for Shares rather than cash, then the Partnership shall direct the Previous General Partner to issue and deliver such Shares to the Tendering Party pursuant to the terms set forth in this Section 6, in which case, (i) the Previous General Partner, acting as a distinct legal entity, shall assume directly the obligation with respect thereto and shall satisfy the Tendering Party’s exercise of its Redemption right, and (ii) such transaction shall be treated, for Federal income tax purposes, as a transfer by the Tendering Party of such Tendered Units to the Previous General Partner in exchange for Shares. If the Partnership elects to redeem any number of Tendered Units for Shares, rather than cash, on the Specified Redemption Date, the Tendering Party shall sell such number of the Tendered Units to the Previous General Partner in exchange for in the case of REIT Shares, a number of REIT Shares equal to the REIT Shares Amount for such number of the Tendered Units. The Tendering Party shall submit (i) such information, certification or affidavit as the Previous General Partner may reasonably require in connection with the application of the Ownership Limit and other restrictions and limitations of the Charter to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in the Previous General Partner’s view, to effect compliance with the Securities Act. The Shares shall be delivered by the Previous General Partner as duly authorized, validly issued, fully paid and accessible Shares, free of any pledge, lien, encumbrance or restriction, other than the Ownership Limit and other restrictions provided in the Charter, the Bylaws of the Previous General Partner, the Securities Act and relevant state securities or “blue sky” laws. Neither any Tendering Party whose Tendered Units are acquired by the Previous General Partner pursuant to this Section 6, any Partner, any Assignee nor any other interested Person shall have any right to require or cause the Previous General Partner or the General Partner to register, qualify or list any Shares owned or held by such Person, whether or not such Shares are issued pursuant to this Section 6, with the SEC, with any state securities commissioner, department or agency, under the Securities Act or the Exchange Act or with any stock exchange; provided, however, that this limitation shall not be in derogation of any registration or similar rights granted pursuant to any other written agreement between the Previous General Partner and any such Person. Notwithstanding any delay in such delivery, the Tendering Party shall be deemed the owner of such Shares for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the Specified Redemption Date. Shares issued upon an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6 may contain such legends regarding restrictions under the Securities Act and applicable state securities laws as the Previous General Partner in good faith determines to be necessary or advisable in order to ensure compliance with such laws.

(d)    The Partnership shall have no obligation to effect any redemption unless and until a Tendering Party has given the Partnership a Notice of Redemption. Each Notice of Redemption shall be sent by hand delivery or by first class mail, postage prepaid, to AIMCO Properties, L.P., c/o AIMCO-GP, Inc., 4582 South Ulster Street, Suite 1700, Denver, Colorado 80237, Attention: Investor Relations, or to such other address as the Partnership shall specify in

 

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writing by delivery to the holders of the Preferred Units in the same manner as that set forth above for delivery of the Notice of Redemption. At any time prior to the Specified Redemption Date for any Redemption, any holder may revoke its Notice of Redemption.

(e)    A Tendering Party shall have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. If the Partnership elects to redeem any number of Tendered Units for cash, the Cash Amount for such number of Tendered Units shall be delivered as a certified check payable to the Tendering Party or, in the General Partner’s sole and absolute discretion, in immediately available funds.

(f)    In the event that the Partnership declines to cause the Previous General Partner to acquire all of the Tendered Units from the Tendering Party in exchange for Shares pursuant to this Section 6 following receipt of a Notice of Redemption (a “Declination”):

(1)    The Previous General Partner or the General Partner shall give notice of such Declination to the Tendering Party on or before the close of business on the Cut-Off Date.

(2)    The Partnership may elect to raise funds for the payment of the Cash Amount either (a) by requiring that the Previous General Partner contribute such funds from the proceeds of a registered public offering (a “Public Offering Funding”) by the Previous General Partner of a number of REIT Shares (“Registrable Shares”) equal to the REIT Shares Amount with respect to the Tendered Units or (b) from any other sources (including, but not limited to, the sale of any Property and the incurrence of additional Debt) available to the Partnership.

(3)    Promptly upon the General Partner’s receipt of the Notice of Redemption and the Previous General Partner or the General Partner giving notice of the Partnership’s Declination, the General Partner shall give notice (a “Single Funding Notice”) to all Qualifying Parties then holding Preferred Units and having Redemption rights pursuant to this Section 6 and require that all such Qualifying Parties elect whether or not to effect a Redemption of their Preferred Units to be funded through such Public Offering Funding. In the event that any such Qualifying Party elects to effect such a Redemption, it shall give notice thereof and of the number of Preferred Units to be made subject thereon in writing to the General Partner within ten (10) Business Days after receipt of the Single Funding Notice, and such Qualifying Party shall be treated as a Tendering Party for all purposes of this Section 6. In the event that a Qualifying Party does not so elect, it shall be deemed to have waived its right to effect a Redemption for the next twelve months; provided, however, that the Previous General Partner shall not be required to acquire Preferred Units pursuant to this Section 6(f) more than twice within any twelve-month period.

Any proceeds from a Public Offering Funding that are in excess of the Cash Amount shall be for the sole benefit of the Previous General Partner and/or the General Partner. The General Partner and/or the Special Limited Partners shall make a Capital Contribution of such amounts to the Partnership for an additional General Partner Interest and/or Limited Partner Interest. Any such contribution shall entitle the General Partner and the Special Limited Partners, as the case may be, to an equitable Percentage Interest adjustment.

 

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(g)    Notwithstanding the provisions of this Section 6, the Previous General Partner shall not, under any circumstances, elect to acquire Tendered Units in exchange for Shares if such exchange would be prohibited under the Charter.

(h)    Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to this Section 6:

(1)    All Preferred Units acquired by the Previous General Partner pursuant to this Section 6 hereof shall be contributed by the Previous General Partner to any or all of the General Partner and the Special Limited Partners in such proportions as the Previous General Partner, the General Partner and the Special Limited Partners shall determine. Any Preferred Units so contributed to the General Partner shall automatically, and without further action required, be converted into and deemed to be a General Partner Interest comprised of an equal number of Partnership Common Units. Any Preferred Units so contributed to the Special Limited Partners shall be converted into Partnership Common Units.

(2)    Subject to the Ownership Limit, no Tendering Party may effect a Redemption for less than five hundred (500) Preferred Units or, if such Tendering Party holds (as a Limited Partner or, economically, as an Assignee) less than five hundred (500) Preferred Units, all of the Preferred Units held by such Tendering Party.

(3)    No Tendering Party may (a) effect a Redemption more than once in any fiscal quarter of a Twelve-Month Period or (b) effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the Previous General Partner for a distribution to its stockholders of some or all of its portion of such Partnership distribution.

(4)    Notwithstanding anything herein to the contrary, with respect to any Redemption or acquisition of Tendered Units by the Previous General Partner pursuant to this Section 6, in the event that the Previous General Partner or the General Partner gives notice to all Limited Partners (but excluding any Assignees) then owning Partnership Interests (a “Primary Offering Notice”) that the Previous General Partner desires to effect a primary offering of its equity securities then, unless the Previous General Partner and the General Partner otherwise consent, commencement of the actions denoted in Section 6(f) hereof as to a Public Offering Funding with respect to any Notice of Redemption thereafter received, whether or not the Tendering Party is a Limited Partner, may be delayed until the earlier of (a) the completion of the primary offering or (b) ninety (90) days following the giving of the Primary Offering Notice.

(5)    Without the Consent of the Previous General Partner, no Tendering Party may effect a Redemption within ninety (90) days following the closing of any prior Public Offering Funding.

 

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(6)    The consummation of such Redemption shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(7)    The Tendering Party shall continue to own (subject, in the case of an Assignee, to the provision of Section 11.5 of the Agreement) all Preferred Units subject to any Redemption, and be treated as a Limited Partner or an Assignee, as applicable, with respect to such Preferred Units for all purposes of the Agreement, until such Preferred Units are either paid for by the Partnership pursuant to this Section 6 or transferred to the Previous General Partner (or directly to the General Partner or Special Limited Partners) and paid for, by the issuance of the Shares, pursuant to this Section 6 on the Specified Redemption Date. Until a Specified Redemption Date and an acquisition of the Tendered Units by the Previous General Partner pursuant to this Section 6, the Tendering Party shall have no rights as a stockholder of the Previous General Partner with respect to the REIT Shares issuable in connection with such acquisition.

For purposes of determining compliance with the restrictions set forth in this Section 6(h), all Partnership Common Units and Partnership Preferred Units, including Preferred Units, beneficially owned by a Related Party of a Tendering Party shall be considered to be owned or held by such Tendering Party.

(i)    In connection with an exercise of Redemption rights pursuant to this Section 6, the Tendering Party shall submit the following to the General Partner, in addition to the Notice of Redemption:

(1)    A written affidavit, dated the same date as the Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares and any other classes or shares of the Previous General Partner by (i) such Tendering Party and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the Tendering Party nor any Related Party will own REIT Shares or other shares of the Previous General Partner in excess of the Ownership Limit;

(2)    A written representation that neither the Tendering Party nor any Related Party has any intention to acquire any additional REIT Shares or any other class of shares of the Previous General Partner prior to the closing of the Redemption on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares or any other class of shares of the Previous General Partner by the Tendering Party and any Related Party remain unchanged from that disclosed in the affidavit required by Section 6(i)(1), or (b) after giving effect to the Redemption, neither the Tendering Party nor any Related Party shall own REIT Shares or other shares of the Previous General Partner in violation of the Ownership Limit.

 

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(j)    On or after the Specified Redemption Date, each holder of Preferred Units shall surrender to the Partnership the certificate evidencing such holder’s Preferred Units, at the address to which a Notice of Redemption is required to be sent. Upon such surrender of a certificate, the Partnership shall thereupon pay the former holder thereof the applicable Cash Amount and/or deliver Shares for the Preferred Units evidenced thereby. From and after the Specified Redemption Date (i) distributions with respect to the Preferred Units shall cease to accumulate, (ii) the Preferred Units shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be Partners to the extent of their interest in such Preferred Units, and (iv) all rights whatsoever with respect to the Preferred Units shall terminate, except the right of the holders of the Preferred Units to receive Cash Amount and/or Shares therefor, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor.

(k)    Notwithstanding the provisions of this Section 6, the Tendering Parties shall have no rights under the Agreement that would otherwise be prohibited under the Charter. To the extent that any attempted Redemption would be in violation of this Section 6(k), it shall be null and void ab initio, and the Tendering Party shall not acquire any rights or economic interests in REIT Shares otherwise issuable by the Previous General Partner hereunder.

(l)    Notwithstanding any other provision of the Agreement, on and after the third anniversary of the date of original issuance of the Preferred Units, the Partnership shall have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding Preferred Units by treating any holder of Preferred Units as a Tendering Party who has delivered a Notice of Redemption pursuant to this Section 6 for the amount of Preferred Units to be specified by the General Partner, in its sole and absolute discretion, by notice to such holder that the Partnership has elected to exercise its rights under this Section 6(l). Such notice given by the General Partner to a holder of Preferred Units pursuant to this Section 6(l) shall be treated as if it were a Notice of Redemption delivered to the General Partner by such holder. For purposes of this Section 6(l), (a) any holder of Preferred Units (whether or not eligible to be a Tendering Party) may, in the General Partner’s sole and absolute discretion, be treated as a Tendering Party and (b) the provisions of Sections 6(f)(1), 6(h)(2), 6(h)(3) and 6(h)(5) hereof shall not apply, but the remainder of this Section shall apply, mutatis mutandis.

7.    Conversion.

(a)    At any time and from time to time after the third anniversary of the date of initial issuance of the Preferred Units, the Partnership shall have the right, but not the obligation, to cause any Preferred Units to be converted into the number of Partnership Common Units obtained by multiplying the number of Preferred Units converted by the Conversion Ratio on the date provided for in subparagraph (b)(4) of this Section 7. In order to exercise the conversion right, the Partnership shall send notice of such conversion to each holder of record of Preferred Units to be converted. Such notice shall be provided by facsimile or, if facsimile is not available, then by first class mail, postage prepaid, at such holders’ address as the same appears on the records of the Partnership. Any notice which was transmitted or mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date received by the holder. Each such notice shall state, as appropriate: (1) the date of conversion, which date may be any date within twenty (20) Business Days following the date on which the notice is

 

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transmitted or mailed; and (2) the number of units of Preferred Units to be converted and, if fewer than all such units held by such holder are to be converted, the number of such units to be converted. Upon receiving such notice of conversion, each such holder shall promptly surrender the certificates representing such Preferred Units as are being converted on the conversion date, duly endorsed or assigned to the Partnership or in blank, at the office of the Transfer Agent; provided, however, that the failure to so surrender any such certificates shall not in any way affect the validity of the conversion of the underlying Preferred Units into Partnership Common Units.

(b)     (i) The Partnership Common Units issuable on conversion shall be issued in the same name as the name in which such Preferred Units are registered.

(ii)    The Partnership shall make no payment or allowance for unpaid distributions, whether or not in arrears, on converted units, except that a holder of Preferred Units that are converted shall be entitled to receive a cash payment on the Dividend Payment Date for any distribution on such units that has been declared and for which the record date precedes the conversion date.

(iii)    As promptly as practicable after the surrender of certificates for Preferred Units as aforesaid, and in any event no later than five (5) Business Days after the date of such surrender, the Partnership shall issue and deliver at such office to such holder, or send on such holders’ written order, a certificate or certificates for the number of full Partnership Common Units issuable upon the conversion of such Preferred Units in accordance with the provisions of this Section 7, and any fractional interest in respect of a Partnership Common Unit arising upon such conversion shall be settled as provided in paragraph (c) of this Section 7.

(iv)    Each conversion shall be deemed to have been effected immediately prior to the close of business on the date identified as the conversion date in the notice of conversion sent by the Partnership pursuant to subparagraph (a) of this Section 7; and the person or persons in whose name or names any certificate or certificates for Partnership Common Units shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the units represented thereby at such time on such date, and such conversion shall be at the Conversion Ratio in effect at such time on such date, unless the transfer books of the Partnership shall be closed on that date, in which event such person or persons shall be deemed to become such holder or holders of record at the close of business on the next succeeding day on which such transfer books are open, but such conversion shall be at the Conversion Ratio in effect on the date in the notice of conversion sent by the Partnership as aforesaid.

(c)    No fractional Partnership Common Units or scrip representing fractions of a Partnership Common Unit shall be issued upon conversion of the Preferred Units. Instead of any fractional interest in a Partnership Common Unit that would otherwise be deliverable upon the conversion of Preferred Units, the Partnership shall pay to the holder of such units an amount of cash equal to the product of (i) such fraction and (ii) the Market Value of a REIT Share as of the date of conversion. If more than one of any holder’s units shall be converted at one time, the number of full Partnership Common Units issuable upon conversion thereof shall be computed on the basis of the aggregate number of Preferred Units so converted.

 

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(d)    If the Partnership shall be a party to any transaction (including with limitation a merger, consolidation, statutory exchange, sale of all or substantially all of the Partnership’s assets or recapitalization of the Partnership Common Units) (each of the foregoing being referred to herein as a “Transaction”), in each case, as a result of which Partnership Common Units shall be converted into the right to receive securities or other property (including cash or any combination thereof), each Preferred Unit which is not converted into the right to receive securities or other property in connection with such Transaction shall thereupon be convertible into the kind and amount of securities and other property (including cash or any combination thereof) receivable upon such consummation by a holder of that number of Partnership Common Units into which Preferred Units were convertible immediately prior to such Transaction. The provisions of this paragraph (d) shall apply to successive Transactions.

(e)    The Partnership will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Partnership Common Units or other securities or property on conversion of Preferred Units pursuant hereto; provided, however, that the Partnership shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Partnership Common Units or other securities or property in a name other than that of the holder of the Preferred Units to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Partnership the amount of any such tax or established, to the reasonable satisfaction of the Partnership, that such tax has been paid.

(f)    For purposes of the definition of “Twelve-Month Period” in the Agreement, any holder of Preferred Units that have been converted to Partnership Common Units shall be deemed to have acquired such Partnership Common Units when such Units were acquired.

8.    Status of Reacquired Units.

All Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

9.    General.

The ownership of the Preferred Units shall be evidenced by one or more certificates in the form of Annex II hereto. The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the Class Nine Partnership Preferred Units.

10.    Allocations of Income and Loss.

Subject to the terms of Section 5 hereof, for each taxable year, (i) each holder of Preferred Units will be allocated, to the extent possible, net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership.

 

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11.    Voting Rights.

The holders of the Preferred Units will not have any voting or approval rights, except (a) as required by applicable law or in the Agreement, and (b) as long as any Preferred Units are outstanding, in addition to any other vote or consent of partners required by law or by the Agreement, the affirmative vote or consent of holders of at least 50% of the outstanding Preferred Units will be necessary for effecting any amendment of any of the provisions of this Partnership Unit Designation that materially and adversely affects the rights or preferences of the holders of the Preferred Units. The creation or issuance of any class or series of Partnership units, including, without limitation, any Partnership units that may have rights junior to, on a parity with, or senior or superior to the Preferred Units, will not be deemed to have a material adverse effect on the rights or preferences of the holders of Preferred Units. With respect to the exercise of the above described voting rights, each Preferred Unit will have one (1) vote per Preferred Unit.

12.    Restrictions on Transfer.

Preferred Units are subject to the same restrictions on transfer as are, and the holders of Preferred Units shall be entitled to the same rights of transfer as are, applicable to Common Units as set forth in the Agreement.

 

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ANNEX I

TO EXHIBIT N

NOTICE OF REDEMPTION

 

To:

AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street

Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned Limited Partner or Assignee hereby tenders for redemption Class Nine Partnership Preferred Units in AIMCO Properties, L.P. in accordance with the terms of the Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the Class Nine Partnership Preferred Units. The undersigned Limited Partner or Assignee:

(a)    if the Partnership elects to redeem such Class Nine Partnership Preferred Units for REIT Shares rather than cash, hereby irrevocably transfers, assigns, contributes and sets over to Previous General Partner all of the undersigned Limited Partner’s or Assignee’s right, title and interest in and to such Class Nine Partnership Preferred Units;

(b)    undertakes (i) to surrender such Class Nine Partnership Preferred Units and any certificate therefor at the closing of the Redemption contemplated hereby and (ii) to furnish to Previous General Partner, prior to the Specified Redemption Date:

(1)    A written affidavit, dated the same date as this Notice of Redemption, (a) disclosing the actual and constructive ownership, as determined for purposes of Code Sections 856(a)(6) and 856(h), of REIT Shares by (i) the undersigned Limited Partner or Assignee and (ii) any Related Party and (b) representing that, after giving effect to the Redemption, neither the undersigned Limited Partner or Assignee nor any Related Party will own REIT Shares in excess of the Ownership Limit;

(2)    A written representation that neither the undersigned Limited Partner or Assignee nor any Related Party has any intention to acquire any additional REIT Shares prior to the closing of the Redemption contemplated hereby on the Specified Redemption Date; and

(3)    An undertaking to certify, at and as a condition to the closing of the Redemption contemplated hereby on the Specified Redemption Date, that either (a) the actual and constructive ownership of REIT Shares by the undersigned Limited Partner or Assignee and any Related Party remain unchanged from that disclosed in the affidavit required by paragraph (1) above, or (b) after giving effect to the Redemption contemplated hereby, neither the undersigned Limited Partner or Assignee nor any Related Party shall own REIT Shares in violation of the Ownership Limit.

 

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(c)    directs that the certificate representing the REIT Shares, or the certified check representing the Cash Amount, in either case, deliverable upon the closing of the Redemption contemplated hereby be delivered to the address specified below;

(d)    represents, warrants, certifies and agrees that:

(i)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, good, marketable and unencumbered title to such Preferred Units, free and clear of the rights or interests of any other person or entity;

(ii)    the undersigned Limited Partner or Assignee has, and at the closing of the Redemption will have, the full right, power and authority to tender and surrender such Preferred Units as provided herein; and

(iii)    the undersigned Limited Partner or Assignee has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such tender and surrender.

Dated:                                     

 

Name of Limited Partner or Assignee:

 

 

(Signature of Limited Partner or Assignee)

 

(Street Address)

 

(City) (State) (Zip Code)

Issue check payable to or Certificates in the name

of:                                                                                          

Please insert social security or identifying

number:                                                                                          

 

Signature Guaranteed by:

 

 

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NOTICE: THE SIGNATURE OF THIS NOTICE OF REDEMPTION MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE FOR THE CLASS NINE PREFERRED UNITS WHICH ARE BEING REDEEMED IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

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ANNEX II

TO EXHIBIT N

FORM OF UNIT CERTIFICATE

OF

CLASS NINE PARTNERSHIP PREFERRED UNITS

THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS. IN ADDITION, THE LIMITED PARTNERSHIP INTEREST EVIDENCED BY THIS CERTIFICATE MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SIXTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIMCO PROPERTIES, L.P., DATED AS OF [DATE OF SPIN-OFF], A COPY OF WHICH MAY BE OBTAINED FROM AIMCO-GP, INC., THE GENERAL PARTNER, AT ITS PRINCIPAL EXECUTIVE OFFICE.

Certificate Number             

AIMCO PROPERTIES, L.P.

FORMED UNDER THE LAWS OF THE STATE OF DELAWARE

This certifies that                                                                                                                                                

is the owner of                                                                                                                                                    

CLASS NINE PARTNERSHIP PREFERRED UNITS

OF

AIMCO PROPERTIES, L.P.,

transferable on the books of the Partnership in person or by duly authorized attorney on the surrender of this Certificate properly endorsed. This Certificate and the Class Nine Partnership Preferred Units represented hereby are issued and shall be held subject to all of the provisions of the Agreement of Limited Partnership of AIMCO Properties, L.P., as the same may be amended and/or supplemented from time to time.

IN WITNESS WHEREOF, the undersigned has signed this Certificate.

Dated:

 

By

 

 

 

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ASSIGNMENT

For Value Received,                                                       hereby sells, assigns and transfers unto                                                                                                                                                      Class Nine Partnership Preferred Unit(s) represented by the within Certificate, and does hereby irrevocably constitute and appoint the General Partner of AIMCO Properties, L.P. as its Attorney to transfer said Class Nine Partnership Preferred Unit(s) on the books of AIMCO Properties, L.P. with full power of substitution in the premises.

Dated:                                 

 

By:

 

 

  Name:
Signature Guaranteed by:

 

NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17AD-15.

 

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EXHIBIT O

[reserved]

 

O-1

EXHIBIT P

PARTNERSHIP UNIT DESIGNATION OF

THE LTIP UNITS OF

AIMCO PROPERTIES, L.P.

 

  1.

Issuance and Designation.

A class of Partnership Units is hereby designated as “LTIP Units,” and the number of LTIP Units that may be issued is not limited by the Agreement. From time to time, the General Partner is authorized to issue LTIP Units to Persons providing services to or for the benefit of the Partnership for such consideration or for no consideration as the General Partner may determine to be appropriate and on such terms and conditions as shall be established by the General Partner, and admit such Persons as Limited Partners. LTIP Units may be issued in one or more classes, or one or more series of any such classes, bearing such relationship to one another as to allocations, distributions and other rights as the General Partner shall determine in its sole and absolute discretion subject to Delaware law and the Agreement. Except to the extent that a capital contribution is made with respect to an LTIP Unit, each LTIP Unit is intended to qualify as a profits interests in the Partnership within the meaning of the Code, the Regulations, and any published guidance by the Internal Revenue Service with respect thereto. A Person (other than an existing Partner) who is issued LTIP Units in exchange for no consideration shall be admitted to the Partnership as an additional Limited Partner upon the satisfactory completion of the requirements for admission of an Additional Limited Partner pursuant to Section 12.2.A(i) through (iii) of the Agreement.

 

  2.

Definitions.

Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Adjustment Events” has the meaning set forth in Section 8 hereof.

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Assignee” shall mean a Person to whom one or more LTIP Units have been Transferred in a manner permitted under the Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5 of the Agreement.

“Capital Account Limitation” has the meaning set forth in Section 7(b) hereof.

“Catch-Up Date” means, for any LTIP Unit that initially has a Sharing Percentage that is less than 100%, the date (if any) on which such Sharing Percentage increases to 100%.

“Catch-Up Year” means, for any LTIP Unit that initially has a Sharing Percentage that is less than 100%, the Fiscal Year in which its Catch-Up Date occurs; provided, however, that if the Catch-Up Date occurs after the end of any Fiscal Year but prior to the distribution of Available Cash for the fourth quarter of such Fiscal Year, the “Catch-Up Year” shall be such Fiscal Year.

 

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“Constituent Person” has the meaning set forth in Section 7(f) hereof.

“Conversion Date” has the meaning set forth in Section 7(b) hereof.

“Conversion Notice” means a notice in the form attached hereto as Annex I.

“Conversion Right” has the meaning set forth in Section 7(a) hereof.

“Economic Capital Account Balance” means, with respect to a holder of LTIP Units, its Capital Account balance, plus the amount of its share of any Partner Minimum Gain or Partnership Minimum Gain, in either case, to the extent attributable to its ownership of LTIP Units.

“Eligible Unit” means, as of the time any Liquidating Gain is available to be allocated to an LTIP Unit, an LTIP Unit to the extent, since the date of issuance of such LTIP Unit, such Liquidating Gain when aggregated with other Liquidating Gains realized since the date of issuance of such LTIP Unit exceeds Liquidating Losses realized since the date of issuance of such LTIP Unit.

“Equity Plan” means any stock or other equity-based compensation plan now or hereafter adopted by the Partnership or the Previous General Partner, including the Plan.

“Forced Conversion” has the meaning set forth in Section 7(c) hereof.

“Forced Conversion Notice” has the meaning set forth in Section 7(c) hereof.

“Liquidating Gains” means any net gain realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership (including upon liquidation of the Partnership), including but not limited to Net Income realized in connection with an adjustment of Gross Asset Value of any Partnership asset pursuant to subsection (b) of the definition of “Gross Asset Value” in the Agreement.

“Liquidating Losses” means any net loss realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership (including upon liquidation of the Partnership), including but not limited to Net Loss realized in connection with an adjustment of Gross Asset Value of any Partnership asset pursuant to subsection (b) of the definition of “Gross Asset Value” in the Agreement.

“LTIP Agreement” means a Vesting Agreement, the Plan or any applicable Equity Plan or other compensatory arrangement or incentive program pursuant to which LTIP Units are issued.

“LTIP Unit” shall mean a Partnership Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Partnership Unit Designation, and any LTIP Agreement applicable thereto.

 

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“Market Value” shall mean, as of any determination date and with respect to any share of stock:

(i)    if the shares are listed or admitted to trading on any securities exchange, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, in either case as reported in the principal consolidated transaction reporting system;

(ii)    if the shares are not listed or admitted to trading on any securities exchange, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner; or

(iii)    if the shares are not listed or admitted to trading on any securities exchange, and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported;

provided, however, that, if there are no bid and asked prices reported during the ten (10) days prior to the date in question, the Market Value of the shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, further, that the General Partner is authorized to adjust the market price for any trading day as may be necessary, in its judgment, to reflect an event that occurs at any time after such day that would unfairly distort the Market Value, including, without limitation, a stock dividend, split, subdivision, reverse stock split, or share combination.

“Partnership” shall mean AIMCO Properties, L.P., a Delaware limited partnership.

“Partnership Common Unit” shall mean a Partnership Common Unit held by a Non-AIR Holder.

“Plan” means the Apartment Income REIT Corp. 2020 Stock Award and Incentive Plan, as amended from time to time.

“Previous General Partner” shall mean Apartment Income REIT Corp., a Maryland corporation.

“Proposed Section 83 Safe Harbor Regulation” has the meaning set forth in Section 13 hereof.

“Redemption Threshold” means a threshold that will be met with respect to one or more LTIP Units if, when and to the extent such LTIP Units have satisfied the Capital Account Limitation.

“REIT Share Economic Target” means, as of any date, the Market Value of a REIT Share on such date, multiplied by the Adjustment Factor.

 

P-3

“Section 83 Safe Harbor” has the meaning set forth in Section 13 hereof.

“Sharing Percentage” means, with respect to any LTIP Unit, such percentage, if any, that is specified as such in the Vesting Agreement or other documentation pursuant to which such LTIP Unit was issued.

“Transaction” has the meaning set forth in Section 7(f) hereof.

“Unvested LTIP Units” has the meaning set forth in Section 3(a) hereof.

“Vested LTIP Units” has the meaning set forth in Section 3(a) hereof.

“Vesting Agreement” has the meaning set forth in Section 3(a) hereof.

 

  3.

Vesting.

(a)    Vesting, Generally. LTIP Units may, in the sole discretion of the General Partner, be issued subject to vesting, forfeiture and additional restrictions on Transfer pursuant to the terms of an award, vesting or other similar agreement (a “Vesting Agreement”). The terms of any Vesting Agreement may be modified by the General Partner from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the Plan or any other Equity Plan, if applicable. LTIP Units that were fully vested when issued, or that have vested and are no longer subject to forfeiture under the terms of a Vesting Agreement, are referred to as “Vested LTIP Units”; all other LTIP Units are referred to as “Unvested LTIP Units.”

(b)    Forfeiture. Unless otherwise specified in the relevant LTIP Agreement, upon the occurrence of any event specified in such LTIP Agreement as resulting in either the right of the Partnership to repurchase LTIP Units at a specified purchase price or the forfeiture of any LTIP Units, if the Partnership exercises such right to repurchase or upon the occurrence of the event causing forfeiture in accordance with the applicable LTIP Agreement, then the relevant LTIP Units shall immediately, and without any further action, be treated as cancelled and no longer outstanding for any purpose. Unless otherwise specified in the applicable LTIP Agreement, no consideration or other payment shall be due with respect to any LTIP Units that have been forfeited, other than any distributions payable to holders of such LTIP Units as of a record date prior to the effective date of the forfeiture. Except as otherwise provided in the Agreement (including without limitation Section 4(d) hereof) or any LTIP Agreement, in connection with the repurchase or forfeiture of any holder’s LTIP Units, the balance of such holder’s Capital Account that is attributable to such holder’s LTIP Units shall be reduced by the amount, if any, by which it exceeds the target balance contemplated by Section 4(c) hereof, calculated with respect to such holder’s remaining LTIP Units, if any.

 

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  4.

Allocations

(a)    General. Except as otherwise provided in the Agreement or the relevant LTIP Agreement, Holders of LTIP Units shall be allocated Net Income, Net Loss and depreciation and amortization expenses of the Partnership in amounts per LTIP Unit determined in the same manner as amounts allocated per Partnership Common Unit are determined; provided, however, that for any LTIP Unit that initially has a Sharing Percentage that is less than 100%, until the Catch-Up Year (if any) for such LTIP Unit, the amounts so allocated with respect to such LTIP Unit pursuant to Section 6.2A(3) or Section 6.2B of the Agreement shall be equal to the product of such Sharing Percentage and the amount that would otherwise be allocable with respect to such LTIP Unit pursuant to this Section 4(a). The allocations provided by the preceding sentence shall be subject to Section 6.3B of the Agreement and any special allocations required by Section 4(b) or Section 4(c) hereof. The General Partner is authorized in its discretion to delay or accelerate the participation of the LTIP Units in allocations of Net Income, Net Loss and depreciation and amortization expenses of the Partnership under this Section 4(a), or to adjust the allocations made under this Section 4(a), so that the ratio of (i) the total amount of Net Income, Net Loss and depreciation and amortization expenses of the Partnership allocated with respect to each LTIP Unit in any taxable year, to (ii) the total amount distributed with respect to that LTIP Unit for such taxable year, is more nearly equal to the ratio of (i) the Net Income, Net Loss and depreciation and amortization expenses of the Partnership allocated with respect to the Partnership Common Units for such taxable year, to (ii) the amounts distributed with respect to the Partnership Common Units for such taxable year.

(b)    Special Allocations with Respect to LTIP Units in a Catch-Up Year. In the Catch-Up Year (if any) for any LTIP Unit that initially has a Sharing Percentage that is less than 100%, (i) Net Income, Net Loss and depreciation and amortization expenses of the Partnership allocable under Article 6 of the Agreement to holders of Partnership Common Units and LTIP Units not subject to this Section 4(b) shall be recomputed after giving effect to the special allocations with respect to such LTIP Unit under clause (ii) of this Section 4(b), and (ii) the holder of such LTIP Unit shall be specially allocated an amount of Net Income, Net Loss and depreciation and amortization expenses of the Partnership equal to the excess of (x) the respective cumulative amounts that would have been allocated with respect to such LTIP Unit had such LTIP Unit been a Partnership Common Unit during the period from the date of issuance of such LTIP Unit through the end of the Fiscal Year immediately prior to the Catch-Up Year, over (y) the respective cumulative amounts actually allocated with respect to such LTIP Unit during such period. Such special allocation shall be in addition to any amounts allocated to the holder of such LTIP Unit pursuant to Section 4(a).

(c)    Special Allocations of Liquidating Gains with Respect to LTIP Units. If Liquidating Gains are allocated under this Section 4(c), Net Income, Net Loss and depreciation and amortization expenses of the Partnership allocable under Article 6 of the Agreement to holders of Partnership Common Units and LTIP Units not subject to this Section 4(c) shall be recomputed without regard to the Liquidating Gains so allocated. After giving effect to the special allocations set forth in Section 6.3.B of the Agreement and Section 4(d) hereof, and notwithstanding the provisions of Section 6.2 of the Agreement, any Liquidating Gains shall first be allocated to the holders of Eligible Units until the Economic Capital Account Balance of each such holder, to the extent attributable to such holder’s ownership of Eligible Units, is equal to

 

P-5

(i) the REIT Share Economic Target, multiplied by (ii) the number of such holder’s Eligible Units, it being understood that Liquidating Gains will be so allocated only to the extent each such Eligible Unit is eligible to be allocated Liquidating Gains. Except as otherwise provided in any LTIP Agreement, any such allocations shall be made among the holders of Eligible Units in proportion to the amounts eligible to be allocated to each under this Section 4(c). The parties agree that the intent of this Section 4(c) is to make the Capital Account balances of the holders of LTIP Units, to the extent attributable to their LTIP Units, economically equivalent (on a per-unit basis) to the Market Value of a REIT Share on the date as of which such special allocation pursuant to this Section 4(c) is being made, multiplied by the Conversion Factor, but only to the extent the Partnership has recognized cumulative net gains with respect to its assets since the issuance of the relevant LTIP Unit. The allocations set forth in this Section 4(c) shall be taken into account for determining the Capital Account of each Partner, including for purposes of Section 6.3.C of the Agreement.

(d)    Forfeiture Allocations. Upon a forfeiture of any Unvested LTIP Units by any Partner, gross items of income, gain, loss or deduction shall be allocated to such Partner if and to the extent required by final Regulations promulgated after January 31, 2017 to ensure that allocations made with respect to all unvested Partnership Interests are recognized under Code Section 704(b).

 

  5.

Distributions.

(a)    Operating Distributions. Except as otherwise provided in the Agreement or the relevant LTIP Agreement, holders of LTIP Units shall be entitled to receive, if, when and as authorized by the General Partner out of funds or other property legally available for the payment of distributions, regular, special, extraordinary or other distributions (other than distributions upon or pursuant to the liquidation of the Partnership) which may be made from time to time, in an amount per LTIP Unit equal to the amount of any such distributions that would have been payable to such holders if the LTIP Units had been Partnership Common Units (if applicable, assuming such LTIP Units were held for the entire period to which such distributions relate); provided, that if any LTIP Unit has a Sharing Percentage then in effect that is less than 100%, the holder of such LTIP Unit will only be entitled to receive such distributions in an amount equal to the product of the Sharing Percentage for such LTIP Unit and the amount that would otherwise be distributable with respect to such LTIP Unit pursuant to this Section 5(a).

(b)    Liquidating Distributions. Each holder of LTIP Units shall also be entitled to receive, if, when and as authorized by the General Partner out of funds or other property legally available for the payment of distributions, distributions upon liquidation of the Partnership in an amount equal to the positive balance of such holder’s Capital Account as of the date of liquidation (after taking into account any allocations pursuant to the liquidation) to the extent attributable to the ownership of such LTIP Units as set forth in Section 13.2 of the Agreement.

(c)    Distributions Generally. Distributions on the LTIP Units, if authorized, shall be payable on such dates and in such manner as may be authorized by the General Partner. Absent a contrary determination by the General Partner, the payment and record dates for

 

P-6

distributions on LTIP Units shall be the same as the payment and record dates for the corresponding distribution on the Partnership Common Units. A holder of LTIP Units will only be entitled to distributions with respect to an LTIP Unit as set forth in this Exhibit P and, in making distributions pursuant to Section 5.1 of the Agreement, the General Partner of the Partnership shall take into account the provisions of this Section 5.

 

  6.

Redemption.

Holders of LTIP Units shall not be entitled to the Redemption right provided for in Section 8.6 of the Agreement, unless, until and to the extent such LTIP Units have been converted into Partnership Common Units.

 

  7.

Conversion to Partnership Common Units.

(a)    A holder of LTIP Units that is a Qualifying Party shall have the right (the “Conversion Right”), at such holder’s option, at any time to convert all or a portion of such holder’s Vested LTIP Units into Partnership Common Units, taking into account all adjustments (if any) made pursuant to Section 8 hereof; provided, however, that a Qualifying Party may not exercise the Conversion Right for less than one thousand (1,000) Vested LTIP Units or, if such Qualifying Party holds less than one thousand (1,000) Vested LTIP Units, all of the Vested LTIP Units held by such Qualifying Party that are not subject to the limitation on conversion under Section 7(b) hereof. Qualifying Parties shall not have the right to convert Unvested LTIP Units into Partnership Common Units until they become Vested LTIP Units; provided, however, that when a Qualifying Party is notified of the expected occurrence of an event that will cause his or her Unvested LTIP Units to become Vested LTIP Units, such Qualifying Party may give the Partnership a Conversion Notice conditioned upon and effective as of the time of vesting and such Conversion Notice, unless subsequently revoked by the Qualifying Party, shall be accepted by the Partnership subject to such condition. In all cases, the conversion of any LTIP Units into Partnership Common Units shall be subject to the conditions and procedures set forth in this Section 7.

(b)    A Qualifying Party may convert Vested LTIP Units into an equal number of Partnership Common Units, giving effect to all adjustments (if any) made pursuant to Section 8 hereof; provided, however, that in no event may a Qualifying Party convert a number of Vested LTIP Units that exceeds (x) the Economic Capital Account Balance of such Qualifying Party that is attributable to such Qualifying Party’s ownership of LTIP Units, divided by (y) the REIT Share Economic Target, in each case, determined as of a date on which satisfaction of the Redemption Threshold is being determined (the “Capital Account Limitation”). In order to exercise the Conversion Right, a Qualifying Party shall deliver a Conversion Notice to the Partnership not less than three (3) nor more than ten (10) days prior to the date of conversion (the “Conversion Date”) specified in such Conversion Notice; provided, however, that if the General Partner has not given to the Qualifying Party notice of a proposed or upcoming Transaction at least thirty (30) days prior to the effective date of such Transaction, then the Qualifying Party shall have the right to deliver a Conversion Notice until the earlier of (x) the tenth (10th) day after such notice from the General Partner of a Transaction or (y) the third (3rd) Business Day immediately preceding the effective date of such Transaction. A Conversion Notice shall be provided in the manner provided in Section 15.1 of the Agreement. Each Qualifying Party

 

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seeking to convert Vested LTIP Units covenants and agrees with the Partnership that all Vested LTIP Units to be converted pursuant to this Section 7 shall be free and clear of all liens. For purposes of the definition of “Twelve-Month Period” in the Agreement, any holder of LTIP Units that have been converted to Partnership Common Units shall be deemed to have acquired such Partnership Common Units when such LTIP Units were acquired. A holder of LTIP Units that is a Qualifying Party may deliver a Notice of Redemption pursuant to Section 8.6 of the Agreement relating to the Partnership Common Units to be received upon conversion of LTIP Units in advance of the Conversion Date; provided, however, that the Redemption of such Partnership Common Units shall not take place until on or after the Conversion Date. For clarity, it is noted that the objective of this paragraph is to enable a Qualifying Party that satisfies the Twelve-Month Period to effect a Redemption of the Partnership Common Units received upon conversion of Vested LTIP Units simultaneously with such conversion, with the further consequence that, if the Previous General Partner elects to assume the Partnership’s redemption obligation with respect to such Partnership Common Units under Section 8.6 of the Agreement by delivering to such Qualifying Party REIT Shares rather than cash, then such Qualifying Party can receive such REIT Shares simultaneously with the conversion of such Vested LTIP Units into Partnership Common Units. The General Partner shall cooperate with a Qualifying Party to coordinate the timing of the different events described in the foregoing sentence.

(c)    The Partnership, at any time at the election of the General Partner, may cause any number of Vested LTIP Units to be converted (a “Forced Conversion”) into an equal number of Partnership Common Units, giving effect to all adjustments (if any) made pursuant to Section 8 hereof; provided, however, that the Partnership may not cause a Forced Conversion of any LTIP Units that would not at the time be eligible for conversion at the option of the holder thereof pursuant to Section 7(b) hereof. In order to exercise its right of Forced Conversion, the Partnership shall deliver a written notice of such Forced Conversion (a “Forced Conversion Notice”) to the applicable holder of LTIP Units specifying the number of LTIP Units subject to the Forced Conversion, which notice shall be given not less than ten (10) nor more than sixty (60) days prior to the Conversion Date specified in such notice. A Forced Conversion Notice shall be provided in the manner provided in Section 15.1 of the Agreement.

(d)    A conversion of Vested LTIP Units for which the holder thereof has given a Conversion Notice, or the Partnership has given a Forced Conversion Notice, shall occur automatically after the close of business on the applicable Conversion Date without any action on the part of such holder of LTIP Units, as of which time such holder of LTIP Units shall be credited on the books and records of the Partnership as of the opening of business on the next day with the number of Partnership Common Units into which such LTIP Units were converted. After the conversion of LTIP Units as aforesaid, the Partnership shall deliver to such holder of LTIP Units, upon his or her written request, a certificate of the General Partner certifying the number of Partnership Common Units and remaining LTIP Units, if any, held by such person immediately after such conversion. The Assignee of any Limited Partner may exercise the rights of such Limited Partner pursuant to this Section 7 and such Limited Partner shall be bound by the exercise of such rights by the Assignee.

(e)    For purposes of making future allocations under Section 4(c) hereof and applying the Capital Account Limitation, if any LTIP Units are converted into Partnership Common Units, the portion of the Economic Capital Account Balance of the holder of such LTIP

 

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Units that is treated as attributable to such holder’s LTIP Units shall be reduced, as of the date of conversion, by the product of the number of LTIP Units converted and the REIT Share Economic Target, determined as of the relevant Conversion Date.

(f)    If the Partnership or the Previous General Partner shall be a party to any transaction (including without limitation a merger, consolidation, statutory exchange, sale of all or substantially all of the Partnership’s assets or other business combination or reorganization, but excluding any Adjustment Event, in each case, as a result of which Partnership Common Units shall be exchanged for or converted into the right, or the holders shall otherwise be entitled, to receive cash, securities or other property or any combination thereof (each of the foregoing being referred to herein as a “Transaction”)), then the General Partner shall, immediately prior to the Transaction, exercise its right to cause a Forced Conversion with respect to the maximum number of LTIP Units then eligible for conversion, taking into account any allocations that occur in connection with the Transaction or that would occur in connection with the Transaction if the assets of the Partnership were sold at the Transaction price or the portion thereof attributable to the Partnership, as determined by the General Partner in good faith, or if applicable, at a value for the Partnership assets determined by the General Partner in good faith using the value attributed to the Partnership Common Units in the context of the Transaction (in which case the Conversion Date shall be the effective date of the Transaction and the conversion shall occur immediately prior to the effectiveness of the Transaction). In anticipation of such Forced Conversion and the consummation of the Transaction, the Partnership shall use commercially reasonable efforts to cause each holder of LTIP Units to be afforded the right to receive in connection with such Transaction in consideration for the Partnership Common Units into which his or her LTIP Units will be converted the same kind and amount of cash, securities and other property (or any combination thereof) receivable upon the consummation of such Transaction by a holder of the same number of Partnership Common Units, assuming such holder is not a Person with which the Partnership consolidated or into which the Partnership merged or which merged into the Partnership or to which such sale or transfer was made, as the case may be (a “Constituent Person”), or an affiliate of a Constituent Person. In the event that holders of Partnership Common Units have the opportunity to elect the form or type of consideration to be received upon consummation of the Transaction, prior to such Transaction, the General Partner shall give prompt written notice to each holder of LTIP Units of such opportunity, and shall use commercially reasonable efforts to afford each holder of LTIP Units the right to elect, by written notice to the General Partner, the form or type of consideration to be received upon conversion of each LTIP Unit held by such holder into Partnership Common Units in connection with such Transaction. If a holder of LTIP Units fails to make such an election, such holder (and any of its transferees) shall receive upon conversion of each LTIP Unit held by him or her (or by any of his or her transferees) the same kind and amount of consideration that a holder of Partnership Common Units would receive if such holder of Partnership Common Units failed to make such an election. Subject to the rights of the Partnership and the General Partner under any LTIP Agreement, the Partnership shall use commercially reasonable efforts to cause the terms of any Transaction to be consistent with the provisions of this Section 7(f) and to enter into an agreement with the successor or acquiring entity, as the case may be, for the benefit of any holder of LTIP Units that will not be converted into Partnership Common Units in connection with the Transaction that will (i) contain provisions enabling the Qualifying Parties that remain outstanding after such Transaction to convert their LTIP Units into securities as comparable as reasonably possible under the circumstances to the Partnership Common Units

 

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and (ii) preserve as far as reasonably possible under the circumstances the distribution, special allocation, conversion, and other rights set forth in the Agreement, including this Exhibit P, for the benefit of the holder of LTIP Units.

(g)    No conversion of LTIP Units into Partnership Common Units may be made by a Person if, based on the advice of the Partnership’s counsel or accounting firm, the Partnership believes there is a material risk that such conversion could (i) result in the Partnership’s being treated as an association taxable as a corporation, (ii) adversely affect the ability of the Previous General Partner to continue to qualify as a REIT or subject the Previous General Partner to any additional taxes under Section 857 or Section 4981 of the Code, or (iii) be effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code or cause the Partnership to fail to qualify for a safe harbor from such treatment which the Partnership desires to preserve.

 

  8.

Adjustments.

The Partnership shall maintain at all times a one-to-one correspondence between LTIP Units and Partnership Common Units for conversion, distributions, allocations and other purposes, including without limitation complying with the following procedures; provided, that the foregoing is not intended to alter (a) differences as a result of a Sharing Percentage that is less than 100%, (b) the special allocations pursuant to Section 4 hereof, or (c) differences between distributions to be made with respect to LTIP Units and Partnership Common Units pursuant to Section 13.2 of the Agreement and Section 5(b) hereof in the event that the Capital Accounts attributable to the LTIP Units are less than those attributable to Partnership Common Units due to insufficient special allocations pursuant to Section 4(c) hereof or related provisions. If an Adjustment Event (as defined below) occurs, then the General Partner shall take any action reasonably necessary, including any amendment to the Agreement or update Exhibit A to the Agreement adjusting the number of outstanding LTIP Units or subdividing or combining outstanding LTIP Units, to maintain a one-for-one conversion and economic equivalence ratio between Partnership Common Units and LTIP Units. The following shall be “Adjustment Events”: (i) the Partnership makes a distribution on all outstanding Partnership Common Units in Partnership Units, (ii) the Partnership subdivides the outstanding Partnership Common Units into a greater number of units or combines the outstanding Partnership Common Units into a smaller number of units, or (iii) the Partnership issues any Partnership Units in exchange for its outstanding Partnership Common Units by way of a reclassification or recapitalization of its Partnership Common Units. If more than one Adjustment Event occurs, any adjustment to the LTIP Units need be made only once using a single formula that takes into account each and every Adjustment Event as if all Adjustment Events occurred simultaneously. For the avoidance of doubt, the following shall not be Adjustment Events: (x) the issuance of Partnership Units in a financing, reorganization, acquisition or other similar business transaction, (y) the issuance of Partnership Units pursuant to any employee benefit or compensation plan or distribution reinvestment plan, or (z) the issuance of any Partnership Units to the General Partner in respect of a capital contribution to the Partnership. If the Partnership takes an action affecting the Partnership Common Units other than actions specifically described above as “Adjustment Events,” and in the opinion of the General Partner such action would require an action to maintain the one-to-one correspondence described above, the General Partner shall have the right to take such action, to the extent permitted by law, the Plan and by any other applicable Equity

 

P-10

Plan or other compensatory arrangement or incentive program pursuant to which LTIP Units are issued, in such manner and at such time as the General Partner, in its sole discretion, may determine to be reasonably appropriate under the circumstances. If an amendment is made to the Agreement adjusting the number of outstanding LTIP Units as herein provided, the Partnership shall promptly file in the books and records of the Partnership an officer’s certificate setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after the filing of such certificate, the Partnership shall mail a notice to each holder of LTIP Units setting forth the adjustment to his or her LTIP Units and the effective date of such adjustment. Any adjustment to the number of outstanding LTIP Units pursuant to this Section 8 shall be binding on the Partnership and every Limited Partner.

 

  9.

Status of Reacquired Units.

All LTIP Units that have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding.

 

  10.

General.

The General Partner shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent redemption, or any other event having an effect on the ownership of, the LTIP Units. Unless the General Partner determines otherwise, LTIP Units shall not be certificated.

 

  11.

Voting Rights.

Limited Partners holding LTIP Units shall have the same voting rights as Limited Partners holding Partnership Common Units, with the LTIP Units voting together as a single class with the Partnership Common Units and having one vote per LTIP Unit, and holders of LTIP Units shall not be entitled to approve, vote on or consent to any other matter.

 

  12.

Restrictions on Transfer.

Subject to the terms of any Vesting Agreement, LTIP Units are subject to the same restrictions on transfer, and the holders of LTIP Units shall be entitled to the same rights of transfer, as are applicable to Partnership Common Units as set forth in the Agreement.

 

  13.

Section 83 Safe Harbor.

Each Partner authorizes the General Partner to elect to apply the safe harbor (the “Section 83 Safe Harbor”) set forth in proposed Regulations Section 1.83-3(l) and proposed Internal Revenue Service Revenue Procedure published in Notice 2005-43 (together, the “Proposed Section 83 Safe Harbor Regulation”) (under which the fair market value of a Partnership Interest that is Transferred in connection with the performance of services is treated as being equal to the liquidation value of the interest), or in similar Regulations or guidance, if such Proposed Section 83 Safe Harbor Regulation or similar Regulations are promulgated as final or temporary Regulations. If the General Partner determines that the Partnership should make such election, the General Partner is hereby authorized to amend the Agreement without

 

P-11

the consent of any other Partner to provide that (i) the Partnership is authorized and directed to elect the Section 83 Safe Harbor, (ii) the Partnership and each of its Partners (including any Person to whom a Partnership Interest, including an LTIP Unit, is Transferred in connection with the performance of services) will comply with all requirements of the Section 83 Safe Harbor with respect to all Partnership Interests Transferred in connection with the performance of services while such election remains in effect, and (iii) the Partnership and each of its Partners will take all actions necessary, including providing the Partnership with any required information, to permit the Partnership to comply with the requirements set forth or referred to in the applicable Regulations for such election to be effective until such time (if any) as the General Partner determines, in its sole discretion, that the Partnership should terminate such election. The General Partner is further authorized to amend the Agreement to modify Article 6 of the Agreement to the extent the General Partner determines in its discretion that such modification is necessary or desirable as a result of the issuance of any applicable law, Regulations, notice or ruling relating to the tax treatment of the transfer of Partnership Interests in connection with the performance of services. Notwithstanding anything to the contrary in the Agreement, each Partner expressly confirms that it will be legally bound by any such amendment.

 

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ANNEX I

TO EXHIBIT P

NOTICE OF CONVERSION OF LTIP UNITS

 

To:

AIMCO Properties, L.P.

c/o AIMCO-GP, Inc.

4582 South Ulster Street, Suite 1700

Denver, Colorado 80237

Attention: Investor Relations

The undersigned holder of LTIP Units hereby irrevocably elects to convert the number of LTIP Units in AIMCO Properties, L.P. (the “Partnership”) set forth below into Partnership Common Units in accordance with the terms of the Sixth Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of [DATE OF SPIN-OFF], as it may be amended and supplemented from time to time (the “Agreement”). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Partnership Unit Designation of the LTIP Units. The undersigned hereby represents, warrants, and agrees that: (i) the undersigned holder of LTIP Units has, and at the Conversion Date will have, good, marketable and unencumbered title to such LTIP Units, free and clear of the rights or interests of any other person or entity; (ii) the undersigned holder of LTIP Units has, and at the Conversion Date will have, the full right, power and authority to convert such LTIP Units as provided herein; and (iii) the undersigned holder of LTIP Units has obtained the consent or approval of all persons and entities, if any, having the right to consent to or approve such conversion.

Name of Holder:                     

Dated:                     

Number of LTIP Units to be converted:                     

Conversion Date:

 

 

(Signature of Holder)

 

(Street Address)

 

(City) (State) (Zip Code)

Medallion Guarantee:

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS), WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC RULE 17Ad-15.

 

P-I-1

EXHIBIT Q

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS [—] PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

 

  1.

Number of Units and Designation.

A class of Partnership Preferred Units is hereby designated as “Class [●] Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be twenty (20).

 

  2.

Definitions.

Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Agreement” shall mean the Agreement of Limited Partnership of the Partnership, as amended, supplemented or restated from time to time.

“Affiliate” of a Person means a Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. For purposes of this definition, “control,” as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.

“Annual Distribution Rate” shall have the meaning set forth in Section 4 of this Partnership Unit Designation.

“Business Day” shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open.

“Change of Control” shall mean the occurrence of one or more of the following events: (a) any sale, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Partnership and its subsidiaries, taken as a whole, to any “person” or “group” (as such terms are defined in Sections 13(d) and 14(d)(2) of the Exchange Act), (other than to the Partnership or its subsidiaries); (b) a “person” or “group” (as such terms are defined in Sections 13(d) and 14(d)(2) of the Exchange Act), becomes the ultimate “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the Voting Units of the Partnership on a fully diluted basis; or (c) a “change of control” or similar event occurs under the terms of any other series of Partnership Units.

 

Q-1

Notwithstanding the foregoing: (i) any holding company, all or substantially all of the assets of which are comprised of the Partnership or any 100% direct or indirect parent company of the Partnership, shall not itself be considered a “person” or “group”; (ii) the transfer of assets between or among the Partnership’s subsidiaries and the Partnership shall not itself constitute a Change of Control; (iii) the term “Change of Control” shall not include a merger or consolidation of the Partnership with or the sale, assignment, conveyance, transfer or other disposition of all or substantially all of the Partnership’s assets to, an Affiliate incorporated or organized solely for the purpose of reorganizing the Partnership in another jurisdiction and/or into another type or form or entity and/or for the sole purpose of forming or collapsing a holding company structure; (iv) a “person” or “group” shall not be deemed to have beneficial ownership of securities subject to a stock or asset purchase agreement, merger agreement or similar agreement (or voting or option or similar agreement related thereto) until the consummation of the transactions contemplated by such agreement; and (v) the Spin-Off and any transactions related thereto, including any and all restructuring steps undertaken in connection therewith, shall not constitute a Change of Control.

“Class [●] Partnership Preferred Unit” shall have the meaning set forth in Section 1 of this Partnership Unit Designation.

“Distribution Payment Date” shall mean February 28, May 29, August 29, and November 29 of each year; provided, that if any Distribution Payment Date falls on any day other than a Business Day, the distribution payment payable on such Distribution Payment Date shall be paid on the Business Day immediately following such Distribution Payment Date and no interest shall accrue on such distribution from such date to such Distribution Payment Date.

“Distribution Periods” shall mean the Initial Distribution Period and each subsequent quarterly Distribution Period commencing on and including February 28, May 29, August 29, and November 29 of each year and ending on and including the day preceding the first day of the next succeeding Distribution Period, other than the Distribution Period during which any Class [●] Partnership Preferred Units shall be redeemed pursuant to Section 7 of this Partnership Unit Designation, which shall end on and include the Redemption Date with respect to the Class [●] Partnership Preferred Units being redeemed.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Initial Distribution Period” shall mean the period commencing on and including the Issue Date and ending on and including February 28, 2021.

“Issue Date” shall mean [Spin-Off Date], 2020.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall mean one-hundred thousand dollars ($100,000) per Class [●] Partnership Preferred Unit.

 

Q-2

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

“Person” shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

“Record Date” shall have the meaning set forth in Section 4(a) of this Partnership Unit Designation.

“Redemption Date” shall mean, in the case of any redemption of any Class [●] Partnership Preferred Units, the date fixed for redemption of such units.

“Redemption Price” shall mean, with respect to Class [●] Partnership Preferred Unit to be redeemed, 100% of the Liquidation Preference thereof, plus (except as provided in Section 7(c) of this Partnership Unit Designation) all accumulated, accrued and unpaid distributions thereon, if any, to, but excluding, the Redemption Date.

“REIT” shall mean a “real estate investment trust,” as defined in Section 856 of the Code.

“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

“set apart for payment” shall be deemed to include, without any action other than the following, the recording by the Partnership in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of distributions or other distribution by the General Partner, the allocation of funds to be so paid on any series or class of Partnership Units; provided, however, that if any funds for any class or series of Junior Partnership Units or any class or series of Parity Partnership Units are placed in a separate account of the Partnership or delivered to a disbursing, paying or other similar agent, then “set apart for payment” with respect to the Class [●] Partnership Preferred Units shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent.

“Spin-Off” shall mean the distribution by Apartment Investment and Management Company to the holders of Apartment Investment and Management Company’s common stock on a pro rata basis of substantially all of the outstanding shares of the Previous General Partner’s common stock.

 

  3.

Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class [●] Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class [●] Partnership Preferred Units (the partnership units being hereinafter referred to, collectively, as “Senior Partnership Units”);

 

Q-3

(b)    on a parity with the Class [●] Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class [●] Partnership Preferred Units, if the holders of such class or series of partnership units and the Class [●] Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accumulated, accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority of one over the other (the partnership units referred to in this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class [●] Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of partnership units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class [●] Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units, and such class or series shall not, in either case, rank prior to the Class [●] Partnership Preferred Units (the partnership units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

 

  4.

Quarterly Cash Distributions.

(a)    The holders of Class [●] Partnership Preferred Units shall be entitled to receive, if, when and as authorized and declared by the General Partner, out of funds legally available for that purpose, cash distributions on the Class [●] Partnership Preferred Units in an amount per unit equal to $8,500 per annum (the “Annual Distribution Rate”) (equivalent to a rate of 8.5% per annum of the Liquidation Preference), and no more; provided that the “Annual Distribution Rate” shall increase to (1) $9,000 per annum (equivalent to a rate of 9.0% per annum of the Liquidation Preference) beginning at the start of the 5th year after the date hereof, (2) $9,500 per annum (equivalent to a rate of 9.5% per annum of the Liquidation Preference) beginning at the start of the 6th year after the date hereof , (3) $10,000 per annum (equivalent to a rate of 10.0% per annum of the Liquidation Preference) beginning at the start of the 7th year after the date hereof, and (4) beginning at the start of the 7th year after the date hereof, and continuing at the start of each year after the date hereof thereafter through the start of the 27th year after the date hereof, an amount equal to the per annum amount in the prior year plus $250 (equivalent to an annual increase of 25 bps) (e.g., at the start of the 8th year after the date hereof the Annual Distribution Rate shall equal $10,250 per annum (equivalent to a rate of 10.25% per annum of the Liquidation Preference, and at the start of the 27th year after the date hereof, the Annual Distribution Rate shall equal $15,000 (equivalent to a rate of 15% per annum of the Liquidation Preference) (and, for the avoidance of doubt, the Annual Distribution Rate shall remain $15,000 per annum thereafter))). Such distributions (i) shall accrue and be cumulative from and including the Issue Date, whether or not in any Distribution Period or Periods (x) the Partnership has earnings, (y) such distributions shall be authorized and declared or (z) there shall be funds of the Partnership legally available for the payment of such distributions, and (ii) shall be payable in cash quarterly, if, when and as authorized and declared by the General Partner, in

 

Q-4

arrears on each Distribution Payment Date, commencing on February 28, 2021. Each such distribution shall be payable in arrears to the holders of record of the Class [●] Partnership Preferred Units, as they appear on the records of the Partnership at the close of business on February 15, May 15, August 15 or November 15 (each a “Record Date”), as the case may be, immediately preceding such Distribution Payment Date. Accumulated, accrued and unpaid distributions for any past Distribution Periods may be declared and paid at any time, without reference to any regular Distribution Payment Date, to holders of record on such date, which date shall not precede by more than 45 days the payment date thereof, as may be fixed by the General Partner.

(b)    The amount of distributions payable per Class [●] Partnership Preferred Unit for each full Distribution Period shall be computed by dividing the Annual Distribution Rate by four (4). The amount of distributions payable per Class [●] Partnership Preferred Unit for the Initial Distribution Period, or any period shorter than a full Distribution Period, shall be computed ratably on the basis of twelve 30-day months and a 360-day year. Holders of Class [●] Partnership Preferred Units shall not be entitled to any distributions, whether payable in cash, property or stock, in excess of cumulative distributions, as herein provided, on the Class [●] Partnership Preferred Units. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Class [●] Partnership Preferred Units that may be in arrears.

(c)    So long as any Class [●] Partnership Preferred Units are outstanding, except as described in the immediately following sentence, no distributions shall be authorized and declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property shall be authorized and declared or made, directly or indirectly, by the Partnership with respect to any class or series of Parity Partnership Units for any period unless distributions equal to the full amount of accumulated, accrued and unpaid distributions have been or contemporaneously are authorized and declared and paid, or authorized and declared and a sum sufficient for the payment thereof has been or contemporaneously is set apart for such payment, on the Class [●] Partnership Preferred Units for all Distribution Periods terminating on or prior to the date such distribution or distribution is authorized and declared, paid, set apart for payment or made, as the case may be, with respect to such class or series of Parity Partnership Units. When distributions are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all distributions authorized and declared upon the Class [●] Partnership Preferred Units and all distributions authorized and declared upon any other class or series of Parity Partnership Units shall be authorized and declared ratably in proportion to the respective amounts of distributions accumulated, accrued and unpaid on the Class [●] Partnership Preferred Units and accumulated, accrued and unpaid on such Parity Partnership Units.

(d)    So long as any Class [●] Partnership Preferred Units are outstanding, no distributions (other than distributions or distributions paid solely in Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units) shall be authorized and declared or paid or set apart for payment by the Partnership and no other distribution of cash or other property shall be authorized and declared or made, directly or indirectly, by the Partnership with respect to any Junior Partnership Units, nor shall any Junior Partnership Units be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Partnership Common Units made for purposes of an employee

 

Q-5

incentive or benefit plan of the Previous General Partner or any subsidiary or as permitted under Article IV of the Articles of Amendment and Restatement for the Previous General Partner for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any units) directly or indirectly by the Partnership (except by conversion into or exchange for Junior Partnership Units, or options, warrants or rights to subscribe for or purchase Junior Partnership Units), nor shall any other cash or other property otherwise be paid or distributed to or for the benefit of any holder of Junior Partnership Units in respect thereof, directly or indirectly, by the Partnership unless, in each case, distributions equal to the full amount of all accumulated, accrued and unpaid distributions on all outstanding Class [●] Partnership Preferred Units and any other Parity Partnership Units shall have been authorized and declared and paid, or such distributions have been authorized and declared and a sum sufficient for the payment thereof has been set apart for such payment, on all outstanding Class [●] Partnership Preferred Units and any other Parity Partnership Units for all past dividend periods with respect to the Class [●] Partnership Preferred Units and all past Distribution Periods with respect to such Parity Partnership Units ending on or prior to the date such distribution or distribution is authorized and declared, paid, set apart for payment or made with respect to such Junior Partnership Units, or the date such Junior Partnership Units are redeemed, purchased or otherwise acquired or monies paid to or made available for any sinking fund for such redemption, or the date any such cash or other property is paid or distributed to or for the benefit of any holders of Junior Partnership Units in respect thereof, as the case may be.

Notwithstanding the provisions of this Section 4, the Partnership shall not be prohibited from (i) declaring or paying or setting apart for payment any distribution or distribution on any Parity Partnership Units or (ii) redeeming, purchasing or otherwise acquiring any Parity Partnership Units, in each case, if such declaration, payment, redemption, purchase or other acquisition is necessary in order to maintain the continued qualification of the Previous General Partner as a REIT under Section 856 of the Code.

 

  5.

Liquidation Preference.

(a)    In the event of any liquidation, dissolution or winding up of the Partnership, whether voluntary or involuntary, before any payment or distribution by the Partnership (whether of capital, surplus or otherwise) shall be made to or set apart for the holders of any Junior Partnership Units, the holders of Class [●] Partnership Preferred Units shall be entitled to receive, for each Class [●] Partnership Preferred Unit, the Liquidation Preference thereof, plus all accumulated, accrued and unpaid distributions thereon, if any, to, but excluding, the date of final distribution to such holders; but such holders shall not be entitled to any further payment. Until the holders of the Class [●] Partnership Preferred Units have been paid the Liquidation Preference in full, plus all accumulated, accrued and unpaid distributions thereon, if any, to, but excluding, the date of final distribution to such holders, no payment will be made to any holder of Junior Partnership Units upon the liquidation, dissolution or winding up of the Partnership. If, upon any liquidation, dissolution or winding up of the Partnership, the assets of the Partnership, or proceeds thereof, legally available for distribution among the holders of Class [●] Partnership Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other units of any class or series of Parity Partnership Units, then such assets, or the proceeds thereof, shall be distributed among the holders of Class [●] Partnership Preferred Units and any such other Parity Partnership Units ratably in the same

 

Q-6

proportion as the respective amounts that would be payable on such Class [●] Partnership Preferred Units and any such other Parity Partnership Units if all amounts payable thereon were paid in full. For the purposes of this Section 5, (i) a consolidation or merger of the Partnership with one or more entities, (ii) a sale or transfer of all or substantially all of the Partnership’s assets, and (iii) a statutory unit exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Partnership.

(b)    Upon any liquidation, dissolution or winding up of the Partnership, after payment shall have been made in full to the holders of Class [●] Partnership Preferred Units and any Parity Partnership Units, as provided in Section 5(a) any series or class or classes of Junior Partnership Units shall, subject to the respective terms thereof, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Class [●] Partnership Preferred Units and any Parity Partnership Units shall not be entitled to share therein.

(c)    In determining whether a distribution (other than upon voluntary or involuntary liquidation, dissolution or winding up of the Partnership) by distribution, redemption or other acquisition of units of the Partnership or otherwise is permitted under the Act, no effect shall be given to amounts that would be needed, if the Partnership were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of holders of the Partnership Units whose preferential rights upon dissolution are superior or prior to those receiving the distribution.

 

  6.

Redemption.

(a)    Optional Redemption. The Partnership may, at its option, redeem Class [●] Partnership Preferred Units at any time on or after the fifth anniversary of the Issue Date (but not prior to such date), in whole, or from time to time in part, at a redemption price payable in cash equal to the Redemption Price applicable thereto.

(b)    Mandatory Redemption. Substantially concurrently with the occurrence of a Change of Control, the Partnership shall redeem all outstanding Class [●] Partnership Preferred Units at a redemption price payable in cash equal to the Redemption Price.

(c)    Anything herein to the contrary notwithstanding, and except as otherwise required by law, the Persons who are holders of record of Class [●] Partnership Preferred Units at the close of business on a Record Date will be entitled to receive the distribution payable on the corresponding Distribution Payment Date notwithstanding the redemption of those units after such Record Date and on or prior to such Distribution Payment Date or the default by the Partnership in the payment of the distribution due on that Distribution Payment Date, in which case the Redemption Price payable upon redemption of such Class [●] Partnership Preferred Units will not include such distribution, and the full amount of the distribution payable for the applicable Distribution Period shall instead be paid on such Distribution Payment Date to the holders of record at the close of business on such Record Date as aforesaid.

(d)    The Redemption Date shall be selected by the Partnership, and shall be specified in a notice of redemption which will be given not less than three (3) days nor more than sixty (60) days prior to the Redemption Date, to the holders of record of the Class [●]

 

Q-7

Partnership Preferred Units to be redeemed at their addresses as they appear on the records of the Partnership. No failure to give such notice or any defect therein or in the giving thereof shall affect the validity of the proceedings for the redemption of any Class [●] Partnership Preferred Units except as to, and to the extent adversely affecting, any such holder to whom notice was defective or not given. Any notice given in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed or otherwise sent or given whether or not the holder receives the notice. Each notice shall state: (i) the Redemption Date; (ii) the number of Class [●] Partnership Preferred Units to be redeemed; (iii) the Redemption Price and whether or not accumulated, accrued and unpaid distributions will be payable as part of the Redemption Price, or payable on the next Distribution Payment Date to the Persons who were holders of record at the close of business on the relevant Record Date; (iv) the procedures that the holders of Class [●] Partnership Preferred Units must follow to receive payment of the Redemption Price; (v) that distributions on the units to be redeemed will cease to accumulate on such Redemption Date unless the Partnership fails to make available the funds necessary for such redemption; and (vi) whether such redemption is being made pursuant to Section 6(a) or Section 6(b). If fewer than all of the Class [●] Partnership Preferred Units held by any holder are to be redeemed, the notice given to such holder shall also specify the number of Class [●] Partnership Preferred Units to be redeemed from such holder.

(e)    If notice of redemption of any Class [●] Partnership Preferred Units has been given (unless the Partnership fails to make available the funds necessary for such redemption), then from and after the Redemption Date, distributions will cease to accumulate on such Class [●] Partnership Preferred Units, such Class [●] Partnership Preferred Units shall no longer be deemed outstanding and all rights of the holders of such units will terminate, except the right to receive the Redemption Price payable upon redemption (and any distribution payable pursuant to Section 6(c)). The Partnership’s obligation to make available the funds necessary to effect a redemption in accordance with the preceding sentence shall be deemed fulfilled if, on or before the applicable Redemption Date, the Partnership shall irrevocably deposit in trust with a bank or trust company (which may not be an Affiliate of the Partnership) that has, or is an Affiliate of a bank or trust company that has, a capital and surplus of at least $50,000,000, such amount of cash as is necessary for such redemption plus, if such Redemption Date occurs after any Record Date and on or prior to the related Distribution Payment Date, such amount of cash as is necessary to pay the distribution payable on such Distribution Payment Date in respect of such Class [●] Partnership Preferred Units called for redemption, with irrevocable instructions that such cash be applied to the redemption of the Class [●] Partnership Preferred Units so called for redemption and, if applicable, the payment of such distribution. No interest shall accrue for the benefit of the holders of Class [●] Partnership Preferred Units to be redeemed on any cash so set aside by the Partnership. Subject to applicable escheat laws, any such cash unclaimed at the end of two years from the Redemption Date shall revert to the general funds of the Partnership, after which reversion the holders of Class [●] Partnership Preferred Units so called for redemption shall look only to the general funds of the Partnership for the payment of such cash. In the event that any Redemption Date shall not be a Business Day, then payment of the Redemption Price payable upon redemption need not be made on such Redemption Date but may be made on the next succeeding Business Day with the same force and effect as if made on such Redemption Date and no interest, additional distributions or other sums shall accrue on the amount so payable for the period from and after such Redemption Date to such next succeeding Business Day. Solely in respect of any optional redemption pursuant to clause (a) above, if less

 

Q-8

than all of the outstanding Class [●] Partnership Preferred Units are to be redeemed, the Class [●] Partnership Preferred Units to be redeemed shall be selected pro rata (as nearly as may be practicable without creating fractional units) or by lot.

(f)    Upon delivery of any Class [●] Partnership Preferred Units to be so redeemed, in accordance with the notice of redemption and the procedures of the depositary, such Class [●] Partnership Preferred Units shall be redeemed by the Partnership at the Redemption Price.

(g)    Unless full cumulative distributions for all past Distribution Periods on all outstanding Class [●] Partnership Preferred Units and for all past Distribution Periods on any other series or class of Parity Partnership Units have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment, (i) no Class [●] Partnership Preferred Units or any Parity Partnership Units shall be redeemed unless all outstanding Class [●] Partnership Preferred Units are simultaneously redeemed, and (ii) the Partnership shall not purchase or otherwise acquire, directly or indirectly, any Class [●] Partnership Preferred Units or any Parity Partnership Units (except by conversion into or exchange for Junior Partnership Units); provided, however, that the foregoing shall not prevent the purchase or acquisition by the Partnership of Class [●] Partnership Preferred Units or any Parity Partnership Units pursuant to Section 11 of this Partnership Unit Designation in order to preserve the qualification of the Previous General Partner as a REIT for federal and/or state income tax purposes or pursuant to a purchase or exchange offer made on the same terms to the holders of all outstanding Class [●] Partnership Preferred Units. Subject to the limitations set forth in this Partnership Unit Designation (including these terms of the Class [●] Partnership Preferred Units), the Partnership shall be entitled at any time and from time to time to repurchase Class [●] Partnership Preferred Units in open-market transactions, by tender or by private agreement, in each case, as duly authorized by the General Partner and effected in compliance with applicable laws.

 

  7.

Conversion.

(a)    The Class [●] Partnership Preferred Units are not convertible into or exchangeable for any other property or securities of the Partnership.

 

  8.

Status of Reacquired Units.

All Class [●] Partnership Preferred Units which shall have been issued and reacquired in any manner by the Partnership shall be deemed cancelled and no longer outstanding, but may be issued by the General Partner from time to time in its discretion.

 

  9.

Allocations of Income and Loss.

Subject to the terms of Section 5 hereof, for each taxable year, (i) each holder of Preferred Units will be allocated, to the extent possible, net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership.

 

Q-9

10.       Voting Rights.

(a)    Holders of the Class [●] Partnership Preferred Units shall not have any voting rights either general or special, except as set forth in Section 10(b) below.

(b)    So long as any Class [●] Partnership Preferred Units are outstanding, in addition to any other vote or consent of stockholders required by law or by the Agreement, the affirmative vote of at least 66-2/3% of the votes entitled to be cast by the holders of the Class [●] Partnership Preferred Units voting as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:

(i)    any amendment, alteration or repeal of any of the provisions of, or the addition of any provision to, the Agreement, including this Preferred Unit Designation, whether by merger, consolidation or otherwise, that would materially and adversely affect the rights or preferences of the holders of the Class [●] Partnership Preferred Units; provided, however, that (x) the amendment of the provisions of the Agreement so as to authorize or create, or to increase or decrease the authorized amount of, or issue any Junior Partnership Units, Class [●] Partnership Preferred Units or any class of Parity Partnership Units, shall not be deemed to materially and adversely affect the rights or preferences of the holders of Class [●] Partnership Preferred Units; and (y) with respect to any such amendment, alteration or repeal of any of the provisions of, or the addition of any provision to, the Agreement, including this Preferred Unit Designation, whether by merger, consolidation or otherwise, so long as the Class [●] Partnership Preferred Units remains outstanding with the terms thereof materially unchanged, taking into account that, upon the occurrence of such event, the Partnership may not be the surviving entity and such surviving entity may thereafter be the issuer of the Class [●] Partnership Preferred Units, the occurrence of any such event shall not be deemed to materially and adversely affect the voting powers, rights, or preferences of the Class [●] Partnership Preferred Units; or

(ii)    the authorization, creation of, increase in the authorized amount of, or issuance of any class or series of Senior Partnership Units or any security convertible into any class or series of Senior Partnership Units (whether or not such class or series of Senior Partnership Units is currently authorized);

provided, however, that no such vote of the holders of Class [●] Partnership Preferred Units shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect, or when the issuance of any such Senior Partnership Units or convertible or exchangeable security is to be made, as the case may be, provision is made for the redemption of all Class [●] Partnership Preferred Units at the time outstanding.

For purposes of the foregoing provisions and all other voting rights under this Preferred Unit Designation, each Class [●] Partnership Preferred Unit shall have one (1) vote per unit. Except as otherwise required by applicable law or as set forth herein or in the Agreement, the Class [●] Partnership Preferred Units shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any corporate action.

 

Q-10

11.       Restrictions on Transfer.

The Class [●] Partnership Preferred Units constitutes Preferred Units, and Preferred Units constitutes the Partnership Units. Therefore, the Class [●] Partnership Preferred Units, being Partnership Units, is governed by and issued subject to all the limitations, terms and conditions of the Agreement applicable to Partnership Units generally. The foregoing sentence shall not be construed to limit the applicability to the Class [●] Partnership Preferred Units of any other term or provision of the Agreement.

12.       Maturity.

The Class [●] Partnership Preferred Units shall be perpetual unless redeemed or reacquired by the Partnership in accordance with this Preferred Unit Designation.

 

Q-11

EXHIBIT R

PARTNERSHIP UNIT DESIGNATION OF

THE CLASS [—] PARTNERSHIP PREFERRED UNITS OF

AIMCO PROPERTIES, L.P.

1.         Number of Units and Designation. A class of Partnership Preferred Units is hereby designated as “Class [●] Partnership Preferred Units,” and the number of Partnership Preferred Units constituting such class shall be two hundred and fifty (250).

2.         Definitions. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned thereto in the Agreement, as modified by this Partnership Unit Designation and the defined terms used herein. For purposes of this Partnership Unit Designation, the following terms shall have the respective meanings ascribed below:

“Class [●] Preferred Units” shall have the meaning set forth in Section 1 of this Preferred Unit Designation.

“Initial Issue Date” shall have the meaning set forth in Section 4(a) of this Preferred Unit Designation.

“Junior Partnership Units” shall have the meaning set forth in Section 3(c) of this Partnership Unit Designation.

“Liquidation Preference” shall have the meaning set forth in Section 5(a) of this Preferred Unit Designation.

“Parity Partnership Units” shall have the meaning set forth in Section 3(b) of this Partnership Unit Designation.

“Preferred Distribution Payment Date” shall have the meaning set forth in Section 4(a) of this Preferred Unit Designation.

“Preferred Distribution Period” shall have the meaning set forth in Section 4(a) of this Preferred Unit Designation.

“Preferred Distribution Record Date” shall have the meaning set forth in Section 4(a) of this Preferred Unit Designation.

“Redemption Date” shall have the meaning set forth in Section 6(a) of this Preferred Unit Designation.

“Redemption Premium” shall have the meaning set forth in Section 6(a) of this Preferred Unit Designation.

“Redemption Price” shall have the meaning set forth in Section 6(a) of this Preferred Unit Designation.

 

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“Senior Partnership Units” shall have the meaning set forth in Section 3(a) of this Partnership Unit Designation.

 

  3.

Ranking.

Any class or series of Partnership Units of the Partnership shall be deemed to rank:

(a)    prior or senior to the Class [●] Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Class [●] Partnership Preferred Units (the partnership units being hereinafter referred to, collectively, as “Senior Partnership Units”);

(b)    on a parity with the Class [●] Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, distribution payment dates or redemption or liquidation prices per unit or other denomination thereof be different from those of the Class [●] Partnership Preferred Units, if the holders of such class or series of partnership units and the Class [●] Partnership Preferred Units shall be entitled to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accumulated, accrued and unpaid distributions per unit or other denomination or liquidation preferences, without preference or priority of one over the other (the partnership units referred to in this paragraph being hereinafter referred to, collectively, as “Parity Partnership Units”); and

(c)    junior to the Class [●] Partnership Preferred Units, as to the payment of distributions and as to the distribution of assets upon liquidation, dissolution or winding up, if (i) such class or series of partnership units shall be Partnership Common Units or Class I High Performance Partnership Units or (ii) the holders of Class [●] Partnership Preferred Units shall be entitled to receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series of Partnership Units, and such class or series shall not, in either case, rank prior to the Class [●] Partnership Preferred Units (the partnership units referred to in clauses (i) and (ii) of this paragraph being hereinafter referred to, collectively, as “Junior Partnership Units”).

 

  4.

Distributions.

(a)    Each holder of the then outstanding Class [●] Preferred Units shall be entitled to receive cumulative preferential cash distributions, when and as authorized by the General Partner, out of funds legally available for the payment of distributions, at the rate of 12% per annum of the total of (i) $1,000 per Class [●] Preferred Unit plus (ii) any accumulated but unpaid distributions from past Preferred Distribution Payment Dates. Such distributions shall accumulate on a daily basis and be cumulative from the first date on which any Class [●] Preferred Units are issued (the “Initial Issue Date”), and shall be payable semi-annually in arrears on June 30 and December 31 of each year (each, a “Preferred Distribution Payment Date”); provided, however, that if any Preferred Distribution Payment Date is not a business day, the Preferred

 

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Distribution Payment may be paid on the preceding business day or the following business day with the same force and effect as if paid on such Preferred Distribution Payment Date. Any distribution payable on the Class [●] Preferred Units for any partial Preferred Distribution Period (as defined below) will be computed on the basis of a 360-day year consisting of twelve 30-day months. The term “Preferred Distribution Period” shall mean, with respect to the first “Preferred Distribution Period,” the period from and including the Initial Issue Date to and including the first Preferred Distribution Payment Date, and with respect to each subsequent “Preferred Distribution Period,” the period from but excluding a Preferred Distribution Payment Date to and including the next succeeding Preferred Distribution Payment Date or other date as of which accumulated distributions are to be calculated. Distributions shall be paid to holders of record of the Class [●] Preferred Units as their names appear in the records of the Partnership at the close of business on the applicable record date, which shall be the 15th day of the calendar month in which the applicable Preferred Distribution Payment Date falls or on such other date designated by the General Partner of the Partnership for the payment of distributions that is not more than 30 nor less than 10 days prior to such Preferred Distribution Payment Date (each, a “Preferred Distribution Record Date”). Distributions in respect of any past Preferred Distribution Periods that are in arrears may be authorized and paid at any time to holders of record on the Preferred Distribution Record Date related to each such Preferred Distribution Period.

(b)    No distributions on the Class [●] Preferred Units shall be authorized by the General Partner of the Partnership or paid or set apart for payment by the Partnership at such time as the terms and provisions of any written agreement between the Partnership and any party that is not an affiliate of the Partnership, including any agreement relating to its indebtedness, prohibit such authorization, payment or setting apart for payment or provide that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such authorization or payment shall be restricted or prohibited by law. For purposes of this Partnership Unit Designation, “affiliate” shall mean any party that controls, is controlled by or is under common control with the Partnership.

(c)    Notwithstanding the foregoing, distributions on the Class [●] Preferred Units shall accumulate as of the Preferred Distribution Payment Date on which they first become payable whether or not the terms and provisions set forth in Section 4(b) hereof at any time prohibit the current payment of distributions, whether or not the Partnership has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized or declared. Furthermore, distributions will be authorized and paid when due in all events to the fullest extent permitted by law and, if revaluation of the Partnership or its assets would permit payment of distributions which would otherwise be prohibited, then such revaluation shall be done.

(d)    Unless full cumulative distributions on all outstanding Class [●] Preferred Units have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past Preferred Distribution Periods (such amounts not to include, for the avoidance of doubt, any amounts accumulating during the current Preferred Distribution Period), no distributions (other than in Partnership Units ranking junior to the Class [●] Preferred Units as to distributions and upon liquidation) shall be authorized or paid or set aside for payment nor shall any other distribution be authorized or made upon any Partnership Units ranking junior to the Class [●] Preferred Units as to distributions or upon

 

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liquidation, nor shall any Partnership Units ranking junior to the Class [●] Preferred Units as to distributions or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such units) by the Partnership (except by conversion into or exchange for other Partnership Units ranking junior to the Class [●] Preferred Units as to distributions and upon liquidation). Any distribution payment made on the Class [●] Preferred Units shall be first credited against the earliest accumulated but unpaid distribution due with respect to such units which remains payable.

(e)    When distributions are not paid in full (or a sum sufficient for such full payment is not set apart) upon the Class [●] Preferred Units, all distributions authorized and paid upon the Class [●] Preferred Units shall be pro rata based on the number of Class [●] Preferred Units then outstanding.

(f)    Holders of the Class [●] Preferred Units shall not be entitled to any distribution, whether payable in cash, property or securities, in excess of the full cumulative distributions on the Class [●] Preferred Units as described above.

 

  5.

Liquidation Preference.

(a)    Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Partnership, the holders of the Class [●] Preferred Units then outstanding are entitled to receive out of the assets of the Partnership legally available for distribution to its members or equity holders however denominated a liquidation preference equal to the sum of the following (collectively, the “Liquidation Preference”): (i) $1,000 per Class [●] Preferred Unit, (ii) all accumulated but unpaid distributions thereon through and including the date of payment, and (iii) if applicable, the Redemption Premium (as defined below) then in effect, before any distribution of assets is made to holders of any other class or series of Partnership Units that ranks junior to the Class [●] Preferred Units as to liquidation rights.

(b)    In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Partnership are insufficient to pay the full amount of the Liquidation Preference on all outstanding Class [●] Preferred Units, then the holders of the Class [●] Preferred Units shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.

(c)    After payment of the full amount of the Liquidation Preference to which they are entitled, the holders of the Class [●] Preferred Units will have no right or claim to any of the remaining assets of the Partnership.

(d)    Upon the Partnership’s provision of written notice as to the effective date of any such liquidation, dissolution or winding up of the Partnership, accompanied by a check or wire transfer of immediately available funds in the amount of the full Liquidation Preference to which each record holder of the Class [●] Preferred Units is entitled, the Class [●] Preferred Units shall no longer be deemed outstanding Partnership Units and all rights of the holders of the Class [●] Preferred Units will terminate.

 

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(e)    The consolidation or merger of the Partnership with or into any other business enterprise or of any other business enterprise with or into the Partnership, or the sale, lease or conveyance of all or substantially all of the assets or business of the Partnership, shall not be deemed to constitute a liquidation, dissolution or winding up of the Partnership.

 

  6.

Redemption.

(a)    Right of Optional Redemption. The Partnership, at its option, may redeem the Class [●] Preferred Units, in whole or in part, at any time or from time to time, for cash at a redemption price (the “Redemption Price”) equal to $1,000 per Class [●] Preferred Unit, plus all accumulated and unpaid distributions thereon to and including the date fixed for redemption (except as provided in Section 6(c) below), plus a redemption premium per Class [●] Preferred Unit (each, a “Redemption Premium”) calculated as follows based on the date fixed for redemption (the “Redemption Date”):

 

Period

   Redemption
Premium 		 

Issuance date until and including December 31, 2022

   $ 50  

Thereafter

     0  

If less than all of the outstanding Class [●] Preferred Units are to be redeemed, the Class [●] Preferred Units to be redeemed shall be selected by any equitable method determined by the Partnership provided that such method does not result in fractional units.

(b)    Limitations on Redemption. Unless full cumulative distributions on all of the Class [●] Preferred Units have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Preferred Distribution Periods (such amounts not to include, for the avoidance of doubt, any amounts accumulating during the current Preferred Distribution Period), no Class [●] Preferred Units shall be redeemed or otherwise acquired, directly or indirectly, by the Partnership unless all outstanding Class [●] Preferred Units are simultaneously redeemed or acquired, and the Partnership shall not purchase or otherwise acquire, directly or indirectly, any of the Class [●] Preferred Units (except by exchange for Partnership Units ranking junior to the Class [●] Preferred Units as to distributions and upon liquidation); provided, however, that the foregoing shall not prevent the purchase or acquisition of the Class [●] Preferred Units pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Class [●] Preferred Units or any such purchase or acquisition made in order to ensure that the Previous General Partner remains qualified as a real estate investment trust (a “REIT”) within the meaning of section 856 of the Internal Revenue Code of 1986, as amended (the “Code”) for federal income tax purposes.

(c)    Rights to Distributions on Units Called for Redemption. Immediately prior to or upon any redemption of the Class [●] Preferred Units, the Partnership shall pay, in cash, any accumulated and unpaid distributions to and including the Redemption Date, unless a Redemption Date falls after a Preferred Distribution Record Date and prior to the corresponding Preferred Distribution Payment Date, in which case, each holder of the Class [●] Preferred Units at the close of business on such Preferred Distribution Record Date shall be entitled to the distribution payable on such units on the corresponding Preferred Distribution Payment Date notwithstanding the redemption of such units before such Preferred Distribution Payment Date.

 

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(d)    Procedures for Redemption.

(i)    Upon the Partnership’s provision of notice as to the Redemption Date, accompanied by payment in the amount of the full Redemption Price, plus a Redemption Premium, if any, through such effective date to which each record holder of the Class [●] Preferred Units is entitled, the Class [●] Preferred Units shall be redeemed and shall no longer be deemed outstanding Partnership Units and all rights of the holders of the Class [●] Preferred Units will terminate. No failure to give such notice or any defect therein or in the sending thereof shall affect the validity of the proceedings for the redemption of any of the Class [●] Preferred Units except as to the holder to whom notice was defective or not given.

(ii)    In addition to any information required by law or by the applicable rules of any exchange upon which the Class [●] Preferred Units may be listed or admitted to trading, such notice shall state: (A) the Redemption Date; (B) the Redemption Price; (C) the Redemption Premium, if any; (D) the number of Class [●] Preferred Units to be redeemed; and (E) that distributions on the Class [●] Preferred Units to be redeemed will cease to accumulate on such Redemption Date. If less than all of the Class [●] Preferred Units held by any holder are to be redeemed, the notice sent to such holder shall also specify the number of Class [●] Preferred Units held by such holder to be redeemed.

(iii)    If notice of redemption of any of the Class [●] Preferred Units has been given and if the funds necessary for such redemption have been set aside by the Partnership for the benefit of the holders of any of the Class [●] Preferred Units so called for redemption, then, from and after the Redemption Date, distributions will cease to accumulate on such Class [●] Preferred Units, such Class [●] Preferred Units shall no longer be deemed outstanding and all rights of the holders of such Class [●] Preferred Units will terminate, except the right to receive the Redemption Price, and the Redemption Premium, if any.

(iv)    The deposit of funds with a bank or trust company for the purpose of redeeming the Class [●] Preferred Units shall be irrevocable except that:

(A)    The Partnership shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any Class [●] Preferred Units redeemed shall have no claim to such interest or other earnings; and

(B)    Any balance of money so deposited by the Partnership and unclaimed by the holders of the Class [●] Preferred Units entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings thereon, to the Partnership, and after any such repayment, the holders of the Class [●] Preferred Units entitled to the funds so repaid to the Partnership shall look only to the Partnership for payment without interest or other earnings.

 

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(e)    Status of Redeemed Units. Any Class [●] Preferred Units that shall at any time have been redeemed or otherwise acquired by the Partnership shall, after such redemption or acquisition, be deemed cancelled and no longer outstanding, but may be issued by the General Partner from time to time in its discretion.

7.         Conversion. The Class [●] Partnership Preferred Units are not convertible into or exchangeable for any other property or securities of the Partnership.

8.         Dissenters’ Rights. Holders of the Class [●] Preferred Units shall have no dissenters’ rights.

9.         Allocations of Income and Loss. Subject to the terms of Section 5 hereof, for each taxable year, (i) each holder of Preferred Units will be allocated, to the extent possible, net income of the Partnership in an amount equal to the distributions made on such holder’s Preferred Units during such taxable year, and (ii) each holder of Preferred Units will be allocated its pro rata share, based on the portion of outstanding Preferred Units held by it, of any net loss of the Partnership that is not allocated to holders of Partnership Common Units or other interests in the Partnership.

10.       Voting Rights. Except (a) as provided in this Section or (b) where a vote by class is required in the Agreement or by law, the holders of the Class [●] Preferred Units shall not be entitled to vote on any matter submitted to partners or equity holders of the Partnership however denominated for a vote. Notwithstanding the foregoing, the consent of the holders of a majority of the outstanding Class [●] Preferred Units (excluding any Class [●] Preferred Units owned by any holder that is an affiliate of the, controlled by, or under common control with, the Partnership), voting as a separate class, shall be required for (a) authorization or issuance of any equity security of the Partnership senior to or on a parity with the Class [●] Preferred Units, (b) any amendment to the Agreement which has a material adverse effect on the rights and preferences of the Class [●] Preferred Units or which increases the number of authorized or issued Class [●] Preferred Units, or (c) any reclassification of the Class [●] Preferred Units.

11.       Notice. All notices to be given to the holders of the Class [●] Preferred Units shall be given by (i) mail, postage prepaid, (ii) overnight delivery courier service, (iii) facsimile transmission, (iv) electronic mail or (v) personal delivery, to the holders of record, addressed to the address or sent to the facsimile number shown by the records of the Partnership.

12.       Restriction on Ownership and Transfer. The Class [●] Preferred Units are freely transferable, subject to the following sentences of this Section 12. Transfers must be (i) pursuant to an effective registration statement under the Securities Act of 1933 simultaneously with registration of the Class [●] Preferred Units under Section 12 of the Securities Exchange Act of 1934; or (ii) in reliance upon an available exemption from the registration requirements of the Securities Act of 1933. Transfers under clauses (i) and (ii) shall be subject to the transferee agreeing to be bound by the same restrictions on transfer. Class [●] Preferred Units also are subject to the provisions of the Agreement applicable to Partnership Units generally, including, without limitation, any applicable restrictions on transfer set forth therein.

 

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Exhibit 10.6

 

 

 

Aimco JO Intermediate Holdings, LLC

$534,127,075

5.2% Secured Mezzanine Notes due January 31, 2024

 

 

Mezzanine Note Agreement

 

 

Dated as of             , 2020

 

 

 

Table of Contents

 

         Page  

Section 1.

 

Authorization of Notes

     1  

Section 2.

 

Transfer and Issuance of Notes

     1  

Section 3.

 

Closing

     1  

Section 4.

 

Deliverables at Closing

     1  

Section 4.1.

 

Delivery of Transferred Interests

     1  

Section 4.2.

 

Pledge Agreement and Collateral

     2  

Section 4.3.

 

James Oxford Operating Agreement

     2  
Section 5.   Representations and Warranties of the Company      2  

Section 5.1.

 

Organization; Power and Authority

     2  

Section 5.2.

 

Authorization, Etc.

     2  

Section 5.3.

 

Organization and Ownership of Shares of Certain Subsidiaries

     2  

Section 5.4.

 

REIT Representations

     3  

Section 5.5.

 

Title to Property

     3  

Section 5.6.

 

Existing Indebtedness; Restrictions on Indebtedness and Liens.

     3  
Section 6.   Notices From the Company      3  
Section 7.   Payment and Prepayment of the Notes      4  

Section 7.1.

 

Maturity; Payment of Interest

     4  

Section 7.2.

 

Mandatory Prepayments

     4  

Section 7.3

 

Other Prepayments

     4  

Section 7.4

 

Allocation of Partial Prepayments

     4  

Section 7.5

 

Maturity; Surrender, Interest on Prepayments, Etc

     5  

Section 7.6.

 

Payments Due on Non-Business Days

     5  

Section 7.7.

 

Late Charges

     5  

Section 7.8

 

Make-Whole Amount

     5  
Section 8.   Affirmative Covenants      5  

Section 8.1.

 

Existence, Etc.

     6  

Section 8.2.

 

REIT Covenants

     6  

Section 8.3.

 

Maintenance of Properties

     6  

Section 8.4.

 

Maintenance of Insurance

     6  

Section 8.5.

 

Compliance with Laws

     6  

Section 8.6.

 

Compliance with Mortgage Loan Documents

     6  
Section 9.   Negative Covenants      7  

Section 9.1.

 

Merger, Consolidation, Etc.

     7  

Section 9.2.

 

Liens

     7  

Section 9.3.

 

Indebtedness

     8  

Section 9.4.

 

Dispositions

     8  

Section 9.5.

 

Sale and Leaseback Transactions

     9  

Section 9.6.

 

Change in Nature of Business

     9  

 

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Section 10.

 

Events of Default

     9  

Section 11.

 

Remedies on Default, Etc.

     10  

Section 11.1.

 

Acceleration

     10  

Section 11.2.

 

Other Remedies

     11  

Section 11.3.

 

Rescission

     11  

Section 11.4.

 

No Waivers or Election of Remedies, Expenses, Etc.

     11  

Section 12.

 

Collateral Matters

     11  

Section 12.1.

 

Collateral

     11  

Section 12.2.

 

Collateral Agent

     11  

Section 13.

 

Registration; Exchange; Substitution of Notes

     12  

Section 13.1.

 

Registration of Notes

     12  

Section 13.2.

 

Transfer and Exchange of Notes

     13  

Section 13.3.

 

Replacement of Notes

     13  

Section 14.

 

Payments on Notes

     13  

Section 14.1.

 

Place of Payment

     13  

Section 14.2.

 

Payment by Wire Transfer

     14  

Section 14.3.

 

Withholding

     14  

Section 15.

 

Survival of Representations and Warranties; Entire Agreement

     14  

Section 16.

 

Amendment and Waiver

     15  

Section 16.1.

 

Requirements

     15  

Section 16.2.

 

Binding Effect, Etc.

     15  

Section 16.3.

 

Notes Held by Company, Etc.

     15  

Section 17.

 

Notices

     15  

Section 18.

 

Miscellaneous

     16  

Section 18.1.

 

Successors and Assigns

     16  

Section 18.2.

 

Accounting Terms

     16  

Section 18.3.

 

Severability

     16  

Section 18.4.

 

Construction, Etc.

     16  

Section 18.5.

 

Counterparts

     17  

Section 18.6.

 

Governing Law

     17  

Section 18.7.

 

Jurisdiction and Process; Waiver of Jury Trial

     17  

 

ii

Schedules

     

Schedule A

     —     

Defined Terms

Schedule 1

     —     

Form of 5.2% Secured Mezzanine Note due January 31, 2024

Schedule 2

     —     

Equity Interests Exchanged for Notes

Schedule 5.3

     —     

James Oxford Subsidiaries

Schedule 5.6

     —     

Existing Indebtedness

Purchaser Schedule

     —     

Information Relating to Purchasers

 

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AIMCO JO INTERMEDIATE HOLDINGS, LLC

4582 South Ulster Street, Suite 1400

Denver, Colorado 80237

5.2% Secured Mezzanine Notes due January 31, 2024

As of             , 2020

To Each of the Purchasers Listed in

the Purchaser Schedule Hereto:

Ladies and Gentlemen:

Aimco JO Intermediate Holdings, LLC, a Delaware limited liability company (the “Company”), agrees with each of the Purchasers as follows:

Section 1.    Authorization of Notes. The Company has authorized the issue of $534,127,075 aggregate principal amount of its 5.2% Secured Mezzanine Notes due January 31, 2024 (the “Notes”) in exchange for the Equity Interests in James Oxford described on Schedule 2. The Notes shall be substantially in the form set out in Schedule 1. Certain capitalized and other terms used in this Agreement are defined in Schedule A and, for purposes of this Agreement, the rules of construction set forth in Section 18.4 shall govern.

Section 2.    Transfer and Issuance of Notes. Subject to the terms and conditions of this Agreement, the Company will issue to each Purchaser, in exchange for the Equity Interests transferred from each Purchaser to the Company as listed on Schedule 2 (such Equity Interests, the “Transferred Interests”), at the Closing provided for in Section 3, Notes in the principal amount specified opposite such Purchaser’s name in the Purchaser Schedule. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.

Section 3.    Closing. The issuance of the Notes to be issued to each Purchaser shall occur at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 155 N. Wacker Dr., Chicago, Illinois 60606, at 9:00 a.m., Chicago time, at a closing (the “Closing”) on             , 2020. At the Closing, the Company will deliver to each Purchaser the Notes to be issued to such Purchaser in the form of a single Note dated the date of the Closing and registered in such Purchaser’s name, against delivery by such Purchaser to the Company of the Transferred Interests owned by such Purchaser. In addition, at the Closing, the Company shall be admitted as a partner in James Oxford.

Section 4.    Deliverables at Closing. At the Closing the following shall occur:

Section 4.1.    Delivery of Transferred Interests. Each Purchaser shall transfer to the Company ownership in the Transferred Interests, and the Company shall be admitted to James Oxford as a partner.

Section 4.2.    Pledge Agreement and Collateral. The Company shall deliver to the Collateral Agent, for the benefit of each Purchaser, an executed counterpart of the Pledge Agreement and certificates representing the Transferred Interests, if any such certificates exist.

Section 4.3.    James Oxford Operating Agreement. The Company shall deliver to such Purchaser executed counterparts of the limited partnership agreement of James Oxford, which shall permit the Collateral Agent or a purchaser at a foreclosure sale to, pursuant to the remedies available to each such Person under the Pledge Agreement, be admitted to James Oxford as a partner during an Event of Default hereunder.

Section 5.    Representations and Warranties of the Company. The Company represents and warrants to each Purchaser that:

Section 5.1.    Organization; Power and Authority. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign limited liability company and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the limited liability company power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Note Documentation and to perform the provisions hereof and thereof.

Section 5.2.    Authorization, Etc. This Agreement, the Pledge Agreement and the Notes have been duly authorized by all necessary limited liability company action on the part of the Company, and this Agreement, the Pledge Agreement and the Notes constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

Section 5.3.    Organization and Ownership of Shares of Certain Subsidiaries.

(a)    As of the Closing and after giving effect to the transfer of the Transferred Interests by the Purchasers, the Company will own all of the outstanding Equity Interests in James Oxford, except for the Minority Common Interests. As of the Closing and after giving effect to the transactions contemplated hereby, AIMCO/Bethesda is the owner of the Minority Common Interests. As of the Closing, James Oxford directly or indirectly owns all of the outstanding Equity Interests in each James Oxford Subsidiary listed on Schedule 5.3. All of the outstanding Equity Interests of James Oxford owned by the Company have been validly issued, are fully paid and non-assessable and are owned by the Company free and clear of any Lien that is prohibited by this Agreement.

(b)    All of the outstanding Equity Interests of each James Oxford Subsidiary have been validly issued, are fully paid and non-assessable and are owned directly or indirectly by James Oxford free and clear of any Lien that is prohibited by this Agreement.

(c)    James Oxford, each James Oxford Entity and each James Oxford Subsidiary is a corporation, limited partnership, limited liability company or other legal entity duly organized, validly existing and, where applicable, in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation, limited partnership, limited liability company or other legal entity and, where applicable, is in good standing in each jurisdiction in which such qualification is required by

 

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law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. James Oxford, each James Oxford Entity and each James Oxford Subsidiary has the corporate, limited partnership, limited liability company or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.

Section 5.4.    REIT Representations. As of the date of this agreement and at all times thereafter while any portion of any Note remains outstanding, James Oxford will hold real property (within the meaning of Treasury Regulation section 1.856-3(d)).

Section 5.5.    Title to Property. The Company has good title to, and is the record and beneficial owner of, the Collateral free and clear of all Liens other than Liens expressly permitted hereunder. James Oxford has good title to, and is the record and beneficial owner of, directly or indirectly, all Equity Interests in each James Oxford Subsidiary. Each James Oxford Subsidiary has good and marketable title to the Specified Property listed opposite its name on Schedule 5.3, in each case free and clear of Liens prohibited by this Agreement, except for those defects in title that, individually or in the aggregate, would not have a Material Adverse Effect.

Section 5.6.    Existing Indebtedness; Restrictions on Indebtedness and Liens.

(a)    Schedule 5.6 sets forth a complete and correct list of all outstanding Indebtedness for borrowed money of the Company, James Oxford, each James Oxford Entity and each James Oxford Subsidiary as of the Closing. Neither the Company, James Oxford nor any James Oxford Entity or any James Oxford Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any such Indebtedness and no event or condition exists with respect to any such Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.

(b)    Neither the Company, James Oxford nor any James Oxford Entity or James Oxford Subsidiary is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary, any agreement relating thereto or any other agreement (including its charter or any other organizational document) which would prohibit the incurrence of Indebtedness hereunder or the granting of Liens on the Collateral.

Section 6.    Notices From the Company. The Company shall deliver to each holder of a Note promptly, and in any event within 15 Business Days (or 10 Business Days in the case of (x) a merger or consolidation of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary or (y) a Change of Control) after a Responsible Officer becoming aware of the existence of any (i) Default or Event of Default, (ii) default or event of default under any document evidencing Indebtedness for borrowed money secured by a mortgage, deed of trust, assignment of rents or other security interest on any Specified Property or of the Equity Interests in any Person that owns, directly or indirectly, any Specified Property, (iii) Disposition of any Specified Property, (iv) Casualty or Condemnation Event with respect to any Specified Property, (v) merger or consolidation of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary or (vi) Change of Control, written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto.

 

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Section 7.    Payment and Prepayment of the Notes.

Section 7.1.    Maturity; Payment of Interest.

(a)    The entire unpaid principal balance of each Note shall be due and payable on the Maturity Date.

(b)    The Company shall pay interest (computed on the basis of a 360-day year of twelve 30-day months) on (i) the unpaid balance of each Note at the rate of 5.2% per annum from the date hereof, payable quarterly, on the first day of January, April, July and October in each year, commencing on April 1, 2021, and on the Maturity Date, until the principal of each Note shall have been paid in full, and (ii) to the extent permitted by law, any overdue payment of interest, at the Default Rate pursuant to Section 7.1(c) below.

(c)     (1) If any amount due in respect of the Notes (other than amounts due on the Maturity Date) remains past due for thirty (30) days or more, interest on such unpaid amount(s) shall accrue from the date payment was due at the Default Rate and shall be payable upon demand by any Purchaser and (2) if any amount due in respect of the Notes is not paid in full on the Maturity Date, then interest shall accrue at the Default Rate on all such unpaid amounts from the Maturity Date until fully paid and shall be payable upon demand by the Purchasers.

Section 7.2.    Mandatory Prepayments. Promptly, and in any event within 15 Business Days, following a Disposition by (including, without limitation, a Casualty or Condemnation Event) or merger, consolidation or similar event or transaction of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary, the Company shall prepay or cause to be prepaid the Notes in an amount equal to the Net Cash Proceeds of such Disposition or merger, consolidation or similar event or transaction, which prepayment shall be accompanied by the Make-Whole Amount determined for the prepayment date with respect to such amount; provided that no such prepayment shall be required if the Remaining Collateral Value Test is satisfied and the Company elects to reinvest such Net Cash Proceeds in accordance with the Reinvestment Conditions; provided further, if the Company elects to pursue such reinvestment option and such reinvestment does not occur within 180 days of the receipt of such Net Cash Proceeds, the Company shall prepay or cause to be prepaid the Notes on such 180th day.

Section 7.3.    Other Prepayments. Except as provided in Section 7.2 or Section 11.1, the Notes shall not be prepaid in whole or in part prior to the Maturity Date and the Purchasers shall have no obligation to accept any such attempted prepayment prior to the Maturity Date. The Company expressly acknowledges and agrees that (a) the prohibition on prepayments is reasonable and is the product of an arm’s length transaction between sophisticated business people, (b) it shall be estopped hereafter from claiming differently than as agreed to in this paragraph, (c) its agreement to a prohibition on prepayments as herein described is a material inducement to the Purchasers’ decision to enter into this Agreement and (d) upon a prepayment of the Notes in violation of this Section 7.2, the Purchasers would suffer substantial harm, and any prepayment received and accepted in violation of this Section 7.3 shall be accompanied by the Make-Whole Amount. This Section 7.3 shall not prejudice the rights of the Purchasers to accelerate the Notes pursuant to Section 11 hereof.

Section 7.4.    Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes pursuant to Section 7.2, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.

 

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Section 7.5.    Maturity; Surrender, Interest on Prepayments, Etc. Each prepayment of Notes made pursuant to Section 7.2 shall be accompanied by all accrued and unpaid interest in the amount so prepaid and the applicable Make-Whole Amount. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.

Section 7.6.    Payments Due on Non-Business Days. Anything in the Note Documentation to the contrary notwithstanding, (x) except as set forth in clause (y), any payment of interest on any Note that is due on a date that is not a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; and (y) any payment of principal of or Make-Whole Amount on any Note (including principal due on the Maturity Date of such Note) that is due on a date that is not a Business Day shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.

Section 7.7.    Late Charges. If any scheduled interest payment is not received by the holder of any Note within 10 Business Days after the applicable payment date, inclusive of the date on which such amount is due, the Company shall pay to the applicable holder, immediately without demand by such holder, the Late Charge.

Section 7.8.    Make-Whole Amount.

The term “Make-Whole Amount” means, with respect to any Note, an amount equal to the Remaining Scheduled Payments with respect to the Called Principal of such Note. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

“Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 7.2 or has become or is declared to be immediately due and payable pursuant to Section 11.1, as the context requires.

“Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of interest on such Called Principal that would be due after the Settlement Date and on or prior to the Maturity Date if no payment of such Called Principal were made prior to its scheduled due date; provided that if such Settlement Date is not a date on which interest payments are due to be made under the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 7.2 or Section 11.1.

“Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 7.2 or has become or is declared to be immediately due and payable pursuant to Section 11.1, as the context requires.

The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the obligation to pay the Make-Whole Amount set forth herein is intended to provide compensation for the deprivation of such right under such circumstances. The right to receive the Make-Whole Amount upon any prepayment or acceleration is a material inducement to the Purchasers’ decision to enter into this Agreement.

 

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Section 8.    Affirmative Covenants. The Company covenants that so long as any of the Notes are outstanding:

Section 8.1.    Existence, Etc. Subject to Section 9.1, the Company will at all times preserve and keep its limited liability company existence in full force and effect. Subject to Section 9.1, the Company will at all times cause to be preserved and kept in full force and effect the limited partnership, limited liability company or corporate existence of James Oxford, each James Oxford Entity and each James Oxford Subsidiary and all rights and franchises of the Company, James Oxford, the James Oxford Entities and the James Oxford Subsidiaries unless, in the case of each James Oxford Entity and each James Oxford Subsidiary, the termination of or failure to preserve and keep in full force and effect such existence, right or franchise would not, individually or in the aggregate, have a Material Adverse Effect.

Section 8.2.    REIT Covenants.

(a)    At all times necessary after the Closing while any portion of any Note remains outstanding, James Oxford will hold real property (within the meaning of Treasury Regulation section 1.856-3(d)).

(b)    Except for such regulatory notices, consents, or approvals as may be required under applicable law, James Oxford has taken all steps necessary such that, upon default and foreclosure of the Note, the registered holders will replace the Company as a partner in James Oxford, and AIMCO/Bethesda has agreed that, in such circumstances, it will not unreasonably oppose the admission of the registered holders as partners therein.

Section 8.3.    Maintenance of Properties. The Company will, and shall cause James Oxford, each of the James Oxford Entities and each of the James Oxford Subsidiaries to, (a) maintain, preserve and protect all of its properties and equipment necessary in the operation of its business, ordinary wear and tear, force majeure, casualty events and transactions not prohibited by this Agreement excepted, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; (b) make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) use the standard of care typical in the industry in the operation and maintenance of its facilities, taken as a whole.

Section 8.4.    Maintenance of Insurance. Except where the failure to do so would not reasonably be expected to have a Material Adverse Effect, the Company will maintain or cause to be maintained, such insurance coverage with respect to liabilities, losses or damage in respect of the assets, properties and business of the Company, James Oxford, the James Oxford Entities and the James Oxford Subsidiaries as may customarily be carried or maintained under similar circumstances by Persons of established reputation engaged in similar businesses (as determined in good faith by the Company), in each case in such amounts, with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for such Persons.

Section 8.5.    Compliance with Laws. The Company, James Oxford, each James Oxford Entity and each James Oxford Subsidiary will comply, and shall cause their respective Subsidiaries to comply, with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, except to the extent the failure of the Company, James Oxford, such James Oxford Entity, such James Oxford Subsidiary or such other Subsidiary to comply could not reasonably be expected to have a Material Adverse Effect.

 

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Section 8.6.    Compliance with Mortgage Loan Documents. Except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, the Company will, and shall cause James Oxford, each of the James Oxford Entities and each of the James Oxford Subsidiaries to, comply with the provisions of any document evidencing Indebtedness for borrowed money secured by a mortgage, deed of trust, assignment of rents or other security interest on any Specified Property or of the Equity Interests in any Person that owns, directly or indirectly, any Specified Property or any mezzanine Indebtedness incurred by the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary.

Section 9.    Negative Covenants. The Company covenants that so long as any of the Notes are outstanding:

Section 9.1.    Merger, Consolidation, Etc. The Company will not and will not permit James Oxford, any James Oxford Entity or any James Oxford Subsidiary to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, consummate a Division as the Dividing Person, or liquidate or dissolve, unless:

(i)    the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary receives consideration (A) at least equal to the fair market value (such fair market value to be determined (i) on the date of contractually agreeing to such merger, consolidation or other transaction and (ii) in good faith by the Company), of the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary, as applicable, which such fair market value shall be a positive number, and (B) that is 100% in the form of cash; provided that for purposes of determining “cash” consideration, any assumption of Indebtedness or other liabilities by buyer shall be deemed cash consideration, so long as seller is released from such Indebtedness or other liabilities, and (ii) the Company prepays or causes to be prepaid the Notes to the extent required by Section 7.2.

No such Disposition of assets or property shall have the effect of releasing the Company or any successor corporation, limited partnership, limited liability company or other entity that shall theretofore have become such in the manner prescribed in this Section 9.1, from its liability under the Note Documentation.

Section 9.2.    Liens. (a) The Company will not directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any of the Collateral, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, except:

(i)    Liens arising under the Note Documentation; or

(ii)    Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings in the circumstances, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP.

 

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(b)    The Company will not permit James Oxford, any James Oxford Entity or any James Oxford Subsidiary to, directly or indirectly, create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any of its property or assets, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, except:

(i)    Liens existing on the date hereof that secure Indebtedness listed on Schedule 5.6 hereto and any renewals or extensions thereof; provided that the property covered thereby is not increased and any renewal or extension of the obligations secured or benefitted thereby is permitted pursuant to Section 9.3;

(ii)    Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings in the circumstances, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

(iii)    carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith and by appropriate proceedings in the circumstances, if adequate reserves with respect thereto are maintained on the books of the applicable Person to the extent required in accordance with GAAP;

(iv)    easements, rights-of-way, restrictions and other similar encumbrances affecting real property and other minor defects or irregularities in title and other similar encumbrances including the reservations, limitations, provisos and conditions, which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property of James Oxford, any James Oxford Entity or any James Oxford Subsidiary, as applicable, or materially interfere with the ordinary conduct of the business of the applicable Person;

(v)    statutory rights of set-off arising in the ordinary course of business;

(vi)    with respect to any real property, immaterial title defects or irregularities that do not, individually or in the aggregate, materially impair the use of such real property;

(vii)    Liens on any cash earnest money deposits or other escrow arrangements made in connection with any letter of intent or purchase agreement; and

(viii)     Liens arising under the Note Documentation.

Section 9.3.    Indebtedness. (a) The Company will not directly or indirectly create, incur, assume, guarantee, or otherwise become directly or indirectly liable with respect to any Priority Debt other than Indebtedness hereunder.

(b)    The Company will not permit James Oxford, any James Oxford Entity or any James Oxford Subsidiary to, directly or indirectly, create, incur, assume, guarantee, or otherwise become directly or indirectly liable with respect to any Indebtedness, except:

(i)    Indebtedness outstanding on the date hereof that is listed on Schedule 5.6 hereto and any refinancings, refundings, renewals or extensions thereof; provided the amount of

 

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such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing and by an amount equal to any existing commitments unutilized thereunder; and

(ii)    other Indebtedness not permitted in clause (b)(i) above in an aggregate principal amount not to exceed $5,000,000.

Section 9.4.    Dispositions. The Company will not and will not permit James Oxford, any James Oxford Entity or any James Oxford Subsidiary to make any Disposition (other than the incurrence of any Lien not prohibited under Section 9.2), unless:

(a)    with respect to any Casualty or Condemnation Event, the Company prepays or causes to be prepaid the Notes to the extent required by Section 7.2; or

(b)    with respect to any other Disposition, (i) the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary receives consideration (A) at least equal to the fair market value (such fair market value to be determined (x) on the date of contractually agreeing to such Disposition and (y) in good faith by the Company), of the property subject to such Disposition and (B) that is 100% in the form of cash; provided that for purposes of determining “cash” consideration, any assumption of Indebtedness or other liabilities by buyer shall be deemed cash consideration, so long as seller is released from such Indebtedness or other liabilities, and (ii) the Company prepays or causes to be prepaid the Notes to the extent required by Section 7.2; or

(c)     in the case of a Disposition of a Specified Property or a Disposition of all or any portion of the Equity Interests of the owner of such Specified Property, (i) contemporaneously with such Disposition, real property with, or Equity Interests of an owner of real property with, similar cash flows and comparable fair market value to the Specified Property Disposed of or owned by such Person whose Equity Interests are Disposed of is exchanged or otherwise substituted for such Specified Property or such owner of Specified Property and (ii) each Purchaser provides prior written consent to such Disposition, which consent is not to be unreasonably withheld.

Upon the occurrence of any Disposition contemplated by Section 9.4(c), any real property exchanged or substituted for a Specified Property shall become a “Specified Property” for all purposes under this Agreement and the other Note Documentation and such original Specified Property shall cease to be a “Specified Property” under this Agreement and the other Note Documentation.

Section 9.5.    Sale and Leaseback Transactions. The Company will not and will not permit James Oxford, any James Oxford Entity or any James Oxford Subsidiary to enter into any

 

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arrangement, directly or indirectly, whereby it shall sell or transfer any property (real or personal) used or useful in its business, whether now owned or hereinafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred (each such transaction, a “Sale/Leaseback Transaction”), unless (a) such Disposition is permitted under Section 9.2, (b) the Company complies with Section 7.2, and (c) such lease is not required to be capitalized in accordance with GAAP and is not otherwise Indebtedness.

Section 9.6.    Change in Nature of Business. The Company will not and will not permit James Oxford, any James Oxford Entity or any James Oxford Subsidiary to engage in any material line of business substantially different from those lines of business currently conducted by the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary on the date hereof or any business substantially related or incidental or ancillary thereto.

Section 10.    Events of Default. An “Event of Default” shall exist if any of the following conditions or events shall occur and be continuing:

(a)    the Company defaults in the payment of any principal, Late Charge or Make-Whole Amount on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or

(b)    the Company defaults in the payment of any interest on any Note for more than 30 Business Days after the same becomes due and payable; or

(c)    the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 10(a) or (b)) and such default is not remedied within 60 days after the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 10(c)); or

(d)    the Company (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or

(e)    a court or other Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, James Oxford or any Material Subsidiary, as applicable, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company, James Oxford or such Material Subsidiary, as applicable, or any such petition shall be filed against the Company, James Oxford or such Material Subsidiary, as applicable, and such petition shall not be dismissed within 60 days; or

(f)    one or more final judgments or orders for the payment of money aggregating in excess of $50,000,000, including any such final order enforcing a binding arbitration decision, are rendered against James Oxford, any James Oxford Entity and/or any James Oxford Subsidiary and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay.

 

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Section 11.    Remedies on Default, Etc.

Section 11.1.    Acceleration. (a) If an Event of Default with respect to the Company described in Section 10(d) or (e) (other than an Event of Default described in clause (i) of Section 10(d) or described in clause (vi) of Section 10(d) by virtue of the fact that such clause encompasses clause (i) of Section 10(d)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.

(b)    If any other Event of Default has occurred and is continuing, the Required Holders may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.

(c)    If any Event of Default described in Section 10(a) or (b) has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.

(d)    Upon any Notes becoming due and payable under this Section 11.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including interest accrued thereon at the Default Rate) and (y) the Make-Whole Amount determined in respect of such principal amount, shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. The right to receive the Make-Whole Amount upon any prepayment or acceleration is a material inducement to the Purchasers’ decision to enter into this Agreement.

Section 11.2.    Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 11.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise; provided that only the Collateral Agent shall be entitled to exercise remedies with respect to the Collateral pursuant to the Pledge Agreement.

Section 11.3.    Rescission. At any time after any Notes have been declared due and payable pursuant to Section 11.1(b) or (c), the Required Holders, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all due or overdue interest on the Notes, all principal of and Make-Whole Amount on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount and (to the extent permitted by applicable law) any Late Charge or overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 16, and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 11.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.

Section 11.4.    No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder’s rights, powers or remedies. No right,

 

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power or remedy conferred by this Agreement or any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. The Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 11, including reasonable attorneys’ fees, expenses and disbursements.

Section 12.    Collateral Matters.

Section 12.1.    Collateral. At the time of the Closing, the Company shall grant to the Collateral Agent for the benefit of the Purchasers a first lien, priority security interest in the Equity Interests it owns or at any time hereafter acquires in James Oxford and all proceeds thereof by executing and delivering the Pledge Agreement.

Section 12.2.    Collateral Agent.

(a)    Each Purchaser hereby appoints AIR OP to act on behalf of the Purchasers as collateral agent (in such capacity, together with its successors and assigns, the “Collateral Agent”) under the Pledge Agreement and to exercise such powers and perform such duties as are expressly delegated to the Collateral Agent by the terms of this Agreement and the Pledge Agreement, and AIR OP agrees to act as such. In taking any action pursuant to the provisions of the Pledge Agreement, and in exercising any rights or remedies set forth therein, the Collateral Agent shall act at the direction of the Required Holders, and any such actions taken at the direction of the Required Holders shall be binding upon all Purchasers. Notwithstanding any provision to the contrary contained elsewhere in this Agreement and the Pledge Agreement, the duties of the Collateral Agent shall be ministerial and administrative in nature, and the Collateral Agent shall not have any duties or responsibilities, except those expressly set forth herein and in the Pledge Agreement, nor shall the Collateral Agent have or be deemed to have any trust or fiduciary relationship with any Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement and the Pledge Agreement or otherwise exist against the Collateral Agent.

(b)    Subject to the provisions of the Pledge Agreement, each Purchaser agrees that the Collateral Agent shall execute and deliver the Pledge Agreement and all agreements, powers of attorney, documents and instruments incidental thereto, and act in accordance with its terms.

(c)    The Collateral Agent shall have no obligation whatsoever to the Purchasers to assure that the Collateral exists or is owned by the Company or is cared for, protected, or insured or has been encumbered, or that the Collateral Agent’s Liens have been properly or sufficiently or lawfully created, perfected, protected, maintained or enforced or are entitled to any particular priority, or to determine whether all of the Company’s property constituting Collateral has been properly and completely listed or delivered, as the case may be, or the genuineness, validity, marketability or sufficiency thereof or title thereto, or to exercise at all or in any particular manner or under any duty of care, disclosure, or fidelity, or to continue exercising, any of the rights, authorities, and powers granted or available to the Collateral Agent pursuant to this Agreement or the Pledge Agreement, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, the Collateral Agent shall have no other duty or liability whatsoever to the Purchasers as to any of the foregoing.

(d)    The Collateral Agent may resign at any time by notice to each Purchaser and the Company, such resignation to be effective upon the acceptance by each Purchaser of a successor agent to its appointment as Collateral Agent. If no successor collateral agent is appointed prior to the intended effective date of the resignation of the Collateral Agent (as stated in the notice of resignation), the Collateral Agent may appoint, after consulting with each Purchaser, subject to the consent of the

 

12

Company (which shall not be unreasonably withheld and which shall not be required during a continuing Event of Default), a successor collateral agent. Upon the acceptance of its appointment as successor collateral agent hereunder, such successor collateral agent shall succeed to all the rights, powers and duties of the retiring Collateral Agent, and the term “Collateral Agent” shall mean such successor collateral agent, and the retiring Collateral Agent’s appointment, powers and duties as the Collateral Agent shall be terminated. Promptly following the acceptance of the appointment of any successor Collateral Agent, the Company shall cause assignments of filings existing on the date of such assignment related to the Collateral to be filed or recorded sufficient to reflect the successor Collateral Agent, as secured party of record in accordance with applicable law related to each portion of the Collateral. After the retiring Collateral Agent’s resignation hereunder, the provisions of this Section 12.2 shall continue to inure to its benefit and the retiring Collateral Agent shall not by reason of such resignation be deemed to be released from liability as to any actions taken or omitted to be taken by it while it was the Collateral Agent under this Agreement.

Section 13.    Registration; Exchange; Substitution of Notes.

Section 13.1.    Registration of Notes. The Company will maintain, in electronic format or otherwise, at its principal place of business, a register of the names and addresses of the holder(s) of this Note and the principal amount (and stated interest) owing to each holder (the “Register”), and will update the Register to reflect any permitted assignments or transfers subsequent to the date hereof. The Company will make payments of principal and interest as specified hereunder to the holder(s) named as such in the Register. The holder(s) shall notify the Company in writing prior to any assignment, transfer or other disposition of this Note (or any portion hereof) or such holder(s)’ rights or interests hereunder, with such written notice to be delivered to the Company not later than one Business Day prior to any such assignment, transfer or disposition and which notice shall specify the principal amount hereunder that is the subject of such assignment, transfer or disposition. Any assignment, transfer or other disposition of this Note (or any portion thereof) shall be effective only upon appropriate entries with respect thereto being made in the Register, which shall be made promptly upon receipt of such written notice. Notwithstanding anything to the contrary herein, the entries in the Register shall be conclusive, absent manifest error; the Company and each holder shall treat the person whose name is recorded in the Register as the owner of its portion of the Note for all purposes of this Note, notwithstanding notice to the contrary; and the registered owner of this Note (or any portion hereof) as indicated on the Register shall be the party with the exclusive right to receive payment of any principal amount and accrued and unpaid interest thereon under this Note. The Register shall be available for inspection by any holder, at any reasonable time and from time to time upon reasonable prior notice. This provision is intended to constitute a “book entry system” within the meaning of Treasury Regulations Section 5f.103-1(c)(1)(ii) and shall be interpreted consistently with such intent.

Section 13.2.    Transfer and Exchange of Notes. Upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 17(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered holder of such Note or such holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within 10 Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Schedule 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes.

 

13

Section 13.3.    Replacement of Notes. Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 17(iii)) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note, and

(a)    in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it, or

(b)    in the case of mutilation, upon surrender and cancellation thereof, within 10 Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.

Section 14.    Payments on Notes.

Section 14.1.    Place of Payment. Subject to Section 14.2, payments of principal, Make-Whole Amount and interest becoming due and payable on the Notes shall be made in Denver, Colorado at the principal office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in the United States or the principal office of a bank or trust company in the United States.

Section 14.2.    Payment by Wire Transfer. So long as any Purchaser shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount interest and all other amounts becoming due hereunder by the method and at the address specified for such purpose below such Purchaser’s name in the Purchaser Schedule, or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other Disposition of any Note held by a Purchaser, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2.

Section 14.3.    Withholding.

(a)    To the extent required by law, each party hereto hereby authorizes each other party (each, a “Withholding Party”) to deduct or withhold any foreign, federal, state or local tax from any amount transferred under this Agreement. Each Withholding Party shall timely pay the full amount deducted or withheld to the relevant governmental authority in accordance with the applicable law. Amounts so deducted or withheld, if any, shall be treated as paid to the applicable party in respect of which such amounts were deducted or withheld.

(b)    By acceptance of any Note, the holder of such Note agrees that such holder will with reasonable promptness duly complete and deliver to the Company, or to such other Person as may be

 

14

reasonably requested by the Company, from time to time (a) in the case of any such holder that is a United States Person, such holder’s United States tax identification number or other Forms reasonably requested by the Company necessary to establish such holder’s status as a United States Person under FATCA and as may otherwise be necessary for the Company to comply with its obligations under FATCA and (b) in the case of any such holder that is not a United States Person, such documentation prescribed by applicable law (including as prescribed by section 1471(b)(3)(C)(i) of the Code) and such additional documentation as may be necessary for the Company to comply with its obligations under FATCA and to determine that such holder has complied with such holder’s obligations under FATCA or to determine the amount (if any) to deduct and withhold from any such payment made to such holder. Nothing in this Section 14.3 shall require any holder to provide information that is confidential or proprietary to such holder unless the Company is required to obtain such information under FATCA and, in such event, the Company shall treat any such information it receives as confidential.

Section 15.    Survival of Representations and Warranties; Entire Agreement. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other holder of a Note. This Agreement, the Notes and the Pledge Agreement embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.

Section 16.    Amendment and Waiver.

Section 16.1.    Requirements. This Agreement, the Notes and the Pledge Agreement may be amended, and the observance of any term hereof or of the Notes or the Pledge Agreement may be waived (either retroactively or prospectively), only with the written consent of the Company and the Required Holders, except that:

(a)    no amendment or waiver of any of Sections 1, 2, 3, 4, or 5 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing; and

(b)    no amendment or waiver may, without the written consent of each Purchaser and the holder of each Note at the time outstanding, (i) subject to Section 11 relating to acceleration or rescission, change the amount or time of any payment or prepayment of principal of, or reduce the rate or change the time of payment or method of computation of (x) interest on the Notes or (y) the Make-Whole Amount on the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any amendment or waiver, or (iii) amend any of Section 7 and Sections 10(a), 10(b), 11 or 16.

Section 16.2.    Binding Effect, Etc. Any amendment or waiver consented to as provided in this Section 16 or the Pledge Agreement applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and any holder of a Note and no delay in exercising any rights hereunder or under any Note or the Pledge Agreement shall operate as a waiver of any rights of any holder of such Note.

 

15

Section 16.3.    Notes Held by Company, Etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement, the Pledge Agreement or the Notes, or have directed the taking of any action provided herein or in the Pledge Agreement or the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.

Section 17.    Notices. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by an internationally recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by an internationally recognized overnight delivery service (charges prepaid). Any such notice must be sent:

(i)     if to any Purchaser, to such Purchaser at the address specified for such communications in the Purchaser Schedule, or at such other address as such Purchaser shall have specified to the Company in writing,

(ii)     if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or

(iii)     if to the Company, to the Company at its address set forth at the beginning hereof to the attention of General Counsel of Apartment Investment and Management Company, or at such other address as the Company shall have specified to the holder of each Note in writing.

Notices under this Section 17 will be deemed given only when actually received.

Section 18.    Miscellaneous.

Section 18.1.    Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and registered assigns (including any subsequent holder of a Note) whether so expressed or not, except that, (i) subject to Section 9.1, the Company may not assign or otherwise transfer any of its rights or Obligations hereunder or under the Notes without the prior written consent of each holder, which written consent is not to be unreasonably withheld, and (ii) each holder may not assign or otherwise transfer any of its rights or obligations hereunder or under the Notes without the prior written consent of the Company, which consent is not to be unreasonably withheld; provided that notwithstanding the foregoing, each holder may assign or otherwise transfer any of its rights or obligations hereunder or under the Notes without the prior written consent of the Company during an Event of Default. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto and their respective successors and assigns permitted hereby) any legal or equitable right, remedy or claim under or by reason of this Agreement.

Section 18.2.    Accounting Terms. All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, all computations made pursuant to this Agreement shall be made in accordance with GAAP.

Section 18.3.    Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

 

 

16

Section 18.4.    Construction, Etc. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Defined terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise (a) any definition of or reference to any of the Note Documentation or any other agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein) and, for purposes of the Notes, shall also include any such notes issued in substitution therefor pursuant to Section 13, (b) subject to Section 18.1, any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Sections and Schedules shall be construed to refer to Sections of, and Schedules to, this Agreement, and (e) any reference to any law or regulation herein shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time.

Section 18.5.    Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.

Section 18.6.    Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.

Section 18.7.    Jurisdiction and Process; Waiver of Jury Trial. (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

(b)    The Company agrees, to the fullest extent permitted by applicable law, that a final judgment in any suit, action or proceeding of the nature referred to in Section 18.7(a) brought in any such court shall be conclusive and binding upon it subject to rights of appeal, as the case may be, and may be enforced in the courts of the United States of America or the State of New York (or any other courts to the jurisdiction of which it or any of its assets is or may be subject) by a suit upon such judgment.

 

17

(c)    The Company consents to process being served by or on behalf of any holder of Notes in any suit, action or proceeding of the nature referred to in Section 18.7(a) by mailing a copy thereof by registered, certified priority or express mail (or any substantially similar form of mail), postage prepaid, return receipt or delivery confirmation requested, to it at its address specified in Section 17 or at such other address of which such holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.

(d)    Nothing in this Section 18.7 shall affect the right of any holder of a Note to serve process in any manner permitted by law, or limit any right that the holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.

(e)    The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.

 

18

If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

 

Very truly yours,
Aimco JO Intermediate Holdings, LLC, a Delaware limited liability company, as the Company
By:  

 

  Title

 

[Signature Page to Mezzanine Note Agreement]

This Agreement is hereby accepted and agreed to as of the date hereof.
AIMCO Properties, L.P., a Delaware limited partnership, as a Purchaser

By: AIMCO-GP, Inc., a Delaware corporation,

its general partner

By:  

                                                  

  Title
AIMCO/Bethesda Holdings, Inc., a Delaware corporation, as a Purchaser
By:  

                                                  

  Title
AIMCO Properties, L.P., a Delaware limited partnership, as the Collateral Agent

By: AIMCO-GP, Inc., a Delaware corporation,

its general partner

By:  

                                                  

  Title

 

[Signature Page to Mezzanine Note Agreement]

Schedule A

Defined Terms

As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:

“Affiliate” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person; provided that neither AIMCO/Bethesda nor AIR OP shall be considered Affiliates of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary for the purposes of the Note Documentation. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.

“Agreement” means this Mezzanine Note Agreement, including all Schedules attached to this Agreement.

“AIMCO/Bethesda” means AIMCO/Bethesda Holdings, Inc., a Delaware corporation, as such entity may be renamed from time to time.

“AIR OP” means AIMCO Properties, L.P., a Delaware limited partnership, as such entity may be renamed from time to time.

“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City, Baltimore or Denver are required or authorized to be closed.

“Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.

“Cash Collateral Account” means a “deposit account” as defined in the Uniform Commercial Code as in effect in the State of New York, at a bank reasonably acceptable to the Collateral Agent in the name of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary for the benefit of the Purchasers that is subject to a Cash Collateral Account Control Agreement.

“Cash Collateral Account Control Agreement” means a deposit account control agreement in a form reasonably satisfactory to the Collateral Agent, executed by the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary, as applicable, the Collateral Agent and the relevant depositary institution.

“Casualty or Condemnation Event” means the receipt by the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary of any cash insurance proceeds or condemnation award payable by reason of theft, loss, physical destruction or damage, taking, expropriation or similar event with respect to any of their respective property.

“Change of Control” means the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof) of Equity Interests in the Company pursuant to which Aimco OP L.P., a Delaware limited partnership, ceases to directly or indirectly own through one or more wholly-owned subsidiaries all of the Equity Interests of the Company (other than the Company Initial Preferred Interests).

“Closing” is defined in Section 3.

“Code” means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder from time to time.

“Collateral” has the meaning set forth in the Pledge Agreement.

“Collateral Agent” is defined in Section 12.2(a).

 

Schedule A

“Company” is defined in the first paragraph of this Agreement.

“Company Initial Preferred Interests” means the up to 125 Series A preferred units of the Company issued in connection with the Restructuring (as defined in the Separation Agreement).

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms “Controlled” and “Controlling” shall have meanings correlative to the foregoing.

“Debtor Relief Laws” means the Bankruptcy Code of the United States, or any other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

“Default Rate” means that rate of interest per annum that is 2% above the rate of interest stated in clause (a) of the first paragraph of the Notes.

“Disposition” or “Dispose” means (i) the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, directly or indirectly, and whether voluntary or involuntary, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith, (ii) a Casualty or Condemnation Event with respect to any property or asset, and (iii) the issuance or sale of Equity Interests, in the case of each of clauses (i), (ii) and (iii), whether in a single transaction or series of related transactions.

“Dividing Person” has the meaning assigned to it in the definition of “Division”.

“Division” means the division of the assets, liabilities and/or obligations of a Person (the “Dividing Person”) among two or more Persons (whether pursuant to a “plan of division” or similar arrangement), which may or may not include the Dividing Person and pursuant to which the Dividing Person may or may not survive.

“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other similar rights entitling the holder thereof to purchase or acquire any of the foregoing.

“Event of Default” is defined in Section 10.

“FATCA” means (a) sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), together with any current or future regulations or official interpretations thereof, (b) any treaty, law or regulation of any other jurisdiction, or relating to an intergovernmental agreement between the United States of America and any other jurisdiction, which (in either case) facilitates the implementation of the foregoing clause (a), and (c) any agreements entered into pursuant to section 1471(b)(1) of the Code.

 

A-2

“GAAP” means generally accepted accounting principles as in effect from time to time in the United States of America.

“Governmental Authority” means

 

  (a)

the government of

 

  (i)

the United States of America or any state or other political subdivision thereof, or

 

  (ii)

any other jurisdiction in which the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary, or

 

  (b)

any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.

“Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including obligations incurred through an agreement, contingent or otherwise, by such Person:

 

  (a)

to purchase such indebtedness or obligation or any property constituting security therefor;

 

  (b)

to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation;

 

  (c)

to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or

 

  (d)

otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof.

In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.

“holder” means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1.

“Indebtedness” with respect to any Person means, at any time, without duplication,

 

  (a)

its liabilities for borrowed money;

 

  (b)

its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);

 

A-3

  (c)

(i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases;

 

  (d)

all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);

 

  (e)

all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);

 

  (f)

the aggregate Swap Termination Value of all Swap Contracts of such Person; and

 

  (g)

any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.

Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.

“James Oxford” means James-Oxford Limited Partnership, a Maryland limited partnership.

“James Oxford Entity” means any wholly-owned subsidiary through which James Oxford indirectly owns any James Oxford Subsidiary.

“James Oxford Subsidiary” means, as of the Closing, each entity listed on Schedule 5.3; provided that any entity exchanged or substituted for a James Oxford Subsidiary pursuant to the terms of this Agreement and the other Note Documentation shall be considered “James Oxford Subsidiary” for all purposes hereunder and thereunder.

“Late Charge” means an amount equal to the delinquent amount then due under the Agreement multiplied by 5%.

“Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of any Equity Interest, the granting of any option or agreement to sell) or any agreement to enter into any of the foregoing.

“Make-Whole Amount” is defined in Section 7.8.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company, James Oxford, the James Oxford Entities or the James Oxford Subsidiaries taken as a whole, (b) the ability of the Company to perform its Obligations under this Agreement, the Notes and the Pledge Agreement, or (c) the validity or enforceability of this Agreement, the Notes or the Pledge Agreement.

 

A-4

“Material Subsidiary” means, at any date of determination, any Subsidiary of the Company that (i) as of the most recently ended fiscal quarter of the Company, has total assets with a value in excess of 10% of the consolidated total assets of the Company and its Subsidiaries for such date or (ii) during the most recently completed four fiscal quarters of the Company, has gross revenues exceeding 10% of the consolidated gross revenues of the Company and its Subsidiaries, in each case determined in accordance with GAAP.

“Maturity Date” is defined as January 31, 2024.

“Minority Common Interests” means the common interests in James Oxford that continue to be owned by AIMCO/Bethesda immediately after Closing.

“Net Cash Proceeds” means (1) the aggregate cash or cash equivalents proceeds received by or on behalf of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary in respect of any Disposition or consideration received in connection with a merger or consolidation, net of (A) direct costs incurred in connection therewith (including, without limitation, reasonable and customary selling expenses, legal, accounting and investment banking fees and sales commissions), (B) taxes paid or payable as a result thereof, (C) amounts required to be applied to the repayment of principal, premium (if any) and interest on Indebtedness secured by the assets subject to such Disposition as a result of such Disposition and (D) amounts provided in good faith as a reserve against (x) any liabilities under any indemnification obligations or purchase price adjustment associated with such Disposition or merger or consolidation or (y) any other liabilities retained by the Company, James Oxford, the applicable James Oxford Entity or the applicable James Oxford Subsidiary associated with the properties sold (provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds) and (2) the aggregate cash or cash equivalents proceeds received by the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary in respect of the incurrence of Indebtedness or the issuance or contribution of Equity Interests, net of all taxes paid or payable as a result thereof, together with any fees, commissions, costs and other customary expenses incurred in connection therewith; it being understood that “Net Cash Proceeds” shall include, without limitation, any cash or cash equivalents received upon the sale or other Disposition of any non-cash consideration received by the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary in any Disposition, merger or consolidation, issuance or contribution of Equity Interests or incurrence of Indebtedness.

“Net Insurance/Condemnation Proceeds” means the aggregate cash or cash equivalents proceeds received by or on behalf of the Company, James Oxford, any James Oxford Entity or any James Oxford Subsidiary in respect of any Casualty or Condemnation Event, net of (1) direct costs incurred by the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary in connection with the adjustment, settlement or collection of any claims of the Company, James Oxford, such James Oxford Entity or such James Oxford Subsidiary in respect thereof (including, without limitation, reasonable and customary selling expenses, legal, accounting and investment banking fees and sales commissions), (2) taxes paid or payable as a result thereof, (3) amounts required to be applied to the repayment of principal, premium (if any) and interest on Indebtedness secured by the assets subject to such Casualty or Condemnation Event as a result of such Casualty or Condemnation Event, (4) in the case of a taking, the reasonable out-of-pocket costs of putting any affected property in a safe and secure position, and (5) amounts provided in good faith as a reserve against (x) any liabilities under any indemnification obligations or purchase price adjustment associated with such Casualty or Condemnation Event or (y) any other liabilities retained by the Company, James Oxford, the applicable James Oxford Entity or the applicable James Oxford Subsidiary associated with the properties sold (provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Insurance/Condemnation Proceeds).

 

A-5

“Note Documentation” means, collectively, this Agreement, the Notes, the Pledge Agreement and each other amendment, agreement or instrument delivered by the Company in accordance with such documentation.

“Notes” is defined in Section 1.

“Obligations” means all advances to, and debts, liabilities and obligations of, the Company arising under the Note Documentation, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against the Company or any of its Affiliates of any proceeding under any Debtor Relief Law naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.

“Person” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.

“Pledge Agreement” means that certain Pledge Agreement, to be dated the date hereof, by the Company in favor of the Collateral Agent for the benefit of the Purchasers.

“Priority Debt” means Indebtedness of the Company secured by a Lien on the Collateral.

“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.

“Purchaser” or “Purchasers” means each of the purchasers that has executed and delivered this Agreement to the Company and such Purchaser’s successors and assigns (so long as any such assignment complies with Section 13.2), provided, however, that any Purchaser of a Note that ceases to be the registered holder or a beneficial owner of such Note as the result of a transfer thereof pursuant to Section 13.2 shall cease to be included within the meaning of “Purchaser” of such Note for the purposes of this Agreement upon such transfer.

“Purchaser Schedule” means the Purchaser Schedule to this Agreement listing the Purchasers of the Notes and including their notice and payment information.

“Register” is defined in Section 13.1.

“Reinvestment Conditions” means, with respect to the reinvestment of Net Cash Proceeds or Net Insurance/Condemnation Proceeds stemming from a Disposition, Casualty or Condemnation Event or merger, consolidation or similar event or transaction, that (i) no Default or Event of Default has occurred and is continuing, (ii) such reinvestment consists of the acquisition, lease, construction or improvement of real property (within the meaning of Treasury Regulation section 1.856-3(d)) useful in the business of the Company or its Subsidiaries that the Company believes will enhance the value of or create value in the Company, James Oxford or their respective Subsidiaries (as reasonably determined by the Company in good faith) and (iii) such reinvestment occurs within 180 days of receipt of such Net Cash Proceeds or Net Insurance/Condemnation Proceeds.

“Remaining Collateral Value Test” means, with respect to a Disposition, Casualty or Condemnation Event or merger, consolidation or similar event or transaction, that the aggregate fair market value of all real property (within the meaning of Treasury Regulation section 1.856-3(d)) owned by James Oxford and its Subsidiaries after giving effect to such Disposition, Casualty or Condemnation Event or merger, consolidation or similar event or transaction exceeds (after subtracting senior secured Indebtedness) the then-outstanding principal amount of the Notes.

“Required Holders” means at any time on or after the Closing, the holders of at least 50 in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).

“Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.

“Sale/Leaseback Transaction” is defined in Section 9.6.

“SEC” means the Securities and Exchange Commission of the United States of America.

“Securities Act” means the Securities Act of 1933 and the rules and regulations promulgated thereunder from time to time in effect.

 

A-6

“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company.

“Separation Agreement” means that certain Separation and Distribution Agreement, dated as of             , 2020, by and among Apartment Investment and Management Company, a Maryland corporation, Aimco OP L.P., a Delaware limited partnership, Apartment Income REIT Corp., a Maryland corporation, and AIR OP.

“Specified Property” means, as of the Closing, each property listed in the column titled “Address of Specified Property Owned by such James Oxford Subsidiary” on Schedule 5.3; provided that any property exchanged or substituted for a Specified Property pursuant to the terms of this Agreement and the other Note Documentation shall be considered “Specified Property” for all purposes hereunder and thereunder.

“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries).

“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc. or any International Foreign Exchange Master Agreement.

“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.

“Synthetic Lease” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.

“Transferred Interests” is defined in Section 2.

“United States Person” has the meaning set forth in Section 7701(a)(30) of the Code.

“Withholding Party” is defined in Section 14.3(a).

 

A-7

Schedule 1

Form of Note

NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THIS NOTE OR ANY INTEREST OR PARTICIPATION THEREIN MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS AND, IN THE CASE OF THIS CLAUSE (B), PROVIDED THAT, IF THE COMPANY REQUESTS, THE COMPANY RECEIVES AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT.

Aimco JO Intermediate Holdings, LLC

5.2% Secured Mezzanine Note Due January 31, 2024

 

No.                

            

$                 PPN             

For value received, the undersigned, Aimco JO Intermediate Holdings, LLC (herein called the “Company”), a limited liability company organized and existing under the laws of the State of Delaware, hereby promises to pay to                    (the “Purchaser”), or registered assigns, the principal sum of                      U.S. dollars on January 31, 2024 (the “Maturity Date”), with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid balance hereof at the rate of 5.2% per annum from the date hereof, payable quarterly, on the first day of January, April, July and October in each year, commencing on April 1, 2021, and on the Maturity Date, until the principal hereof shall have been paid in full. In addition, the Company agrees to pay a Make-Whole Amount, Late Charges and interest at the Default Rate, as provided in the Note Agreement referenced below.

Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the Denver, Colorado office of the Company or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Agreement referred to below.

This Note is one of a series of Secured Mezzanine Notes (herein called the “Notes”) issued pursuant to the Mezzanine Note Agreement, dated as of             , 2020 (as from time to time amended, the “Note Agreement”), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note Agreement.

This Note is a registered Note and, as provided in the Note Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder’s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary.

The Company will make required payments of principal on the dates and in the amounts specified in the Note Agreement. This Note is subject to mandatory prepayment at the times and on the terms specified in the Note Agreement. This Note may not be prepaid at the option of the Company at any time prior to the Maturity Date. The Company’s agreement to a prohibition on optional prepayments is a material inducement to the Purchaser’s decision to enter into the Note Agreement. The Company’s Obligations under this Note and the Note Agreement are secured pursuant to the Pledge Agreement.

If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Agreement.

This Note shall be construed and enforced in accordance with, and the rights of the Company and the holder of this Note shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.

 

Aimco JO Intermediate Holdings, LLC
By:  

                     

  Title

Exhibit 21.1

APARTMENT INCOME REIT CORP.

LIST OF SUBSIDIARIES

 

ENTITY NAME

   STATE CODE

AF HOTEL PARCEL LESSEE, LLC

   DE

AF HOTEL PARCEL LESSOR, LLC

   DE

AF HOTEL PARCEL OPPORTUNITY FUND, LP

   DE

AF HOTEL PARCEL OPPORTUNITY FUND II, LP

   DE

AF HOTEL PARCEL OPPORTUNITY ZONE BUSINESS, LP

   DE

AIC REIT PROPERTIES LLC

   DE

AIMCO 1582 FIRST AVENUE, LLC

   DE

AIMCO 159 FIRST STREET, LLC

   DE

AIMCO 182-188 COLUMBUS AVENUE, LLC

   DE

AIMCO 21 FITZSIMONS, LLC

   DE

AIMCO 234 EAST 88TH ST, LLC

   DE

AIMCO 240 WEST 73RD STREET CO-OWNER, LLC

   DE

AIMCO 240 WEST 73RD STREET, LLC

   DE

AIMCO 270 THIRD STREET, LLC

   DE

AIMCO 306 EAST 89TH STREET, LLC

   DE

AIMCO 311/313 EAST 73RD STREET, LLC

   DE

AIMCO 3131 WALNUT STREET MEMBER I, LLC

   DE

AIMCO 3131 WALNUT STREET MEMBER II, LLC

   DE

AIMCO 3131 WALNUT STREET, LLC

   DE

AIMCO 322 EAST 61ST STREET, LLC

   DE

AIMCO 452 EAST 78TH STREET PROPERTY, LLC

   DE

AIMCO 464-466 AMSTERDAM 200-210 WEST 83RD STREET, LLC

   DE

AIMCO 50 ROGERS STREET, LLC

   DE

AIMCO 510 EAST 88TH STREET PROPERTY, LLC

   DE

AIMCO 514 EAST 88TH STREET, LLC

   DE

AIMCO 518 EAST 88TH ST, LLC

   DE

AIMCO 777 SOUTH BROAD MEMBER, LLC

   DE

AIMCO 777 SOUTH BROAD, LLC

   DE

AIMCO 88TH STREET/SECOND AVENUE PROPERTIES, LLC

   DE

AIMCO AVERY ROW, LLC

   DE

AIMCO BALAYE APARTMENTS I, LLC

   DE

AIMCO BENT TREE, LLC

   DE

AIMCO BOSTON LOFTS, L.P.

   DE

AIMCO BRIAR RIDGE GP, LLC

   DE

AIMCO BRIAR RIDGE, LLC

   DE

AIMCO BROADWAY LOFTS GP, LLC

   DE

AIMCO BROADWAY LOFTS, L.P.

   DE

AIMCO BUENA VISTA APARTMENTS GP, LLC

   DE

AIMCO BUENA VISTA APARTMENTS, LLC

   DE

AIMCO BURKSHIRE COMMONS GP, LLC

   DE

AIMCO CALHOUN CLUB, L.L.C.

   DE

AIMCO CALHOUN, INC.

   DE

AIMCO CALHOUN, L.L.C.

   DE

AIMCO CANYON TERRACE GP, LLC

   DE

AIMCO CANYON TERRACE, L.P.

   DE

AIMCO CHANTILLY GP, LLC

   DE

AIMCO CHESTNUT HALL GP, LLC

  

DE

AIMCO CHESTNUT HALL LIMITED PARTNERSHIP

  

DE

AIMCO CLEARING ACCOUNT, LLC

  

DE

AIMCO COLUMBUS AVE., LLC

  

DE

AIMCO EASTPOINTE, LLC

  

DE

AIMCO ELM CREEK TOWNHOMES TWO, LLC

  

DE

AIMCO FITZSIMONS 3A LESSEE, LLC

  

DE

AIMCO FITZSIMONS 3A LESSOR, LLC

  

DE

AIMCO FITZSIMONS 3A, LLC

  

DE

AIMCO FOXCHASE GP, LLC

  

DE

AIMCO FOXCHASE, L.P.

  

DE

AIMCO FRAMINGHAM, LLC

  

DE

AIMCO GARDENS GP LLC

  

DE

AIMCO GP LA, L.P.

  

DE

AIMCO GRANADA, L.L.C.

  

DE

AIMCO HOLDINGS I, LLC.

  

DE

AIMCO HOLDINGS II, LLC

  

DE

AIMCO HOLDINGS QRS, INC.

  

DE

AIMCO HOLDINGS, L.P.

  

DE

AIMCO LA QRS, INC.

  

DE

AIMCO LEAHY SQUARE APARTMENTS, LLC

  

DE

AIMCO LOCUST ON THE PARK MEMBER I, LLC

  

DE

AIMCO LOCUST ON THE PARK MEMBER II, LLC

  

DE

AIMCO LOCUST ON THE PARK, LLC

  

DE

AIMCO LP LA, LP

  

DE

AIMCO MADERA VISTA, LLC

  

DE

AIMCO MALIBU CANYON, LLC

  

DE

AIMCO MERRILL HOUSE, L.L.C.

  

DE

AIMCO MEZZO, LLC

  

DE

AIMCO MONTEREY GROVE APARTMENTS TIC 2, LLC

  

DE

AIMCO MONTEREY GROVE APARTMENTS, LLC

  

DE

AIMCO NORTH ANDOVER, L.L.C.

  

DE

AIMCO ONE ARDMORE PLACE MEMBER I, LLC

  

DE

AIMCO ONE ARDMORE PLACE MEMBER II, LLC

  

DE

AIMCO ONE ARDMORE PLACE, LLC

  

DE

AIMCO ONE CANAL, LLC

  

DE

AIMCO OP GP SUB

  

DE

AIMCO OPPORTUNITY FUND 3A, LP

  

DE

AIMCO OPPORTUNITY FUND 3A-2, LP

  

DE

AIMCO OPPORTUNITY ZONE 3A BUSINESS, LP

  

DE

AIMCO PACIFICA GP, LLC

  

DE

AIMCO PACIFICA PARK, LLC

  

DE

AIMCO PALAZZO ACQUISITION, LLC

  

DE

AIMCO PARK LA BREA HOLDINGS, LLC

  

DE

AIMCO PARK LA BREA, INC.

  

MD

AIMCO PLEASANT STREET, LLC

  

DE

 

2

AIMCO PROPERTIES FINANCE CORP.

  

DE

AIMCO PROPERTIES FINANCE PARTNERSHIP, L.P.

  

DE

AIMCO PROPERTIES, L.P.

  

DE

AIMCO PROPERTIES, LLC

  

DE

AIMCO PROSPECT 400, L.P.

  

DE

AIMCO ROBIN DRIVE GP, LLC

  

DE

AIMCO ROBIN DRIVE, L.P.

  

DE

AIMCO SAN BRUNO APARTMENTS PARTNERS, LLC

  

DE

AIMCO SCOTCHOLLOW APARTMENTS GP, LLC

  

DE

AIMCO SCOTCHOLLOW APARTMENTS, L.P.

  

DE

AIMCO SELECT PROPERTIES, L.P.

  

DE

AIMCO SOUTHSTAR LOFTS MEMBER I, LLC

  

DE

AIMCO SOUTHSTAR LOFTS MEMBER II, LLC

  

DE

AIMCO SOUTHSTAR LOFTS, LLC

  

DE

AIMCO SUBSIDIARY REIT I, LLC

  

DE

AIMCO SUNSET ESCONDIDO, L.L.C.

  

DE

AIMCO TOWNSHIP AT HIGHLANDS APARTMENTS, LLC

  

DE

AIMCO TREMONT, LLC

  

DE

AIMCO VANTAGE POINTE, L.L.C.

  

DE

AIMCO VENEZIA, LLC

  

DE

AIMCO VILLA DEL SOL, L.P.

  

DE

AIMCO WATERWAYS VILLAGE, LLC

  

DE

AIMCO WAVERLY, LLC

  

DE

AIMCO/BETHESDA EMPLOYEE, L.L.C.

  

DE

AIMCO/BETHESDA HOLDINGS, INC.

  

DE

AIMCO/BLUFFS, L.L.C.

  

DE

AIMCO/BRANDYWINE, L.P.

  

DE

AIMCO/IPT, INC.

  

DE

AIMCO/LAKE RIDGE, L.L.C.

  

DE

AIMCO/LEXINGTON, L.L.C.

  

DE

AIMCO/NASHUA, L.L.C.

  

DE

AIMCO/PARK TOWNE PLACE ASSOCIATES GP, LLC

  

DE

AIMCO/SOUTHRIDGE, L.L.C.

  

DE

AIMCO/WESTRIDGE, L.L.C.

  

DE

AIMCO-GP, INC.

  

DE

APMH 1 LLC DE

  

DE

APMSF COMMON LLC DE

  

DE

APMSF HOLDINGS LLC

  

DE

APMSF INVESTOR LLC

  

DE

APMSF PHASE1 LLC

  

DE

APMSF PHASE 1B LLC

  

DE

APMSF PHASE 1C LLC

  

DE

APMSF PHASE 1D LLC

  

DE

APMSF TRS MEMBER LLC

  

DE

AIR REIT SUB 1, LLC

  

DE

AIR REIT SUB 2, LLC

  

DE

AIR PROPERTY MANAGEMENT, LLC

  

DE

AIR PROPERTY MANAGEMENT TRS, LLC

  

DE

AIVCAP I GP LLC

  

DE

AIVCAP I LP

  

DE

BAY PARC PLAZA APARTMENTS, L.P.

  

DE

BAYBERRY HILL, L.L.C.

  

DE

BRIARCLIFF-OXFORD ASSOCIATES LLC

  

MI

BROAD RIVER PROPERTIES, L.L.C.

  

DE

 

3

BURKSHIRE COMMONS APARTMENTS PARTNERS, L.P.

  

DE

CALMARK HERITAGE PARK II LIMITED PARTNERSHIP

  

CA

CAMARILLO-ROSEWOOD ASSOCIATES LIMITED PARTNERSHIP

  

CA

CCIP STERLING, L.L.C.

  

DE

CCIP STERLING, L.P.

  

PA

CENTURY PROPERTIES FUND XVII, LP

  

DE

CHANTILLY PARTNERS LIMITED PARTNERSHIP

  

VA

CONCAP EQUITIES, INC.

  

DE

CONGRESS REALTY COMPANIES LIMITED PARTNERSHIP

  

MA

CONGRESS REALTY CORP.

  

MA

CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES, LP, SERIES A

  

DE

COOPER RIVER PROPERTIES, L.L.C.

  

DE

CPF CREEKSIDE, LLC

  

DE

CRC CONGRESS REALTY CORP.

  

MA

FLAMINGO SOUTH ACQUISITIONS, LLC

  

DE

FOUR QUARTERS HABITAT APARTMENTS ASSOCIATES, LTD.

  

FL

FOX CAPITAL MANAGEMENT CORPORATION

  

CA

FOX PARTNERS

  

CA

FOX REALTY INVESTORS

  

CA

GEORGETOWN 20Y APARTMENTS, L.L.C.

  

DE

HC/OAC, L.L.C.

  

MD

HERITAGE PARK INVESTORS, INC.

  

CA

HUNT CLUB PARTNERS, L.L.C.

  

MD

IPLP ACQUISITION I LLC

  

DE

ISTC CORPORATION

  

DE

LA BROADCAST CENTER GP LLC

  

DE

LA BROADCAST CENTER QRS INC.

  

DE

LA CRESCENT GARDENS GP LLC

  

DE

LA CRESCENT GARDENS LP

  

DE

LA CRESCENT GARDENS QRS INC.

  

DE

LA HILLCRESTE APARTMENTS LLC

  

DE

LA INDIAN OAKS GP LLC

  

DE

LA INDIAN OAKS LLC

  

DE

LA LAKES GP LLC

  

DE

LA LAKES LP

  

DE

LA LAKES QRS INC.

  

DE

LA MALIBU CANYON GP LLC

  

DE

LA MALIBU CANYON LLC

  

DE

LA MALIBU CANYON QRS INC.

  

DE

LA PARK LA BREA A LLC

  

DE

LA PARK LA BREA B LLC

  

DE

LA PARK LA BREA C HOLDINGS 1 LLC

  

DE

LA PARK LA BREA C HOLDINGS 2 LLC

  

DE

LA PARK LA BREA C LLC

  

DE

LA PARK LA BREA C MEMBER LLC

  

DE

LA PARK LA BREA LLC

  

DE

 

4

LAC PROPERTIES GP II LIMITED PARTNERSHIP

  

DE

LAC PROPERTIES GP III LIMITED PARTNERSHIP

  

DE

LAC PROPERTIES OPERATING PARTNERSHIP, L.P.

  

DE

LAC PROPERTIES QRS II INC.

  

DE

LAC PROPERTIES QRS III INC.

  

DE

LAKE RIDGE-OXFORD ASSOCIATES LIMITED PARTNERSHIP

  

MD

LAKERIDGE-ISLAND CLUB APARTMENTS PARTNERS, L.P.

  

DE

LEXINGTON-OXFORD ASSOCIATES L.P.

  

IN

LINCOLN MARINERS ASSOCIATES LIMITED

  

CA

LINCOLN PROPERTY COMPANY NO. 409, LTD.

  

CA

MADISON RIVER PROPERTIES, L.L.C.

  

DE

MAERIL, INC.

  

DE

MAYER BEVERLY PARK LIMITED PARTNERSHIP

  

CA

MCZ/CENTRUM FLAMINGO II, L.L.C.

  

DE

MCZ/CENTRUM FLAMINGO III, L.L.C.

  

DE

MONROE-OXFORD ASSOCIATES LLC

  

DE

MORTON TOWERS APARTMENTS, L.P.

  

DE

MORTON TOWERS HEALTH CLUB, LLC

  

DE

NASHUA-OXFORD-BAY ASSOCIATES LIMITED PARTNERSHIP

  

MD

NATIONAL BOSTON LOFTS ASSOCIATES, LLLP

  

CO

NHP A&R SERVICES, LLC

  

VA

NHP-HG FOUR, INC.

  

VA

NPI EQUITY INVESTMENTS II, INC.

  

FL

OAC INVESTMENT, INC.

  

MD

OAC L.L.C.

  

MD

OAC LIMITED PARTNERSHIP

  

MD

OAMCO VII, L.L.C.

  

DE

OAMCO XI, L.L.C.

  

DE

OAMCO XIX, L.L.C.

  

DE

OAMCO XIX, L.P.

  

DE

OXFORD APARTMENT COMPANY, INC.

  

MD

OXFORD ASSOCIATES ‘84 LIMITED PARTNERSHIP

  

MD

OXFORD ASSOCIATES ‘85 LIMITED PARTNERSHIP

  

MD

OXFORD EQUITIES CORPORATION

  

IN

OXFORD EQUITIES CORPORATION III

  

DE

OXFORD HOLDING CORPORATION

  

MD

OXFORD INVESTMENT CORPORATION

  

MD

OXFORD INVESTMENT II CORPORATION

  

MD

OXFORD MANAGERS I LIMITED PARTNERSHIP

  

MD

OXFORD PARTNERS X, L.L.C.

  

MD

OXFORD REALTY FINANCIAL GROUP, INC

  

MD

PARK LA BREA ACQUISITION, LLC

  

DE

PARK TOWNE PLACE ASSOCIATES LIMITED PARTNERSHIP

  

DE

REEDY RIVER PROPERTIES, L.L.C.

  

DE

RI-15 GP, LLC

  

DE

 

5

RI-15 LIMITED PARTNERSHIP

  

DC

RIVER LOFT APARTMENTS LIMITED PARTNERSHIP

  

PA

RIVER LOFT ASSOCIATES LIMITED PARTNERSHIP

  

MA

SOUTHRIDGE-OXFORD LIMITED PARTNERSHIP

  

MD

THE OAK PARK PARTNERSHIP LIMITED PARTNERSHIP

  

IL

TUJUNGA GARDENS LIMITED PARTNERSHIP

  

CA

WATERS LANDING PARTNERS, L.L.C.

  

MD

WESTRIDGE-OXFORD LIMITED PARTNERSHIP

  

MD

WL/OAC, L.L.C.

  

MD

ZIMCO XI L.L.C.

  

MD

ZIMCO XVIII L.L.C.

  

MD

ZIMCO/CHANTILLY CORPORATION

  

MD

ZIMCO/MONROE CORPORATION XI

  

MD

 

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Exhibit 99.1

Preliminary and Subject to Completion, dated November 24, 2020

            , 2020

Dear Aimco Stockholder and Future AIR Stockholder,

The board of directors of Apartment Investment and Management Company (“Aimco”) has announced a plan to create Apartment Income REIT Corp. (“AIR”) by separating assets representing approximately 10% of the total estimated value (“gross asset value” or “GAV”), as of March 31, 2020, of Aimco. The separation will result in two, focused and independent companies:

 

  •  

AIR, with assets approximating 90% (prior to giving effect to certain transactions, which proceeds are intended to reduce leverage) of Aimco’s GAV, as of March 31, 2020, is expected to provide a simple and transparent way to invest in the multifamily sector, combining (i) a narrow focus on allocating capital only to stabilized apartment communities; (ii) a high-quality and diversified portfolio of stabilized multifamily properties, (iii) best-in-class property operations, (iv) low financial leverage, (v) limited execution risk, (vi) low overhead costs as a percentage of GAV, and (vii) public market liquidity for its shares, which are expected to be traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “AIRC.”

 

  •  

“New” Aimco, with assets approximating 10% of Aimco’s GAV, as of March 31, 2020, is expected to continue the business of redeveloping and developing apartment communities, while also pursuing other accretive transactions. Aimco’s shares will continue to be traded on the NYSE under the ticker symbol “AIV.”

The Aimco board of directors believes that the two businesses, each with a clear focus, strong, independent boards of directors, dedicated management teams, and strengthened balance sheets, will create greater stockholder value as two companies than as one. Importantly, the separation will provide each stockholder the opportunity to make an individual allocation of capital to one or both of the two differentiated businesses, each with a distinct investment risk/return profile: ownership of stabilized apartment communities through an investment in AIR; or redevelopment, development, and transactions through an investment in Aimco.

The decision by the Aimco board of directors was unanimous and is a result of years of ordinary course strategic review, many months of intensive meetings this calendar year, advice from financial, legal, tax, and accounting experts, and, most importantly, regular conversations with Aimco’s stockholders. Having listened to stockholders and recognizing the disconnect between the Aimco share price and Net Asset Value, or “NAV” (as defined in the enclosed information statement), per share, the board’s goal is to simplify the business, reduce execution risk, reduce financial risk, and increase Funds From Operations (“FFO”) and cash dividends by reducing the vacancy loss and overhead costs incurred during redevelopment and development. During the board’s deliberations, it saw the opportunity to replenish the income tax basis of Aimco’s properties by structuring the separation to be taxable. After further discussion with Aimco’s stockholders, the board saw the opportunity to make other changes, enhancing governance while providing stability to operations during a turbulent time.

About Apartment Income REIT Corp.

The AIR business plan is to: (i) invest only in stabilized apartment communities; (ii) own a high-quality and diversified portfolio of stabilized multifamily properties; (iii) emphasize its comparative advantage in property operations, with high customer-defined satisfaction and retention, low rate of growth in controllable operating expenses, and high operating margins; (iv) maintain a strong balance sheet with leverage, net of cash and receivables, and weighted average interest expense, net of interest income, comparable to or lower than peers; (v)

 

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reduce execution risk through elimination of redevelopment and development activities; and (vi) operate with overhead costs estimated at about 15 basis points of GAV, lower than peers as a percentage of GAV. AIR has sold or will sell assets sufficient to reduce financial leverage by approximately $2 billion.

The AIR portfolio is expected to include 98 apartment communities, which had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point. The AIR portfolio will include garden style, mid-rise, and high-rise apartment communities with eight important geographic concentrations: Boston; Philadelphia; Washington D.C.; Miami; Denver; the San Francisco Bay Area; Los Angeles; and San Diego; and a focus on properties with high land value located in submarkets with outsized growth prospects. The Aimco board of directors believes the geographic and price point diversification will reduce the volatility of AIR’s rental revenue by avoiding undue concentration in any particular market and by exposure to a range of price-points that have different advantages over various economic and housing cycles. AIR is expected to own properties with an estimated GAV of $10.4 billion, and an estimated NAV of $7.8 billion, in each case, as of March 31, 2020.

AIR does not intend to redevelop or develop apartment communities, reducing the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. At the time of the separation, four AIR properties are expected to be under construction or in lease-up, including North Tower at Flamingo Point in Miami Beach, Florida, The Fremont on the Anschutz Medical Campus in Aurora, Colorado, Prism in Cambridge, Massachusetts, and 707 Leahy Apartments in Redwood City, California (collectively, the “Initial Leased Properties”). These properties will be leased to Aimco and, under each such lease, the terms thereof will be on an arm’s-length basis, including the initial term and extensions and the initial annual rent, which will be based on the then-current fair market value of the leased property and market NOI cap rates, subject to certain adjustments and periodic escalation as set forth in such lease. Further, under the terms of the leases, Aimco will have the option to complete the on-going redevelopment and development of such properties and their lease-ups.

AIR will retain substantially all of Aimco’s existing employees, including its property management team. Tom Keltner will be elected Chairman of the AIR board of directors. I will be a member of the AIR board of directors and will also serve as AIR’s Chief Executive Officer, working with an experienced executive team wholly dedicated to AIR, including Lisa Cohn, as President and General Counsel, Keith Kimmel, as President, Property Operations, Paul Beldin, as Executive Vice President and Chief Financial Officer, and Conor Wagner, as Senior Vice President and Chief Investment Officer.

The separation will increase the tax basis of AIR’s properties based on the value of the shares of AIR common stock when distributed to stockholders. This is expected to enhance AIR’s ability to allocate capital by reducing tax friction. It is also expected to reduce the need for taxable stock dividends.

AIR’s governance will be improved by the separation of the roles of Chairman of the board of directors and Chief Executive Officer, and by withdrawal from the Maryland Unsolicited Takeover Act (“MUTA”). To enable AIR’s management team to prioritize operations during a turbulent economy and to execute a smooth transition to a pure-play business model, the Aimco board of directors decided unanimously to classify the AIR board of directors for two years. Class I will serve until the 2021 annual meeting of stockholders, and all classes will stand for annual election at the 2022 annual meeting and thereafter. By having opted out of MUTA, AIR will not be able to reclassify its board without stockholder approval.

The Aimco board of directors believes that the separation and associated transactions will provide a number of benefits to Aimco, AIR, and their respective stockholders. We believe that expected benefits to AIR and its stockholders include:

 

  •  

Simplicity: A simplified business focused solely on the ownership and active management of stabilized apartment communities;

 

  •  

Transparency: A business that is more readily understood and valued by investors;

 

  •  

Predictability: A business that is more predictable due to strong operations and reduced exposure to the execution risk of redevelopment and development;

 

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  •  

Lower Leverage: A strong balance sheet with leverage, net of cash and loans receivable, and a weighted average interest expense, net of interest income, at or below peer averages, and with AIR expected to issue corporate level debt when its cost is lower than that of non-recourse property debt;

 

  •  

Higher Operating Income: FFO is expected to be increased by (i) the elimination of earnings dilution from properties with reduced or no earnings during their development, redevelopment, or lease-up, and (ii) lower overhead costs (expected to be approximately 15 bps of GAV) due primarily to the elimination of overhead costs related to redevelopment and development activities;

 

  •  

Growth: AIR expects to grow through (i) the continuous enhancement of its operating properties; and (ii) the acquisition of stabilized apartment communities when AIR has a favorable cost of capital, including the use of units in its operating partnership as an acquisition currency;

 

  •  

Refreshed Tax Basis: A refreshed tax basis reduces the tax costs of future property sales and so enhances portfolio management, makes cash dividends more likely to be a return of capital or capital gains for tax purposes, increasing their after-tax value for taxable investors, and reduces the need for taxable stock dividends;

 

  •  

Higher Dividends: Higher FFO supports higher dividends, while FFO made more predictable due to lower leverage and reduced exposure to redevelopment and development, supports a higher payout ratio; and

 

  •  

Independence: AIR, with a board of directors and management team independent from Aimco, will be incentivized to make decisions that are in the best interests of AIR.

About “new” Apartment Investment and Management Company

The business plan for “new” Aimco will be to: (i) focus on redevelopment and development projects, including those sourced by Aimco, those in collaboration with IQHQ, a leading developer of life science properties, and those leased from AIR; (ii) undertake complex transactions when warranted by risk-adjusted returns, including the opportunity for additional pipelines of redevelopment or development opportunities; (iii) capitalize its redevelopment, development, and acquisition activities primarily with private, project, or activity-specific capital; and (iv) rely on a relatively small executive team engaging with qualified partners to execute its redevelopment, development and acquisition activities.

Aimco will own the redevelopment and development business and a portfolio of assets that is expected to consist of 11 stabilized multifamily properties, primarily located in the Boston and San Diego areas, as well as: (i) Aimco’s loan to, and equity option in, the partnership owning Parkmerced Apartments located in southwest San Francisco, California; (ii) Hamilton on the Bay, a multifamily property located on the waterfront in Miami, Florida, with 271 apartment homes as well as the land and zoning to construct 389 additional apartment homes; and (iii) the assemblage of 1001 Brickell Bay Drive, a 350,000 square foot office building located in Miami Beach, Florida, and the Yacht Club multifamily property adjacent to 1001 Brickell Bay Drive.

Aimco will be well-capitalized with an estimated GAV of $1.3 billion, and an estimated NAV of $1.2 billion, each as of March 31, 2020 (in each case, without giving effect to the value of the Initial Leased Properties or the Separate Portfolio Assets (each as defined below)). Aimco is also expected to own a separate portfolio of 16 assets (the “Separate Portfolio Assets”) with an estimated GAV of $0.9 billion, securing property debt of approximately $0.7 billion, including purchase money notes payable to AIR of approximately $0.5 billion.

Aimco will employ approximately 50 of Aimco’s existing employees. It is expected to be governed by an independent board of directors, including six new, independent directors, and two independent directors from the AIR board: Bob Miller, who will be elected Chairman of the Aimco board of directors, and Mike Stein. I, too, will be a member of Aimco’s board of directors with specific responsibilities during the next two years to support

 

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the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors. Wes Powell, now Aimco’s Executive Vice President—Redevelopment, will also be a member of Aimco’s board of directors and will serve as Aimco’s Chief Executive Officer. Senior management will include Lynn Stanfield as Chief Financial Officer and Jennifer Johnson as General Counsel and Chief Administrative Officer.

To provide sufficient time for the Aimco board of directors and the senior management team to establish and execute the “new” Aimco business plan of long-cycle redevelopment and development, and because individual projects most often require three to five years from inception to completion, the Aimco board of directors unanimously determined to opt into MUTA effective as of the separation and to classify the new Aimco board of directors so that only one-third of the directors stand for election at each annual meeting until Aimco’s 2024 annual meeting, at which time all directors will stand for election annually.

The Aimco board of directors believes that the separation and associated transactions will provide a number of benefits to Aimco, AIR, and their respective stockholders. We believe that expected benefits to Aimco and its stockholders include:

 

  •  

Opportunity: A pipeline of redevelopment and development opportunities including those sourced by Aimco, those in collaboration with IQHQ, and those leased from AIR;

 

  •  

Investment Flexibility: A broader menu of investment choices, now eschewed by AIR that includes transactions that are short-term dilutive, longer-term to value realization, more complicated, better measured by NAV creation than FFO, or that involve more non-recourse leverage and that may result in higher investment returns; and

 

  •  

Independence: “New” Aimco, with a board of directors and management team independent from AIR, will be incentivized to make decisions that are in the best interests of Aimco.

Separation of AIR and “New” Aimco

AIR and Aimco will provide for clear separation between the two businesses, after a defined transition period, by providing that: (i) the shared services agreements will be subject to cancellation by either party upon reasonable notice; (ii) the purchase money notes between AIR and Aimco, with a three-year maturity, is expected to be the sole financial obligation expected between AIR and Aimco (except for customary indemnifications and leases for the purposes of redevelopment and development of AIR properties); and (iii) AIR’s commitment to lease certain properties to Aimco, and Aimco’s commitment to lease such leased properties from AIR (with the right to cause their development, redevelopment and/or lease-up), will be limited to four specific properties for which the interruption of the redevelopment and development process would be inefficient, costly, and wasteful to stockholder value and where construction has begun or is expected to begin before June 30, 2022.

Reasons for the Timing of the Separation

The Aimco board of directors carefully considered the timing of the separation. In particular, the board considered the following concerns of Aimco stockholders:

 

  •  

Lower Leverage: we expect a reduction of approximately $1 billion in leverage as a result of the separation;

 

  •  

Increased FFO and cash dividends: we expect a significant reduction in costs and an increase in FFO and cash dividends as a result of the separation; and

 

  •  

Increased flexibility: we expect that the separation will provide stockholders with the flexibility to make individual decisions regarding capital allocation between the business of ownership of stabilized apartment communities, and the business of redevelopment, development, and transactions.

After the completion of the distribution of AIR shares, current Aimco stockholders will own the same properties before and after the separation, only in two simpler, more focused, and less levered entities.

 

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The Aimco board of directors also considered the taxability of the distribution of AIR shares, weighing the interests of taxable stockholders (including Aimco’s directors and senior management) against the interests of the larger enterprise, which is owned primarily by stockholders whom we believe to be tax exempt or tax indifferent, and determined that it is in the best interests of the company and Aimco’s stockholders to structure the distribution to be taxable.

Finally, the Aimco board of directors considered the priority of providing certainty and time for management to address the challenges of managing the business during a turbulent economy, and a time of government intervention in the setting and collection of rents, universities operating virtually and businesses whose employees work from home, and business sectors that remain severely stressed.

Mechanics of the Separation

The separation will be completed through a pro rata distribution of all of the outstanding shares of AIR common stock to Aimco stockholders of record as of the close of business on                  , 2020, the record date for the separation. Each Aimco stockholder will receive one share of AIR common stock for each one share of Aimco common stock held as of the close of business on the record date. Immediately prior to such distribution by Aimco, AIMCO Properties, L.P. (which is expected to be renamed Apartment Income, L.P. after a customary transitional period, “AIR OP”) will complete a pro rata distribution of all of the outstanding common limited partnership units of Aimco OP L.P., a new Delaware limited partnership owned by AIR OP and formed to hold the businesses and portfolio of assets described below, to holders of record of AIR OP common units and common unit equivalents as of the close of business on the record date. The number of shares of Aimco common stock you own will not change as a result of the distribution of AIR shares.

If you hold shares of Aimco common stock as of the close of business on the record date for the distribution of AIR shares, upon completion of the distribution, you will hold your Aimco common stock and you also will hold AIR common stock.

As more specifically described in the enclosed information statement, the distribution of AIR common stock is intended to be a taxable distribution. An amount equal to the fair market value of the AIR common stock each stockholder receives on the distribution date (plus any cash in lieu of fractional shares of AIR common stock) will generally be treated as a taxable dividend to the extent of such stockholder’s ratable share of any current or accumulated earnings and profits of Aimco. The excess will be treated as a non-taxable return of capital to the extent of such stockholder’s tax basis in its Aimco common stock and any remaining excess will be treated as capital gain.

No vote of Aimco’s stockholders is required or being sought in connection with the separation. Therefore, we are not asking you for a proxy, and you are requested not to send us a proxy. You do not need to make any payment, surrender or exchange your Aimco common stock, or take any other action to receive your shares of AIR common stock.

The enclosed information statement, which is being made available to all Aimco stockholders, describes the transactions in detail and contains important information about AIR and AIR OP and their business after the completion of the separation. We urge you to read the information statement in its entirety.

 

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On behalf of my colleagues on the Aimco board of directors, I thank you for your investment in Aimco. We look forward to serving you as you become a stockholder of AIR.

Sincerely,

Terry Considine

Chairman of the Board and

Chief Executive Officer of Aimco and

Future Chief Executive Officer of Apartment Income

REIT Corp.

 

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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

 

PRELIMINARY AND SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2020

INFORMATION STATEMENT

APARTMENT INCOME REIT CORP.

Common Stock

(Par Value $0.01 Per Share)

This information statement is being furnished in connection with (i) the pro rata distribution (the “Separation”) by Apartment Investment and Management Company (“Aimco”) to its stockholders of all of the outstanding shares of Class A common stock of Apartment Income REIT Corp. (“AIR Common Stock”), a Maryland corporation wholly owned by Aimco (formerly named Aimco-LP, Inc., “AIR”), and (ii) the pro rata distribution by AIMCO Properties, L.P. (which is expected to be renamed Apartment Income, L.P. after a customary transitional period, “AIR OP”), the operating partnership of Aimco, to the holders of AIR OP common limited partnership units (including AIR) and the holders of AIR OP Class I High Performance partnership units (the common limited partnership units and Class I High Performance partnership units, collectively, “AIR OP Common Units”), of all of the outstanding common limited partnership units of Aimco OP L.P. (“New OP Units”), a new Delaware limited partnership owned by AIR OP and formed to hold the businesses and portfolio of assets described below (formerly named Durango OP, LP, “New OP”). Immediately prior to the Separation, AIR will issue $2 million in Class A preferred stock of AIR (the “Class A Preferred Stock”) to Aimco, subject to a binding commitment to sell such Class A Preferred Stock to unrelated investors, and AIR OP will issue $2 million in a new series of preferred limited partnership units of AIR OP to AIR with terms substantially the same as the terms of the Class A Preferred Stock.

If you hold shares of common stock of Aimco (“Aimco Common Stock”) as of the close of business on the record date, upon completion of the Separation, you will hold shares of Aimco Common Stock and AIR Common Stock. In addition, current Aimco stockholders will own the same properties before and after the Separation, only in two simpler, more focused, and less levered entities.

The separation of assets approximating 10% of the total estimated value (“gross asset value” or “GAV”), as of March 31, 2020, of Aimco, will result in two, focused and independent companies: (I) AIR, with assets approximating 90% (prior to giving effect to certain transactions, which proceeds are intended to reduce leverage) of Aimco’s GAV, as of March 31, 2020, which is expected to provide a simple and transparent way to invest in the multifamily sector, combining (i) a narrow focus on allocating capital only to stabilized apartment communities; (ii) a high-quality and diversified portfolio of stabilized multifamily properties, (iii) best-in-class property operations, (iv) low financial leverage, (v) limited execution risk, (vi) low overhead costs as a percentage of GAV, and (vii) public market liquidity for its shares, which are expected to be traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “AIRC”; and (II) “New” Aimco, with assets approximating 10% of Aimco’s GAV, as of March 31, 2020, which is expected to continue the business of redeveloping and developing apartment communities, while also pursuing other accretive transactions. Aimco’s shares will continue to be traded on the NYSE under the ticker symbol “AIV.” The Aimco board of directors believes that the two businesses, each with a clear focus, strong, independent boards of directors, dedicated management teams, and strengthened balance sheets, will create greater stockholder value as two companies than as one. The separation will provide each stockholder the opportunity to make an individual allocation of capital to one or both of the two differentiated businesses, each with a distinct investment risk/return profile: ownership of stabilized apartment communities through an investment in AIR; or redevelopment, development, and transactions through an investment in Aimco.

The AIR portfolio is expected to include 98 apartment communities, which had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point. The AIR portfolio will include garden style, mid-rise, and high-rise apartment communities with eight important geographic concentrations: Boston; Philadelphia; Washington D.C.; Miami; Denver; the San Francisco Bay Area; Los Angeles; and San Diego; and a focus on properties with high land value located in submarkets with outsized growth prospects. The Aimco board of directors believes the geographic and price point diversification will reduce the volatility of AIR’s rental revenue by avoiding undue concentration in any particular market and by exposure to a range of price-points that have different advantages over various economic and housing cycles. AIR is expected to own properties with an estimated GAV of $10.4 billion, and an estimated Net Asset Value, or “NAV” (as defined below), of $7.8 billion, in each case, as of March 31, 2020.

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Aimco will own the redevelopment and development business and a portfolio of assets that is expected to consist of 11 stabilized multifamily properties, primarily located in the Boston and San Diego areas, as well as: (i) Aimco’s loan to, and equity option in, the partnership owning Parkmerced Apartments located in southwest San Francisco, California (the “Parkmerced Loan”); (ii) Hamilton on the Bay, a multifamily property located on the waterfront in Miami, Florida, with 271 apartment homes as well as the land and zoning to construct 389 additional apartment homes; and (iii) the assemblage of 1001 Brickell Bay Drive, a 350,000 square foot office building located in Miami Beach, Florida, and the Yacht Club multifamily property adjacent to 1001 Brickell Bay Drive. Aimco will be well-capitalized with an estimated GAV of $1.3 billion, and an estimated NAV of $1.2 billion, each as of March 31, 2020 (in each case, without giving effect to the value of the Initial Leased Properties or the Separate Portfolio Assets (each as defined below)). Aimco is also expected to own a separate portfolio of 16 assets (the “Separate Portfolio Assets”) with an estimated GAV of $0.9 billion, securing property debt of approximately $0.7 billion, including purchase money notes payable to AIR of approximately $0.5 billion.

The assets that will be allocated to AIR and Aimco, as applicable, were selected based on the go-forward business plans of each company. Assets that are allocated to AIR are primarily stabilized multifamily properties located in varying geographies that are intended to provide AIR with the blend and balance of assets to support its strategic goals. Assets that are allocated to Aimco are primarily either undergoing redevelopment, development, or lease-up, or are expected to provide stabilized income to help meet Aimco’s ongoing liquidity needs.

AIR does not intend to redevelop or develop apartment communities, reducing the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. At the time of the Separation, four AIR properties are expected to be under construction or in lease-up, including North Tower at Flamingo Point in Miami Beach, Florida, The Fremont on the Anschutz Medical Campus in Aurora, Colorado, Prism in Cambridge, Massachusetts, and 707 Leahy Apartments in Redwood City, California (collectively, the “Initial Leased Properties”). These properties will be leased to Aimco and, under each such lease, the terms thereof will be on an arm’s-length basis, including the initial term and extensions and the initial annual rent, which will be based on the then-current fair market value of the leased property and market NOI cap rates, subject to certain adjustments and periodic escalation as set forth in such lease. Further, under the terms of the leases, Aimco will have the option to complete the on-going redevelopment and development of such properties and their lease-ups (provided that once Aimco elects to commence the same, it will use commercially reasonable efforts to diligently pursue it to completion).

AIR will retain substantially all of Aimco’s existing employees, including its property management team, and Aimco will employ approximately 50 of Aimco’s existing employees. AIR will initially provide Aimco with property management services and customary administrative and support services.

Each Aimco common stockholder will receive one share of AIR Common Stock for each one share of Aimco Common Stock held of record by such stockholder as of the close of business on                  , 2020 (the “record date”). You will receive cash in lieu of any fractional shares of AIR Common Stock which you would have otherwise received. The date on which the shares of AIR Common Stock will be distributed to you (the “distribution date”) is expected to be                 , 2020. After the Separation is completed, AIR will be an independent, publicly traded company, and the outstanding AIR Common Stock is expected to be owned 100% by Aimco common stockholders.

No vote of Aimco’s stockholders is required or being sought in connection with the Separation. Therefore, we are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, surrender or exchange your Aimco Common Stock, or take any other action to receive your shares of AIR Common Stock in connection with the Separation.

 

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There is no current trading market for AIR Common Stock. We anticipate that a limited market, commonly known as a “when-distributed” trading market, will develop at some point following the record date and prior to the distribution, and that “regular-way” trading in shares of AIR Common Stock will begin on the first trading day following the distribution. If trading begins on a “when-distributed” basis, you may purchase or sell shares of AIR Common Stock up to and including the distribution date, but your transaction will not settle until after the distribution date. Shares of AIR Common Stock are expected to be traded on the NYSE under the ticker symbol “AIRC.” As discussed under “The Separation—Listing and Trading of AIR Common Stock,” if you sell your Aimco Common Stock in the “due-bills” market after the record date and before the distribution date, you will also be selling your right to receive shares of AIR Common Stock in connection with the Separation. However, if you sell your Aimco Common Stock in the “ex-distribution” market after the record date and before the distribution date, you will still receive shares of AIR Common Stock in the Separation.

AIR will elect to be subject to tax as a real estate investment trust for U.S. federal income tax purposes (“REIT”) commencing with its initial taxable year ending December 31, 2020. To assist AIR in complying with the limitation on the concentration of ownership of REIT stock imposed by the Internal Revenue Code of 1986, as amended (the “Code”), among other purposes, AIR’s charter will provide for restrictions on ownership and transfer of AIR’s shares of capital stock, including, certain restrictions that, subject to certain exceptions, will prevent any person from beneficially or constructively owning more than (i) 8.7% (or 15% in the case of certain pension trusts and registered investment companies), by value or number of shares, whichever is more restrictive, of the outstanding shares of AIR Common Stock, or (ii) 8.7% (or 15% in the case of certain pension trusts and registered investment companies) in aggregate value of the outstanding shares of all classes and series of AIR capital stock, including AIR Common Stock and any AIR preferred stock. The charter will also prohibit anyone from buying shares of AIR’s capital stock if the purchase would result in AIR losing its REIT status. This could happen if a transaction results in five or fewer individuals (applying certain attribution rules of the Code) owning 50% or more of the value of all of AIR’s shares of capital stock or in fewer than 100 persons owning all of AIR’s shares of capital stock. See “Description of AIR’s Capital Stock—Restrictions on Transfer and Ownership of AIR Stock.”

 

 

In reviewing this information statement, you should carefully consider the matters described under “Risk Factors” beginning on page 30.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

This information statement will be first made available to Aimco common stockholders beginning on or about              , 2020.

The date of this information statement is              , 2020.

 

 

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TRADEMARKS AND SERVICE MARKS

Aimco and its subsidiaries own or have rights to various trademarks, logos, service marks, and trade names that each entity uses in connection with the operation of its business. Aimco and its subsidiaries also own or have the rights to copyrights that protect the content of their respective products. Solely for convenience, the trademarks, service marks, trade names, and copyrights referred to in this prospectus are listed without the ™, ®, and © symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, trade names, and copyrights included or referred to in this information statement.

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TABLE OF CONTENTS

 

SUMMARY

     1  

SUMMARY HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

     27  

RISK FACTORS

     30  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     49  

THE SEPARATION

     51  

DIVIDEND POLICY

     70  

DESCRIPTION OF FINANCING AND MATERIAL INDEBTEDNESS

     71  

CAPITALIZATION

     72  

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

     73  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     81  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     82  

BUSINESS AND PROPERTIES

     137  

MANAGEMENT

     150  

EXECUTIVE COMPENSATION

     161  

PRINCIPAL ELEMENTS OF AIR PREDECESSOR EXECUTIVE COMPENSATION PROGRAM

     167  

GOING FORWARD AIR COMPENSATION ARRANGEMENTS

     180  

SUMMARY COMPENSATION TABLE

     183  

GRANTS OF PLAN-BASED AWARDS IN 2019

     185  

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2019

     187  

OPTION EXERCISES AND STOCK VESTED IN 2019

     190  

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

     191  

APARTMENT INCOME REIT CORP. 2020 STOCK AWARD AND INCENTIVE PLAN

     192  

APARTMENT INCOME REIT CORP. 2020 EMPLOYEE STOCK PURCHASE PLAN

     199  

APARTMENT INCOME REIT CORP. 2007 STOCK AWARD AND INCENTIVE PLAN

     202  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     205  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     208  

OUR RELATIONSHIP WITH AIMCO FOLLOWING THE SEPARATION

     209  

DESCRIPTION OF AIR’S CAPITAL STOCK

     214  

DESCRIPTION OF AIR OP PARTNERSHIP UNITS AND SUMMARY OF AIR OP PARTNERSHIP AGREEMENT

     226  

U.S. FEDERAL INCOME TAX CONSIDERATIONS

     236  

WHERE YOU CAN FIND MORE INFORMATION

     255  

INDEX TO FINANCIAL STATEMENTS

     F-1  

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SUMMARY

The following is a summary of material information included in this information statement. This summary may not contain all of the details concerning the Separation or other information that may be important to you. To better understand the Separation and AIR’s business, you should carefully review this entire information statement.

Unless otherwise indicated or the context otherwise requires, any references in this information statement to: (i) “we,” “our,” “us,” the “Company” and “AIR” refer collectively to AIR, AIR OP, and their consolidated subsidiaries; (ii) “Aimco” refers collectively to Aimco, New OP and their consolidated subsidiaries (other than AIR, AIR OP, and their consolidated subsidiaries after the Separation); and (iii) our “charter” refers to AIR’s amended and restated charter that will govern the rights of holders of AIR Common Stock upon the consummation of the Separation.

This information statement has been prepared on a prospective basis on the assumption that, among other things, the Separation will be consummated as contemplated by this information statement. There can be no assurance, however, that the Separation will occur or will occur as so contemplated.

You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover or as of any earlier date as of which such information is given, as applicable. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information, except in the normal course of our public disclosure obligations as required by applicable law. In particular, a number of matters contained in this information statement relate to agreements or arrangements that have not yet been finalized and expectations of what may occur. Prior to the completion of the Separation, it is possible that these agreements, arrangements, and expectations may change.

Our Company

The board of directors of Aimco has announced a plan to create AIR by separating assets approximating 10% of the GAV, as of March 31, 2020, of Aimco. The Separation will result in two, focused and independent companies: (I) AIR, with assets approximating 90% (prior to giving effect to certain transactions, which proceeds are intended to reduce leverage) of Aimco’s GAV, as of March 31, 2020, which is expected to provide a simple and transparent way to invest in the multifamily sector, combining (i) a narrow focus on allocating capital only to stabilized apartment communities; (ii) a high-quality and diversified portfolio of stabilized multifamily properties, (iii) best-in-class property operations, (iv) low financial leverage, (v) limited execution risk, (vi) low overhead costs as a percentage of GAV, and (vii) public market liquidity for its shares, which are expected to be traded on the NYSE under the ticker symbol “AIRC”; and (II) “New” Aimco, with assets approximating 10% of Aimco’s GAV, as of March 31, 2020, which is expected to continue the business of redeveloping and developing apartment communities, while also pursuing other accretive transactions. Aimco’s shares will continue to be traded on the NYSE under the ticker symbol “AIV.”

Each of AIR and Aimco will have its own distinctive focus. The AIR business plan is to: (i) invest only in stabilized apartment communities; (ii) own a high-quality and diversified portfolio of stabilized multifamily properties; (iii) emphasize its comparative advantage in property operations, with high customer-defined satisfaction and retention, low rate of growth in controllable operating expenses, and high operating margins; (iv) maintain a strong balance sheet with leverage, net of cash and receivables, and weighted average interest expense, net of interest income, comparable to or lower than peers; (v) reduce execution risk through elimination of redevelopment and development activities; and (vi) operate with overhead costs estimated at about 15 basis points of GAV, lower than peers as a percentage of GAV. AIR has sold or will sell assets sufficient to reduce



 

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financial leverage by approximately $2 billion. We believe that AIR’s simplified business, focused on the ownership and active management of stabilized apartment communities, will be more readily understood and valued by investors and will be more predictable due to strong operations and reduced exposure to the execution risk of redevelopment and development. We intend for AIR to have a strong balance sheet with leverage, net of cash and loans receivable, and a weighted average interest expense, net of interest income, at or below peer averages. We also expect AIR to issue corporate level debt when its cost is lower than that of non-recourse property debt. We further expect that AIR’s Funds From Operations (“FFO”) will increase and be more predictable, supporting higher dividends, as a result of the elimination of earnings dilution from properties with lower leverage and reduced or no earnings during their development, redevelopment or lease-up, lower overhead costs due primarily to the elimination of overhead costs related to redevelopment and development activities.

AIR will retain substantially all of Aimco’s existing employees, including its property management team, and Aimco will employ approximately 50 of Aimco’s existing employees. AIR will initially provide Aimco with property management services and customary administrative and support services. AIR, directly and through subsidiaries in which it owns all of the outstanding common equity, will be the general and special limited partner of AIR OP. AIR OP will hold substantially all of AIR’s assets and manage the daily operations of AIR’s business directly and indirectly through certain subsidiaries.

Tom Keltner will be elected Chairman of the AIR board of directors. Terry Considine will be a member of the AIR board of directors and will also serve as AIR’s Chief Executive Officer, working with an experienced executive team wholly dedicated to AIR, including Lisa Cohn, as President and General Counsel, Keith Kimmel, as President, Property Operations, Paul Beldin, as Executive Vice President and Chief Financial Officer, and Conor Wagner, as Senior Vice President and Chief Investment Officer. In addition, Terry Considine will be a member of Aimco’s board of directors with specific responsibilities during the next two years to support the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors, which is expected to include six independent directors who have not previously served on the Aimco board of directors.

The AIR portfolio is expected to include 98 apartment communities, which had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point. The AIR portfolio will include garden style, mid-rise, and high-rise apartment communities with eight important geographic concentrations: Boston; Philadelphia; Washington D.C.; Miami; Denver; the San Francisco Bay Area; Los Angeles; and San Diego; and a focus on properties with high land value located in submarkets with outsized growth prospects. The Aimco board of directors believes the geographic and price point diversification will reduce the volatility of AIR’s rental revenue by avoiding undue concentration in any particular market and by exposure to a range of price-points that have different advantages over various economic and housing cycles.

AIR is expected to own properties with an estimated GAV of $10.4 billion, and an estimated NAV, of $7.8 billion, in each case, as of March 31, 2020.

Aimco will own the redevelopment and development business and a portfolio of assets that is expected to consist of (i) Royal Crest Estates (Warwick), located in Warwick, Rhode Island; Royal Crest Estates (Marlboro), located in Marlborough, Massachusetts; Waterford Village, located in Bridgewater, Massachusetts; Wexford Village, located in Worchester, Massachusetts; Royal Crest Estates (Nashua), located in Nashua, New Hampshire; The Bluffs at Pacifica, located in San Francisco, California; St. George Villas, located in St. George, South Carolina; Casa del Hermosa, located in San Diego, California; Casa del Sur, located in San Diego, California; Casa del Norte, located in San Diego, California; and Casa del Mar, located in San Diego, California (collectively, the “Excluded Seed Properties”), which are stabilized multifamily properties primarily located in the Boston and San Diego areas; and (ii) certain other investments, consisting of the Parkmerced Loan; Hamilton on the Bay, a multifamily property located on the waterfront in Miami, Florida, with 271 apartment homes as well as the land and zoning to construct 389 additional apartment homes; and the assemblage of 1001 Brickell



 

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Bay Drive, a 350,000 square foot office building located in Miami Beach, Florida, and the Yacht Club multifamily property adjacent to 1001 Brickell Bay Drive (collectively, the “Additional Excluded Properties”).

Aimco will be well-capitalized with an estimated GAV of $1.3 billion, and an estimated NAV of $1.2 billion, each as of March 31, 2020 (in each case, without giving effect to the value of the Initial Leased Properties or the Separate Portfolio Assets).

Aimco is also expected to own the Separate Portfolio Assets with an estimated GAV of $0.9 billion, securing property debt of approximately $0.7 billion, including purchase money notes payable to AIR of approximately $0.5 billion.

AIR does not intend to redevelop or develop apartment communities, reducing the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. At the time of the Separation, the Initial Leased Properties are expected to be under construction or in lease-up, including North Tower at Flamingo Point in Miami Beach, Florida, The Fremont on the Anschutz Medical Campus in Aurora, Colorado, Prism in Cambridge, Massachusetts, and 707 Leahy Apartments in Redwood City, California. These properties will be leased to Aimco and, under each such lease, the terms thereof will be on an arm’s-length basis, including the initial term and extensions and the initial annual rent, which will be based on the then-current fair market value of the leased property and market NOI cap rates, subject to certain adjustments and periodic escalation as set forth in such lease. Further, under the terms of the leases, Aimco will have the option to complete the on-going redevelopment and development of such properties and their lease-ups (provided that once Aimco elects to commence the same, it will use commercially reasonable efforts to diligently pursue it to completion).

AIR’s expected business activities following the completion of the Separation are summarized below.

Ownership of Apartment Communities and Management of Our Portfolio

We will own a portfolio of 98 apartment communities (including the Initial Leased Properties), which

had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point, in which we will hold an average ownership of approximately 93.5%, as of September 30, 2020, measured by GAV. Our portfolio will include garden style, mid-rise, a high rise apartment communities with eight important geographic concentrations, focusing on properties with high land value located in submarkets with outsized growth prospects. The portfolio is diversified across several of the largest markets in the United States and is also diversified across “A,” “B,” and “C+” price points, averaging “B+” in quality. For a description of this rating system, see “Business and Properties—Properties.”

We will target geographic diversification in our portfolio in order to reduce the volatility of our rental revenue by avoiding undue concentration in any particular market. Similarly, we will seek price point diversification to better manage rental rate volatility. Our portfolio will seek to include about one-half “A” rated properties, and about one-half “B” and “C+” rated properties. We believe the diversity of price points allows us to benefit from price-points that have different advantages over various economic and housing cycles. Our price point “A” apartment communities typically provide higher margins but have tenants with fast growing incomes that are more susceptible to competitive housing supply, while our price point “B” and “C” apartment communities typically provide lower margins but have less volatile rental rates and are less susceptible to competitive housing supply. We also plan to maintain a dynamic capital allocation and market selection process and expect to decrease over time our investment in jurisdictions with high unfunded public liabilities and to increase our allocation to locations with lower public tax burdens, including the southeastern United States.

We may choose to improve the quality of our portfolio through our relationship with Aimco, as we may lease certain properties to Aimco for development or redevelopment and lease-up in accordance with the Master Leasing Agreement (as defined below). Under these leases Aimco will have the option, but not an obligation, to terminate the leases once the properties reach and maintain stabilization (so long as the fair market value of the property at



 

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stabilization is not less than the fair market value of such property at lease inception). We will manage our portfolio to allocate investment capital to enhance rent growth and increase long-term capital values through routine investments in property upgrades (such as upgrading kitchens, bathrooms and other interior design aspects) and through portfolio design, emphasizing land value as well as location and submarket.

As part of our portfolio strategy, we may seek to sell communities with lower expected free cash flow internal rates of return and reinvest the proceeds from such sales in accretive uses such as capital enhancements, share repurchases, and selective acquisitions of stabilized communities with projected free cash flow internal rates of return higher than expected from the communities being sold. When the cost of capital is favorable, we will look to grow through the acquisition of stabilized apartment communities that we believe we can operate better than their previous owners. Through this disciplined approach to capital allocation, we expect to increase the quality and expected growth rate of our portfolio.

Redevelopment and Development

We do not intend to redevelop or develop apartment communities, reducing the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. Instead, we may choose to improve the quality of our portfolio through our relationship with Aimco, as we may lease certain properties to Aimco for development or redevelopment and lease-up. Aimco will redevelop and develop properties for us and increase occupancy at properties that are not stabilized due to a recently completed redevelopment or development, commencing with the Initial Leased Properties. In addition, we may engage third parties to complete certain development, redevelopment or lease-up projects for us and we may engage in transactions, including joint venture transactions, with Aimco or other third parties relating to redevelopment or development projects.

We expect to lease the Initial Leased Properties (and additional properties, as may be mutually agreed between us and Aimco in the future, subject to the approval of each of AIR’s and Aimco’s independent directors) to Aimco pursuant to leases entered into in accordance with the Master Leasing Agreement for a percentage of then-current fair market value. Aimco will then have the option to redevelop, develop or lease-up the property with the goal of maximizing long-term value of the community. Upon completion of the redevelopment and development and lease-up, Aimco will have the option, but not an obligation, to terminate any of the leases for these properties once they reach and maintain stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception), and receive payment for the redevelopment or development-related improvements, either by payment from AIR of a sum equal to 95% of the difference between the then-current fair market value of the property less the fair market value of the property at the time of lease inception if AIR exercises an option to pay such fee, or through a sale of the property to a third party (by AIR and Aimco), with AIR guaranteed to receive an amount attributable to the fair market value of the property at the time of lease inception and Aimco retaining any excess proceeds. In the event of such sale of the property, Aimco may also elect to purchase the property at a purchase price equal to the fair market value thereof at the time of lease inception (and may subsequently sell the property to a third party, subject to AIR’s right of first refusal during the first year following Aimco’s acquisition). If AIR elects not to pay the fee for the redevelopment or development-related improvements, and Aimco declines to so purchase the property or cause its sale to a third party, Aimco may elect to rescind its termination of the applicable lease and instead continue such lease in effect in accordance with its terms. If Aimco does not exercise (or rescinds) its right to terminate a lease, Aimco will have the option to assign the lease to a third party, subject to our consent and right of first refusal.

Aimco may also source its own opportunities and acquire other properties or portfolios from third parties that it believes can be redeveloped or developed or leased-up to become stabilized properties and we will have an option to purchase such properties prior to or once the redevelopment and development and lease-ups are completed. If we, subject to our discretion, agree to acquire any such properties, we will acquire such property from Aimco at then-current fair market value. If we do not acquire such properties, Aimco will be permitted to retain such properties or sell them to third parties.

Property Management

We will also manage and operate apartment communities. In addition to managing our own properties, pursuant to the Property Management Agreements (as defined below), we initially will provide property



 

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management services and certain other property-related services to Aimco for the majority of its properties, and Aimco will generally be obligated to pay to us a property management fee based on an agreed percentage of revenue collected and such other fees as may be mutually agreed for various other services. See “Our Relationship with Aimco Following the Separation.”

We will seek to continuously improve properties under our management by: employing service-oriented, well-trained team members; taking advantage of advances in technology; increasing automation; centralizing operational tasks where efficient to do so; standardizing business processes, operational measurements, and internal reporting; and enhancing financial controls over field operations. Our focus will be on customer satisfaction, resident selection and retention, revenue management and ancillary services, controlling expenses, and improving and maintaining apartment community quality. For further discussion of our focus, see “Business and Properties—Our Company—Property Management.”

Our Management Team

In connection with the Separation, AIR will retain substantially all of Aimco’s existing employees, including its property management team, and Aimco will employ approximately 50 of Aimco’s existing employees. Each of AIR and Aimco will have senior management teams focused on the performance of each company’s respective businesses and value-creation opportunities. We believe that the separation of the Aimco and AIR portfolios, and an experienced senior management team at each of Aimco and AIR will result in the respective businesses each receiving the senior management focus and attention required for each business to realize its potential.

Our senior management team has a collective track record of successful redevelopment and development projects, active management of real estate operations, or real estate portfolio management, all within a REIT environment. Our senior management team averages 12 years working together. Tom Keltner will be elected Chairman of the AIR board of directors. Terry Considine will be a member of the AIR board of directors and will also serve as AIR’s Chief Executive Officer. Mr. Considine has served as Chief Executive Officer of Aimco since July 1994. Mr. Considine will resign as Chief Executive Officer of Aimco in connection with the Separation and will continue to serve Aimco with specific responsibilities during the next two years to support the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors. During the two years when Mr. Considine will have specific responsibilities to the Aimco board of directors, he will not accept compensation from Aimco that would serve to increase his current compensation, provided that, AIR and Aimco have agreed that following the Separation, Aimco will reimburse AIR for base salary, short-term incentive amounts, and long-term incentive amounts paid by AIR to Mr. Considine under his employment agreement with AIR that are in excess of $1 million annually. In addition, Mr. Considine will serve on the boards of directors of both AIR and Aimco, but will not serve as Chairman of either. Mr. Considine (in addition to any other directors serving on both boards of directors) will recuse himself from voting as a member of either board of directors during the approval or disapproval of any transactions between the two companies. In addition, our senior management team will include Lisa Cohn, as President and General Counsel, Keith Kimmel, as President, Property Operations, Paul Beldin, as Executive Vice President and Chief Financial Officer, and Conor Wagner, as Senior Vice President and Chief Investment Officer.

Management’s compensation is designed to be aligned with strategy and performance and to incentivize growth and returns. See “Management—Executive Compensation.”

In addition, we will have a board of directors that meets the NYSE independence requirements, including being comprised of a majority of independent directors, and AIR will separate the roles of Chairman of the board of directors and Chief Executive Officer. Effective as of the Separation, AIR will withdraw from the Maryland Unsolicited Takeover Act (“MUTA”). To enable AIR’s management team to prioritize operations during a turbulent economy and to execute a smooth transition to a pure-play business model, the Aimco board of directors decided unanimously to classify the AIR board of directors for two years. Class I will serve until the 2021 annual meeting of stockholders, and all classes will stand for annual election at the 2022 annual meeting



 

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and thereafter. By having opted out of MUTA, AIR will not be able to reclassify its board without stockholder approval.

REIT Status

We will elect to be treated as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2020. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our “real estate investment trust taxable income,” which is generally equivalent to net taxable ordinary income (and may be all cash or a combination of cash and stock satisfying the requirements of applicable law). See “U.S. Federal Income Tax Considerations.”

Overview of the Separation

The board of directors of Aimco has announced a plan to create AIR by separating assets representing approximately 10% of the GAV, as of March 31, 2020, of Aimco. The Separation will result in two, focused and independent companies:

 

  •  

AIR, with assets approximating 90% (prior to giving effect to certain transactions, which proceeds are intended to reduce leverage) of Aimco’s GAV, as of March 31, 2020, which is expected to provide a simple and transparent way to invest in the multifamily sector, combining (i) a narrow focus on allocating capital only to stabilized apartment communities; (ii) a high-quality and diversified portfolio of stabilized multifamily properties, (iii) best-in-class property operations, (iv) low financial leverage, (v) limited execution risk, (vi) low overhead costs as a percentage of GAV, and (vii) public market liquidity for its shares; and

 

  •  

“New” Aimco, with assets approximating 10% of Aimco’s GAV, as of March 31, 2020, which is expected to continue the business of redeveloping and developing apartment communities, while also pursuing other accretive transactions.

Upon the completion of the Separation, AIR will own, through subsidiaries in which it will own all of the common equity, the general partner interest, and special limited partner interest in AIR OP, which will also have minority third-party limited partners, and Aimco will own, directly and through subsidiaries in which it will own all of the common equity, the general partnership interest and special limited partnership interest in New OP, which will also have minority third-party limited partners.

Immediately prior to the distribution of New OP Units, New OP will receive, by contribution from AIR OP, certain properties, assets, and liabilities related to the Aimco business in exchange for New OP Units. Following such contribution by AIR OP, on the distribution date, AIR OP will distribute its New OP Units to holders of AIR OP Common Units, including AIR and AIMCO-GP, Inc., a Delaware corporation and the general partner of AIR OP (“AIR OP GP”) (with AIR and AIR OP GP further distributing their New OP Units to Aimco), on a pro rata basis.

AIR will contribute a portion of its interests in AIR OP and all of its interests in AIR OP GP to two newly formed subsidiary REITs in a taxable transaction in exchange for common and preferred stock in each REIT. Aimco will then distribute on a pro rata basis to all holders of Aimco Common Stock the AIR Common Stock.

On the distribution date, each Aimco common stockholder will receive from Aimco one share of AIR Common Stock for each one share of Aimco Common Stock held as of the close of business on the record date. You will not be required to make any payment, or surrender or exchange your Aimco Common Stock, or take any other action to receive your AIR Common Stock in connection with the Separation. Following such distribution by Aimco, Aimco and AIR will be two, focused and independent companies.



 

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The following transactions also have occurred, or are expected to occur concurrently with, prior to or immediately following the completion of the Separation (collectively, the “Restructuring”):

 

  •  

Aimco OP GP, LLC (“New OP GP”) was formed as a Delaware limited liability company on August 11, 2020 with Aimco as its initial member. New OP was formed as a Delaware limited partnership on August 11, 2020, with AIR OP as its sole initial limited partner and New OP GP as its initial general partner.

 

  •  

AIR OP’s limited partnership agreement is expected to be amended to provide, among other things, that all redemption and exchange rights related to the units of AIR OP will be denominated in AIR Common Stock rather than Aimco Common Stock if the Separation is consummated (see “Description of AIR OP Partnership Units and Summary of AIR OP Partnership Agreement” below).

 

  •  

In accordance with the terms of the Separation and Distribution Agreement (the “Separation Agreement”), AIR OP will cause the Aimco business (other than (i) a portion of the 16 Separate Portfolio Assets and (ii) its interests in AIMCO Royal Crest—Nashua L.L.C., the Delaware limited liability company that owns Royal Crest Estates (Nashua) (“Royal Crest Nashua LLC”), which entity will be transferred to New OP for no consideration immediately after the distribution of New OP Units pursuant to a binding agreement entered into prior to such distribution) and certain other assets to be contributed to New OP in exchange for 100% of the outstanding New OP Units.

 

  •  

It is expected that certain entities that will be subsidiaries of New OP after the separation will assume or retain a certain amount of existing secured property-level indebtedness related to the Aimco business, while entities that will be subsidiaries of AIR will assume or retain a certain amount of existing secured property-level indebtedness related to the AIR business.

 

  •  

It is expected that AIR and its subsidiaries will have a revolving credit facility and a term loan credit facility, each of which may be secured by certain equity interests in subsidiaries of AIR and its subsidiaries, and which credit facilities are expected to be a continuation of Aimco’s existing revolving credit facility and term loan credit facility, subject to such changes to reflect the new corporate structure and market conditions.

 

  •  

Substantially all of Aimco’s (and its subsidiaries’) employees will become or remain employees of AIR OP (and its subsidiaries), while approximately 50 of Aimco’s (and its subsidiaries’) employees will become or remain employees of New OP (and its subsidiaries).

 

  •  

In accordance with the Separation Agreement, AIR OP will distribute 100% of the outstanding New OP Units to the holders of AIR OP Common Units (including AIR and AIR OP GP), pro rata with respect to their ownership of AIR OP Common Units as of the close of business on the record date. Each of the holders of AIR OP Common Units will be entitled to receive one New OP Unit for each one AIR OP Common Unit held as of the close of business on the record date.

 

  •  

AIR and AIR OP GP will distribute their New OP Units to Aimco.

 

  •  

AIR OP will transfer its interests in Royal Crest Nashua LLC to New OP.

 

  •  

New OP or its subsidiaries and AIR OP and its subsidiaries will contribute the Separate Portfolio Assets to a partnership (“James-Oxford LP”) in exchange for common and preferred interests in James-Oxford LP. New OP will then contribute its interests in James-Oxford LP to Aimco JO Intermediate Holdings, LLC (“Aimco JO”), a new subsidiary of Aimco REIT Sub, LLC (“New Sub REIT”), a new subsidiary REIT of New OP. AIR OP and its subsidiaries will sell their interests in James-Oxford LP (other than a less than 5% common interest) to Aimco JO in exchange for notes payable to subsidiaries of AIR of $0.5 billion and certain other obligations. The transactions described above are intended to constitute taxable transactions with respect to the interests in James-Oxford LP.

 

  •  

Aimco will contribute its interest in AIR OP GP to AIR.



 

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  •  

On November 5, 2020, AIR REIT Sub 1, LLC (“Sub REIT 1”) and AIR REIT Sub 2, LLC (“Sub REIT 2”), each Delaware limited liability companies, were formed. Sub REIT 1 and Sub REIT 2 will each elect to be treated as a REIT for U.S. federal income tax purposes commencing with its initial taxable year ending December 31, 2020. AIR will contribute an amount of AIR OP Common Units representing an approximately 34% limited partner interest in AIR OP to Sub REIT 1, and will contribute AIR OP Common Units representing an approximately 34% limited partner interest in AIR OP and its interests in AIR OP GP to Sub REIT 2, each in exchange for common and preferred interests in Sub REIT 1 and Sub REIT 2 (as applicable), which transactions are intended to trigger gain for U.S. federal income tax purposes. Sub REIT 1 and Sub REIT 2 are each expected to also have approximately 125 third-party holders of a nominal amount of non-participating non-voting preferred stock with an aggregate initial liquidation preference of approximately $125,000 to satisfy certain requirements for qualifying as a REIT for U.S. federal income tax purposes, and AIR OP is expected to issue a new series of preferred limited partnership units of AIR OP to each of Sub REIT 1 and Sub REIT 2 with terms substantially the same as such non-participating non-voting preferred stock.

 

  •  

Aimco Development Company, LLC (formerly named AIVTRS I, LLC, “Redev/Dev TRS”) was formed as a Delaware limited liability company on August 21, 2020 with AIR OP as its initial member. Redev/Dev TRS has elected to be treated as a corporation for U.S. federal income tax purposes, and Redev/Dev TRS and Aimco have jointly filed an election to treat Redev/Dev TRS as a taxable REIT subsidiary of Aimco. New OP will then contribute the redevelopment and development business to Redev/Dev TRS.

 

  •  

AIR Property Management TRS, LLC (“Property Management TRS”) was formed as a Delaware limited liability company on October 29, 2020 with AIR OP as its initial member. AIR OP will form AIR Property Management Company, LLC (“Property Management LLC”) as a Delaware limited liability company. Property Management TRS will elect to be treated as a corporation for U.S. federal income tax purposes. AIR OP will then contribute its property management business to Property Management LLC and to Property Management TRS. New OP and New Sub REIT will each contribute cash to Property Management TRS in exchange for preferred interests. Property Management TRS will jointly elect with AIR, Aimco, and their applicable subsidiary REITs to be treated as a taxable REIT subsidiary of such entities.

 

  •  

AIR will issue $2 million in Class A Preferred Stock to Aimco, subject to a binding commitment to sell such Class A Preferred Stock to unrelated investors, and AIR OP will issue $2 million in a new series of preferred limited partnership units of AIR OP to AIR with terms substantially the same as the terms of the Class A Preferred Stock.

 

  •  

In accordance with the Separation Agreement, Aimco will distribute all of the outstanding AIR Common Stock to Aimco common stockholders as of the record date on a pro rata basis. Each Aimco common stockholder will be entitled to receive one share of AIR Common Stock for each one share of Aimco Common Stock held by such stockholder as of the record date.

 

  •  

Aimco will sell its Class A Preferred Stock in AIR to unrelated investors.

 

  •  

In addition to the Separation Agreement, AIR and AIR OP (or their applicable subsidiaries), on the one hand, and Aimco and New OP (or their applicable subsidiaries), on the other hand, as well as James-Oxford LP (or its applicable subsidiaries) in certain instances, will enter into an Employee Matters Agreement (as defined below), Property Management Agreements, a Master Services Agreement (as defined below), and a Master Leasing Agreement, each as further described below, and certain other agreements as further described below.

Until the Separation has occurred, Aimco has the right to terminate the Separation, even if all of the conditions have been satisfied, if the board of directors of Aimco determines, in its sole discretion, that the Separation is not in the best interests of Aimco and its stockholders or that market conditions or other



 

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circumstances are such that the Separation is no longer advisable at that time. We cannot provide any assurances that the Separation will be completed. For a more detailed description of these conditions, see “The Separation—Conditions to the Separation.”

Organizational Structure

In general, AIR intends to own its assets and conduct substantially all of its business through AIR OP and its subsidiaries. The following chart depicts a simplified graphical representation of the relevant portion of Aimco’s corporate structure before and after the Separation:

Before the Separation

 

LOGO



 

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After the Separation

 

LOGO

Reasons for the Separation

The decision by the Aimco board of directors was unanimous and is a result of years of ordinary course strategic review, many months of intensive meetings this calendar year, advice from financial, legal, tax, and accounting experts, and regular conversations with Aimco’s stockholders. Having listened to stockholders and recognizing the disconnect between the Aimco share price and NAV, the board’s goal is to simplify the business, reduce execution risk, reduce financial risk, and increase FFO and cash dividends by reducing the vacancy loss and overhead costs incurred during redevelopment and development. During the board’s deliberations, it saw the opportunity to replenish the income tax basis of Aimco’s properties by structuring the Separation to be taxable. After further discussion with Aimco’s stockholders, the board saw the opportunity to make other changes, enhancing governance while providing stability to operations during a turbulent time.

Consistent with Aimco’s ongoing strategic planning, Aimco’s management and board of directors thoroughly evaluated a range of alternatives and transactions, and determined that the Separation is the best path forward to enhance value for all stockholders for a number of reasons, including the following:

 

  •  

Creates two, focused and independent companies, each with the opportunity to pursue growth through the execution of distinctly different business plans. We believe that having two, focused and independent companies with distinct investment profiles will maximize the strategic focus and financial flexibility of each company to grow and return capital to stockholders. The Aimco board of directors believes that the two businesses, each with a clear focus, strong, independent boards of directors, dedicated management teams, and strengthened balance sheets, will create greater stockholder value as two companies than as one. The AIR business plan is to: (i) invest only in stabilized apartment communities; (ii) own a high-quality and diversified portfolio of stabilized multifamily properties; (iii) emphasize its comparative advantage in property operations, with high customer-defined satisfaction and retention, low rate of growth in controllable operating expenses, and



 

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high operating margins; (iv) maintain a strong balance sheet with leverage, net of cash and receivables, and weighted average interest expense, net of interest income, comparable to or lower than peers; (v) reduce execution risk through elimination of redevelopment and development activities; and (vi) operate with overhead costs estimated at about 15 basis points of GAV, lower than peers as a percentage of GAV. AIR has sold or will sell assets sufficient to reduce financial leverage by approximately $2 billion. AIR’s focus on the ownership of stabilized properties and active management is expected to result in higher and more predictable earnings, measured by FFO. The business plan for Aimco will be to: (i) focus on redevelopment and development projects, including those sourced by Aimco, those in collaboration with IQHQ, a leading developer of life science properties, and those leased from AIR; (ii) undertake complex transactions when warranted by risk-adjusted returns, including the opportunity for additional pipelines of redevelopment or development opportunities; (iii) capitalize its redevelopment, development, and acquisition activities primarily with private, project, or activity-specific capital; and (iv) rely on a relatively small executive team engaging with qualified partners to execute its redevelopment, development and acquisition activities. Aimco’s focus is expected to create long-term value for real estate investors and will provide Aimco with flexibility to pursue broader opportunities, including those that are short-term dilutive, longer-term to value realization, more complicated, better measured by NAV creation than FFO, or that involve more, non-recourse leverage.

 

  •  

Enhances investor transparency, better highlights the attributes of both companies, and provides investors with the option to invest in one or both companies. The Separation will provide each stockholder the opportunity to make an individual allocation of capital to one or both of the two differentiated businesses, each with a distinct investment risk/return profile: ownership of stabilized apartment communities through an investment in AIR; or redevelopment, development, and transactions through an investment in Aimco. The separation will enable potential investors and the financial community to evaluate Aimco and AIR separately and assess the merits, performance, and future prospects of their respective businesses. In addition, we believe the Separation will make AIR and Aimco more competitive and appealing to a broader investor audience moving forward, providing them with the opportunity to invest in two companies with compelling value propositions and distinct investment strategies. AIR is expected to have higher dividends, with FFO made more predictable due to lower leverage and reduced exposure to redevelopment and development. Aimco’s business is expected to be less predictable in terms of quarter over quarter activity but to also have higher long-term target returns commensurate with such level of risk. Investors can increase their allocation to Aimco or to AIR, depending on their preference.

 

  •  

Limits AIR’s exposure to risks associated with the redevelopment and development business. AIR will be able to invest in stabilized properties that it believes will better support its underlying business. AIR is expected to have limited to no risk of earnings or cash flow dilution from non-earning assets, and to have limited execution risk for redevelopment, development, and lease-ups, low leverage and lower overhead costs (both in total dollars and as a percentage of gross asset value). Through its relationship with Aimco, AIR is expected to retain access to some of the advantages of Aimco’s redevelopment and development business, such as newly developed and stabilized properties, without the execution risk, leverage or associated costs.

 

  •  

Provides our management teams with the ability to focus on our distinct businesses and be more closely aligned with the needs of investors. Each of AIR and Aimco will have an independent board of directors and independent management and will be incentivized to make decisions that are in the best interests of its respective business. The separation of the businesses will give each senior management team the opportunity to focus on the goals and expectations of each company’s investors. We expect that the separation of the experienced senior management teams and other key personnel operating our



 

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businesses will result in the ability for each company to better satisfy the needs of its respective stockholders.

 

  •  

Improves AIR’s access to capital markets. Aimco’s share price has traded at a consistent discount to NAV, making it difficult for Aimco to grow through raising new primary equity capital. The Separation is expected to increase FFO and Adjusted Funds From Operations (“AFFO”) at AIR and produce a better price to FFO ratio than has previously been given to Aimco while it owned all of the businesses of Aimco and AIR. In addition, we expect that de-leveraging and the prospect of a rating upgrade at AIR after the Separation are likely to provide AIR with enhanced access to corporate unsecured debt issuances at more favorable interest rates. As a result of the separation, we expect AIR will have improved access to the capital markets and a strong capital structure tailored to its strategic goals, enabling investment in the acquisition of properties to grow its portfolio.

 

  •  

Increases financial flexibility. Aimco’s board of directors believes that a taxable separation will increase AIR’s strategic and financial flexibility to grow, earn competitive returns on capital, and create long-term value for stockholders. The Separation will result in a refreshed tax basis for AIR, which enhances AIR’s ability to allocate capital by reducing tax friction and reduces the tax costs of future property sales and therefore enhances portfolio management. We also expect that this will reduce the need for future stock dividends and make cash dividends more likely to be a return of capital or capital gains for tax purposes, increasing their after-tax value for taxable investors.

The board of directors of Aimco also considered certain potentially negative factors associated with the Separation, including the risk that the benefits of the Separation may not be realized, the risk that there may be disruptions to the business as a result of the Separation, the one-time costs of the separation, the fact that there may be conflicts between AIR and Aimco, and the fact that the separation as structured is expected to result in certain tax liabilities for Aimco stockholders, which it determined were outweighed by the benefits of the transaction. For more information, please refer to the sections entitled “The Separation—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Our Relationship with Aimco Following the Separation

After the Separation, AIR and Aimco will be two, focused and independent companies. AIR OP will be approximately 95% owned by AIR, and New OP will be approximately 95% owned by Aimco. To set forth our relationship from and after the Separation, AIR, AIR OP, Aimco, and New OP (and our respective subsidiaries, as applicable) will enter into, among other agreements: (1) the Separation Agreement setting forth the mechanics of the Separation and certain organizational matters, (2) an agreement relating to employee matters (the “Employee Matters Agreement”), (3) agreements pursuant to which AIR will provide property management and related services to Aimco (collectively, the “Property Management Agreements”), (4) an agreement pursuant to which AIR will provide Aimco with customary administrative and support services on an ongoing basis (the “Master Services Agreement”), (5) a Master Leasing Agreement pursuant to which Aimco may enter into leases with AIR pursuant to which Aimco will lease from AIR certain properties under redevelopment and (at Aimco’s option) to be redeveloped, developed, or leased-up (including the Initial Leased Properties), and under which Aimco will have certain lease termination rights (the “Master Leasing Agreement”), and (6) three-year, $534 million, notes payable by Aimco’s subsidiary, Aimco JO, to AIR. See “Our Relationship with Aimco Following the Separation” for more details.



 

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Strengths

The Separation is intended to provide us and Aimco with the necessary structure, management, and strategy to create stockholder value. In particular, we believe that AIR will have the following strengths following the Separation:

 

  •  

Focused business model. AIR will focus solely on the ownership and active management of a high-quality and diversified portfolio of stabilized apartment communities. We believe that a singular and clear focus will create a business that is more readily understood and valued by investors. We expect that AIR will be more predictable due to strong operations and reduced exposure to the execution risk of redevelopment and development, and we intend to provide returns to our investors through what we expect to be stable and consistent revenue, principally through collection of rent from the properties we own. AIR will use its senior management team to manage portfolio and capital allocations, including the acquisition or sale of properties, continuing upgrades and re-investment, as well as establish and execute balance sheet strategies, and oversee third-party property management.

 

  •  

Diversified real estate portfolio. AIR’s real estate portfolio, with properties in eight important geographic concentrations, among other markets, provides geographic diversification in order to reduce the volatility of our rental revenue by avoiding undue concentration in any particular market. AIR’s portfolio is also diversified by price point and quality. We seek price point diversification to allows us to benefit from price-points that have different advantages over various economic and housing cycles. Our price point “A” apartment communities typically provide higher margins but have tenants with fast growing incomes that are more susceptible to competitive housing supply, while our price point “B” and “C” apartment communities typically provide lower margins but have less volatile rental rates and are less susceptible to competitive housing supply.

 

  •  

Investment in low risk asset classes. AIR is expected to limit its exposure to risk by (i) investing in a transparent and well understood asset class, maintaining a diversified portfolio of high quality, multifamily properties whose cash flows are predictable and with generally stable growth, and minimizing the risk of redevelopment and development, and (ii) maintaining a balance sheet with leverage consistent with peer averages.

 

  •  

Ability to obtain redeveloped and developed properties from Aimco. Although Aimco and AIR will be focused and independent companies, we believe there are potential benefits to each from the opportunities they have to work together in the future when it is in their respective interests. AIR may benefit from Aimco’s acceleration of the development or redevelopment of certain of AIR’s properties that have potential for redevelopment or development in the future. Specifically, we may choose to improve the quality of our portfolio through our relationship with Aimco, as we may lease certain properties to Aimco for development or redevelopment and lease-up. Under these leases Aimco will have the option, but not an obligation, to terminate the leases once the properties reach and maintain stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception). We will have a purchase option with respect to any real property owned or, subject to the consent of the landlord, leased by Aimco for which redevelopment has been substantially completed by Aimco (if applicable) and that has reached a specified occupancy for a minimum time period (excluding the Excluded Seed Properties, the Additional Excluded Properties, the Separate Portfolio Assets, and properties leased from AIR pursuant to the Master Leasing Agreement).

 

  •  

Management team with relevant experience and incentives aligned with stockholders. AIR’s senior management team will focus solely on AIR’s business and will be incentivized to make decisions that are in the best interests of AIR. AIR will also have asset managers and internal auditors to oversee its performance, and both management and board investment committees to review and approve transactions. AIR’s senior management team has a collective track record of active management of real estate operations and real estate portfolio management, all within a REIT environment.



 

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  •  

Experienced leader with incentives aligned with stockholders’ interests. Terry Considine will serve as AIR’s Chief Executive Officer. Mr. Considine has served as Chief Executive Officer of Aimco since July 1994. In addition, Mr. Considine has over 45 years of experience in the real estate and other industries. As a substantial equity holder in AIR, we believe Mr. Considine’s interests will be well-aligned with the interests of AIR’s stockholders.

Strategy

Following the Separation, AIR will seek to maximize stockholder value through:

 

  •  

Diversified investments. We intend to own a portfolio of stabilized properties in top United States markets and focus on properties with high land value located in submarkets with outsized growth prospects. We also intend to maintain a balanced multifamily portfolio consisting of properties diversified across “A,” “B,” and “C” price points, allowing AIR to benefit from price-points that have different advantages over various economic and housing cycles.

 

  •  

High quality portfolio with strong property management operations. We will actively manage our portfolio, aiming to maintain high quality properties attractive to customers with above average incomes and prospects. Our apartment communities will generally be equipped with smart home technology and other amenities. We will aim to drive rent growth based on high levels of resident retention through strong customer selection and satisfaction, coupled with disciplined innovation resulting in sustained cost control, to maximize net operating income growth and margins.

 

  •  

Cautious use of financial leverage. We expect to operate at leverage levels lower than that historically associated with Aimco and at levels in line with our peers. We intend to have a strong, low-cost, low-leverage balance sheet that is flexible and maintains a well-laddered maturity schedule, and plan to target pro forma leverage ratio (net debt / normalized EBITDA) of 5.5:1. Specifically, our leverage immediately after the Separation is expected to be principally comprised of single asset, non-recourse, property level debt. We will consider issuing corporate debt when its cost is lower than non-recourse property debt.

 

  •  

Reduced Execution Risk. We will be able to reduce the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. Instead, we are expected to benefit from a series of valuable opportunities to transact with Aimco when it is in our interests to enhance our portfolio, while limiting our exposure to such risks.

Financing

We expect to implement and maintain a capital structure that is adequate to pursue our business plan and a cost of capital that allows us to provide attractive returns to our stockholders and compete for investment opportunities. At the completion of the Separation, it is expected that AIR and its subsidiaries will have a revolving credit facility and a term loan credit facility, each of which may be secured by certain equity interests in subsidiaries of AIR, and which credit facilities are expected to be a continuation of Aimco’s existing revolving credit facility and term loan credit facility, subject to such changes to reflect the new corporate structure and market conditions. However, the terms and conditions remain under discussion and are subject to change.

Over time, we may become party to one or more additional financing arrangements, including credit facilities or other bank debt, bonds, and mortgage financing.

We also anticipate that certain entities that will be our subsidiaries after the Separation will assume or retain a certain amount of existing secured property-level indebtedness related to the properties we will own after the Separation. For additional information concerning our indebtedness, see “Description of Financing and Material Indebtedness.”



 

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Restrictions on Ownership and Transfer of AIR Common Stock

To assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code, among other purposes, our charter will provide for restrictions on ownership and transfer of AIR’s shares of capital stock, including, certain restrictions that, subject to certain exceptions, will prevent any person from beneficially or constructively owning more than (i) 8.7% (or 15% in the case of certain pension trusts and registered investment companies), by value or number of shares, whichever is more restrictive, of the outstanding shares of AIR Common Stock, or (ii) 8.7% (or 15% in the case of certain pension trusts and registered investment companies) in aggregate value of the outstanding shares of all classes and series of AIR capital stock, including AIR Common Stock and any AIR preferred stock. The charter will also prohibit anyone from buying shares of AIR’s capital stock if the purchase would result in AIR losing its REIT status. This could happen if a transaction results in five or fewer individuals (applying certain attribution rules of the Code) owning 50% or more of the value of all of AIR’s shares of capital stock or in fewer than 100 persons owning all of AIR’s shares of capital stock. See “Description of AIR’s Capital Stock—Restrictions on Transfer and Ownership of AIR Stock.”

Our Tax Status

We will elect to be subject to tax as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2020. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders, and the concentration of ownership of our capital stock. We believe that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. In connection with the Separation, we will receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden, Arps”), to the effect that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

Risks Related to Our Business and the Separation

Our business and the Separation pose a number of risks, including:

 

  •  

Pandemics, such as COVID-19, may affect our ability to collect rents and late fees from tenants, and our ability to evict tenants, in addition to having other negative effects on our business, which in turn could adversely affect our financial condition and results of operations;

 

  •  

If Aimco is unable to successfully redevelop or develop new properties in a timely manner or at all or fails to perform under our agreements with it, it could materially adversely affect our financial condition and results of operations;

 

  •  

Failure to generate sufficient net operating income may adversely affect our liquidity, limit our ability to fund necessary capital expenditures, or adversely affect our ability to pay dividends or distributions;

 

  •  

Competition could limit our ability to lease apartment homes, increase or maintain rents or execute our development strategy;

 

  •  

Because real estate investments are relatively illiquid, we may not be able to sell apartment communities when appropriate;

 

  •  

If we are not successful in our acquisition of apartment communities, our results of operations could be adversely affected;



 

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  •  

Although we will be insured for certain risks, the cost of insurance, increased claims activity, or losses resulting from casualty events may affect our financial condition and results of operations;

 

  •  

We depend on our senior management;

 

  •  

“Sale of asset” provisions, such as in our Master Leasing Agreement, may have the effect of discouraging, delaying or preventing the sale of our properties;

 

  •  

There may be, or there may be the appearance of, conflicts of interest in our relationship with Aimco;

 

  •  

Our debt financing could result in foreclosure of our apartment communities, prevent us from making distributions on our equity, or otherwise adversely affect our liquidity;

 

  •  

The board of directors of Aimco has reserved the right, in its sole discretion, to amend, modify, or abandon the Separation at any time prior to the distribution;

 

  •  

The historical and pro forma financial information included in this information statement may not be a reliable indicator of future results;

 

  •  

We may be unable to achieve some or all of the benefits that we expect to achieve from the Separation;

 

  •  

The Separation could give rise to disputes or other unfavorable effects, which could materially and adversely affect our business, financial position or results of operations;

 

  •  

In connection with the Separation, we have assumed and will assume, and will indemnify Aimco for, certain liabilities. If we are required to make payments pursuant to these indemnities, we may need to divert cash to meet those obligations and our financial results could be adversely affected. In addition, Aimco will indemnify us for certain liabilities. These indemnities may not be sufficient to insure us against the full amount of liabilities we incur, and Aimco may not be able to satisfy its obligations in the future;

 

  •  

Although we intend to receive solvency opinions in connection with the Separation, the Separation may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws;

 

  •  

Although we have endeavored to enter into agreements on market terms, our agreements with Aimco may not reflect terms that would have resulted from arm’s-length negotiations with unaffiliated third parties;

 

  •  

The distribution of AIR Common Stock is intended to be taxable and the distribution will generally be taxable to you as a dividend;

 

  •  

AIR may fail to qualify as a REIT;

 

  •  

Complying with the REIT requirements may cause AIR to forgo otherwise attractive business opportunities;

 

  •  

There is no existing market for AIR Common Stock, and a trading market that will provide you with adequate liquidity may not develop for AIR Common Stock. In addition, once AIR Common Stock begins trading, the market price and trading volume of AIR Common Stock may fluctuate widely;

 

  •  

We cannot guarantee the timing, amount, or payment of dividends on AIR Common Stock;

 

  •  

Future sales or distributions of AIR Common Stock could depress the market price for shares of AIR Common Stock;

 

  •  

The combined post-Separation value of Aimco Common Stock and AIR Common Stock may not equal or exceed the pre-Separation value of Aimco Common Stock;

 

  •  

AIR and its subsidiaries may be prohibited from making distributions and other payments;

 

  •  

Limits on ownership of shares specified in AIR’s charter may result in the loss of economic and voting rights by purchasers that violate those limits;



 

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  •  

AIR’s charter may limit the ability of a third-party to acquire control of AIR; and

 

  •  

The Maryland General Corporation Law may limit the ability of a third-party to acquire control of AIR.

These and other risks related to the Separation and our business are discussed in greater detail under the heading “Risk Factors” in this information statement. You should read and consider all of these risks carefully.

Certain Other Events

On October 16, 2020, Land & Buildings Investment Management, LLC and certain related parties (“L&B”) filed a definitive solicitation statement related to L&B’s intent to solicit and obtain consents from holders of shares of Aimco Common Stock for purposes of requesting on its and their behalf that a special meeting of Aimco’s stockholders be held (the “Proposed Special Meeting Request”) for the purposes of (1) considering and voting upon a non-binding resolution urging the Aimco board of directors to put any proposed separation involving Aimco to a vote of Aimco’s stockholders at a duly called meeting of stockholders and to refrain from proceeding with any such separation involving Aimco unless approved by a vote of a majority of Aimco’s stockholders and (2) to transact such other business as may properly come before the special meeting. On October 21, 2020, Aimco filed a definitive consent revocation solicitation statement with respect to the Proposed Special Meeting Request. The Aimco board of directors set a record date of November 4, 2020, for the Proposed Special Meeting Request.

On November 11, 2020, L&B delivered consents to Aimco with respect to the Proposed Special Meeting Request and certain matters incidental to calling the special meeting, which the independent inspector of elections certified on November 18, 2020, as representing 64,313,667 shares of Aimco Common Stock as of the November 4, 2020 record date, or approximately 43.2% of the outstanding shares as of such record date. As of November 23, 2020, L&B had not taken the remaining steps necessary under Aimco’s bylaws to properly request a special meeting of Aimco’s stockholders.

Our Corporate Information

AIR will be a Maryland corporation. Our principal executive offices will be located at 4582 S. Ulster Street, Suite 1700, Denver, CO 80237, and our telephone number is (303) 757-8101. We will maintain a website at aircommunities.com. Information contained on or connected to, or that can be accessed from, our website does not and will not constitute part of this information statement or the registration statement on Form 10, of which this information statement is a part.

Questions and Answers about AIR and the Separation

The following are some of the questions that you may have regarding the Separation and brief answers to those questions. For more detailed information about the matters discussed in these questions and answers, see “The Separation” beginning on page 51 and “Our Relationship with Aimco Following the Separation” beginning on page 209. These questions and answers, as well as the “Summary” beginning on page 1, are not meant to be a substitute for the information contained in the remainder of this information statement, and this information is qualified in its entirety by the more detailed descriptions and explanations contained elsewhere in this information statement. You are urged to read this information statement in its entirety.

 

What is AIR and how will the separation of the AIR business from Aimco benefit the two companies and their stockholders?   

AIR is expected to provide a simple and transparent way to invest in the multifamily sector, combining (i) a narrow focus on allocating capital only to stabilized apartment communities; (ii) a high-quality and diversified portfolio of stabilized multifamily properties, (iii) best-in-class property operations, (iv) low financial leverage, (v) limited execution risk, (vi) low overhead costs as a percentage of GAV, and (vii) public market liquidity for its shares. Aimco is expected to continue the business of redeveloping and developing apartment communities, while also pursuing other accretive transactions.



 

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The Aimco board of directors believes that the two businesses, each with a clear focus, strong, independent boards of directors, dedicated management teams, and strengthened balance sheets, will create greater stockholder value as two companies than as one. The Separation will provide each stockholder the opportunity to make an individual allocation of capital to one or both of the two differentiated businesses, each with a distinct investment risk/return profile: ownership of stabilized apartment communities through an investment in AIR; or redevelopment, development, and transactions through an investment in Aimco.

 

Each of AIR and Aimco will have its own distinctive focus. The AIR business plan is to: (i) invest only in stabilized apartment communities; (ii) own a high-quality and diversified portfolio of stabilized multifamily properties; (iii) emphasize its comparative advantage in property operations, with high customer-defined satisfaction and retention, low rate of growth in controllable operating expenses, and high operating margins; (iv) maintain a strong balance sheet with leverage, net of cash and receivables, and weighted average interest expense, net of interest income, comparable to or lower than peers; (v) reduce execution risk through elimination of redevelopment and development activities; and (vi) operate with overhead costs estimated at about 15 basis points of GAV, lower than peers as a percentage of GAV. AIR has sold or will sell assets sufficient to reduce financial leverage by approximately $2 billion. We believe that AIR’s simplified business, focused on the ownership and active management of stabilized apartment communities, will be more readily understood and valued by investors and will be more predictable due to strong operations and reduced exposure to the execution risk of redevelopment and development. We intend for AIR to have a strong balance sheet with leverage, net of cash and loans receivable, and a weighted average interest expense, net of interest income, at or below peer averages. We also expect AIR to issue corporate level debt when its cost is lower than that of non-recourse property debt. We further expect that AIR’s FFO will increase and be more predictable, supporting higher dividends, as a result of the elimination of earnings dilution from properties with lower leverage and reduced or no earnings during their development, redevelopment or lease-up, lower overhead costs due primarily to the elimination of overhead costs related to redevelopment and development activities.

Why am I receiving this information statement?   

Aimco is delivering this information statement to you because you are a holder of Aimco Common Stock as of the record date for the Separation.

 

Aimco will distribute the AIR Common Stock to the holders of Aimco Common Stock on a pro rata basis. Each Aimco common stockholder will receive one share of AIR Common Stock for each one share of Aimco Common Stock held as of the close of business on the record date. Following the Separation, you will own AIR Common Stock, as well as your Aimco Common Stock. The number of shares of Aimco Common Stock you own will not change as a result of the Separation.



 

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   This information statement will help you understand how the Separation will affect your post-separation ownership in Aimco and AIR.
What are the reasons for the Separation?   

The board of directors of Aimco believes that separating the AIR business and assets from the remainder of Aimco’s businesses and assets is in the best interests of Aimco and its stockholders for a number of reasons, including the following:

 

•  Creates two, focused and independent companies, each with the opportunity to pursue growth through the execution of distinctly different business plans;

 

•  Enhances investor transparency, better highlights the attributes of both companies and provides investors with the option to invest in one or both companies;

 

•  Limits AIR’s exposure to risks associated with the redevelopment and development business;

 

•  Provides our management teams with the ability to focus on our distinct businesses and be more closely aligned with the needs of investors;

 

•  Improves AIR’s access to capital markets; and

 

•  Increases financial flexibility.

 

For more information on the reasons for the Separation, including certain potentially negative factors considered by Aimco’s board of directors, please refer to the section entitled “The Separation—Reasons for the Separation” included elsewhere in this information statement.

What will AIR’s initial portfolio consist of?   

The AIR portfolio is expected to include 98 apartment communities, which had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point. The AIR portfolio will include garden style, mid-rise, and high-rise apartment communities with eight important geographic concentrations: Boston; Philadelphia; Washington D.C.; Miami; Denver; the San Francisco Bay Area; Los Angeles; and San Diego; and a focus on properties with high land value located in submarkets with outsized growth prospects. The Aimco board of directors believes the geographic and price point diversification will reduce the volatility of AIR’s rental revenue by avoiding undue concentration in any particular market and by exposure to a range of price-points that have different advantages over various economic and housing cycles.

 

AIR is expected to own properties with an estimated GAV of $10.4 billion, and an estimated NAV, of $7.8 billion, in each case, as of March 31, 2020.

Why is AIR referred to as a REIT, and what is a REIT?   

AIR will elect to be subject to tax as a REIT for U.S. federal income tax purposes commencing with its initial taxable year ending December 31, 2020.

 

A REIT is a company that derives most of its income from real property or real estate mortgages and has elected to be subject to tax as a REIT. If



 

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   a corporation elects to be subject to tax as a REIT and qualifies as a REIT, it will generally not be subject to U.S. federal corporate income taxes on income that it currently distributes to its stockholders. A company’s qualification as a REIT depends on its ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels to its stockholders, and the concentration of ownership of its capital stock.
Why is the Separation of AIR structured as a distribution?    Aimco believes that a distribution of AIR Common Stock to its stockholders is an efficient way to separate our assets from the rest of Aimco’s portfolio and that the Separation will create benefits and value for AIR, Aimco, AIR OP and New OP, and our respective stockholders and unitholders.
How will the Separation of AIR work?   

AIR will hold the equity of the entities that hold the AIR business, assets, and liabilities, including the Initial Leased Properties.

 

On the distribution date, Aimco will distribute AIR Common Stock to each holder of Aimco Common Stock on a pro rata basis, with each holder of Aimco Common Stock receiving one share of AIR Common Stock for each one share of Aimco Common Stock held as of the close of business on the record date.

 

The Separation of assets representing approximately 10% of the GAV, as of March 31, 2020, of Aimco will result in two, focused and independent companies. AIR OP will be approximately 95% owned by AIR, while New OP will be approximately 95% owned by Aimco.

What is the record date for the Separation?    The record date for determining the holders of Aimco Common Stock who will receive shares of AIR Common Stock in the Separation is the close of business on                 , 2020.
When will the Separation occur?    The Separation is expected to occur on or about                 , 2020, subject to the satisfaction or waiver of certain conditions described under “The Separation—Conditions to the Separation.”
What do Aimco stockholders need to do to participate in the Separation?    No action is required on the part of Aimco stockholders. If you hold Aimco Common Stock as of the record date, you will not be required to take any action in order to receive shares of AIR Common Stock in the Separation. No vote of Aimco’s stockholders is required or being sought in connection with the Separation. Therefore, we are not asking you for a proxy, and you are requested not to send us a proxy. The distribution will not affect the number of outstanding shares of Aimco Common Stock or any rights of Aimco common stockholders, although the market value of each share of Aimco Common Stock will be affected.
How will the rights of holders of Aimco Common Stock change after the Separation?    Holders of Aimco Common Stock will receive AIR Common Stock in connection with the Separation. The number of shares of Aimco Common Stock you own will not change as a result of the Separation,


 

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and your rights with respect to your Aimco Common Stock will not change. However, the market value of each share of Aimco Common Stock will be affected.

 

Shares of AIR Common Stock are expected to be traded on the NYSE under the ticker symbol “AIRC.” Aimco Common Stock will continue to be traded on the NYSE after the Separation under the ticker symbol “AIV.”

If I sell my shares of Aimco Common Stock prior to the Separation, will I still be entitled to receive AIR Common Stock in the Separation?   

If you hold shares of Aimco Common Stock as of the record date and decide to sell the shares prior to the distribution, you may choose to sell such shares with or without your entitlement to receive shares of AIR Common Stock. If you sell your Aimco Common Stock in the “due-bills” market after the record date and prior to the distribution, you will also be selling your right to receive shares of AIR Common Stock in connection with the Separation. However, if you sell your Aimco Common Stock in the “ex-distribution” market after the record date and prior to the distribution, you will still receive shares of AIR Common Stock in the Separation.

 

If you sell your Aimco Common Stock after the record date and prior to the distribution, you should make sure your bank or broker understands whether you want to sell your Aimco Common Stock with shares of AIR Common Stock you will receive in the Separation or without such shares of AIR Common Stock. You should consult your financial advisors, such as your bank, broker or tax advisor, to discuss your options and alternatives. See “The Separation—Listing and Trading of AIR Common Stock” for additional details.

How will fractional shares be treated in the Separation?    No fractional shares will be distributed in connection with the Separation. Instead, holders of Aimco Common Stock will receive a cash payment equal to the value of such shares in lieu of fractional shares. See “The Separation—Treatment of Fractional Shares.”
What are the U.S. federal income tax consequences of the Separation?   

As a REIT, Aimco distributes to its stockholders all or substantially all of its earnings and profits each year. As more specifically described in the sections referenced below, an amount equal to the fair market value of the AIR Common Stock you receive on the distribution date (plus any cash in lieu of fractional shares of AIR Common Stock) will generally be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Aimco (including gain recognized by Aimco in connection with the Separation). The excess will be treated as a non-taxable return of capital to the extent of your tax basis in shares of Aimco Common Stock and any remaining excess will be treated as capital gain.

 

Aimco will not be able to advise stockholders of the amount of earnings and profits of Aimco until after the end of the calendar year in which the Separation occurs. Aimco anticipates, however, that it will recognize a substantial amount of capital gain for tax purposes in connection with the Separation that will have the effect of substantially increasing its earnings and profits for the year. Aimco’s current estimate is $1.8 billion



 

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to $4.7 billion, assuming a $30 to $50 range for the value of shares of AIR Common Stock in the Separation.

 

In addition, substantial taxable income is expected from approximately $2 billion in property sales, most of which have already closed or are under contract to close prior to the Separation. Such taxable income, estimated at $1.6 billion to $1.7 billion, will be mostly distributed prior to the Separation in the form of dividends of cash and stock, or all stock, based on the election of the individual stockholder. Taxable stockholders will generally recognize taxable income associated with those property sales. A portion of this taxable income is expected to be distributed as part of the Separation.

 

Your tax basis in the shares of AIR Common Stock received will generally equal the fair market value of such shares on the distribution date. The fair market value of AIR Common Stock reported by Aimco to you on the Internal Revenue Service’s (the “IRS”) Form 1099-DIV may differ from the trading price of shares of AIR Common Stock on the distribution date. Your holding period for such shares will begin the day after the distribution date.

 

Your tax basis in shares of Aimco Common Stock held at the time of the distribution generally will be reduced (but not below zero) if the fair market value of AIR Common Stock distributed by Aimco in the Separation (plus any cash in lieu of fractional shares of AIR Common Stock) exceeds Aimco’s available current and accumulated earnings and profits. Your holding period for such shares of Aimco Common Stock will not be affected by the distribution. Aimco will not be able to advise stockholders of the amount of earnings and profits of Aimco until after the end of the 2020 calendar year.

 

The tax consequences to you of the Separation depend on your individual situation. You are urged to consult with your tax advisor as to the particular tax consequences of the Separation to you, including the applicability of any U.S. federal, state, local, and non-U.S. tax laws. For additional details, see “The Separation—U.S. Federal Income Tax Consequences of the Separation” and “U.S. Federal Income Tax Considerations.”

What are the conditions to the Separation?

  

The Separation is subject to the satisfaction or waiver by Aimco of a number of conditions, including, among others:

 

•  each of the Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, the Master Services Agreement, the Master Leasing Agreement, and certain other ancillary agreements shall have been duly executed and delivered by the parties thereto;

 

•  the Restructuring shall have been completed in accordance with the Separation Agreement (other than those steps in the Restructuring contemplated to occur following the Separation);

 

•  Aimco shall have received such solvency opinions, each in such form and substance, as it shall deem necessary,



 

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appropriate or advisable in connection with the consummation of the Separation;

 

•  the receipt by AIR of an opinion from Skadden, Arps to the effect that, commencing with AIR’s taxable year ending December 31, 2020, AIR will be organized in conformity with the requirements for qualification as a REIT under the Code, and AIR’s proposed method of operation will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws;

 

•  the receipt by Aimco of an opinion from Skadden, Arps to the effect that, commencing with Aimco’s taxable year ended December 31, 1994, Aimco has been organized in conformity with the requirements for qualification as a REIT under the Code, and Aimco’s actual method of operation through the date hereof has enabled, and its proposed method of operation will continue to enable, it to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws;

 

•  the SEC shall have declared effective AIR’s registration statement on Form 10, of which this information statement is a part, and New OP’s registration statement on Form 10, each under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and no stop order relating to the registration statements shall be in effect, and no proceedings for such purpose shall be pending before, or threatened by, the SEC, and this information statement shall have been made available to holders of Aimco Common Stock as of the record date;

 

•  all actions and filings necessary or appropriate under applicable federal, state or foreign securities, or “blue sky” laws and the rules and regulations thereunder, shall have been taken and, where applicable, become effective or been accepted;

 

•  the AIR Common Stock to be distributed in the Separation shall have been accepted for listing on the NYSE, subject to compliance with applicable listing requirements;

 

•  no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Separation, shall be threatened, pending or in effect;

 

•  any material governmental and third-party approvals shall have been obtained and be in full force and effect;

 

•  AIR and Aimco shall have entered into the financing transactions described in this information statement and contemplated to occur on or prior to the Separation, and the respective financings thereunder shall have been consummated and shall be in full force and effect;



 

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•  Aimco has entered into a binding agreement with a third party to sell the Class A Preferred Stock;

 

•  Aimco and AIR shall each have taken all necessary actions that may be required to provide for the adoption by AIR of its amended and restated charter and bylaws, and AIR shall have filed its related Articles of Amendment and Restatement with the Maryland State Department of Assessments and Taxation;

 

•  AIR shall have adopted the amended and restated articles of incorporation and amended and restated bylaws; and

 

•  no event or development shall have occurred or exist that, in the judgment of the board of directors of Aimco, in its sole discretion, makes it inadvisable to effect the Separation. We cannot assure you that all of the conditions will be satisfied or waived.

 

See “The Separation—Conditions to the Separation” for additional details.

Can Aimco decide to terminate the Separation even if all the conditions have been satisfied?    Yes. The Separation is subject to the satisfaction or waiver by Aimco of certain conditions. Until the Separation has occurred, Aimco has the right to terminate the Separation, even if all of the conditions have been satisfied, if the board of directors of Aimco determines, in its sole discretion, that the Separation is not in the best interests of Aimco and its stockholders or that market conditions or other circumstances are such that the Separation is no longer advisable at that time.
Does AIR intend to pay cash dividends?    Following the Separation, AIR will be required to distribute annually to holders of its common stock at least 90% of its “real estate investment trust taxable income,” which is generally equivalent to net taxable ordinary income (and may be all cash or a combination of cash and stock satisfying the requirements of applicable law). AIR’s board of directors will determine and declare AIR’s dividends. In making a dividend determination, AIR’s board of directors will consider a variety of factors, including: REIT distribution requirements; current market conditions; liquidity needs; and other uses of cash, such as for deleveraging and accretive investment activities. AIR’s board of directors is expected to target a dividend payout ratio between 65% and 80% of AFFO, and we expect to pay our first dividend in May 2021. For more information, see “Dividend Policy.”
What will happen to Aimco equity awards in connection with the Separation?    Any equity awards relating to shares of Aimco Common Stock will be adjusted to reflect the impact of the Separation. Specifically, it is expected that each outstanding time or performance-vesting Aimco equity award will be converted into awards both of shares of Aimco Common Stock and of shares of AIR Common Stock. The number of shares of Aimco Common Stock and AIR Common Stock subject to each converted award will be determined in a manner intended to preserve the aggregate value of the original Aimco equity award as measured immediately before the Separation.


 

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What will be the relationship between Aimco and AIR following the Separation?    After the completion of the Separation, AIR and Aimco will be two, focused and independent companies. AIR and Aimco will enter into the Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, and the Master Services Agreement, the Master Leasing Agreement, among others. Such agreements will govern our relationship with Aimco and its subsidiaries from and after the Separation, including certain allocations of assets and liabilities and obligations attributable to periods prior to the Separation, and our rights and obligations, including indemnification arrangements for certain liabilities after the Separation, ongoing services, including property management services, provided by us to Aimco, or our leases to Aimco of the leased properties, including the Initial Leased Properties. AIR will initially provide Aimco with property management services and customary administrative and support services. We will also be the beneficiaries of three-year, $534 million, notes payable by Aimco’s subsidiary, Aimco JO. See “Our Relationship with Aimco Following the Separation.”
Will I receive physical certificates representing shares of AIR Common Stock following the Separation?    No. No physical certificates representing shares of AIR Common Stock will be issued. Instead, Aimco, with the assistance of Computershare Trust Company, N.A., the distribution agent, will cause the securities to be issued electronically shares of AIR Common Stock to you or to your bank or brokerage firm or 401(k) plan or other channel on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of AIR Common Stock, or your bank or brokerage firm will credit your account for the securities or it will be reflected in your 401(k) or other statement. A benefit of issuing the securities electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning physical stock certificates. See “The Separation—Manner of Effecting the Separation.”
What will the price be for my shares of AIR Common Stock and when will I be able to trade such shares?    There is no current trading market for AIR Common Stock. Shares of AIR Common Stock are expected to be traded on the NYSE under the ticker symbol “AIRC.” We anticipate that a limited market, commonly known as a “when-distributed” trading market, will develop at some point following the record date, and that “regular-way” trading in shares of AIR Common Stock will begin on the first trading day following the distribution. If trading begins on a “when-distributed” basis, you may purchase or sell AIR Common Stock up to and including the distribution date, but your transaction will not settle until after the distribution date. We cannot predict the trading prices for AIR Common Stock before, on or after the distribution date.
Will the number of shares of Aimco Common Stock that I own change as a result of the Separation?    No. The number of shares of Aimco Common Stock you own will not change as a result of the Separation.


 

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If you own Aimco Common Stock as of the close of business on the record date, you will receive one share of AIR Common Stock for each share of Aimco Common Stock that you own on the record date.

Will my shares of Aimco Common Stock continue to trade after the Separation?    Yes. Aimco Common Stock will continue to be traded on the NYSE after the Separation under the ticker symbol “AIV.”
Will AIR or AIR OP incur or assume indebtedness in connection with the Separation?    Yes. It is expected that AIR and its subsidiaries will have a revolving credit facility and a term loan credit facility, each of which may be secured by certain equity interests in subsidiaries of AIR, and which credit facilities are expected to be a continuation of Aimco’s existing revolving credit facility and term loan credit facility, subject to such changes to reflect the new corporate structure and market conditions. However, the terms and conditions remain under discussion and are subject to change. In addition, we anticipate that AIR and AIR OP (through ownership of our subsidiaries) will assume or retain existing property-level indebtedness related to the properties we will own after the Separation.
Are there risks associated with owning AIR Common Stock?    Yes. Our business is subject to both general and specific risks and uncertainties relating to our business, including risks specific to our ownership of real estate and the real estate industry in which we operate, our leverage, our relationship with Aimco and its subsidiaries, and Aimco’s and AIR’s status as two, focused and independent companies. Our business is also subject to risks relating to the Separation. These risks are described in the “Risk Factors—Risks Related to the Separation” section in this information statement and are described in more detail in the “Risk Factors” section of this information statement. We encourage you to read those sections carefully.
Do I have appraisal rights in connection with the Separation?    No. Aimco stockholders will not have any appraisal rights in connection with the Separation.
Who is the transfer agent for AIR Common Stock?    The transfer agent for the AIR Common Stock will be Computershare Trust Company, N.A.
Where can I get more information?    If you have any questions relating to the Separation, AIR Common Stock, AIR OP Common Units, Aimco Common Stock or New OP Units, you should contact Aimco at:
   Apartment Investment and Management Company
Investor Relations
4582 South Ulster Street, Suite 1700
Denver, CO 80237
  

Phone: (303) 793-4661

Email: Investor@aimco.com



 

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SUMMARY HISTORICAL CONSOLIDATED AND

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

Set forth below are the summary historical consolidated financial data of Aimco (as Aimco exists prior the Separation, “AIR Predecessor”) and AIR Predecessor’s summary unaudited pro forma combined financial data as of the dates and for the periods presented. The summary historical condensed consolidated financial data as of September 30, 2020, and for the nine months ended September 30, 2020 and 2019, as set forth below, were derived from AIR Predecessor’s unaudited condensed consolidated financial statements, which are included elsewhere in this information statement. The summary historical consolidated financial data as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018, and 2017, as set forth below, were derived from AIR Predecessor’s audited consolidated financial statements, which are included elsewhere in this information statement. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of ordinary recurring adjustments, necessary for a fair presentation of the information for the periods presented. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

AIR Predecessor’s unaudited pro forma consolidated financial data have been derived from the historical consolidated financial statements. AIR Predecessor’s unaudited pro forma condensed consolidated balance sheet as of September 30, 2020, assumes the Separation and the related transactions occurred on September 30, 2020. AIR Predecessor’s unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 2020, and for the year ended December 31, 2019, assume the Separation and the related transactions occurred on January 1, 2019. The following unaudited pro forma consolidated financial data gives effect to the Separation and the related transactions, including: (i) the distribution of 148,865,947 shares of AIR Common Stock by Aimco to Aimco common stockholders in the Separation, the distribution of New OP Units by AIR OP to the holders of AIR OP Common Units (and subsequent distribution to Aimco by holders of AIR OP Common Units that are subsidiaries of Aimco), and the sale of AIR Class A Preferred Stock to a third party, (ii) the impact of the Property Management Agreements, Master Services Agreement and the Master Leasing Agreement between us and New OP and Aimco, and (iii) incremental costs recorded within general and administrative expenses related to employment agreements.

AIR Predecessor’s unaudited pro forma consolidated financial statements are not necessarily indicative of what our actual financial position and results of operations would have been if the Separation and related transactions occurred on the dates indicated, nor does it purport to represent our future financial position or results of operations. The unaudited pro forma adjustments are based on information and assumptions that we consider reasonable and factually supportable.

Since the information presented below is only a summary and does not provide all of the information contained in the historical consolidated financial statements of AIR Predecessor or our unaudited pro forma consolidated financial statements, including the related notes, you should read the section herein entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and AIR Predecessor’s historical consolidated financial statements and notes thereto and our unaudited pro forma consolidated financial statements and the notes thereto included elsewhere in this information statement.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally acceptable accounting principles (“GAAP”). GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting periods. Actual results could differ from these estimates.

AIR expects to operate in a manner intended to enable it to qualify as a REIT under Sections 856-860 of the Code. A REIT that distributes at least 90% of its “real estate investment trust taxable income” as a dividend to its



 

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stockholders each year and that meets certain other conditions will not be taxed on that portion of its taxable income that is distributed to its stockholders. Since AIR will operate as a REIT and distributes 100% of taxable income to its stockholders, no provision for U.S. federal income taxes has been made in the accompanying combined financial statements. The assets are also subject to certain other taxes, including state and local taxes that are included in general and administrative expenses in the combined statements of operations.

 

    Nine Months Ended September 30,     Year Ended December 31,  

(in thousands, except per share data)

  Pro Forma
2020
(unaudited) 		    2020
(unaudited) 		    2019
(unaudited) 		    Pro Forma
2019
(unaudited) 		    2019     2018     2017  

STATEMENT OF OPERATIONS:

             

Total revenues

  $ 541,605     $ 658,815     $ 684,262     $ 732,724     $ 914,294     $ 972,410     $ 1,005,437  

Total operating expenses

    442,310       577,444       564,117       599,862       757,521       756,654       811,454  

Net income

    38,782       27,366       365,261       71,000       508,027       716,603       347,079  

Net income attributable to AIR per common share—basic

  $ 0.23     $ 0.14     $ 2.26     $ 0.35     $ 3.16     $ 4.34     $ 2.02  

Net income attributable to AIR per common share—diluted

  $ 0.23     $ 0.14     $ 2.26     $ 0.35     $ 3.15     $ 4.34     $ 2.02  

 

     As of September 30,      As of December 31,  

(in thousands)

   Pro Forma
2020
(unaudited) 		     2020
(unaudited) 		     2019      2018  

BALANCE SHEET DATA:

           

Net real estate

   $ 4,714,493      $ 6,039,984      $ 6,019,307      $ 5,723,475  

Total assets

     6,153,052        7,042,129        6,828,739        6,190,004  

Total indebtedness

     3,938,734        4,406,797        4,505,590        4,075,665  

Total liabilities

     4,002,434        4,821,512        4,866,164        4,325,072  

Total equity

     2,071,169        2,136,797        1,860,795        1,763,641  

 

     Nine Months Ended September 30,     Year Ended December 31,  

(in thousands)

   2020
(unaudited) 		    2019
(unaudited) 		    2019     2018     2017  

CASH FLOW DATA:

          

Net cash provided by operating activities

   $ 265,876     $ 278,748     $ 374,472     $ 396,388     $ 392,072  

Net cash (used in) provided by investing activities

     (355,969 )      (16,005 )      (205,413 )      121,846       13,019  

Net cash provided by (used in) financing activities

     180,882       (242,113 )      (63,952 )      (588,180 )      (393,700 ) 
     Nine Months Ended September 30,     Year Ended December 31,  

(in thousands)

   2020
(unaudited) 		    2019
(unaudited) 		    2019     2018     2017  

OTHER DATA:

          

Pro forma Funds From Operations (“Pro forma FFO”)(1)

   $ 283,665     $ 274,572     $ 370,702     $ 382,698     $ 383,733  

 

     Three Months Ended September 30,      Three Months Ended December 31,  

(in thousands, unaudited)

           2020                     2019              2019      2018     2017  

ADJUSTED EBITDAre:

            

Net (loss) income

   $ (24,815 )    $ 3,970      $ 142,766      $ 5,266 (2)    $ 262,097 (2) 

Adjusted EBITDAre(1)

     125,041       139,034        142,735        144,582 (4)      141,245 (4) 

Annualized Adjusted EBITDAre(1)(3)

     500,164       556,136        570,940        578,328 (4)      564,980 (4) 

 

(1)

Pro forma FFO and Adjusted EBITDAre are non-GAAP financial measures. Since these non-GAAP financial measures are not measures calculated in accordance with GAAP, they should not be considered in



 

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  isolation of, or as a substitute for, our results reported under GAAP as indicators of our operating performance. These measures, as we calculate them, may not be comparable to similarly titled measures employed by other companies. We present these non-GAAP measures because management believes that they are meaningful to understanding our performance during the periods presented and its ongoing business. Non-GAAP measures are not prepared in accordance with GAAP and therefore are not necessarily comparable to similarly titled metrics or the financial results of other companies. These non-GAAP measures should be considered a supplement to, not a substitute for, or superior to, the corresponding financial measures calculated in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for definitions of Pro forma FFO and Adjusted EBITDAre and an important discussion of their uses, inherent limitations, and reconciliations to their most directly comparable GAAP financial measure.
(2)

For the years ended December 31, 2018 and 2017, represents Net Income attributable to Aimco common stockholders.

(3)

We calculate Annualized Adjusted EBITDAre based on the most recent three-month Adjusted EBITDAre, annualized.

(4)

For the years ended December 31, 2018 and 2017, we calculated Adjusted EBITDA instead of Adjusted EBITDAre. For an explanation of how Adjusted EBITDA is calculated, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



 

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RISK FACTORS

The following sets forth material risks related to the Separation, AIR’s business, and the AIR Common Stock. You should carefully consider the following risks and other information contained in this information statement in evaluating us and the AIR Common Stock, including the matters addressed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” contained in this information statement. The risks described below are not the only risks that AIR’s business faces or that the separate companies will face after the consummation of the Separation and the related transactions. Additional risks and uncertainties not currently known or that are currently expected to be immaterial may also materially and adversely affect either company’s business, financial condition, and could, in turn, impact the trading price of the AIR Common Stock.

RISKS RELATED TO OUR BUSINESS

Pandemics, such as COVID-19, may affect our ability to collect rents and late fees from tenants, and our ability to evict tenants, in addition to having other negative effects on our business, which in turn could adversely affect our financial condition and results of operations.

A local, regional, national or international outbreak of a contagious disease, such as COVID-19, could negatively impact our tenants and our operations. The World Health Organization declared COVID-19 to be a pandemic on March 11, 2020. The outbreak of the COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting a wide variety of measures including states of emergency, mandatory quarantines, required business and school closures, implementing “shelter in place” orders, and restricting travel. In addition, many cities and states have enacted, or are considering enacting, exceptions to contractual obligations for residents and commercial tenants, including government mandated rent delays or other abatement measures or concessions or prohibitions on lease terminations or evictions. Many experts predict that the outbreak will trigger a period of material global economic slowdown or a global recession.

Factors that have negatively impacted, or would negatively impact, our operations or those of entities in which we hold a partial interest, during the COVID-19 pandemic or another pandemic include:

 

  •  

our ability to collect rents and late fees on a timely basis or at all, without reductions or other concessions;

 

  •  

our ability to evict residents for non-payment and for other reasons;

 

  •  

our ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during a disruption;

 

  •  

fluctuations in regional and local economies, local real estate conditions, and rental rates;

 

  •  

our ability to control incremental costs associated with COVID-19;

 

  •  

our ability to dispose of communities at all or on terms favorable to us;

 

  •  

our ability to complete redevelopments and developments and other construction projects as planned; and

 

  •  

potential litigation relating to the COVID-19 pandemic.

Given the ongoing and dynamic nature of the circumstances surrounding the COVID-19 pandemic, it is difficult to predict how significant the impact of this outbreak will be on the global economy, our residents and commercial tenants, our communities, and the operations of entities in which we hold a partial interest, or for how long disruptions are likely to continue. The extent of such impact will depend on developments, which are highly uncertain, rapidly evolving and cannot be predicted, including the ability to contain the virus, the duration

 

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of measures implemented, and the overall impact of these measures. Such developments, depending on their nature, duration, and intensity, could have a material adverse effect on our operating results and financial condition. The COVID-19 pandemic also may have the effect of heightening many of the other risks described below.

If Aimco is unable to successfully redevelop or develop new properties in a timely manner or at all or fails to perform under our agreements with it, it could materially adversely affect our financial condition and results of operations.

From time to time, we may receive redeveloped or developed property from Aimco (including the Initial Leased Properties, following any development, redevelopment and/or lease-up thereof), with the option to pay a certain amount based on the difference between the then-current fair market value of the property less the fair market value of the property at lease inception (at a small discount thereto) once the applicable property has reached and maintained stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception). We will initially depend on Aimco to provide us with the option to obtain newly redeveloped or developed properties. In addition to the risks associated with the ownership of real estate investments in general, there are significant risks to Aimco associated with Aimco’s redevelopment and development activities. If Aimco is unsuccessful in redeveloping or developing properties and fails to perform under our agreements with it, it could have an impact on our ability to grow our portfolio and to acquire stabilized properties at prices favorable to us, which could have a material adverse effect on our financial condition and results of operations.

Failure to generate sufficient net operating income may adversely affect our liquidity, limit our ability to fund necessary capital expenditures, or adversely affect our ability to pay dividends or distributions.

Our ability to fund necessary capital expenditures on our communities depends on, among other things, our ability to generate net operating income in excess of required debt payments. If we are unable to fund capital expenditures on our communities, we may not be able to preserve the competitiveness of our communities, which could adversely affect their net operating income and long-term value.

Our ability to make payments to our investors depends on our ability to generate net operating income in excess of required debt payments and capital expenditure requirements. Our net operating income and liquidity may be adversely affected by events or conditions beyond our control, including:

 

  •  

the general economic climate;

 

  •  

an inflationary environment in which the costs to operate and maintain our communities increase at a rate greater than our ability to increase rents, which we can only do upon renewal of existing leases or at the inception of new leases;

 

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competition from other apartment communities and other housing options;

 

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local conditions, such as loss of jobs, unemployment rates, or an increase in the supply of apartments, that might adversely affect apartment occupancy or rental rates;

 

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changes in governmental regulations and the related cost of compliance;

 

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changes in tax laws and housing laws, including the enactment of rent control laws or other laws regulating multifamily housing; and

 

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changes in interest rates and the availability of financing.

Competition could limit our ability to lease apartment homes, increase or maintain rents or execute our development strategy.

Our apartment communities and the apartment communities we manage compete for residents with other housing alternatives, including other rental apartments and condominiums, and, to a lesser degree, single-family

 

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homes that are available for rent, as well as new and existing condominiums and single-family homes for sale. Competitive residential housing, as well as household formation and job creation in a particular area, could adversely affect our ability to lease apartment homes and to increase or maintain rental rates.

Because real estate investments are relatively illiquid, we may not be able to sell apartment communities when appropriate.

Real estate investments are relatively illiquid and generally cannot be sold quickly. REIT tax rules also restrict our ability to sell apartment communities. Thus, we may not be able to change our portfolio promptly in response to changes in economic or other market conditions. Our ability to dispose of apartment communities in the future will depend on prevailing economic and market conditions, including the cost and availability of financing. This could have a material adverse effect on our financial condition or results of operations.

If we are not successful in our acquisition of apartment communities, our results of operations could be adversely affected.

The selective acquisition of stabilized apartment communities when it has a favorable cost of capital (including the use of AIR OP Common Units as an acquisition currency) is a component of our strategy. However, we may not be able to complete transactions successfully in the future. Although we seek to acquire apartment communities when such acquisitions increase our free cash flow and internal rates of return, and are accretive to net asset value, such transactions may fail to perform in accordance with our expectations. In particular, following acquisition, the value and operational performance of an apartment community may be diminished if obsolescence or neighborhood changes occur before we are able to sell the apartment community. This could have an adverse effect on our financial condition or results of operations.

Potential liability or other expenditures associated with potential environmental contamination may be costly.

Various federal, state, and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Potentially hazardous materials may include polychlorinated biphenyls, petroleum-based fuels, lead-based paint, or asbestos, among other materials. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions, damages to natural resources, and for potential fines or penalties in connection with such damage or with respect to the improper management of hazardous materials. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or personal injury, disease, disability, or other infirmities related to the alleged presence of hazardous materials at an apartment community. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate.

Rent control laws and other regulations that limit our ability to increase rental rates may negatively impact our rental income and profitability.

State and local governmental agencies may introduce rent control laws or other regulations that limit our ability to increase rental rates, which may affect our rental income. Especially in times of recession and economic slowdown, rent control initiatives can acquire significant political support. If rent controls unexpectedly became applicable to certain of our properties, our revenue from and the value of such properties could be adversely affected.

 

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Laws benefiting disabled persons may result in our incurrence of unanticipated expenses.

Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988, or FHAA, requires apartment communities first occupied after March 13, 1991, to comply with design and construction requirements for disabled access. For those apartment communities receiving federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. These and other federal, state, and local laws may require structural modifications to our apartment communities or changes in policy/practice, or affect renovations of the communities. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our apartment communities are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA, the FHAA, and the Rehabilitation Act of 1973 in connection with the ongoing operation of our apartment communities and the apartment communities we manage.

Moisture infiltration and resulting mold remediation may be costly.

Although we will be proactively engaged in managing moisture intrusion and preventing the presence of mold at our apartment communities, it is not unusual for periodic moisture intrusion to cause mold in isolated locations within an apartment community. AIR has implemented policies, procedures, and training, and include a detailed moisture intrusion and mold assessment during acquisition due diligence. We believe these measures will manage mold exposure at our apartment communities and will minimize the effects that mold may have on our residents. To date, AIR Predecessor has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. We will have only limited insurance coverage for property damage claims arising from the presence of mold and for personal injury claims related to mold exposure.

Although we will be insured for certain risks, the cost of insurance, increased claims activity, or losses resulting from casualty events may affect our financial condition and results of operations.

We will be insured for a portion of our consolidated apartment communities’ exposure to casualty losses resulting from fire, earthquake, hurricane, tornado, flood, and other perils, which insurance is subject to deductibles and self-insurance retention. We recognize casualty losses or gains based on the net book value of the affected apartment community and the amount of any related insurance proceeds. In many instances, the actual cost to repair or replace the apartment community may exceed its net book value and any insurance proceeds. We recognize the uninsured portion of losses as casualty losses in the periods in which they are incurred. In addition, we will be self-insured for a portion of our exposure to third-party claims related to our employee health insurance plans, workers’ compensation coverage, and general liability exposure. With respect to our exposure to claims of third parties, we establish reserves at levels that reflect our known and estimated losses. The ultimate cost of losses and the impact of unforeseen events may vary materially from recorded reserves, and variances may adversely affect our operating results and financial condition. We purchase insurance to reduce our exposure to losses and limit our financial losses on large individual risks. The availability and cost of insurance are determined by market conditions outside our control. No assurance can be made that we will be able to obtain and maintain insurance at the same levels and on the same terms as we do today. If we are not able to obtain or maintain insurance in amounts we consider appropriate for our business, or if the cost of obtaining such insurance increases materially, we may have to retain a larger portion of the potential loss associated with our exposures to risks.

Natural disasters and severe weather may affect our financial condition and results of operations.

Natural disasters such as earthquakes and severe weather such as hurricanes may result in significant damage to our apartment communities. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the

 

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affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake) or destructive weather event (such as a hurricane) affecting a region may have a significant adverse effect on our financial condition and results of operations. We cannot accurately predict natural disasters or severe weather, or the number and type of such events that will affect us. As a result, our operating and financial results may vary significantly from one period to the next. Although we anticipate and plan for losses, there can be no assurance that our financial results will not be adversely affected by our exposure to losses arising from natural disasters or severe weather in the future that exceed our previous experience and assumptions.

We depend on our senior management.

Our success and our ability to implement and manage anticipated future growth depend, in large part, upon the efforts of our senior management team, who have extensive market knowledge and relationships, and exercise substantial influence over our operational, financing, acquisition, and disposition activity. Members of our senior management team have national or regional industry reputations that attract business and investment opportunities and assist us in negotiations with lenders, existing and potential tenants, and other industry participants. The loss of services of one or more members of our senior management team, or our inability to attract and retain similarly qualified personnel, could adversely affect our business, diminish our investment opportunities, and weaken our relationships with lenders, business partners, existing and prospective tenants, and industry participants, which could adversely affect our financial condition, results of operations, cash flow, per share trading price of AIR Common Stock and ability to make distributions to our stockholders.

Our business and operations would suffer in the event of significant disruptions or cyberattacks of our information technology systems or our failure to comply with laws, rules and regulations related to privacy and data protection.

Information technology, communication networks, and related systems are essential to the operation of our business. We use these systems to manage our resident and vendor relationships, internal communications, accounting and record-keeping systems, and many other key aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks, which also depend on the strength of our procedures and the effectiveness of our internal controls. Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyberattacks.

Despite system redundancy, risk transfer, insurance, indemnification, the implementation of security measures, required employee awareness training, and the existence of a disaster recovery plan for our internal information technology systems, our systems, and systems maintained by third-party vendors with which we do business are vulnerable to damage from any number of sources. We face risks associated with energy blackouts, natural disasters, terrorism, war, telecommunication failures, and cyberattacks and intrusions, such as computer viruses, malware, attachments to emails, intrusion, and unauthorized access, including from persons inside our organization or from persons outside our organization with access to our systems. We may also incur additional costs to remedy damages caused by such disruptions. Although we make efforts to maintain the security and integrity of our systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Any compromise of our security could also result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, loss or misuse of the information (which may be confidential, proprietary, or commercially sensitive in nature), and a loss of confidence in our security measures, which could harm our business.

We also are subject to laws, rules, and regulations in the United States, such as the California Consumer Protection Act, or CCPA (which became effective on January 1, 2020), relating to the collection, use, and security of employee and other data. Evolving compliance and operational requirements under the CCPA and the privacy and data security laws of other jurisdictions in which we operate impose significant costs that are likely

 

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to increase over time. Our failure to comply with laws, rules, and regulations related to privacy and data protection could harm our business or reputation.

“Sale of assets” provisions, such as in our Master Leasing Agreement, may have the effect of discouraging, delaying or preventing the sale of our properties.

Upon the occurrence of a sale of all or substantially all of our assets, as specified in our Master Leasing Agreement, Aimco will have the right to terminate the Master Leasing Agreement. The ability for Aimco to terminate the Master Leasing Agreement upon a sale of all or substantially all of our assets may have the effect of discouraging, delaying or preventing the sale of our properties, even if the sale of our properties would be beneficial to our stockholders.

There may be, or there may be the appearance of, conflicts of interest in our relationship with Aimco.

There may be, or there may be the appearance of, conflicts of interest in our relationship with Aimco. The Separation has been designed to minimize conflicts of interest between AIR and Aimco, however, there can be no assurance that such conflicts don’t exist.

Although each of AIR and Aimco will have an independent board of directors and independent management and will be incentivized to make decisions that are in the best interests of its respective business, Mr. Considine, along with Messrs. Miller and Stein, will serve on both AIR’s and Aimco’s boards of directors, however, such directors will recuse themselves from voting as members of either board of directors during the approval or disapproval of any transactions between the two companies.

The agreements between Aimco and us generally will not limit or restrict Aimco or its affiliates from engaging in any business or managing other entities that engage in business of the type conducted by us. Although AIR and Aimco will not generally engage in the same business, Aimco and its affiliates may in the future determine to manage apartment communities and other real estate assets, some of which may be in close proximity to certain of our apartment communities, or increase its ownership of stabilized apartment communities. Certain business opportunities appropriate for us may also in the future be appropriate for Aimco or its affiliates, and we may compete with Aimco for certain business opportunities. This may cause us to compete with Aimco for business opportunities or result in a change in our current business strategy.

Actual, potential, or perceived conflicts could give rise to investor dissatisfaction, settlements with stockholders, litigation or regulatory inquiries or enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities, and a resulting increased risk of litigation and regulatory enforcement actions.

Our business could be negatively affected as a result of the actions of activist stockholders.

Publicly traded companies have increasingly become subject to campaigns by investors advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. Given our stockholder composition and other factors, it is possible our stockholders or future activist stockholders may attempt to effect such changes. Responding to proxy contests and other actions by such activist stockholders or others would be costly and time-consuming, disrupt our operations and divert the attention of our board of directors and senior management team from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of stockholder activism or changes to the

 

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composition of the board of directors may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, cause concern to our current or potential lenders, partners, or others with whom we do business, and make it more difficult to attract and retain qualified personnel.

RISKS RELATED TO OUR INDEBTEDNESS AND FINANCING

Our debt financing could result in foreclosure of our apartment communities, prevent us from making distributions on our equity, or otherwise adversely affect our liquidity.

At the completion of the Separation, it is expected that we will have a revolving credit facility and a term loan credit facility, each of which may be secured by certain equity interests in subsidiaries of AIR, and which credit facilities are expected to be a continuation of Aimco’s existing revolving credit facility and term loan credit facility, subject to such changes to reflect the new corporate structure and market conditions. However, the terms and conditions remain under discussion and are subject to change. Over time, we may become party to one or more additional financing arrangements, including credit facilities or other bank debt, bonds, and mortgage financing. We also anticipate that certain entities that will be our subsidiaries after the Separation will assume or retain a certain amount of existing secured property-level indebtedness related to the properties we will own after the Separation.

In connection with such financing activities, we will be subject to the risk that our cash flow from operations will be insufficient to make required payments of principal and interest, and the risk that our indebtedness may not be refinanced or that the terms of any refinancing will not be as favorable as the terms of then-existing indebtedness. If we fail to make required payments of principal and interest on our non-recourse debt, our lenders could foreclose on the apartment communities and other collateral securing such debt, which would result in the loss to us of income and asset value. At the completion of the Separation, the majority of our apartment communities will be encumbered by debt. Our organizational documents do not limit the amount of debt that we may incur, and we have significant amounts of debt outstanding. Payments of principal and interest may leave us with insufficient cash resources to operate our communities or pay distributions required to maintain AIR’s qualification as a REIT.

Disruptions in the financial markets could affect our ability to obtain financing and the cost of available financing and could adversely affect our liquidity.

Our ability to obtain financing and the cost of such financing depends on the overall condition of the United States credit markets. During periods of economic uncertainty, the United States credit markets may experience significant liquidity disruptions, which may cause the spreads on debt financings to widen considerably and make obtaining financing, both non-recourse property debt and corporate borrowings such as those under a credit facility, more difficult. In particular, apartment borrowers have benefited from the historic willingness of the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, to make substantial amounts of loans secured by multifamily properties, even in times of economic distress. These two lenders are federally chartered and subject to federal regulation, which is subject to change, making uncertain their prospects and ability to provide liquidity in a future downturn.

If our ability to obtain financing is adversely affected, we may be unable to satisfy scheduled maturities on existing financing through other sources of liquidity, which could result in lender foreclosure on the apartment communities securing such debt and loss of income and asset value, both of which would adversely affect our liquidity.

Increases in interest rates would increase our interest expense and reduce our profitability.

As of December 31, 2019, AIR Predecessor had approximately $445.1 million of variable-rate indebtedness outstanding. We estimate that an increase or decrease in 30-day LIBOR of 100 basis points with constant credit risk spreads would increase or reduce interest expense by approximately $4.5 million on an annual basis.

 

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As of December 31, 2019, AIR Predecessor had approximately $177.7 million in cash and cash equivalents and restricted cash, a portion of which bear interest at variable rates indexed to LIBOR-based rates, which may partially mitigate the effect of an increase in variable rates on our variable-rate indebtedness discussed above.

The potential phasing out of LIBOR after 2021 may affect our financial results.

In July 2017, the Financial Conduct Authority, which regulates LIBOR, announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In 2018, the Alternative Reference Rates Committee identified the Secured Overnight Financing Rate, or SOFR, as the alternative to LIBOR. Whether or not SOFR attains market traction as a LIBOR replacement remains a question, and the future of LIBOR at this time is uncertain. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Due to the broad use of LIBOR as a reference rate, all financial market participants, including us, are impacted by the risks associated with this transition. To the extent that any of our debt agreements contain variable-rate interest based, in part, on LIBOR, any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition, operating results, and cash flows.

Covenant restrictions may limit our operations and impact our ability to make payments to our investors.

Some of our existing and/or future debt and other securities may contain covenants that restrict our operations and impact our ability to make distributions or other payments to our investors unless certain financial tests or other criteria are satisfied. For example, our credit facilities are expected to provide, among other things, that we may not make dividends or distributions to our investors during any four consecutive fiscal quarters in an aggregate amount greater than 95% of our Nareit FFO (as defined below) for such period, subject to certain non-cash adjustments, or such amount as may be necessary to maintain our REIT status. AIR OP’s outstanding preferred units will prohibit the payment of dividends on AIR Common Stock or AIR OP Common Units if we fail to pay the dividends to which the holders of the preferred units are entitled. In addition, our debt agreements may contain other customary affirmative and negative covenants. Our credit facilities are expected to be a continuation of Aimco’s existing revolving credit facility and term loan credit facility, subject to such changes to reflect the new corporate structure and market conditions. However, the terms and conditions remain under discussion and are subject to change.

We may increase leverage, which could further exacerbate the risks associated with our substantial indebtedness.

We may decide to increase our leverage. Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. Although our credit facilities may limit our ability to incur additional indebtedness, our governing documents do not limit the amount of debt we may incur, and our board of directors may change our target debt levels at any time without the approval of our stockholders. We may incur additional indebtedness from time to time in the future to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our indebtedness could intensify.

RISKS RELATED TO THE SEPARATION

The board of directors of Aimco has reserved the right, in its sole discretion, to amend, modify, or abandon the Separation at any time prior to the distribution.

Until the Separation occurs, Aimco’s board of directors will have the sole discretion to amend, modify or abandon the Separation at any time prior to the distribution. This means Aimco may cancel or delay the planned

 

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distribution of AIR Common Stock if at any time the board of directors of Aimco determines, in its sole discretion, that the distribution of the AIR Common Stock or the terms thereof are not in the best interests of Aimco and its stockholders or that market conditions or other circumstances are such that the Separation is no longer advisable at that time. If Aimco’s board of directors determines to terminate the Separation, stockholders of Aimco will not receive any distribution of AIR Common Stock and holders of AIR OP Common Units will not receive any distribution of New OP Units, as applicable, and Aimco and AIR OP will be under no obligation whatsoever to their stockholders or equityholders, as applicable, to distribute such shares or units. In addition, the Separation is subject to the satisfaction or waiver (by Aimco in its sole discretion) of a number of conditions. See “The Separation—Conditions to the Separation.”

The historical and pro forma financial information included in this information statement may not be a reliable indicator of future results.

Our historical consolidated financial data and our unaudited pro forma consolidated financial data included in this information statement may not reflect our business, financial position results of operations had we been an independent company during the periods presented, or what our business, financial position, results of operations or cash flows will be in the future when we are an independent company. Prior to the Separation, our business has been operated by Aimco as part of one corporate organization and not operated as a stand-alone company.

Our historical consolidated financial data represents the financial position and results of operations of Aimco’s and AIR OP’s consolidated financial statements without giving effect to the Separation. Our historical consolidated financial statements include the parts of the Aimco business that will not be a part of the AIR business after the Separation, and therefore includes income, expenses, and other financial measures not attributable to our business. The consolidated financial statements do not necessarily reflect what our financial position, results of operations or cash flows would have been if we had been a stand-alone company during the periods presented, nor are they necessarily indicative of our future results of operations, financial position or cash flows.

The pro forma financial data included in this information statement includes adjustments based upon available information that our management believes to be reasonable to reflect these factors. However, the assumptions may change or may be incorrect, and actual results may differ, perhaps significantly. For these reasons, our cost structure may be higher, and our future performance may be worse, than the performance implied by the pro forma financial data presented in this information statement. For additional information about the basis of presentation of our combined historical financial data and our pro forma combined financial data included in this information statement, see “Description of Financing and Material Indebtedness,” “Capitalization,” “Summary Historical Consolidated and Unaudited Pro Forma Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this information statement.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Separation.

Following the Separation, we and Aimco will be two, focused and independent companies. We may not be able to achieve some or all of the benefits that we expect to achieve as a company independent from Aimco in the time we expect, if at all. For instance, it may take longer than anticipated for us to, or we may never, succeed in growing our business through the acquisition of new stabilized apartment communities or through our active management strategies.

The Separation could give rise to disputes or other unfavorable effects, which could materially and adversely affect our business, financial position or results of operations.

The Separation may lead to increased operating and other expenses, of both a nonrecurring and a recurring nature, and to changes to certain operations, which expenses or changes could arise pursuant to arrangements

 

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made between Aimco and us or could trigger contractual rights of, and obligations to, third parties. Disputes with third parties could also arise out of these transactions, and we could experience unfavorable reactions to the Separation from employees, lenders, ratings agencies, regulators or other interested parties. These increased expenses, changes to operations, disputes with third parties or other effects could materially and adversely affect our business, financial position or results of operations. In addition, following the Separation, disputes with Aimco could arise in connection with each of the Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, the Master Services Agreement, the Master Leasing Agreement or certain other agreements.

In connection with the Separation, we have assumed and will assume, and will indemnify Aimco for, certain liabilities. If we are required to make payments pursuant to these indemnities, we may need to divert cash to meet those obligations and our financial results could be adversely affected. In addition, Aimco will indemnify us for certain liabilities. These indemnities may not be sufficient to insure us against the full amount of liabilities we incur, and Aimco may not be able to satisfy its obligations in the future.

Pursuant to the Separation Agreement, we will agree to assume and indemnify Aimco for certain liabilities, including liabilities in excess of $10 million in the aggregate arising out of litigation matters related to pre-closing occurrences (that are not related to the Separation, the Restructuring, the related transactions, or other liabilities allocated to Aimco pursuant to the terms of the Separation Agreement). Such liabilities may include, among other items, associated defense costs, settlement amounts, and judgments. Payments pursuant to these assumptions and indemnities may be significant and may require us to divert cash to meet these obligations, which could negatively impact our business.

Third parties could also seek to hold us responsible for any of the liabilities allocated to Aimco, including those related to the Separation, the Restructuring, or the related transactions. Aimco will agree to indemnify us for such liabilities, but such indemnities may not be sufficient to protect us against the full amount of such liabilities. In addition, Aimco may not be able to fully satisfy its indemnification obligations with respect to the liabilities we incur. Even if we ultimately succeed in recovering from Aimco, any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, financial condition, results of operations, and cash flows.

For more information, see “Our Relationship with Aimco Following the Separation” and “Legal Proceedings—Separation.”

Although we intend to receive solvency opinions in connection with the Separation, the Separation may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws.

We intend to receive solvency opinions in connection with the Separation, however, a court could nonetheless deem the Separation or certain internal restructuring transactions undertaken by Aimco in connection therewith to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor-transferor was insolvent, or that rendered the debtor-transferor insolvent, inadequately capitalized or unable to pay its debts as they become due.

If a court were to find that any part of the Separation was a fraudulent transfer or conveyance, a court could void the Separation or impose substantial liabilities upon us, which could adversely affect our financial condition and our results of operations. Among other things, the court could require us to fund liabilities of other companies involved in the restructuring transactions for the benefit of creditors or require stockholders to return any dividends previously paid by AIR. Moreover, a court could void certain elements of the Separation or AIR could be awarded monetary damages for the difference between the consideration received by Aimco or its stockholders and the fair market value of the transferred property at the time of the Separation. Whether a transaction is a fraudulent conveyance or transfer will vary depending upon the jurisdiction whose law is being applied.

 

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Although we have endeavored to enter into agreements on market terms, our agreements with Aimco may not reflect terms that would have resulted from arm’s-length negotiations with unaffiliated third parties.

The agreements related to the Separation, including the Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, the Master Services Agreement, the Master Leasing Agreement, and certain other agreements, will have been entered into in the context of the Separation while we are still controlled by Aimco. As a result, although we have endeavored to enter into these agreements on market terms, they may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. The terms of the agreements being entered into in the context of the Separation concern, among other things, allocation of assets and liabilities attributable to periods prior to the Separation and the rights and obligations, including certain indemnification obligations, of Aimco and us after the Separation, certain services provided by us to Aimco and by Aimco to us after the Separation, and Aimco’s lease from us of the Initial Leased Properties. For a more detailed description, see “Our Relationship with Aimco Following the Separation” and “Description of Financing and Material Indebtedness.”

The distribution of AIR Common Stock is intended to be taxable and the distribution will generally be taxable to you as a dividend.

The distribution of AIR Common Stock is intended to be taxable. An amount equal to the fair market value of AIR Common Stock received by you on the distribution date (plus any cash received in lieu of fractional shares) will generally be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Aimco, with the excess treated first as a non-taxable return of capital to the extent of your tax basis in shares of Aimco Common Stock and then as capital gain. The fair market value of AIR Common Stock reported by Aimco to you on IRS Form 1099-DIV may differ from the trading price of AIR Common Stock on the distribution date. In addition, Aimco or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the distribution payable to non-U.S. stockholders, and any such withholding would be satisfied by Aimco or such agent withholding and selling a portion of the AIR Common Stock otherwise distributable to non-U.S. stockholders or by withholding from other property held in the non-U.S. stockholder’s account with the withholding agent. Your tax basis in shares of Aimco Common Stock held at the time of the distribution will be reduced (but not below zero) if the fair market value of AIR shares distributed by Aimco to you in the distribution (plus any cash received in lieu of fractional shares) exceeds your ratable share of Aimco’s available current and accumulated earnings and profits. Your holding period for such Aimco shares will not be affected by the distribution. Aimco will not be able to advise stockholders of the amount of earnings and profits of Aimco until after the end of the 2020 calendar year.

Additionally, Aimco’s current earnings and profits are measured as of the end of the tax year and are generally allocated to all distributions made during such tax year on a pro rata basis. As a result, a proportionate part of Aimco’s current earnings and profits for the entire taxable year of the Separation will be allocated to the Separation distribution. That proportionate part will be treated as dividend income to you even if you have not held Aimco stock for the entire taxable year of Aimco in which the Separation occurs. Thus, if you did not hold your Aimco Common Stock for the entire taxable year of Aimco in which the Separation occurs, you may be allocated a disproportionate amount of ordinary income attributable to Aimco’s current earnings and profits as a result of the Separation distribution.

Although Aimco will be treating the distribution as a taxable dividend and is ascribing a value to AIR shares in the distribution for tax purposes, this treatment and valuation is not binding on the IRS or any other tax authority. These taxing authorities could assert a different treatment, including treating the distributions as a partial liquidation, which could result in different treatment for non-corporate stockholders. Such treatment may result in Aimco having an insufficient dividend paid deduction to eliminate all of its taxable income and could require Aimco to pay a “deficiency dividend” to its stockholders and/or a tax payment to the IRS, which is indemnified by AIR pursuant to the Separation Agreement, and the amount of such indemnification payment could be significant.

 

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These taxing authorities could also ascribe a higher valuation to AIR shares, particularly if our stock trades at prices significantly above the value ascribed to AIR shares by Aimco in the period following the distribution. Such a higher valuation may cause a larger reduction in the tax basis of your Aimco shares or may cause you to recognize additional dividend or capital gain income. You should consult your tax advisor as to the particular tax consequences of the distribution to you.

RISKS RELATED TO TAX LAWS AND REGULATIONS

AIR may fail to qualify as a REIT.

If AIR fails to qualify as a REIT, AIR will not be allowed a deduction for dividends paid to its stockholders in computing its taxable income and will be subject to United States federal income tax at regular corporate rates. This would substantially reduce our funds available for distribution to our investors. Unless entitled to relief under certain provisions of the Code, AIR also would be disqualified from taxation as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT. In addition, AIR’s failure to qualify as a REIT may place us in default under our credit facilities.

We believe that AIR will operate in a manner that enables it to meet the requirements for qualification and taxation as a REIT. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Moreover, even a technical or inadvertent mistake could jeopardize our REIT status. AIR’s qualification as a REIT will depend on its satisfaction of certain asset, income, investment, organizational, distribution, stockholder ownership, and other requirements on a continuing basis. AIR’s ability to satisfy the asset tests will depend upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we do not obtain independent appraisals. AIR’s compliance with the REIT annual income and quarterly asset requirements will also depend upon our ability to manage successfully the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or other issuers constitutes a violation of the REIT requirements. Moreover, future economic, market, legal, tax, or other considerations may cause AIR to fail to qualify as a REIT, or the board of directors of AIR may determine to revoke its REIT status.

Furthermore, if Aimco fails to remain qualified as a REIT for its 2020 and 2021 taxable years, and AIR will be deemed to be a “successor” of Aimco under Section 856 of the Code, then AIR may also fail to qualify as a REIT. There can be no assurance that Aimco will remain qualified as a REIT for its 2020 and 2021 taxable years.

REIT distribution requirements limit our available cash.

As a REIT, AIR will be subject to annual distribution requirements. AIR OP will pay distributions intended to enable AIR to satisfy its distribution requirements. This will limit the amount of cash available for other business purposes, including amounts to fund our growth. AIR will generally be required to distribute annually at least 90% of its “real estate investment trust taxable income,” which is generally equivalent to net taxable ordinary income, determined without regard to the dividends paid deduction and excluding any net capital gain, in order for its distributed earnings not to be subject to United States federal corporate income tax. We intend to make distributions to AIR’s stockholders to comply with the requirements applicable to REITs under the Code (which may be all cash or a combination of cash and stock satisfying the requirements of applicable law). However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell apartment communities or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code.

 

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AIR may be subject to federal, state, and local income taxes in certain circumstances.

Even as a REIT, AIR may be subject to United States federal income and excise taxes in various situations, such as on its undistributed income. AIR could also be required to pay a 100% tax on any net income on non-arm’s-length transactions between AIR and a taxable REIT subsidiary (“TRS”) and on any net income from sales of apartment communities that were held for sale primarily in the ordinary course. State and local tax laws may not conform to the United States federal income tax treatment, and AIR may be subject to state or local taxation in various state or local jurisdictions in which AIR transacts business. Any taxes imposed on AIR would reduce our operating cash flow and net income and could negatively impact our ability to pay dividends and distributions.

Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.

REITs are entitled to a United States federal tax deduction for dividends paid to their stockholders. As compared to other taxable corporations, this ability to reduce or eliminate the REIT’s taxable income by paying dividends to stockholders is a principal benefit of maintaining REIT status, generally resulting in a lower combined tax liability of the REIT and its stockholders as compared to that of the combined tax liability of other taxable corporations and their stockholders. Notwithstanding this combined benefit, dividends payable by REITs may result in marginally higher taxes to the stockholder.

C-corporations are generally required to pay United States federal income tax on earnings. After tax earnings are then available for stockholder dividends. The maximum United States federal tax rate applicable to income from “qualified dividends” payable to United States stockholders that are individuals, trusts, and estates is currently 20%, plus the 3.8% investment tax surcharge. While dividends payable by REITs are generally not eligible for the qualified dividend reduced rates, stockholders that are individuals, trusts, or estates, and meet certain requirements, may generally deduct 20% of the aggregate amount of ordinary dividends from REITs. This deduction is available for taxable years beginning after December 31, 2017, and before January 1, 2026, and will generally cause the maximum tax rate for ordinary dividends from REITs to be 29.6%, plus the 3.8% investment tax surcharge. The more favorable tax rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts, and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporates that pay dividends, which could adversely affect the value of the shares of REITs, including AIR Common Stock.

Complying with the REIT requirements may cause AIR to forgo otherwise attractive business opportunities.

To qualify as a REIT, AIR will need to continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts distributed to AIR stockholders, and the ownership of AIR stock. As a result of these tests, AIR may be required to make distributions to stockholders at disadvantageous times or when AIR does not have funds readily available for distribution, forgo otherwise attractive investment opportunities, liquidate assets in adverse market conditions, or contribute assets to a TRS that is subject to regular corporate federal income tax.

Changes to United States federal income tax laws could materially and adversely affect AIR and AIR’s stockholders.

The present United States federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial, or administrative action at any time, which could affect the United States federal income tax treatment of an investment in AIR Common Stock. The United States federal income tax rules dealing with REITs are constantly under review by persons involved in the legislative process, the IRS, and the United States Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. We cannot predict how changes in the tax laws might affect AIR and AIR’s stockholders. Revisions in federal tax laws and interpretations thereof could significantly and negatively affect AIR ability to qualify as a REIT and the tax considerations relevant to an investment in AIR Common Stock, or could cause AIR to change its investments and commitments.

 

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Government housing regulations may limit the opportunities at some of our apartment communities and failure to comply with resident qualification requirements may result in financial penalties or loss of benefits, such as rental revenues paid by government agencies. Additionally, the government may cease to operate or reduce funding for government housing programs, which would result in a loss of benefits from those programs.

We will own equity interests in entities that own certain apartment communities that benefit from governmental programs intended to provide housing to people with low or moderate incomes. These programs, which are usually administered by the United States Department of Housing and Urban Development, or HUD, or state housing finance agencies, typically provide one or more of the following: mortgage insurance; favorable financing terms; tax-exempt interest; historic or low-income housing tax credits; or rental assistance payments to the apartment community owners. As a condition of the receipt of assistance under these programs, the apartment communities must comply with various requirements, which typically limit rents to pre-approved amounts and limit our choice of residents to those with incomes at or below certain levels. Failure to comply with these requirements may result in financial penalties or loss of benefits. We will likely be required to obtain the approval of HUD in order to acquire or dispose of a significant interest in or manage a HUD-assisted apartment community. We may not always receive such approval.

RISKS RELATED TO AIR COMMON STOCK

There is no existing market for AIR Common Stock, and a trading market that will provide you with adequate liquidity may not develop for AIR Common Stock. In addition, once AIR Common Stock begins trading, the market price and trading volume of AIR Common Stock may fluctuate widely.

There is no current trading market for AIR Common Stock. The AIR Common Stock issued in the Separation will be trading publicly for the first time. We anticipate that a limited market, commonly known as a “when-distributed” trading market, will develop at some point following the record date, and that “regular-way” trading in shares of AIR Common Stock will begin on the first trading day following the distribution. However, an active trading market for AIR Common Stock may not develop as a result of the Separation or be sustained in the future. The lack of an active trading market may make it more difficult for you to sell your shares and could lead to our share price being depressed or more volatile.

For many reasons, including the risks identified in this information statement, the market price of AIR Common Stock following the Separation may be more volatile than the market price of Aimco Common Stock before the Separation. These factors may result in short-term or long-term negative pressure on the value of AIR Common Stock.

We cannot predict the prices at which AIR Common Stock may trade after the Separation. The market price of AIR Common Stock may fluctuate significantly, depending upon many factors, some of which may be beyond our control, including, but not limited to:

 

  •  

our financial condition and performance;

 

  •  

the financial condition of our tenants, including Aimco and its subsidiaries, including the extent of tenant bankruptcies or defaults;

 

  •  

our dividend policy;

 

  •  

a shift in our investor base;

 

  •  

the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other REITs, and fixed-income securities;

 

  •  

uncertainty and volatility in the equity and credit markets;

 

  •  

fluctuation in interest rates;

 

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  •  

our quarterly or annual earnings, or those of other REITs;

 

  •  

actual or anticipated fluctuations in our operating results;

 

  •  

our ability to obtain financing as needed;

 

  •  

changes in laws and regulations affecting our business;

 

  •  

changes in accounting standards, policies, guidance, interpretations or principles;

 

  •  

announcements by us or our competitors of significant investments, acquisitions or dispositions;

 

  •  

the failure of securities analysts to cover AIR Common Stock after the Separation;

 

  •  

the failure of securities indices that currently include Aimco Common Stock to add or substitute our common stock for that of Aimco after the completion of the Separation;

 

  •  

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

  •  

the operating performance and stock price of other REITs;

 

  •  

overall market fluctuations;

 

  •  

a decline in the real estate markets;

 

  •  

general economic conditions and other external factors; and

 

  •  

all other risk factors addressed elsewhere in this information statement.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of AIR Common Stock.

We cannot guarantee the timing, amount, or payment of dividends on AIR Common Stock.

We will be required to distribute annually to holders of AIR Common Stock at least 90% of our “real estate investment trust taxable income,” which is generally equivalent to net taxable ordinary income (and may be all cash or a combination of cash and stock satisfying the requirements of applicable law). Although we expect to target a dividend payout ratio between 65% and 80% of AFFO, our board of directors will determine the amount of, and declare, our dividends. Our board of directors’ decisions regarding the payment of dividends will depend on many factors, such as REIT distribution requirements, current market conditions, liquidity needs, and other uses of cash, such as for deleveraging and accretive investment activities, and other factors that it deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and access the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividend if we commence paying dividends. For more information, please refer to “Dividend Policy.”

We may choose to pay dividends in our own stock, in which case you could be required to pay income taxes in excess of the cash dividends you receive.

We may in the future distribute taxable dividends that are payable in cash and shares of AIR Common Stock where up to only 20% (or, for dividends declared between April 1, 2020, and December 31, 2020, 10%) of such a dividend is made in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. Holder (as defined below under “U.S. Federal Income Tax Considerations”) sells the stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain Non-U.S. Holders (as defined

 

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below under “U.S. Federal Income Tax Considerations”), we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of AIR Common Stock to pay taxes owed on dividends, it may put downward pressure on the trading price of AIR Common Stock.

It is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in future years. Moreover, the IRS may impose additional requirements with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

Future sales or distributions of AIR Common Stock could depress the market price for shares of AIR Common Stock.

The AIR Common Stock that Aimco intends to distribute to its stockholders in the Separation generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any holder of Aimco Common Stock to sell AIR Common Stock on or after the record date, it is possible that some Aimco stockholders will decide to sell some or all of the shares of AIR Common Stock that they receive in the Separation, including to pay any taxes payable by such stockholders upon receipt of AIR Common Stock.

In addition, some of the holders of Aimco Common Stock are index funds tied to stock or investment indices or are institutional investors bound by various investment guidelines. Companies are generally selected for investment indices, and in some cases selected by institutional investors, based on factors such as market capitalization, industry, trading liquidity, and financial condition. As a company separate from Aimco, we may initially have a lower market capitalization than Aimco has today, and our business will differ from the business of Aimco prior to the Separation. As a result, AIR Common Stock may not qualify for those investment indices. In addition, AIR Common Stock may not meet the investment guidelines of some institutional investors. Consequently, these index funds and institutional investors may have to sell some or all of the AIR Common Stock they receive in the Separation, which may result in a decline in the price of AIR Common Stock.

Any disposition by a significant stockholder of AIR Common Stock, or the perception in the market that such dispositions could occur, may cause the price of AIR Common Stock to fall. Any such decline could impair our ability to raise capital through future sales of AIR Common Stock. Further, AIR Common Stock may not qualify for other investment indices, including indices specific to REITs, and any such failure may discourage new investors from investing in AIR Common Stock.

The combined post-Separation value of Aimco Common Stock and AIR Common Stock may not equal or exceed the pre-Separation value of Aimco Common Stock.

We cannot assure you that the combined trading prices of Aimco Common Stock and AIR Common Stock after the Separation will be equal to or greater than the trading price of Aimco Common Stock prior to the Separation. Until the market has fully evaluated the stand-alone business of our company, the price at which shares of AIR Common Stock trades may fluctuate more significantly than might otherwise be typical, including volatility caused by general market conditions. Similarly, until the market has fully evaluated the business of Aimco without the portfolio of assets that will be allocated to AIR, the price at which Aimco Common Stock trades may fluctuate more significantly than might otherwise be typical.

RISKS RELATED TO OUR CORPORATE STRUCTURE

AIR and its subsidiaries may be prohibited from making distributions and other payments.

All of AIR’s apartment communities will be owned by subsidiaries of AIR OP, and all of AIR’s operations will be conducted by subsidiaries of Aimco. As a result, AIR will depend on distributions and other payments

 

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from AIR OP, and AIR OP will depend on distributions and payments from its subsidiaries in order to satisfy our financial obligations and make payments to our investors. The ability of AIR OP and its subsidiaries to make such distributions and other payments depends on their earnings and cash flows and may be subject to statutory or contractual limitations. As an equity investor in the REIT subsidiaries, AIR OP and its subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors and any holders of preferred equity senior to our equity investments. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of their debt or other obligations that are senior to our claims.

Limits on ownership of shares specified in AIR’s charter may result in the loss of economic and voting rights by purchasers that violate those limits.

AIR’s charter will provide for restrictions on ownership and transfer of AIR’s shares of capital stock, including, certain restrictions that, subject to certain exceptions, will prevent any person from beneficially or constructively owning more than (i) 8.7% (or 15% in the case of certain pension trusts and registered investment companies), by value or number of shares, whichever is more restrictive, of the outstanding shares of AIR Common Stock, or (ii) 8.7% (or 15% in the case of certain pension trusts and registered investment companies) in aggregate value of the outstanding shares of all classes and series of AIR capital stock, including AIR Common Stock and any AIR preferred stock. The charter will also prohibit anyone from buying shares of AIR’s capital stock if the purchase would result in AIR losing its REIT status. This could happen if a transaction results in five or fewer individuals (applying certain attribution rules of the Code) owning 50% or more of the value of all of AIR’s shares of capital stock or in fewer than 100 persons owning all of AIR’s shares of capital stock.

In addition to the ownership limits described above, AIR’s charter will prohibit any person from (i) beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under section 856(h) of the Code, (ii) transferring shares of our capital stock if such transfer would result in shares of our capital stock being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) beneficially or constructively owning shares of our stock to the extent such beneficial or constructive ownership in a tenant of AIR’s real property that is described in Section 856(d)(2)(B) of the Code if the income derived by AIR from such tenant would cause AIR to fail to satisfy any of the gross income requirements of Section 856(c) of the Code, (iv) beneficially or constructively owning shares of our capital stock if such ownership would result in our failing to qualify as a REIT, and (v) beneficially or constructively owning shares of stock to the extent such beneficial ownership of stock would result in us failing to qualify as a “domestically controlled qualified investment entity” within the meaning of section 897(h) of the Code.

If anyone acquires shares in excess of the ownership limits or in violation of the ownership requirements of the Code for REITs or the transfer restrictions in AIR’s charter:

 

  •  

the transfer will be considered null and void;

 

  •  

we will not reflect the transaction on AIR’s books;

 

  •  

we may institute legal action to enjoin the transaction;

 

  •  

we may demand repayment of any dividends received by the affected person on those shares;

 

  •  

we may redeem the shares;

 

  •  

the affected person will not have any voting rights for those shares; and

 

  •  

the shares (and all voting and dividend rights of the shares) will be held in trust for the benefit of one or more charitable organizations designated by AIR.

AIR may purchase the shares of capital stock held in trust at a price equal to the lesser of the price paid by the transferee of the shares or the then-current market price. If the trust transfers any of the shares of capital

 

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stock, the affected person will receive the lesser of the price paid for the shares or the then-current market price. An individual who acquires shares of capital stock that violate the above rules bears the risk that the individual:

 

  •  

may lose control over the power to dispose of such shares;

 

  •  

may not recognize profit from the sale of such shares if the market price of the shares increases;

 

  •  

may be required to recognize a loss from the sale of such shares if the market price decreases; and

 

  •  

may be required to repay to us any dividends received from us as a result of his or her ownership of the shares.

AIR’s charter may limit the ability of a third-party to acquire control of AIR.

The 8.7% and other ownership limits discussed above may have the effect of delaying or precluding acquisition by a third-party of control of AIR without the consent of the board of directors of AIR. AIR’s charter will authorize its board of directors to issue up to 1,022,175,000 shares of stock, consisting of 1,022,175,000 shares of AIR Common Stock and 1,000,000 shares of preferred stock. Under AIR’s charter, its board of directors will have the authority to classify and reclassify any of AIR’s unissued shares of capital stock into shares of capital stock with such preferences, conversion or other rights, voting power restrictions, limitations as to dividends, qualifications, or terms or conditions of redemptions as the AIR board of directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of AIR, where there is a difference of opinion between the AIR board of directors and others as to what is in AIR’s stockholders’ best interests. In addition, AIR’s charter will provide that AIR’s board of directors will initially be divided into three classes, denominated as Class I, Class II and Class III, with such classes serving until the 2021, 2022 and 2023 annual meeting of AIR stockholders, respectively, at which annual meetings each Class will be elected to a term expiring at the 2024 annual meeting of AIR stockholders (with classification ending at the 2024 annual meeting). The classification of our board of directors may also have the effect of delaying or precluding acquisition by a third-party of control of AIR without the consent of the board of directors of AIR.

The Maryland General Corporation Law may limit the ability of a third-party to acquire control of AIR.

As a Maryland corporation, AIR will be subject to various Maryland laws that may have the effect of discouraging offers to acquire AIR and increasing the difficulty of consummating any such offers, where there is a difference of opinion between the AIR board of directors and others as to what is in AIR’s stockholders’ best interests. The Maryland General Corporation Law, specifically the Maryland Business Combination Act, restricts mergers and other business combination transactions between AIR and any person who acquires, directly or indirectly, beneficial ownership of shares of AIR’s stock representing 10% or more of the voting power without prior approval of the board of directors of AIR. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 66-2/3% of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. The Maryland General Corporation Law, specifically the Maryland Control Share Acquisition Act, provides generally that a person who acquires shares of AIR’s capital stock representing 10% or more of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote. Additionally, the Maryland General Corporation Law provides, among other things, that the board of directors of AIR will have broad discretion in adopting stockholders’ rights plans and has the sole power to fix the record date, time, and place for special meetings of the stockholders. To date, AIR has not adopted a stockholders’ rights plan. In addition, the Maryland General Corporation Law provides that a corporation that (x) has at least three directors who are not officers or employees of the entity or related to an acquiring person and (y) has a class of equity securities registered under the Exchange Act, may elect in its charter or bylaws or by resolution of the board of directors to be subject to all or part of a special subtitle that provides that:

 

  •  

the corporation will have a staggered board of directors;

 

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  •  

any director may be removed only for cause and by the vote of two-thirds of the votes entitled to be cast in the election of directors generally, even if a lesser proportion is provided in the charter or bylaws;

 

  •  

the number of directors may only be set by the board of directors, even if the procedure is contrary to the charter or bylaws;

 

  •  

vacancies may only be filled by the remaining directors, even if the procedure is contrary to the charter or bylaws; and

 

  •  

the secretary of the corporation may call a special meeting of stockholders at the request of stockholders only on the written request of the stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting, even if the procedure is contrary to the charter or bylaws.

AIR does not expect to make any of the elections described above effective as of the Separation.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This information statement includes forward-looking statements, including the sections entitled “Summary,” “Risk Factors,” “The Separation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business and Properties.” Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief, or expectations, including, but not limited to, statements regarding: the anticipated timing, structure and benefits of the Separation; tax treatment and tax consequences of the Separation, including factors related thereto; any assumed or illustrative tax considerations and any statements or assumptions regarding holder tax situations; future financing plans, business strategies, growth prospects, and operating and financial performance; and expectations regarding the making of distributions and the payment of dividends.

Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “plan(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from our expectations include but are not limited to:

 

  •  

the effects of the coronavirus (COVID-19) pandemic on Aimco’s and AIR’s business and on the global and U.S. economies generally;

 

  •  

real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing of acquisitions and dispositions; and changes in operating costs, including energy costs;

 

  •  

financing risks, including the availability and cost of capital markets’ financing; the risk that our cash flows from operations may be insufficient to meet required payments of principal and interest; and the risk that our earnings may not be sufficient to maintain compliance with debt covenants;

 

  •  

insurance risks, including the cost of insurance, natural disasters and severe weather such as hurricanes;

 

  •  

the effects of other global or national health pandemics, epidemics or concerns;

 

  •  

legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of governmental regulations that affect us and interpretations of those regulations; and possible environmental liabilities, including costs, fines, or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by us;

 

  •  

negative economic conditions in our geographies of operation;

 

  •  

uninsured or underinsured losses that our properties may experience and other unanticipated expenses, including environmental compliance costs and liabilities;

 

  •  

our ability to manage our indebtedness level, changes in the terms of such indebtedness and changes in market interest rates;

 

  •  

covenants in our debt agreements and in the Master Leasing Agreement may limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial position, or results of operations;

 

  •  

our ability to pay dividends and the tax treatment of such dividends for our stockholders;

 

  •  

our loss of key personnel;

 

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  •  

our ability to qualify or maintain our status as a REIT;

 

  •  

whether or not the Separation is completed on the anticipated terms or at all;

 

  •  

the ability of AIR, AIR OP, Aimco and New OP to satisfy any necessary conditions to complete the Separation;

 

  •  

our ability to complete financings related to the Separation on acceptable terms or at all;

 

  •  

our relationship with Aimco following the Separation;

 

  •  

the ability to achieve some or all of the benefits that we expect to achieve from the Separation or to successfully operate as an independent company following the Separation;

 

  •  

activities by stockholder activists, including a proxy contest;

 

  •  

the ability and willingness of Aimco and its subsidiaries to meet or perform its obligations under any contractual arrangements that are entered into with us in connection with the Separation and any of its obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

 

  •  

unexpected liabilities, disputes or other potential unfavorable effects related to the Separation; and

 

  •  

additional factors discussed in the sections entitled “Business and Properties,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this information statement.

Forward-looking statements speak only as of the date of this information statement. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based.

 

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THE SEPARATION

Overview of the Separation

Consistent with Aimco’s ongoing strategic planning, Aimco’s management and board of directors thoroughly evaluated a range of alternatives and transactions, and determined that the creation of AIR by separating assets representing approximately 10% of the GAV, as of March 31, 2020, of Aimco is the best path forward to enhance value for all stockholders.

Upon the satisfaction or waiver by Aimco of the conditions to the Separation, which are described in more detail in “—Conditions to the Separation” below, Aimco will effect the Separation by distributing 100% of AIR Common Stock held by Aimco pro rata to holders of Aimco Common Stock. The distribution of AIR Common Stock is expected to take place on                  , 2020. On the distribution date, each holder of Aimco Common Stock will receive one share of AIR Common Stock for each one share of Aimco Common Stock (and cash in lieu of fractional shares of Aimco Common Stock) held as of the close of business on the record date.

You will not be required to make any payment, or surrender or exchange your Aimco Common Stock, or take any other action to receive your AIR Common Stock to which you are entitled on the distribution date.

In connection with the Separation, we will enter into agreements with Aimco that set forth the relationship between us and Aimco following the Separation. See “Our Relationship with Aimco Following the Separation.”

Until the Separation has occurred, Aimco has the right to terminate the Separation, even if all of the conditions have been satisfied, if the board of directors of Aimco determines, in its sole discretion, that the Separation is not in the best interests of Aimco and its stockholders or that market conditions or other circumstances are such that the Separation is no longer advisable at that time. We cannot provide any assurances that the Separation will be completed. For a more detailed description of these conditions, see “—Conditions to the Separation.”

Reasons for the Separation

The decision by the Aimco board of directors was unanimous and is a result of years of ordinary course strategic review, many months of intensive meetings this calendar year, advice from financial, legal, tax, and accounting experts, and regular conversations with Aimco’s stockholders. Having listened to stockholders and recognizing the disconnect between the Aimco share price and NAV, the board’s goal is to simplify the business, reduce execution risk, reduce financial risk, and increase FFO and cash dividends by reducing the vacancy loss and overhead costs incurred during redevelopment and development. During the board’s deliberations, it saw the opportunity to replenish the income tax basis of Aimco’s properties by structuring the Separation to be taxable. After further discussion with Aimco’s stockholders, the board saw the opportunity to make other changes, enhancing governance while providing stability to operations during a turbulent time.

Consistent with Aimco’s ongoing strategic planning, Aimco’s management and board of directors thoroughly evaluated a range of alternatives and transactions, and determined that the Separation is the best path forward to enhance value for all stockholders for a number of reasons, including the following:

 

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Creates two, focused and independent companies, each with the opportunity to pursue growth through the execution of distinctly different business plans. We believe that having two, focused and independent companies with distinct investment profiles will maximize the strategic focus and financial flexibility of each company to grow and return capital to stockholders. The Aimco board of directors believes that the two businesses, each with a clear focus, strong, independent boards of directors, dedicated management teams, and strengthened balance sheets, will create greater stockholder value as two companies than as one. The AIR business plan is to: (i) invest only in stabilized apartment communities; (ii) own a high-quality and diversified portfolio of stabilized

 

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multifamily properties; (iii) emphasize its comparative advantage in property operations, with high customer-defined satisfaction and retention, low rate of growth in controllable operating expenses, and high operating margins; (iv) maintain a strong balance sheet with leverage, net of cash and receivables, and weighted average interest expense, net of interest income, comparable to or lower than peers; (v) reduce execution risk through elimination of redevelopment and development activities; and (vi) operate with overhead costs estimated at about 15 basis points of GAV, lower than peers as a percentage of GAV. AIR has sold or will sell assets sufficient to reduce financial leverage by approximately $2 billion. AIR’s focus on the ownership of stabilized properties and active management is expected to result in higher and more predictable earnings, measured by FFO. The business plan for Aimco will be to: (i) focus on redevelopment and development projects, including those sourced by Aimco, those in collaboration with IQHQ, a leading developer of life science properties, and those leased from AIR; (ii) undertake complex transactions when warranted by risk-adjusted returns, including the opportunity for additional pipelines of redevelopment or development opportunities; (iii) capitalize its redevelopment, development, and acquisition activities primarily with private, project, or activity-specific capital; and (iv) rely on a relatively small executive team engaging with qualified partners to execute its redevelopment, development and acquisition activities. Aimco’s focus is expected to create long-term value for real estate investors and will provide Aimco with flexibility to pursue broader opportunities, including those that are short-term dilutive, longer-term to value realization, more complicated, better measured by NAV creation than FFO, or that involve more, non-recourse leverage.

 

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Enhances investor transparency, better highlights the attributes of both companies, and provides investors with the option to invest in one or both companies. The Separation will provide each stockholder the opportunity to make an individual allocation of capital to one or both of the two differentiated businesses, each with a distinct investment risk/return profile: ownership of stabilized apartment communities through an investment in AIR; or redevelopment, development, and transactions through an investment in Aimco. The separation will enable potential investors and the financial community to evaluate Aimco and AIR separately and assess the merits, performance, and future prospects of their respective businesses. In addition, we believe the Separation will make AIR and Aimco more competitive and appealing to a broader investor audience moving forward, providing them with the opportunity to invest in two companies with compelling value propositions and distinct investment strategies. AIR is expected to have higher dividends, with FFO made more predictable due to lower leverage and reduced exposure to redevelopment and development. Aimco’s business is expected to be less predictable in terms of quarter over quarter activity but to also have higher long-term target returns commensurate with such level of risk. Investors can increase their allocation to Aimco or to AIR, depending on their preference.

 

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Limits AIR’s exposure to risks associated with the redevelopment and development business. AIR will be able to invest in stabilized properties that it believes will better support its underlying business. AIR is expected to have limited to no risk of earnings or cash flow dilution from non-earning assets, and to have limited execution risk for redevelopment, development, and lease-ups, low leverage and lower overhead costs (both in total dollars and as a percentage of gross asset value). Through its relationship with Aimco, AIR is expected to retain access to some of the advantages of Aimco’s redevelopment and development business, such as newly developed and stabilized properties, without the execution risk, leverage or associated costs.

 

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Provides our management teams with the ability to focus on our distinct businesses and be more closely aligned with the needs of investors. Each of AIR and Aimco will have an independent board of directors and independent management and will be incentivized to make decisions that are in the best interests of its respective business. The separation of the businesses will give each senior management team the opportunity to focus on the goals and expectations of each company’s investors. We expect that the separation of the experienced senior management teams and other key personnel operating our businesses will result in the ability for each company to better satisfy the needs of its respective stockholders.

 

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Improves AIR’s access to capital markets. Aimco’s share price has traded at a consistent discount to NAV, making it difficult for Aimco to grow through raising new primary equity capital. The Separation is expected to increase FFO and AFFO at AIR and produce a better price to FFO ratio than has previously been given to Aimco while it owned all of the businesses of Aimco and AIR. In addition, we expect that de-leveraging and the prospect of a rating upgrade at AIR after the Separation are likely to provide AIR with enhanced access to corporate unsecured debt issuances at more favorable interest rates. As a result of the Separation, we expect AIR will have improved access to the capital markets and a strong capital structure tailored to its strategic goals, enabling investment in the acquisition of properties to grow its portfolio.

 

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Increases financial flexibility. Aimco’s board of directors believes that a taxable Separation will increase AIR’s strategic and financial flexibility to grow, earn competitive returns on capital, and create long-term value for stockholders. The Separation will result in a refreshed tax basis for AIR, which enhances AIR’s ability to allocate capital by reducing tax friction and reduces the tax costs of future property sales and therefore enhances portfolio management. We also expect that this will reduce the need for future stock dividends and make cash dividends more likely to be a return of capital or capital gains for tax purposes, increasing their after-tax value for taxable investors.

The board of directors of Aimco also considered a number of potentially negative factors in evaluating the Separation, including the following:

 

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Anticipated benefits of the Separation may not be realized. Following the Separation, AIR and Aimco will be two, focused and independent companies. AIR and/or Aimco may not be able to achieve some or all of the benefits that it expects to achieve as a company independent from the other in the time it expects, if at all. For instance, it may take longer than anticipated for AIR to, or AIR may never, succeed in growing its business through the acquisition of new stabilized apartment communities or through AIR’s active management strategies.

 

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There may be disruptions to the business as a result of the Separation. The actions required to separate AIR and Aimco could disrupt AIR and Aimco’s operations after the Separation.

 

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One-time costs of the Separation. AIR and Aimco will incur costs in connection with the transition to being separate public companies that may include accounting, tax, legal and other professional service costs, recruiting and relocation costs associated with hiring or reassigning personnel, costs to separate information systems, and, in the case of AIR, costs related to establishing a new brand identity in the market place.

 

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There may be conflicts between AIR and Aimco. There may be, or there may be the appearance of, conflicts of interest in AIR’s relationship with Aimco. Mr. Considine, along with Messrs. Miller and Stein, will serve on both AIR’s and Aimco’s boards of directors, however, such directors will recuse themselves from voting as members of either board of directors during the approval or disapproval of any transactions between the two companies. The agreements between Aimco and us generally will not limit or restrict Aimco or its affiliates from engaging in any business or managing other entities that engage in business of the type conducted by us. Actual, potential, or perceived conflicts could give rise to investor dissatisfaction, settlements with stockholders, litigation, or regulatory inquiries or enforcement actions.

 

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The Separation as structured is expected to result in certain tax liabilities for Aimco stockholders. In general, Aimco expects that the Separation will be treated as a taxable transaction for U.S. federal income tax purposes. As more specifically described in “The Separation—U.S. Federal Income Tax Consequences of the Separation” and “U.S. Federal Income Tax Considerations,” an amount equal to the fair market value of the AIR Common Stock stockholders receive on the distribution date will generally be treated as a taxable dividend to the extent of each stockholder’s ratable share of any current or accumulated earnings and profits of Aimco (including gain recognized by Aimco in connection with the Separation). The excess will be treated as a non-taxable return of capital to the

 

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extent of each stockholder’s tax basis in shares of Aimco Common Stock and any remaining excess will be treated as capital gain. Aimco will not be able to advise stockholders of the amount of earnings and profits of Aimco until after the end of the calendar year in which the Separation occurs.

The board of directors of Aimco concluded that the potential benefits of the Separation outweighed these factors. For more information, please refer to the section entitled “Risk Factors” included elsewhere in this information statement.

Manner of Effecting the Separation

The general terms and conditions relating to the Separation will be set forth in the Separation Agreement between us and Aimco and New OP. Under the Separation Agreement, the Separation is anticipated to be effective from and after 12:01 a.m. on                 , 2020.

Separation

On                  , 2020, the board of directors of Aimco declared the distribution of all AIR Common Stock on the basis of one share of AIR Common Stock for each one share of Aimco Common Stock held of record as of the close of business on the record date. The actual total number of shares of AIR Common Stock to be distributed will depend on the number of shares of Aimco Common Stock outstanding at the close of business on the record date. The shares of AIR Common Stock to be distributed will constitute all of the outstanding shares of AIR Common Stock immediately after the Separation.

In accordance with the terms of the Separation Agreement, AIR OP will cause the Aimco business (other than (i) a portion of the 16 Separate Portfolio Assets and (ii) its interest in Royal Crest Nashua LLC, which entity will be transferred to New OP for no consideration immediately after the distribution of New OP Units pursuant to a binding agreement entered into prior to such distribution) and certain other assets to be contributed to New OP in exchange for 100% of the outstanding New OP Units. Substantially all of Aimco’s (and its subsidiaries’) employees will become or remain employees of AIR OP (and its subsidiaries), while approximately 50 of Aimco’s (and its subsidiaries’) employees will become or remain employees of New OP (and its subsidiaries).

AIR OP will distribute 100% of the outstanding New OP Units to the holders of AIR OP Common Units (including AIR and AIR OP GP), pro rata with respect to their ownership of AIR OP Common Units as of the close of business on the record date. AIR and AIR OP GP will distribute their New OP Units to Aimco.

AIR OP will transfer its interests in Royal Crest Nashua LLC to New OP.

New OP or its subsidiaries and AIR OP and its subsidiaries will contribute the Separate Portfolio Assets to James-Oxford LP in exchange for common and preferred interests in James-Oxford LP. New OP will then contribute its interests in James-Oxford LP to Aimco JO. AIR OP and its subsidiaries will sell their interests in James-Oxford LP (other than a less than 5% common interest) to Aimco JO in exchange for notes payable to subsidiaries of AIR of $0.5 billion and certain other obligations. The transactions described above are intended to constitute taxable transactions with respect to the interests in James-Oxford LP.

Aimco will contribute its interest in AIR OP GP to AIR.

Sub REIT 1 and Sub REIT 2 will each elect to be treated as a REIT for U.S. federal income tax purposes commencing with its initial taxable year ending December 31, 2020. AIR will contribute an amount of AIR OP Common Units representing an approximately 34% limited partner interest in AIR OP to Sub REIT 1, and will contribute AIR OP Common Units representing an approximately 34% limited partner interest in AIR OP and its interest in AIR OP GP to Sub REIT 2, each in exchange for common and preferred interests in Sub REIT 1 and Sub REIT 2 (as applicable), which transactions are intended to trigger gain for U.S. federal income tax

 

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purposes. Sub REIT 1 and Sub REIT 2 are each expected to also have approximately 125 other holders of a nominal amount of non-participating non-voting preferred stock with an aggregate initial liquidation preference of approximately $125,000 to satisfy certain requirements for qualifying as a REIT for U.S. federal income tax purposes, and AIR OP is expected to issue a new series of preferred limited partnership units of AIR OP to each of Sub REIT 1 and Sub REIT 2 with terms substantially the same as such non-participating non-voting preferred stock.

New OP will contribute the redevelopment and development business to Redev/Dev TRS. AIR OP will form Property Management LLC. AIR OP will then contribute its property management business Property Management LLC and to Property Management TRS (which has been previously formed). New OP and New Sub REIT will each contribute cash to Property Management TRS in exchange for preferred interests.

AIR will issue $2 million in Class A Preferred Stock to Aimco, subject to a binding commitment to sell such Class A Preferred Stock to unrelated investors, and AIR OP will issue $2 million in a new series of preferred limited partnership units of AIR OP to AIR with terms substantially the same as the terms of the Class A Preferred Stock.

Thereafter, Aimco will distribute 100% of the outstanding AIR Common Stock to Aimco common stockholders as of the record date on a pro rata basis.

The next day following the Separation, Aimco will sell its Class A Preferred Stock in AIR to unrelated investors.

In summary, on the distribution date, (x) each holder of AIR OP Common Units will receive from AIR OP one New OP Unit for each one AIR OP Common Unit held as of the close of business on the record date, and (y) each Aimco common stockholder will receive from Aimco one share of AIR Common Stock for each one share of Aimco Common Stock held as of the close of business on the record date. Following such distribution by Aimco, Aimco and AIR will be two, focused and independent companies. AIR OP will be approximately 95% owned by AIR, while New OP will be approximately 95% owned by Aimco.

Stock Certificates

Neither Aimco nor AIR will be issuing physical certificates representing shares of AIR Common Stock. Instead, if you own Aimco Common Stock as of the close of business on the record date, the shares of AIR Common Stock that you are entitled to receive in the Separation, will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm or 401(k) plan or other channel on your behalf by way of direct registration in book-entry form. A benefit of issuing stock or units electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning physical certificates.

If you hold physical certificates that represent your shares of Aimco Common Stock and you are the registered holder of the shares of Aimco Common Stock represented by those certificates, the distribution agent will mail you an account statement that reflects the number of shares of AIR Common Stock that have been registered in book-entry form in your name. If you have any questions concerning the mechanics of having shares of common stock registered in book-entry form, you are encouraged to contact Aimco Investor Relations by mail at 4582 South Ulster Street, Suite 1700, Denver, CO 80237, by phone at (303) 793-4661 or by email at investor@aimco.com.

Most Aimco stockholders hold their shares of Aimco Common Stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your Aimco Common Stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of AIR Common Stock that you are entitled to receive as a result of the Separation. If you have any questions concerning the mechanics of having shares of AIR Common Stock held in “street name,” you are encouraged to contact your bank or brokerage firm.

 

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Results of the Separation

After the completion of the Separation, we and Aimco will be two, focused and independent companies. Immediately following the Separation, AIR expects to have approximately 812 registered stockholders, based on the number of registered stockholders of Aimco Common Stock as of November 17, 2020. Immediately following the Separation, AIR expects to have approximately 148,865,947 shares of AIR Common Stock issued and outstanding, based on the number of shares of Aimco Common Stock issued and outstanding as of November 17, 2020. The actual number of shares of AIR Common Stock to be distributed will be determined on the record date and will reflect any changes in the number of shares of Aimco Common Stock between November 17, 2020, and the record date. The Separation will not affect the number of outstanding shares of Aimco Common Stock, or any rights of Aimco stockholders. If you hold Aimco Common Stock as of the close of business on the record date, upon completion of the Separation, you will continue to hold your Aimco Common Stock and you will also hold AIR Common Stock.

Effective immediately upon the completion of the Separation, we and Aimco will enter into a number of other agreements to set forth our relationship from and after the Separation concerning, among other things, allocations of assets and liabilities attributable to periods prior to the Separation and the rights and obligations, including indemnification arrangements for certain liabilities after the Separation, ongoing services, including property management services, provided by us to Aimco, or our leases to Aimco of the leased properties, including the Initial Leased Properties. For a more detailed description of these agreements, see “Our Relationship with Aimco Following the Separation” and “Description of Financing and Material Indebtedness.”

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of AIR Common Stock in connection with the Separation. Instead, the distribution agent will aggregate all fractional shares of AIR Common Stock into whole shares and sell them on the open market at the prevailing market prices on behalf of those registered holders who otherwise would be entitled to receive a fractional share. We anticipate that these sales will occur as soon as practicable after the distribution date. The distribution agent will then distribute to such registered holders the aggregate cash proceeds of such sale, in an amount equal to their pro rata share of the total proceeds of those sales. Any applicable expenses, including brokerage fees, will be paid by us. We do not expect the amount of any such fees to be material to us.

If you hold physical stock certificates that represent your shares of Aimco Common Stock and you are the registered holder of the Aimco Common Stock represented by those certificates, your check for any cash that you may be entitled to receive instead of fractional shares of AIR Common Stock will be mailed to you separately. If you hold your shares of Aimco Common Stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds from the sales and will electronically credit your account for your share of such proceeds.

None of AIR, Aimco or the distribution agent will guarantee any minimum sale price for the fractional shares of AIR Common Stock. None of AIR, Aimco or the distribution agent will pay any interest on the proceeds from the sale of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient holders. Each stockholder entitled to receive cash proceeds from these fractional shares should consult his, her, or its tax advisor as to his, her or its particular circumstances. See “U.S. Federal Income Tax Consequences of the Separation.”

Listing and Trading of AIR Common Stock

There is no current trading market for AIR Common Stock. A condition to the Separation is the listing of AIR Common Stock on the NYSE. AIR Common Stock has been approved for listing on the NYSE, and shares are expected to be traded under the ticker symbol “AIRC.”

 

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At some point following the record date and continuing up to and including the distribution date, we expect that there will be two markets in Aimco Common Stock: a “due-bills” market and an “ex-distribution” market. Shares of Aimco Common Stock that trade on the “due-bills” market will trade with an entitlement to shares of AIR Common Stock distributed pursuant to the Separation. Shares of Aimco Common Stock that trade on the “ex-distribution” market will trade without an entitlement to shares of AIR Common Stock distributed pursuant to the Separation. Therefore, if you sell shares of Aimco Common Stock in the “due-bills” market after the record date and before the distribution date, you will be selling your right to receive shares of AIR Common Stock in connection with the Separation. If you own shares of Aimco Common Stock as of the close of business on the record date and sell those shares on the “ex-distribution” market before the distribution date, you will still receive the shares of AIR Common Stock that you would be entitled to receive pursuant to your ownership of the shares of Aimco Common Stock on the record date.

Furthermore, at some point following the record date and continuing up to and including the distribution date, we expect that a limited market, commonly known as a “when-distributed” trading market, will develop in AIR Common Stock. “When-distributed” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet distributed. The “when-distributed” trading market will be a market for shares of AIR Common Stock that will be distributed pro rata to Aimco stockholders on the distribution date. If you own shares of Aimco Common Stock as of the close of business on the record date, you would be entitled to shares of AIR Common Stock distributed pursuant to the Separation. You may trade this entitlement to shares of AIR Common Stock, without trading the shares of Aimco Common Stock you own, on the “when-distributed” market. On the first trading day following the distribution, “when-distributed” trading with respect to AIR Common Stock will end and “regular-way” trading in AIR Common Stock will begin.

Treatment of Aimco Equity Awards

Any equity awards relating to shares of Aimco Common Stock will be adjusted to reflect the impact of the Separation. Specifically, it is expected that each outstanding time or performance-vesting Aimco equity award will be converted into awards both of shares of Aimco Common Stock and of shares of AIR Common Stock. The number of shares of Aimco Common Stock and AIR Common Stock subject to each converted award will be determined in a manner intended to preserve the aggregate value of the original Aimco equity award as measured immediately before the Separation.

U.S. Federal Income Tax Consequences of the Separation

The following is a summary of U.S. federal income tax consequences generally applicable to the Separation, and in particular the distribution by Aimco of AIR Common Stock to stockholders of Aimco. For purposes of this section under this heading “—U.S. Federal Income Tax Consequences of the Separation”: (i) references to “AIR,” “we,” “our” and “us” mean only AIR and not its subsidiaries or other lower-tier entities, except as otherwise indicated; and (ii) references to Aimco refer to Aimco, New OP, and their consolidated subsidiaries (other than AIR and AIR OP and their consolidated subsidiaries after the Separation).

The information in this summary is based on: the Code; current, temporary and proposed regulations promulgated by the U.S. Treasury Department (“Treasury Regulations”); the legislative history of the Code; current administrative interpretations and practices of the IRS; and court decisions; all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. The summary is also based upon the assumption that Aimco, AIR, and their respective subsidiaries and affiliated entities will operate in accordance with their applicable organizational documents or partnership agreements and the agreements and other documents applicable to the Separation. This summary is for general information only and is not legal or tax advice. The Code provisions applicable to the Separation are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury Regulations, and administrative and judicial interpretations thereof.

 

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Moreover, this summary does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules, such as:

 

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financial institutions;

 

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insurance companies;

 

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broker-dealers;

 

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regulated investment companies;

 

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partnerships and trusts;

 

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persons who hold our stock on behalf of another person as a nominee;

 

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persons who receive our stock through the exercise of employee stock options or otherwise as compensation;

 

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persons holding our stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment;

 

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and, except to the extent discussed below:

 

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tax-exempt organizations; and

 

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foreign investors.

This summary assumes that investors will hold their Aimco Common Stock and AIR Common Stock as a capital asset, which generally means as property held for investment. This summary also assumes that investors will hold their Aimco Common Stock at all times from the record date through the distribution date. Special rules may apply to determine the tax consequences to an investor that purchases or sells Aimco Common Stock between the record date and the distribution date. You are urged to consult your tax advisor regarding the consequences to you of any such sale.

For purposes of this discussion under this heading “U.S. Federal Income Tax Consequences of the Separation,” a U.S. Holder is a stockholder of Aimco that is for U.S. federal income tax purposes:

 

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a citizen or resident of the United States;

 

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a corporation created or organized in the United States or under the laws of the United States, or of any state thereof, or the District of Columbia;

 

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an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or

 

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a trust if a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust.

A “Non-U.S. Holder” is a stockholder of Aimco that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership) for U.S. federal income tax purposes. If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds Aimco stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the Separation.

The U.S. federal income tax treatment of the Separation depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences of the Separation to any

 

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particular stockholder of Aimco will depend on the stockholder’s particular tax circumstances. You are urged to consult your tax advisor regarding the federal, state, local, and foreign income and other tax consequences to you of the Separation in light of your particular investment or tax circumstances.

Tax Classification of the Separation in General

For U.S. federal income tax purposes, the Separation will not be eligible for treatment as a tax-free distribution by Aimco with respect to its stock. Accordingly, the Separation will be treated as if Aimco had distributed to each Aimco common stockholder an amount equal to the fair market value of the AIR Common Stock received by such stockholder (plus any cash received in lieu of fractional AIR shares), determined as of the date of the Separation (such amount, the “spin-off distribution amount”). The tax consequences of the Separation on Aimco’s stockholders are thus generally the same as the tax consequences of Aimco’s cash distributions. The discussion below describes the U.S. federal income tax consequences to a U.S. Holder, a Non-U.S. Holder, and a tax-exempt holder of Aimco stock upon the receipt of AIR Common Stock in the Separation.

Although Aimco intends to take the position that the Separation does not constitute a partial liquidation for U.S. federal income tax purposes, this position is not binding on the IRS or any other tax authority. These tax authorities could assert that the Separation is a distribution in partial liquidation of Aimco for U.S. federal income tax purposes. If the IRS successfully made such an assertion, the portion of the Separation involving a distribution to Aimco’s non-corporate stockholders may be treated as a payment in exchange for such stockholders’ Aimco stock instead of as a dividend.

Although Aimco will ascribe a value to the AIR shares distributed in the Separation, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the distributed AIR shares, particularly if, following the Separation, those shares trade at prices significantly above the value ascribed to those shares by Aimco. Such a higher valuation may affect the distribution amount and thus the tax consequences of the Separation to Aimco’s stockholders.

Aimco will be required to recognize any gain, but will not be permitted to recognize any loss, upon distribution of the AIR shares in the Separation.

Tax Basis and Holding Period of AIR Shares Received by Holders of Aimco Stock

An Aimco stockholder’s tax basis in shares of AIR Common Stock received in the Separation generally will equal the fair market value of such shares on the date of the Separation, and the holding period for such shares will begin the day after the date of the Separation.

Tax Treatment of the Separation to U.S. Holders

The following discussion describes the U.S. federal income tax consequences to a U.S. Holder of Aimco stock upon the receipt of AIR Common Stock in the Separation.

Ordinary Dividends. The portion of the Separation distribution amount received by a U.S. Holder that is payable out of Aimco’s current or accumulated earnings and profits and that is not designated by Aimco as a capital gain dividend will generally be taken into account by such U.S. Holder as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, dividends paid by Aimco are not eligible for taxation at the preferential income tax rates for qualified dividends received by U.S. Holders that are individuals, trusts, and estates from taxable C corporations. Such U.S. Holders, however, are taxed at the preferential rates on dividends designated by and received from a REIT such as Aimco to the extent that the dividends are attributable to:

 

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income retained by the REIT in the prior taxable year on which the REIT was subject to corporate level income tax (less the amount of tax);

 

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dividends received by the REIT from TRSs or other taxable C corporations; or

 

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income in the prior taxable year from the sales of “built-in gain” property acquired by the REIT from C corporations in carryover basis transactions (less the amount of corporate tax on such income).

Aimco’s current earnings and profits are measured as of the end of the tax year and are generally allocated to all distributions made during such tax year on a pro rata basis. As a result, a proportionate part of Aimco’s current earnings and profits for the entire taxable year of Aimco in which the Separation occurs (including gain recognized by Aimco in connection with the Separation, and other property sales and taxable transactions occurring during the taxable year) will be allocated to the spin-off distribution. That proportionate part will be treated as dividend income even for a stockholder of record that has not held its Aimco stock for the entire taxable year of Aimco in which the Separation occurs. Thus, a stockholder that does not hold its Aimco Common Stock for the entire taxable year of Aimco in which the Separation occurs may be allocated a disproportionate amount of ordinary income attributable to Aimco’s current earnings and profits as a result of the spin-off distribution.

In addition, for taxable years that begin after December 31, 2017, and before January 1, 2026, stockholders that are individuals, trusts or estates are generally entitled to a deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT (not including capital gain dividends, as described below, or dividends eligible for reduced rates applicable to qualified dividend income, as described above), subject to certain limitations.

Non-Dividend Distributions. A distribution to Aimco’s U.S. Holders in excess of Aimco’s current and accumulated earnings and profits will generally represent a return of capital and will not be taxable to a stockholder to the extent that the amount of such distribution does not exceed the adjusted basis of the holder’s Aimco shares in respect of which the distribution was made. Rather, the distribution will reduce the adjusted basis of the holder’s shares in Aimco. To the extent that such distribution exceeds the adjusted basis of a U.S. Holder’s Aimco shares, the holder generally must include such distribution in income as long-term capital gain, or short-term capital gain if the holder’s Aimco shares have been held for one year or less.

Capital Gain Dividends. A distribution that Aimco designates as a capital gain dividend will generally be taxed to U.S. Holders as long-term capital gain, to the extent that such distribution does not exceed Aimco’s actual net capital gain for the taxable year, without regard to the period for which the holder that receives such distribution has held its Aimco stock. Corporate U.S. Holders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at reduced maximum federal rates in the case of U.S. Holders that are individuals, trusts, and estates, and ordinary income rates in the case of stockholders that are corporations.

Tax Treatment of the Separation to Non-U.S. Holders

The following discussion describes the U.S. federal income tax consequences to a Non-U.S. Holder of Aimco stock upon the receipt of AIR Common Stock in the Separation.

Ordinary Dividends. The portion of the spin-off distribution amount received by a Non-U.S. Holder that is (1) payable out of Aimco’s earnings and profits, (2) not attributable to Aimco’s capital gains, and (3) not effectively connected with a U.S. trade or business of the Non-U.S. Holder, will be treated as a dividend that is subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty.

In general, Non-U.S. Holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of Aimco stock. In cases where the dividend income from a Non-U.S. Holder’s investment in Aimco stock is, or is treated as, effectively connected with the Non-U.S. Holder’s conduct of a U.S. trade or business, the Non-U.S. Holder generally will be subject to U.S. federal income tax at graduated

 

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rates, in the same manner as U.S. Holders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the Non-U.S. Holder. The income may also be subject to the 30% (or such lower rate as may be specified by an applicable income tax treaty) branch profits tax in the case of a Non-U.S. Holder that is a corporation.

Non-Dividend Distributions. Unless Aimco’s stock constitutes a U.S. real property interest (“USRPI”), the spin-off distribution amount, to the extent not made out of Aimco’s earnings and profits, will not be subject to U.S. income tax. If Aimco cannot determine at the time of the Separation whether or not the spin-off distribution amount will exceed current and accumulated earnings and profits, Aimco or the applicable withholding agent is expected to withhold on the spin-off distributions at the rate applicable to ordinary dividends, as described above.

If Aimco’s stock constitutes a USRPI, as described below, distributions that it makes in excess of the sum of (a) the stockholder’s proportionate share of Aimco’s earnings and profits, plus (b) the stockholder’s basis in its Aimco stock, will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) in the same manner as if the Aimco stock had been sold, and the collection of the tax would be enforced by a refundable withholding tax at a rate of 15% of the amount by which the distribution exceeds the stockholder’s share of Aimco’s earnings and profits. In such situations, the Non-U.S. Holder would be required to file a U.S. federal income tax return and would be subject to the same treatment and same tax rates as a U.S. Holder with respect to such excess, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals.

Subject to certain exceptions discussed below, Aimco’s stock will be treated as a USRPI if, at any time during a prescribed testing period, 50% or more of its assets consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. We expect that 50% or more of Aimco’s assets will consist of USRPIs. Even if the foregoing 50% test is met, however, Aimco’s stock nonetheless will not constitute a USRPI if Aimco is a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT, less than 50% of the value of which is held directly or indirectly by Non-U.S. Holders at all times during a specified testing period (after applying certain presumptions regarding the ownership of Aimco stock, as described in the Code). Although it is anticipated that Aimco will be a domestically controlled qualified investment entity, and that a distribution with respect to Aimco’s stock in excess of Aimco’s earnings and profits will not be subject to taxation under FIRPTA, no assurance can be given that Aimco is or will remain a domestically controlled qualified investment entity.

In the event that Aimco is not a domestically controlled qualified investment entity, but its stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, a distribution to a Non-U.S. Holder nonetheless would not be subject to tax under FIRPTA; provided that the Non-U.S. Holder held 10% or less of Aimco’s stock at all times during a specified testing period. It is anticipated that Aimco’s stock will be regularly traded.

Gain in respect of a non-dividend distribution that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder in two cases: (1) if the Non-U.S. Holder’s investment in Aimco stock is effectively connected with a U.S. trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the same treatment as a U.S. Holder with respect to such gain, or (2) if the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and certain other requirements are met, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Capital Gain Dividends. Under FIRPTA, a dividend that Aimco makes to a Non-U.S. Holder, to the extent attributable to gains from dispositions of USRPIs that Aimco held directly or through pass-through subsidiaries (such gains, “USRPI Capital Gains”), will, except as described below, be considered effectively connected with a U.S. trade or business of the Non-U.S. Holder and will be subject to U.S. income tax at the rates applicable to

 

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U.S. individuals or corporations. Aimco will be required to withhold tax equal to 21% of the maximum amount that could have been designated as a USRPI Capital Gain dividend. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a Non-U.S. Holder that is a corporation. A distribution is not a USRPI Capital Gain dividend if Aimco held an interest in the underlying asset solely as a creditor.

In addition, if a Non-U.S. Holder owning more than 10% of Aimco Common Stock disposes of such stock during the 30-day period preceding the ex-dividend date of any dividend payment by Aimco, and such Non-U.S. Holder acquires or enters into a contract or option to acquire Aimco Common Stock within 61 days of the first day of such 30-day period described above, and any portion of such dividend payment would, but for the disposition, be treated as USRPI Capital Gain to such Non-U.S. Holder under FIRPTA, then such Non-U.S. Holder will be treated as having USRPI Capital Gain in an amount that, but for the disposition, would have been treated as USRPI Capital Gain.

Capital gain dividends received by a Non-U.S. Holder that are attributable to dispositions of Aimco’s assets other than USRPIs are not subject to U.S. federal income tax, unless (1) the gain is effectively connected with the Non-U.S. Holder’s U.S. trade or business, in which case the Non-U.S. Holder would be subject to the same treatment as U.S. Holders with respect to such gain, or (2) the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and certain other requirements are met, in which case the Non-U.S. Holder will incur a 30% tax on his capital gains.

A dividend that would otherwise have been treated as a USRPI Capital Gain dividend will not be so treated or be subject to FIRPTA, and generally will not be treated as income that is effectively connected with a U.S. trade or business, but instead will be treated in the same manner as ordinary income dividends (discussed above); provided that (1) the dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the United States, and (2) the recipient Non-U.S. Holder does not own, actually or constructively more than 10% of that class of stock at any time during the year ending on the date on which the dividend is received. Aimco anticipates that its stock will be “regularly traded” on an established securities exchange.

Special FIRPTA Rules. FIRPTA contains special rules that provide exemptions from FIRPTA and otherwise modify the application of the foregoing FIRPTA rules for particular types of non-U.S. investors, including “qualified foreign pension funds” and their wholly owned foreign subsidiaries and certain widely held, publicly traded “qualified collective investment vehicles.”

Withholding of Amounts Distributable to Non-U.S. Holders in the Separation. If withholding is required on any amounts otherwise distributable to a Non-U.S. Holder in the Separation, Aimco or other applicable withholding agents would collect the amount required to be withheld by converting to cash for remittance to the IRS a sufficient portion of AIR Common Stock that such Non-U.S. Holder would otherwise receive or would withhold from other property held in the Non-U.S. Holder’s account with the withholding agent, and such holder may bear brokerage or other costs for this withholding procedure. A Non-U.S. Holder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the amounts withheld exceeded the holder’s U.S. tax liability for the year in which the Separation occurred.

Other Withholding Rules. Withholding at a rate of 30% generally will be required on dividends (including any portion of the Separation distribution treated as a dividend) made in respect of Aimco Common Stock held by or through certain foreign financial institutions (including investment funds), unless such institution (i) enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and the accounts maintained by, the institution held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments, or (ii) complies with the terms of an intergovernmental agreement between the United States and an applicable foreign country. Accordingly, the entity through which Aimco Common Stock is held will affect the determination of whether such withholding is required. Similarly, dividends made in respect of Aimco Common Stock held by an investor that is a

 

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non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which the applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury Regulations or other guidance, may modify these requirements. Aimco will not pay any additional amounts to stockholders in respect of any amounts withheld. Non-U.S. Holders are encouraged to consult their tax advisors regarding the possible implications of these withholding taxes on their investment in Aimco Common Stock.

Tax Treatment of the Separation to Tax-Exempt Entities

Tax-exempt entities, including qualified employee pension and profit-sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. Such entities, however, may be subject to taxation on their unrelated business taxable income (“UBTI”). While some investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt holder has not held Aimco stock as “debt financed property” within the meaning of the Code (i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt holder), and (2) such Aimco stock is not otherwise used in an unrelated trade or business, the Separation generally should not give rise to UBTI to a tax-exempt holder.

Tax-exempt holders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code are subject to different UBTI rules, which will generally require such stockholders to characterize distributions that Aimco makes as UBTI.

In certain circumstances, a pension trust that owns more than 10% of Aimco’s stock could be required to treat a percentage of the dividends as UBTI, if Aimco is a “pension-held REIT.” Aimco will not be a pension-held REIT unless (1) it is required to “look through” one or more of its pension stockholders in order to satisfy certain REIT requirements and (2) either (i) one pension trust owns more than 25% of the value of Aimco’s stock, or (ii) a group of pension trusts, each individually holding more than 10% of the value of Aimco’s stock, collectively owns more than 50% of Aimco’s stock. Certain restrictions on ownership and transfer of Aimco’s stock should generally prevent a tax-exempt entity from owning more than 10% of the value of Aimco’s stock, and should generally prevent Aimco from becoming a pension-held REIT.

Time for Determination of the Tax Impact of the Separation

The actual tax impact of the Separation will be affected by a number of factors that are unknown at this time, including Aimco’s final earnings and profits for 2020 (including as a result of the gain or loss, if any, Aimco recognizes in the Separation or as a result of the internal restructuring transactions necessary to effect the Separation), the fair market value of AIR Common Stock on the date of the Separation, and the extent to which Aimco engages in sales of FIRPTA or other capital assets during the year of the Separation. Thus, a definitive calculation of the U.S. federal income tax impact of the Separation will not be possible until after the end of the 2020 calendar year. Aimco anticipates, however, that it will recognize a substantial amount of capital gain for tax purposes in connection with the Separation that will have the effect of substantially increasing its earnings and profits for the year. In addition, substantial taxable income is expected from certain property sales, most of which have already closed or are under contract to close prior to the Separation. Such taxable income will be mostly distributed prior to the Separation in the form of dividends of cash and stock, or all stock, based on the election of the individual stockholder. Aimco will notify its stockholders of the tax attributes of the Separation (including the spin-off distribution amount) on an IRS Form 1099-DIV. The fair market value of AIR Common Stock reported by Aimco to you on IRS Form 1099-DIV may differ from the trading price of AIR Common Stock on the distribution date.

 

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Examples

Set forth below are illustrative examples of the U.S. federal income tax consequences generally applicable to U.S. Holders in the transactions described in this information statement. The amounts used in the below examples are not actual results and are meant for illustrative purposes only. Actual results may differ materially from the illustrative examples. We are under no obligation to update any amounts other than in Aimco’s required tax reporting obligations.

Tax Consequences of the Separation

The table below is an illustrative example of the taxable income and federal tax per share from the Separation at various hypothetical values of shares of AIR Common Stock.

ILLUSTRATIVE EXAMPLE OF US INDIVIDUAL SHAREHOLDER FEDERAL TAX IMPLICATIONS – CHART 1

 

     Per Share (rounded)  

Illustrative Tax Impact from AIR Share Distribution

        

Hypothetical AIR Share Value After Separation

   $ 30.00      $ 40.00      $ 50.00  

Estimated Tax Basis Inside Aimco

   $ (18.00 )     $ (18.00 )     $ (18.00 ) 
  

 

 

    

 

 

    

 

 

 

Taxable Income on AIR Shares

   $ 12.00      $ 22.00      $ 32.00  
  

 

 

    

 

 

    

 

 

 

Estimated Income Tax Associated with(1)

        

Capital Gain

   $ 1.00      $ 3.50      $ 6.00  

Unrecaptured Section 1250 Gain

   $ 2.00      $ 2.00      $ 2.00  
  

 

 

    

 

 

    

 

 

 

Total Estimated Income Tax

   $ 3.00      $ 5.50      $ 8.00  
  

 

 

    

 

 

    

 

 

 

 

(1)

Tax amounts assume a 25% rate for unrecaptured Section 1250 gain, a 20% rate for capital gain, plus net investment income tax of 3.5%. Actual tax rates vary depending on individual circumstances, including personal state taxation.

Tax Basis in Shares of Aimco Common Stock

The table below is an illustrative example of a stockholder’s tax basis in shares of Aimco Common Stock after the completion of the Separation.

ILLUSTRATIVE EXAMPLE OF US INDIVIDUAL SHAREHOLDER FEDERAL TAX IMPLICATIONS – CHART 2

 

     Per Share (rounded)  

Illustrative Basis in Aimco Shares After Separation

        

Hypothetical Tax Basis in Aimco Before Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Return of Capital(1)

   $ 14.00      $ 14.00      $ 14.00  
  

 

 

    

 

 

    

 

 

 

Post Separation Tax Basis in Aimco Shares

   $ 16.00      $ 26.00      $ 36.00  
  

 

 

    

 

 

    

 

 

 

 

(1)

It is expected that the return of capital range will be $10 - $18 per share, but this amount will not be known until after the end of the year. Actual amounts may differ materially.

Because the distribution of AIR Common Stock is expected to be taxable to the recipient, the depreciable tax basis of properties owned by AIR is expected to be refreshed, making future dividends issued by AIR likely to include less taxable income. The difference, discounted to a net present value, is expected to offset the tax cost of the Separation in approximately eight years, subject to various assumptions, including discount rate. Also, AIR expects each stockholder’s retained basis will be allocated to the related shares of Aimco Common Stock,

 

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likely creating the opportunity for an offsetting tax benefit in the form of a capital loss, which can be realized by sale of the shares of Aimco Common Stock. In the future, stockholders may decide to hold both shares AIR Common Stock and Aimco Common Stock, sell both shares AIR Common Stock and Aimco Common Stock, or sell either shares AIR Common Stock and Aimco Common Stock.

After-tax Value of Shares of Aimco Common Stock and AIR Common Stock

The tables below are illustrative of the after-tax value of shares of AIR Common Stock and Aimco Common Stock after the completion of the Separation at various hypothetical AIR and Aimco values and at various pre-Separation stockholder tax basis amounts.

ILLUSTRATIVE EXAMPLE OF U.S. INDIVIDUAL SHAREHOLDER FEDERAL TAX IMPLICATIONS

 

     Per Share (rounded)  

Illustrative Tax Impact for Shareholder with $30 Basis in Aimco Before Separation, Selling After Separation

        

Hypothetical AIR Share Value After Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Aimco Share Value After Separation

   $ 4.00      $ 6.00      $ 8.00  
  

 

 

    

 

 

    

 

 

 

Hypothetical Total Value After Separation

   $ 34.00      $ 46.00      $ 58.00  

Hypothetical Tax Basis in AIR Share After Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Tax Basis in Aimco Share After Separation (see Chart 2 above)

   $ 16.00      $ 16.00      $ 16.00  
  

 

 

    

 

 

    

 

 

 

Hypothetical Tax Basis in Total After Separation

   $ 46.00      $ 56.00      $ 66.00  

Hypothetical Capital Loss

   $ (12.00 )     $ (10.00 )     $ (8.00 ) 

Hypothetical Tax Benefit Associated with Capital Loss(1)

   $ 2.75      $ 2.50      $ 2.00  

Hypothetical Total Value After Separation

   $ 34.00      $ 46.00      $ 58.00  

Hypothetical Total Estimated Income Tax on AIR Distribution (see Chart 1 above)

   $ (3.00 )     $ (5.50 )     $ (8.00 ) 

Hypothetical Tax Benefit Associated with Capital Loss

   $ 2.75      $ 2.50      $ 2.00  

Total Value After Tax

   $ 33.75      $ 43.00      $ 52.00  
  

 

 

    

 

 

    

 

 

 

 

(1)

Capital loss assuming this loss offsets 20% capital gains plus net investment income taxed at 3.8%

 

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ILLUSTRATIVE EXAMPLE OF U.S. INDIVIDUAL SHAREHOLDER FEDERAL TAX IMPLICATIONS

 

     Per Share (rounded)  

Illustrative Tax Impact for Shareholder with $40 Basis in Aimco Before Separation, Selling After Separation

        

Hypothetical AIR Share Value After Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Aimco Share Value After Separation

   $ 4.00      $ 6.00      $ 8.00  
  

 

 

    

 

 

    

 

 

 

Hypothetical Total Value After Separation

   $ 34.00      $ 46.00      $ 58.00  

Hypothetical Tax Basis in AIR Share After Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Tax Basis in Aimco Share After Separation (see Chart 2 above)

   $ 26.00      $ 26.00      $ 26.00  
  

 

 

    

 

 

    

 

 

 

Hypothetical Tax Basis in Total After Separation

   $ 56.00      $ 66.00      $ 76.00  

Hypothetical Capital Loss

   $ (22.00 )     $ (20.00 )     $ (18.00 ) 

Hypothetical Tax Benefit Associated with Capital Loss(1)

   $ 5.25      $ 4.75      $ 4.25  

Hypothetical Total Value After Separation

   $ 34.00      $ 46.00      $ 58.00  

Hypothetical Total Estimated Income Tax on AIR Distribution (see Chart 1 above)

   $ (3.00 )     $ (5.50 )     $ (8.00 ) 

Hypothetical Tax Benefit Associated with Capital Loss

   $ 5.25      $ 4.75      $ 4.25  

Total Value After Tax

   $ 36.25      $ 45.25      $ 54.25  
  

 

 

    

 

 

    

 

 

 

 

(1)

Capital loss assuming this loss offsets 20% capital gains plus net investment income taxed at 3.8%

ILLUSTRATIVE EXAMPLE OF U.S. INDIVIDUAL SHAREHOLDER FEDERAL TAX IMPLICATIONS

 

     Per Share (rounded)  

Illustrative Tax Impact for Shareholder with $50 Basis in Aimco Before Separation, Selling After Separation

        

Hypothetical AIR Share Value After Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Aimco Share Value After Separation

   $ 4.00      $ 6.00      $ 5.00  
  

 

 

    

 

 

    

 

 

 

Hypothetical Total Value After Separation

   $ 34.00      $ 46.00      $ 55.00  

Hypothetical Tax Basis in AIR Share After Separation

   $ 30.00      $ 40.00      $ 50.00  

Hypothetical Tax Basis in Aimco Share After Separation (see Chart 2 above)

   $ 36.00      $ 36.00      $ 36.00  
  

 

 

    

 

 

    

 

 

 

Hypothetical Tax Basis in Total After Separation

   $ 66.00      $ 76.00      $ 86.00  

Hypothetical Capital Loss

   $ (32.00 )     $ (30.00 )     $ (28.00 ) 

Hypothetical Tax Benefit Associated with Capital Loss(1)

   $ 7.50      $ 7.25      $ 6.75  

Hypothetical Total Value After Separation

   $ 34.00      $ 46.00      $ 58.00  

Hypothetical Total Estimated Income Tax on AIR Distribution (see Chart 1 above)

   $ (3.00 )     $ (5.50 )     $ (8.00 ) 

Hypothetical Tax Benefit Associated with Capital Loss

   $ 7.50      $ 7.25      $ 6.75  

Total Value After Tax

   $ 38.50      $ 47.75      $ 56.75  
  

 

 

    

 

 

    

 

 

 

 

(1)

Capital loss assuming this loss offsets 20% capital gains plus net investment income taxed at 3.8%

 

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Conditions to the Separation

We expect that the Separation will be effective on the distribution date; provided that the following conditions, among others, have been satisfied or waived by the board of directors of Aimco:

 

  •  

each of the Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, the Master Services Agreement, the Master Leasing Agreement, and certain other ancillary agreements shall have been duly executed and delivered by the parties thereto;

 

  •  

the Restructuring shall have been completed in accordance with the Separation Agreement (other than those steps in the Restructuring contemplated to occur following the Separation);

 

  •  

Aimco shall have received such solvency opinions, each in such form and substance, as it shall deem necessary, appropriate or advisable in connection with the consummation of the Separation;

 

  •  

the receipt by AIR of an opinion from Skadden, Arps to the effect that, commencing with AIR’s taxable year ending December 31, 2020, AIR will be organized in conformity with the requirements for qualification as a REIT under the Code, and AIR’s proposed method of operation will enable it to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws;

 

  •  

the receipt by Aimco of an opinion from Skadden, Arps to the effect that, commencing with Aimco’s taxable year ended December 31, 1994, Aimco has been organized in conformity with the requirements for qualification as a REIT under the Code, and Aimco’s actual method of operation through the date hereof has enabled, and its proposed method of operation will continue to enable, it to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws;

 

  •  

the SEC shall have declared effective AIR’s registration statement on Form 10, of which this information statement is a part, and New OP’s registration statement on Form 10, each under the Exchange Act, and no stop order relating to the registration statements shall be in effect, and no proceedings for such purpose shall be pending before, or threatened by, the SEC, and this information statement shall have been made available to holders of Aimco Common Stock as of the record date;

 

  •  

all actions and filings necessary or appropriate under applicable federal, state, or foreign securities, or “blue sky” laws and the rules and regulations thereunder, shall have been taken and, where applicable, become effective or been accepted;

 

  •  

the AIR Common Stock to be distributed in the Separation shall have been accepted for listing on the NYSE, subject to compliance with applicable listing requirements;

 

  •  

no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Separation, shall be threatened, pending or in effect;

 

  •  

any material governmental and third-party approvals shall have been obtained and be in full force and effect;

 

  •  

AIR and Aimco shall have entered into the financing transactions described in this information statement and contemplated to occur on or prior to the Separation and the respective financings thereunder shall have been consummated and shall be in full force and effect;

 

  •  

Aimco shall have entered into a binding agreement with a third party to sell the Class A Preferred Stock;

 

  •  

Aimco and AIR shall each have taken all necessary actions that may be required to provide for the adoption by AIR of its amended and restated charter and bylaws, and AIR shall have filed its related Articles of Amendment and Restatement with the Maryland State Department of Assessments and Taxation;

 

  •  

AIR shall have adopted the amended and restated articles of incorporation and amended and restated bylaws; and

 

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  •  

no event or development shall have occurred or exist that, in the judgment of the board of directors of Aimco, in its sole discretion, makes it inadvisable to effect the Separation.

We cannot assure you that all of the conditions will be satisfied or waived. In addition, if the Separation is completed and Aimco’s board of directors waives any such condition, such waiver could have a material adverse effect on Aimco’s and AIR’s respective business, financial condition or results of operations, including, without limitation, as a result of illiquid trading due to the failure of AIR Common Stock to be accepted for listing, litigation relating to any preliminary or permanent injunctions that sought to prevent the consummation of the Separation, or the failure of Aimco or AIR to obtain any required regulatory approvals. As of the date hereof, the board of directors of Aimco does not intend to waive any of the conditions described herein and would only consider such a waiver if it determined that such action was in the best interests of Aimco and its stockholders.

The fulfillment of the above conditions will not create any obligation on behalf of Aimco to effect the Separation. Until the Separation has occurred, Aimco has the right to terminate the Separation, even if all the conditions have been satisfied, if the board of directors of Aimco determines, in its sole discretion, that the Separation is not in the best interests of Aimco and its stockholders or that market conditions or other circumstances are such that the separation of AIR and Aimco is no longer advisable at that time.

Solvency Opinion

In furtherance of the related condition referenced above, prior to the Separation the boards of directors of each of Aimco and AIR expect to obtain an opinion from an independent financial advisory firm to the effect that, after giving effect to the consummation of the Separation:

 

  •  

the fair value of the assets of each of Aimco, AIR, New OP, and AIR OP will exceed its debts;

 

  •  

each of Aimco, AIR, New OP, and AIR OP should each be able to pay its respective debts as they become due in the usual course of business;

 

  •  

none of Aimco, AIR, New OP, nor AIR OP will have an unreasonably small amount of assets (or capital) for the operation of the businesses in which each is engaged or in which management has indicated each intends to engage; and

 

  •  

the fair value of the assets of each of Aimco, AIR, New OP, and AIR OP would exceed the sum of its total liabilities and total par value of its issued capital stock.

Regulatory Approvals

We must complete the necessary registration under U.S. federal securities laws of AIR Common Stock, as well as satisfy the NYSE listing requirements for such shares. See “—Conditions to the Separation.”

No Appraisal Rights

None of Aimco’s stockholders will have any appraisal rights or will be entitled to demand payment for their equity in connection with the Separation.

Accounting Treatment

At the completion of the Separation, the balance sheet of AIR will include the assets and liabilities associated with the AIR business, including the properties that will remain with AIR OP. The assets and liabilities of AIR will be recorded at their respective historical carrying values at the Separation in accordance with the provisions of the Financial Accounting Standards Board’s Accounting Standards Codification Topic 505-60, Spinoffs and Reverse Spinoffs. Notwithstanding the legal form of the Separation described elsewhere in

 

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this information statement, for accounting and financial reporting purposes, AIR OP will be presented as being the accounting spinnor. This presentation is in accordance with GAAP, specifically FASB ASC 505-60, “Spinoff and Reverse Spinoffs,” and is primarily a result of the relative significance of AIR’s business to Aimco’s business. Further, Aimco has been determined to best represent the predecessor entity to AIR OP. Therefore, our historical financial statements presented herein and in our future filings, with respect to periods prior to the Separation, will be represented by the historical financial statements of Aimco, or AIR Predecessor.

Reasons for Furnishing this Information Statement

We are furnishing this information statement solely to provide information to Aimco stockholders who will receive shares of AIR Common Stock pursuant to the Separation. You should not construe this information statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Aimco, New OP or AIR OP. We believe that the information contained in this information statement is accurate as of the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and none of AIR, AIR OP, Aimco or New OP undertake any obligation to update the information except in the normal course of their respective business and public disclosure obligations and practices.

Certain Other Events

On October 16, 2020, L&B filed a definitive solicitation statement related to L&B’s intent to solicit and obtain consents from holders of shares of Aimco Common Stock for the Proposed Special Meeting Request for the purposes of (1) considering and voting upon a non-binding resolution urging the Aimco board of directors to put any proposed separation involving Aimco to a vote of Aimco’s stockholders at a duly called meeting of stockholders and to refrain from proceeding with any such separation involving Aimco unless approved by a vote of a majority of Aimco’s stockholders and (2) to transact such other business as may properly come before the special meeting. On October 21, 2020, Aimco filed a definitive consent revocation solicitation statement with respect to the Proposed Special Meeting Request. The Aimco board of directors set a record date of November 4, 2020, for the Proposed Special Meeting Request.

On November 11, 2020, L&B delivered consents to Aimco with respect to the Proposed Special Meeting Request and certain matters incidental to calling the special meeting, which the independent inspector of elections certified on November 18, 2020, as representing 64,313,667 shares of Aimco Common Stock as of the November 4, 2020 record date, or approximately 43.2% of the outstanding shares as of such record date. As of November 23, 2020, L&B had not taken the remaining steps necessary under Aimco’s bylaws to properly request a special meeting of Aimco’s stockholders.

 

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DIVIDEND POLICY

As a REIT, we will be required to distribute annually to holders of AIR Common Stock at least 90% of our “real estate investment trust taxable income,” which, as defined by the Code and United States Department of Treasury regulations, is generally equivalent to net taxable ordinary income (and may be all cash or a combination of cash and stock satisfying the requirements of applicable law). Our board of directors will determine and declare AIR’s dividends. In making a dividend determination, our board of directors will consider a variety of factors, including: REIT distribution requirements; current market conditions; liquidity needs; and other uses of cash, such as for deleveraging and accretive investment activities. Our board of directors is expected to target a dividend payout ratio between 65% and 80% of AFFO, and we expect to pay our first dividend in May 2021. For information regarding risk factors that could materially and adversely affect our ability to make distributions, see “Risk Factors.”

Stockholders receiving such dividend and any future dividend payable in cash or shares of AIR Common Stock will be required to include the full amount of such dividends as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes for the year of such dividends, and may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. With respect to certain non-United States stockholders, we may be required to withhold United States tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in Common Stock. For more information regarding the tax treatment of distributions to holders of AIR Common Stock, see “U.S. Federal Income Tax Considerations.”

The board of directors of AIR OP’s general partner will determine and declare distributions to holders of AIR OP Common Units. AIR, directly and through subsidiaries in which it owns all of the outstanding common equity, will, upon completion of the Separation, be the general and special limited partner of AIR OP and will own all of Aimco’s interests in AIR OP. Immediately following the Separation, it is expected that approximately 95% of the AIR OP Common Units will be held by AIR, directly or through its subsidiaries. AIR OP will hold substantially all of AIR’s assets and manage the daily operations of AIR’s business directly and indirectly through certain subsidiaries and by engaging Aimco to provide certain management, administrative, and support services, including property management. We will use the distributions paid to us by AIR OP and the REIT subsidiaries (which in turn will use the dividends paid to them by AIR OP to fund the dividends paid to their members) to fund the dividends paid to our stockholders. Accordingly, the per share dividends we pay to our stockholders will generally equal the per unit distributions paid by AIR OP to holders of AIR OP Common Units.

Our credit facilities are expected to include customary covenants, including a restriction on dividends and other restricted payments, but is expected to permit dividends and distributions during any four consecutive fiscal quarters in an aggregate amount of up to 95% of our FFO for such period, subject to certain non-cash adjustments, or such amount as may be necessary to maintain our REIT status. In the event that any of our debt agreements or other securities contain any restrictions on making distributions, we also would be required to comply with these restrictions. For more information regarding our financing arrangements, see “Description of Financing and Material Indebtedness.”

 

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DESCRIPTION OF FINANCING AND MATERIAL INDEBTEDNESS

The following summary sets forth information based on our current expectations about the financing arrangements anticipated to be entered into prior to the completion of the Separation. However, the terms and conditions remain under discussion and are subject to change.

Credit Facilities

At the completion of the Separation, it is expected that AIR and its subsidiaries will have a revolving credit facility and a term loan credit facility, each of which may be secured by certain equity interests in subsidiaries of AIR, and which credit facilities are expected to be a continuation of Aimco’s existing revolving credit facility and term loan credit facility, subject to such changes to reflect the new corporate structure and market conditions. However, the terms and conditions remain under discussion and are subject to change. We anticipate that our credit facilities will be guaranteed, jointly and severally, by AIR, AIR OP and certain of our wholly owned subsidiaries. Proceeds are expected to be available to us for general corporate purposes, including funding working capital. We have not yet entered into any commitments with respect to AIR’s financing, and, accordingly, the terms of our financing arrangements have not yet been determined, remain under discussion and are subject to change, including as a function of market conditions.

Over time, we may become party to one or more additional financing arrangements, including credit facilities or other bank debt, bonds, and mortgage financing.

Property-level Mortgage Debt

We anticipate that certain entities that will be our subsidiaries after the Separation will assume or retain a certain amount of existing secured property-level indebtedness related to certain properties. Specifically, AIR OP or its applicable subsidiaries will retain the existing property level debt that encumbers the properties that we will own after the Separation.

 

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CAPITALIZATION

The following table sets forth AIR Predecessor’s consolidated cash and cash equivalents and capitalization as of September 30, 2020, on an unaudited historical basis as it existed prior to the Separation, and on a pro forma basis to give effect to the pro forma adjustments included in AIR’s unaudited pro forma consolidated financial data. The information below is not necessarily indicative of what AIR’s capitalization would have been had the Separation and related transactions been completed as of September 30, 2020. In addition, it is not indicative of AIR’s future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and AIR Predecessor’s audited consolidated financial statements and notes and unaudited consolidated interim financial statements and notes included elsewhere in this information statement.

 

     As of September 30, 2020  
(in thousands)    Actual      Pro Forma
Adjustments 		     Pro Forma  

Cash and cash equivalents

   $ 228,368      $ (228,368 )     $ —    
  

 

 

    

 

 

    

 

 

 

Indebtedness:

        

Non-recourse property debt, net(1)

   $ 4,058,295      $ (508,031 )     $ 3,550,264  

Term loan, net

     348,502        —          348,502  

Revolving credit facility borrowings

     —          39,968        39,968  
  

 

 

    

 

 

    

 

 

 

Total indebtedness

     4,406,797        (468,063 )       3,938,734  
  

 

 

    

 

 

    

 

 

 

AIR equity

     2,121,391        (65,516 )       2,055,875  

Noncontrolling interests in consolidated real estate partnerships

     (60,212 )       (112 )       (60,324 ) 

Common noncontrolling interests in AIR OP

     75,618        —          75,618  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 6,543,594      $ (533,691 )     $ 6,009,903  
  

 

 

    

 

 

    

 

 

 

 

(1)

Pro forma non-recourse property debt, net, is inclusive of our joint venture partner’s 39% share, or $473.7 million, as of September 30, 2020.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated financial statements presented below have been prepared to reflect the effect of certain pro forma adjustments to the historical consolidated financial statements of AIR Predecessor. All significant pro forma adjustments and their underlying assumptions are described more fully in the notes to the unaudited pro forma consolidated financial statements, which you should read in conjunction with such unaudited pro forma consolidated financial statements.

The unaudited pro forma consolidated balance sheet assumes the Separation and the related transactions occurred on September 30, 2020. The unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2020, and for the year ended December 31, 2019, assume the Separation and the related transactions occurred on January 1, 2019. Additionally, the unaudited pro forma consolidated balance sheet assumes that a joint venture transaction and apartment community sales, which management considers to be significant to AIR on a pro forma basis, occurred as of September 30, 2020. The unaudited pro forma consolidated statements of operations assume these transactions occurred on January 1, 2019.

These unaudited pro forma consolidated financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the accompanying notes. The pro forma adjustments reflect events that are (i) directly attributable to the transactions referred to above, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on us, including: (i) the distribution of 148,865,947 shares of AIR Common Stock by Aimco to Aimco common stockholders in the Separation, the distribution of New OP Units by AIR OP to the holders of AIR OP Common Units (and subsequent distribution to Aimco by holders of AIR OP Common Units that are subsidiaries of Aimco), the issuance of AIR Class A Preferred Stock to Aimco, subject to a binding commitment to be sold to a third party, (ii) the impact of the Property Management Agreements, Master Services Agreement, and the Master Leasing Agreement between us and New OP and Aimco, and (iii) incremental employee-related cost impacts recorded within general and administrative expense.

General and administrative costs that we expect to incur, following the completion of the Separation, are for items such as compensation costs (including equity-based compensation awards), professional services, office costs, and other costs associated with our administrative activities. Our annual general and administrative expenses are anticipated to be approximately 15 basis points of GAV in the first year after the completion of the Separation. This estimate was based on management’s judgment.

In the opinion of Aimco’s senior management team, the unaudited pro forma consolidated financial statements include necessary adjustments that can be factually supported to reflect the effects of the Separation and the related transactions.

The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and not necessarily indicative of what our actual financial position and results of operations would have been if the Separation and related transactions occurred on the dates indicated, nor does it purport to represent our future financial position or results of operations. The unaudited pro forma consolidated financial statements also do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.

The unaudited pro forma consolidated financial statements are derived from and should be read in conjunction with the historical consolidated financial statements and accompanying notes included elsewhere in this information statement.

 

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APARTMENT INCOME REIT CORP.

Unaudited Pro Forma Consolidated Balance Sheet

As of September 30, 2020

(In thousands)

 

    AIR
Predecessor
Historical 		    New OP
Historical (A) 		    Property
Sale and
Joint
Venture
Transactions 		    Separation
Pro Forma
Adjustments 		    Pro Forma  

ASSETS

         

Buildings and improvements

  $ 7,006,395     $ (964,577 )    $ —       $ (382,514 )(D)    $ 5,659,304  

Land

    1,891,763       (504,728 )      —         (40,482 )(D)      1,346,553  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

    8,898,158       (1,469,305 )      —         (422,996 )      7,005,857  

Accumulated depreciation

    (2,858,174 )      478,039       —         88,771 (D)      (2,291,364 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net real estate

    6,039,984       (991,266 )      —         (334,225 )      4,714,493  

Cash and cash equivalents

    228,368       (4,531 )      (58,336 )(B)      (165,501 )(E)      —    

Restricted cash

    40,123       (4,635 )      —         —         35,488  

Mezzanine investment

    300,326       (300,326 )      —         —         —    

Notes receivable from related party

    —         —         —         534,127 (F)      534,127  

Net investment in sales-type leases

    —         —         —         502,758 (G)      502,758  

Other assets

    383,298       (42,050 )      —         24,938 (H)      366,186  

Assets held for sale

    50,030       —         (50,030 )(C)      —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 7,042,129     $ (1,342,808 )    $ (108,366 )    $ 562,097     $ 6,153,052  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Non-recourse property debt, net

  $ 4,058,295     $ (449,695 )    $ (58,336 )(B)    $ —       $ 3,550,264  

Term loan, net

    348,502       —         —         —         348,502  

Revolving credit facility borrowings

    —         —         —         39,968 (E)      39,968  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total indebtedness

    4,406,797       (449,695 )      (58,336 )      39,968       3,938,734  

Accrued liabilities and other

    356,538       (175,716 )      —         (117,122 )(H)      63,700  

Liabilities related to assets held for sale

    58,177       —         (58,177 )(C)      —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    4,821,512       (625,411 )      (116,513 )      (77,154 )      4,002,434  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred redeemable noncontrolling interests in AIR Operating Partnership

    79,449       —         —         —         79,449  

Redeemable noncontrolling interests in consolidated real estate partnership

    4,371       (4,371 )      —         —         —    

Equity:

         

Perpetual preferred stock

    —         —         —         2,250 (I)      2,250  

Common Stock, $0.01 par value

    1,489       —         —         —         1,489  

Additional paid-in capital

    4,000,925       (712,914 )      8,147 (C)      637,001 (J)      3,933,159  

Accumulated other comprehensive income

    3,579       —         —         —         3,579  

Distributions in excess of earnings

    (1,884,602 )      —         —         —         (1,884,602 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total AIR equity

    2,121,391       (712,914 )      8,147       639,251       2,055,875  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interests in consolidated real estate partnerships

    (60,212 )      (112 )      —         —         (60,324 ) 

Common noncontrolling interests in AIR Operating Partnership

    75,618       —         —         —         75,618  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    2,136,797       (713,026 )      8,147       639,251       2,071,169  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 7,042,129     $ (1,342,808 )    $ (108,366 )    $ 562,097     $ 6,153,052  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited pro forma consolidated financial statements.

 

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APARTMENT INCOME REIT CORP.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2020

 

                      Separation Pro Forma Adjustments        
    AIR
Predecessor
Historical 		    New OP
Historical
(A) 		    Joint
Venture and
Property
Sale
Transactions 		    Master
Leasing
Agreement
(E) 		    Property
Management
Agreements
(F) 		    Other
Adjustments 		    Pro
Forma 		 

REVENUES:

             

Rental and other property revenues

  $ 658,815     $ (112,802 )    $ (7,874 )(B)    $ (775 )    $ —       $ —       $ 537,364  

Property management and other fee income

    —         —         —         —         4,241       —         4,241  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    658,815       (112,802 )      (7,874 )      (775 )      4,241       —         541,605  

OPERATING EXPENSES:

             

Property operating expenses

    224,532       (45,822 )      (1,980 )(B)      (2,077 )      5,430       6,837 (G)      186,920  

Depreciation and amortization

    296,414       (57,673 )      (1,532 )(B)      (4,548 )      919       —         233,580  

General and administrative expenses

    27,922       (4,939 )      —         —         1,059       (8,621 )(G)      15,421  

Investment management expenses

    5,124       —         —         —         —         (5,124 )(G)      —    

Other expenses, net

    23,452       (4,065 )      —         —         —         (12,998 )(H)      6,389  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    577,444       (112,499 )      (3,512 )      (6,625 )      7,408       (19,906 )      442,310  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    10,407       (14 )      —         25,899       —         19,188 (I)      55,480  

Interest expense

    (140,657 )      18,563       15,407 (C)      (7,278 )      —         (3,715 )(J)      (117,680 ) 

Gain on dispositions of real estate

    47,204       —         (47,204 )(B)      —         —         —         —    

Mezzanine investment income, net

    20,553       (20,553 )      —         —         —         —         —    

Income from unconsolidated real estate partnerships

    629       (629 )      —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax benefit

    19,507       (2,936 )      (36,159 )      24,471       (3,167 )      35,379       37,095  

Income tax benefit

    7,859       (6,728 )      151 (K)      —         —         405 (K)      1,687  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    27,366       (9,664 )      (36,008 )      24,471       (3,167 )      35,784       38,782  

Noncontrolling interests:

             

Net loss (income) attributable to noncontrolling interests in consolidated real estate partnerships

    153       (345 )      3,319 (D)      —         —         —         3,127  

Net income attributable to preferred noncontrolling interests in AIR Operating Partnership

    (5,415 )      —         —         —         —         —         (5,415 ) 

Net income attributable to common noncontrolling interests in AIR Operating Partnership

    (1,134 )      —         1,833       (1,245 )      161       (1,820 )      (2,205 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interests

    (6,396 )      (345 )      5,152       (1,245 )      161       (1,820 )      (4,493 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AIR

    20,970       (10,009 )      (30,856 )      23,226       (3,006 )      33,964       34,289  

Net income attributable to preferred stockholders

    —         —         —         —         —         (150 )(L)      (150 ) 

Net income attributable to participating securities

    (125 )      —         —         —         —         —         (125 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AIR common stockholders

  $ 20,845     $ (10,009 )    $ (30,856 )    $ 23,226     $ (3,006 )    $ 33,814     $ 34,014  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share—basic and diluted

  $ 0.14               $ 0.23  

See notes to unaudited pro forma consolidated financial statements.

 

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APARTMENT INCOME REIT CORP.

Unaudited Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2019

 

                      Separation Pro Forma Adjustments        
    AIR
Predecessor
Historical 		    New OP
Historical
(A) 		    Joint
Venture and
Property
Sale
Transactions 		    Master
Leasing
Agreement
(E) 		    Property
Management
Agreements
(F) 		    Other
Adjustments 		    Pro
Forma 		 

REVENUES:

             

Rental and other property revenues

  $ 914,294     $ (143,692 )    $ (38,137 )(B)    $ (5,561 )    $ —       $ —       $ 726,904  

Property management and other fee income

    —         —         —         —         5,820       —         5,820  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    914,294       (143,692 )      (38,137 )      (5,561 )      5,820       —         732,724  

OPERATING EXPENSES:

             

Property operating expenses

    311,221       (57,541 )      (10,853 )(B)      (3,202 )      7,509       8,857 (G)      255,991  

Depreciation and amortization

    380,171       (64,030 )      (10,730 )(B)      (5,587 )      1,143       —         300,967  

General and administrative expenses

    47,037       (7,062 )      —         —         1,321       (15,008 )(G)      26,288  

Other expenses, net

    19,092       (2,141 )      —         —         —         (335 )(H)      16,616  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    757,521       (130,774 )      (21,583 )      (8,789 )      9,973       (6,486 )      599,862  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    11,424       (26 )      —         34,603       —         25,584 (I)      71,585  

Interest expense

    (168,807 )      18,598       22,129 (C)      (4,264 )      —         (1,342 )(J)      (133,686 ) 

Gain on dispositions of real estate

    503,168       —         (503,168 )(B)      —         —         —         —    

Mezzanine investment income, net

    1,531       (1,531 )      —         —         —         —         —    

Income from unconsolidated real estate partnerships

    803       (935 )      —         —         —         —         (132 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax benefit (expense)

    504,892       3,188       (497,593 )      33,567       (4,153 )      30,728       70,629  

Income tax benefit (expense)

    3,135       (3,301 )      —         —         —         537 (K)      371  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    508,027       (113 )      (497,593 )      33,567       (4,153 )      31,265       71,000  

Noncontrolling interests:

             

Net loss (income) attributable to noncontrolling interests in consolidated real estate partnerships

    (187 )      (206 )      1,055 (D)      —         —         —         662  

Net income attributable to preferred noncontrolling interests in AIR Operating Partnership

    (7,708 )      —         —         —         —         —         (7,708 ) 

Net income attributable to common noncontrolling interests in AIR Operating Partnership

    (26,049 )      —         25,514       (1,721 )      213       (1,603 )      (3,646 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interests

    (33,944 )      (206 )      26,569       (1,721 )      213       (1,603 )      (10,692 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AIR

    474,083       (319 )      (471,024 )      31,846       (3,940 )      29,662       60,308  

Net income attributable to preferred stockholders

    (7,335 )      —         —         —         —         (200 )(L)      (7,535 ) 

Net income attributable to participating securities

    (604 )      —         —         —         —         —         (604 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to AIR common stockholders

  $ 466,144     $ (319 )    $ (471,024 )    $ 31,846     $ (3,940 )    $ 29,462     $ 52,169  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

             

Basic earnings per share

  $ 3.16               $ 0.35  

Diluted earnings per share

  $ 3.15               $ 0.35  

See notes to unaudited pro forma consolidated financial statements.

 

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APARTMENT INCOME REIT CORP.

Notes to Unaudited Pro Forma Consolidated Financial Statements

Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet

 

  (A)

New OP-owned communities and the mezzanine investment are currently held through Aimco and its subsidiaries. The pro forma financial statements present New OP as a spin-off and the column “New OP Historical” represents the elimination of the New OP combined historical balance sheet.

 

  (B)

On September 8, 2020, Aimco completed a joint venture transaction whereby a passive institutional investor purchased a 39% interest in 12 apartment communities. The adjustment reflects the remaining cash received from the transaction that AIR expects to use to repay property debt outstanding as of September 30, 2020.

 

  (C)

As of September 30, 2020, Aimco has sold one apartment community and was under contract to sell another apartment community which closed on November 3, 2020. The adjustment reflects the removal of the historical basis of the community under contract to sell as of September 30, 2020.

 

  (D)

Reflects the derecognition of the historical assets and liabilities of the four in-process redevelopment and development properties: North Tower at Flamingo Point, The Fremont, Prism, and 707 Leahy Apartments, pursuant to the Master Leasing Agreement. AIR will lease these properties to New OP and New OP has the option to complete the ongoing redevelopment and development and their lease-ups.

 

  (E)

Reflects AIR Predecessor’s contributions of cash in connection with the Separation that is to be used by New OP for general corporate uses. A portion of the initial cash contribution is expected to be funded utilizing AIR Predecessor’s available capacity on its credit facility.

 

  (F)

Reflects AIR’s issuance of notes receivable from New OP in exchange for New OP’s purchase of certain properties included in the Separation. The notes receivable mature on January 31, 2024, and bear interest at a rate of 5.2% per annum.

 

  (G)

Reflects AIR’s expected net investment in the sales-type leases of the four properties discussed in (D) above.

 

  (H)

Reflects the assignment of certain other assets and accrued liabilities to New OP pursuant to the Separation Agreement. Included in the adjustments is an initial investment of $12.5 million in IQHQ, a privately held life-sciences real estate development company, and $37.2 million of seller financing receivables. Also reflects the recast of a net deferred tax asset balance of approximately $90 million from accrued liabilities and other to other assets at AIR following after the removal of a net deferred tax liability through New OP’s historical financial statements.

 

  (I)

Reflects the issuance of Class A Preferred Stock bearing an initial annual dividend rate of 8.5%, which increases by 50 basis points per annum in each of years 5, 6, and 7 after the issuance, and by 25 basis points per annum in each of years 8 through 27, at which time the annual dividend rate will remain 15%, by AIR to Aimco, subject to a binding agreement to sell to a third party, with an aggregate liquidation preference of $2 million, and the issuance of 12% preferred stock by AIR to Sub REIT 1 and Sub REIT 2 with an aggregate liquidation preference of $0.3 million.

 

  (J)

Represents the net equity increase to be realized by AIR as a result of the Separation.

Adjustments to the Unaudited Pro Forma Consolidated Statements of Operations

 

  (A)

New OP-owned communities and the mezzanine investment are currently held through Aimco and its subsidiaries. The pro forma financial statements present New OP as a spin-off and the column “New OP Historical” represents the elimination of the New OP combined historical results of operations.

 

  (B)

During the nine months ended September 30, 2020, Aimco sold one apartment community and was under contract to sell another apartment community which closed on November 3, 2020. During the year ended December 31, 2019, Aimco sold 12 apartment communities. In addition, gain on dispositions in 2019 included the expiration of indemnification of liabilities related to the sale of its Asset Management business. The adjustment reflects the removal of the results of operations and associated gains on disposition of these properties.

 

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  (C)

Reflects the interest rate savings from the reinvestment of the proceeds from the property sales and joint venture transactions described elsewhere in these footnotes to pay down property-level debt at AIR.

 

  (D)

On September 8, 2020, Aimco completed a joint venture transaction whereby a passive institutional investor purchased a 39% interest in 12 apartment communities. The adjustment reflects the investor’s share of the net operations of the joint venture, net of certain property and asset management fees due to AIR in exchange for operating the communities.

 

  (E)

Reflects the elimination of the historical results of operations and recognition of interest income on sales-type leases, pursuant to the Master Leasing Agreement, for the four in-process redevelopment and development properties: North Tower at Flamingo Point, The Fremont, Prism, and 707 Leahy Apartments. AIR will lease these properties to New OP and New OP has the option to complete the ongoing redevelopment and development and their lease-ups.

 

  (F)

Reflects the property management fee income, and the recapture of certain property management expenses AIR Predecessor allocated to New OP in its historical financial statements, as AIR will provide property management services to New OP-owned communities pursuant to the Property Management Agreements. In exchange for these services, AIR will receive a 3% fee pursuant to the Property Management Agreements and a fee for other services provided pursuant to the Master Services Agreement, including information technology and human resource related services, which approximates 1% of New OP’s revenue based on the expected level of services provided to New OP.

 

  (G)

Reflects the removal of the redevelopment and development, transactions, joint venture department, and executive-level expenses at AIR, as these departments and related expenses will be moved to New OP upon completion of the Separation in accordance with the Employee Matters Agreement. Also includes an adjustment to present within property operating expenses certain technology infrastructure expenses incurred to support the property management function and operations. AIR will earn fee income for providing property management and other services pursuant to the Property Management Agreements and Master Services Agreement, as described in Note F above.

 

  (H)

Reflects the transaction costs incurred in connection with the Separation of $12.6 million, as well as adjustments to reflect other items of other income (expense), net, associated with the assets and liabilities assigned to New OP.

 

  (I)

Reflects the interest income on the notes receivable due from New OP, as described in Note F to the Unaudited Pro Forma Consolidated Balance Sheet above. Additionally, this adjustment reflects the removal of interest income on the expected assignment of seller financing receivables to New OP.

 

  (J)

New OP’s historical operations, described in Note A above, includes interest expense on a related party note payable between a subsidiary of New OP and AIR OP. In connection with the Separation, AIR OP’s related party note receivable is expected to be assigned to New OP. This adjustment reflects the recapture of interest expense related to this related party note that was adjusted through New OP’s historical operations; as well as interest related to the initial cash contribution to New OP that is expected to be funded utilizing AIR Predecessor’s available capacity on its credit facility.

 

  (K)

Reflects adjustments to income tax benefit or expense giving effect to pro forma adjustments with an effect on taxable income. The provision for income taxes related to taxable income is based on the estimated statutory tax rate of 26%.

 

  (L)

Reflects the dividends on the preferred stock issued by AIR described in Note I to the Unaudited Pro Forma Consolidated Balance Sheet above.

 

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UNAUDITED PRO FORMA NON-GAAP FINANCIAL MEASURES

The unaudited pro forma non-GAAP financial measures presented below have been prepared to provide certain non-GAAP information for AIR, giving effect to the pro forma adjustments to the AIR Predecessor historical results of operations to arrive at pro forma AIR results of operations, more fully described above. Please see the “Non-GAAP Measures” heading under “Management’s Discussion and Analysis” for further discussion of our non-GAAP measures, including the basis upon which they’re calculated. The unaudited pro forma non-GAAP measures assume the Separation and the related transactions occurred on January 1, 2020.

AIR Nareit Funds from Operations, Pro forma Funds from Operations, and Adjusted Funds from Operations

 

     Pro Forma Nine
Months Ended
September 30, 2020 		 

Net income attributable to AIR common stockholders

   $ 34,014  
Adjustments:   
Real estate depreciation and amortization, net of noncontrolling partners’ interest      209,555  
Income tax adjustments related to gain on dispositions and other tax-related items      2,247  
Common noncontrolling interests in AIR OP’s share of above adjustments      (10,886 ) 
Amounts allocable to participating securities      (54 ) 
  

 

 

 

Nareit FFO attributable to AIR common stockholders

   $ 234,876  
Adjustments, all net of common noncontrolling interest in AIR OP and participating securities:   

Prepayment penalties

     9,411  

Straight-line rent

     1,902  

Income on sales-types leases in excess of cash payments (1)

     (5,745 ) 

Severance costs, litigation, and other, net

     960  
  

 

 

 

Pro forma FFO attributable to AIR common stockholders

   $ 241,404  
  

 

 

 

Annualized Pro forma FFO attributable to AIR common stockholders

   $ 321,872  
  

 

 

 
Total share and dilutive share equivalents used to calculate per share amounts      148,628  
Pro forma FFO per AIR common share    $ 1.62  
Annualized Pro forma FFO per AIR common share    $ 2.17  

 

(1)

Due to the terms of the leases on the Initial Leased Properties, lease income is expected to exceed cash rent for a period of time. AIR includes the cash rent receipts for these leases in Pro forma FFO but excludes the incremental GAAP lease income. The lease income for these leases is included in interest income in AIR’s Pro Forma Consolidated Statements of Operations.

 

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AIR EBITDAre and Adjusted EBITDAre

 

     Pro Forma Nine
Months Ended
September 30, 2020 		 
Net income    $ 38,782  

Adjustments:

  

Interest expense

     117,680  

Income tax benefit

     (1,687 ) 

Depreciation and amortization

     233,580  
  

 

 

 

EBITDAre

   $ 388,355  
  

 

 

 

Net loss attributable to noncontrolling interests in consolidated real estate partnerships

     3,127  

EBITDAre adjustments attributable to noncontrolling interests

     (29,558 ) 

Interest income received on securitization investment

     (6,652 ) 

Non-cash straight-line rent

     1,937  

Non-cash income on sales-type leases

     (6,053 ) 

Interest income on AIR’s notes receivable from New OP

     (20,831 ) 

Other adjustments, net(1)

     (2,963 ) 
  

 

 

 

Adjusted EBITDAre

   $ 327,362  
  

 

 

 

Annualized Adjusted EBITDAre(2)

   $ 436,483  
  

 

 

 

 

(1)

Other adjustments, net, includes a $4.0 million reduction of Adjusted EBITDAre to remove the impact of two non-recurring events: (a) a $2.7 million adjustment related to casualty insurance reimbursements and (b) $1.3 million adjustment to incentive compensation for which annualization would distort our operating results, offset partially by $1.0 million of contributions related to rent control ballot measures in California that have been excluded because we believe they are not representative of our future operating performance.

(2)

Pro forma Annualized Adjusted EBITDAre is calculated by taking pro forma Adjusted EBITDAre for the nine months ended September 30, 2020, dividing it by three and multiplying that result by four.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables set forth the selected historical consolidated financial data and other data of AIR Predecessor as of the dates and for the periods presented. The selected historical condensed consolidated financial data as of September 30, 2020, and for the nine months ended September 30, 2020 and 2019, as set forth below, were derived from AIR Predecessor’s unaudited condensed consolidated financial statements, which are included elsewhere in this information statement. The selected historical consolidated financial data as of December 31, 2019, and 2018 and for the years ended December 31, 2019, 2018, and 2017 as set forth below, were derived from AIR Predecessor’s audited consolidated financial statements, which are included elsewhere in this information statement. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of ordinary recurring adjustments, necessary for a fair presentation of the information for the periods presented.

These consolidated financial statements herein do not necessarily reflect what AIR Predecessor’s financial position, results of operations or cash flows would have been if it had been a stand-alone company as of the date or for the periods presented, nor are they necessarily indicative of its future results of operations, financial position or cash flows.

Since the information presented below does not provide all of the information contained in the historical consolidated financial statements of AIR Predecessor, including the related notes, you should read the section herein entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and AIR Predecessor’s historical consolidated financial statements and notes thereto included elsewhere in this information statement.

 

(in thousands, except per share
data) 		  Nine Months Ended
September 30, 		    Years Ended December 31,  
    2020     2019     2019     2018(1)     2017     2016     2015  
    (unaudited)     (unaudited)                                

OPERATING DATA:

             

Total revenues

  $ 658,815     $ 684,262     $ 914,294     $ 972,410     $ 1,005,437     $ 995,854     $ 981,310  

Net income

    27,366       365,261       508,027       716,603       347,079       483,273       271,983  

Net income attributable to AIR Predecessor per common share-diluted(2)

  $ 0.14     $ 2.26     $ 3.15     $ 4.34     $ 2.02     $ 2.75     $ 1.56  

BALANCE SHEET INFORMATION:

             

Total assets

  $ 7,042,129     $ 6,539,178     $ 6,828,739     $ 6,190,004     $ 6,079,040     $ 6,232,818     $ 6,118,681  

Total indebtedness

    4,406,797       4,254,710       4,505,590       4,075,665       3,861,770       3,648,206       3,599,648  

Non-recourse property debt of partnerships served by Asset Management business

    —         —         —         —         227,141       236,426       249,493  

OTHER INFORMATION:

             

Cash dividends/distributions declared per common share/unit

  $ 1.23     $ 1.17     $ 1.56     $ 1.52     $ 1.44     $ 1.32     $ 1.18  

 

(1)

In July 2018, AIR Predecessor sold our Asset Management business and our four affordable apartment communities located in the Hunters Point area of San Francisco.

(2)

On February 20, 2019, AIR Predecessor completed a reverse stock split whereby every 1.03119 Aimco common share and AIR OP Common Partnership Unit (as defined in the AIR OP partnership agreement) was combined into one Aimco common share. AIR Predecessor has revised the outstanding share counts, presentation of share activity, and earnings per share, as if the reverse split occurred on December 31, 2014.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with the sections in this information statements entitled “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements,” “Selected Historical Consolidated Financial Data,” “The Separation,” “Unaudited Pro Forma Consolidated Financial Statements,” “Summary Historical Consolidated and Unaudited Pro Forma Consolidated Financial Data,” “Summary” and “Our Relationship with Aimco Following the Separation” as well as the AIR Predecessor financial statements and related notes thereto, which are incorporated by reference herein. For purposes of this management’s discussion and analysis (“MD&A”) only, all references to the “AIR Predecessor,” “Aimco,” “AIR OP,” “Company,” “we,” “us” or “our” means AIR Predecessor.

The MD&A of AIR’s historical financial condition and results of operations presented below is that of AIR Predecessor. The following refers to and should be read in conjunction with the annual consolidated financial statements and accompanying notes, which are incorporated by reference herein. This MD&A has been included to help provide an understanding of AIR Predecessor’s financial condition, changes in financial condition, and results of operations.

Notwithstanding the legal form of the Separation described elsewhere in this information statement, for accounting and financial reporting purposes, AIR OP will be presented as being the accounting spinnor. This presentation is in accordance with GAAP, specifically FASB ASC 505-60, “Spinoff and Reverse Spinoffs,” and is primarily a result of the relative significance of AIR’s business to Aimco’s business. Further, Aimco has been determined to best represent the predecessor entity to AIR OP. Therefore, our historical financial statements presented herein and in our future filings, with respect to periods prior to the Separation, will be represented by the historical financial statements of Aimco, or AIR Predecessor.

The financial information and results of operations that are discussed in this section relate to AIR Predecessor (unless otherwise specifically stated). Consequently, the discussion in this section relates to AIR Predecessor as it is currently comprised, without giving effect to the Separation and the other transactions contemplated in this information statement. The discussion in this section therefore includes all of AIR Predecessor’s business segments, and does not reflect AIR as it will be constituted following the Separation. As a result, the discussion does not necessarily reflect the expected financial position, results of operations or cash flows of AIR following the Separation or what AIR’s financial position, results of operations, and cash flows would have been had AIR been an independent, publicly traded company during the periods presented. See “Summary,” “The Separation,” and “Our Relationship with Aimco Following the Separation” for a discussion of the Separation and related transactions.

The following discussion may contain forward-looking statements that reflect the plans, estimates and beliefs of AIR Predecessor. The words “plans,” “expects,” “will,” “anticipates,” “believes,” “intends,” “projects,” “estimates” or other words of similar meaning and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those set forth in the forward-looking statements.

Factors that could cause actual results or events to differ materially from those anticipated include the matters described under the sections entitled “Risk Factors,” “Summary,” and “Cautionary Statement Regarding Forward-Looking Statements.” AIR disclaims and does not undertake any obligation to update or revise any forward-looking statement, except as required by applicable law.

 

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For the Nine Months Ended September 30, 2020, Compared to September 30, 2019

Executive Overview

We are focused on the ownership, management, redevelopment, and some development of quality apartment communities located in several of the largest markets in the United States.

On September 14, 2020, we announced a board-led plan, informed by active and regular engagement with shareholders, to reduce financial risk and execution risk, and to increase FFO per share by division of the business between two public entities. The first with 90% of our estimated fair value will be known as Apartment Income REIT or “AIR”. It will own only stabilized apartment communities, eliminating vacancy loss during redevelopment and allowing substantial reduction in execution risk and offsite costs. The second entity with 10% of our estimated fair value will be known as Aimco, or sometimes for clarity, as “new” Aimco. It expects to hold the non-traditional assets, such as the Parkmerced Loan and the Brickell land assembly. “New” Aimco will continue and seek to grow the development and redevelopment business, including collaboration with IQHQ on multifamily opportunities, and it will complete the redevelopment projects now underway or about to be started. After a defined transition period, the two businesses will be wholly separate. From the start, each will have separate boards of directors and separate management teams. The Separation has been structured to refresh the tax basis of the properties to be held by AIR, eliminating or reducing the need for future stock dividends. Shareholders will own the same assets before and after the Separation transaction but will gain the opportunity to make individual allocations between the two businesses.

Impacts of COVID-19 and Governmental Lockdown

The impact of the COVID-19 pandemic and governmental lockdown continued into the third quarter of 2020. At the onset of the pandemic, we formed a cross-functional committee that meets weekly to adjust to the changing conditions in order to keep our team and our residents safe. We continued our commitment to employees by allowing flexible work arrangements, undertook to pay all costs associated with COVID-19 testing and treatment, kept our team intact without layoffs or pay cuts, and continued clear and frequent communication. Utilizing our previous investment in technology and artificial intelligence, paired with policies providing flexibility, our team continued to lease apartments and fulfill service requests in a safe environment for both the team and our residents.

Our top priority is the health and safety of our residents and teammates. Accordingly, we implemented enhanced cleaning procedures as well as physical distancing and remote working guidelines at our communities and corporate offices. Additionally, seeing residents as individuals, each impacted differently by the pandemic and lockdown, our teammates have undertaken to speak to every resident in need, to listen, and to help each to solve his or her problems. We also seek to assist the communities where our residents and employees live and work.

In response to the economic effects of the COVID-19 pandemic and government lockdown, some jurisdictions where our communities are located, including Los Angeles, have enacted laws seeking to suspend contractual obligations of residents, including government-mandated deferrals, rent freezes, repayment extensions, fee abatement measures or concessions, and prohibitions on lease terminations or evictions for tenants. Some states and municipalities are also implementing rental assistance programs and encouraging landlord-tenant negotiations.

 

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During the nine months ended September 30, 2020 we estimate that, in addition to decreased occupancy and lower rental rates, we incurred $22.6 million of incremental costs, respectively. The table below provides additional detail (in millions, except per share data):

 

     Nine Months Ended
September 30,
2020 		 

Incremental bad debt expense

   $ 6.2      $ 0.04  

Lower commercial revenue

     3.7        0.02  

Lower other income, due to local restrictions on charging late fees

     1.0        0.01  

Other COVID-related amounts

     1.0        0.01  
  

 

 

    

 

 

 

Property Level Impact

   $ 11.9      $ 0.08  
  

 

 

    

 

 

 

Net incremental interest expense

     5.4        0.04  

Write-off of commercial straight-line rent receivables

     2.9        0.02  
  

 

 

    

 

 

 

FFO Impact

   $ 20.2      $ 0.14  
  

 

 

    

 

 

 

Deferred broker commissions

     2.4        0.02  
  

 

 

    

 

 

 

Total AFFO Impact

   $ 22.6      $ 0.16  
  

 

 

    

 

 

 

Residential Rent Collection Update

In response to the economic effects of the COVID-19 pandemic and governmental lockdown, most jurisdictions where our communities are located have enacted protections for residents and commercial tenants, including government-mandated rent deferrals, rent freezes, repayment extensions, fee abatement measures or concessions, and prohibitions on lease terminations or evictions for tenants. Some states and municipalities are also implementing rental assistance programs and encouraging landlord-tenant negotiations.

We measure residential rent collection as the amount of payments received as a percentage of all residential amounts owed. The table below represents the percentage of residential billed amounts for the three months ended June 30, 2020 and September 30, 2020.

 

     Three months ended     2020  
     June 30,
2020 		    September 30,
2020 		    July     August     September  

Payments received during the period

     95.3 %      95.6 %      95.8 %      95.3 %      95.7 % 

Payments received after period close

     2.4 %      1.1 %      1.5 %      1.2 %      0.7 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total payments received as of October 23, 2020

     97.7 %      96.7 %      97.3 %      96.5 %      96.4 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the three months ended September 30, 2020, we recognized 98.1% of all residential revenue, treating the balance of 1.9% as bad debt. Of the 98.1% of residential revenue recognized, we collected in cash all but 140 basis points. The amounts uncollected and not reserved as bad debt include balances collateralized by security deposits, of approximately 60 basis points, and those considered collectable based on our review of individual customers’ credit, of approximately 80 basis points, or $1.6 million.

Of the 190 basis points of bad debt the majority, or approximately 130 basis points, is attributed to residents who have not paid April and subsequent rents. Prior to the enactment of restrictive city ordinances and closed court houses, these residents would have paid rent or faced eviction in ordinary course. The remaining amount, approximately 60 basis points, is attributed to non-payment of rent and other charges as might be expected in a difficult economy. The bad debt associated with this latter category started to slow in August and has declined in

 

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each subsequent month. Looking forward, we expect the decline to continue until reaching a more normal level of approximately 30 basis points in 2021. We also expect the emergency ordinances that allow residents to live rent free to unwind providing the opportunity to re-rent these apartments to rent-paying residents.

October rent collections have been consistent with September collections at the same day of the month.

Same-Store revenue update

Our portfolio is intentionally diversified by geography and price point, it is also diversified with a mix of urban and suburban communities. Revenue growth for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, differed significantly based on geography and the density of the area surrounding the community.

Suburban properties include 19,083 units, or approximately 70% of our Same Store (as defined below) portfolio. In these communities ADO was 95.7%, turnover was 39.6%, blended rates were near flat, and residential net rental income was up 0.6%.

Urban markets include 8,527 units of our Same Store portfolio. In these communities ADO was 89.5%, turnover was 47.0%, blended rates were down 6.7%, and residential net rental income was down 7.1%.

Specifically, in Center City and University City Philadelphia, our communities have faced a sharp decline in demand from local universities announcing virtual learning for the fall semester; fewer workers in downtown office buildings, including both Comcast towers, due to work from home policies; and disruption to leasing activity from social unrest.

In Mid-Wilshire and West Los Angeles, bad debt has been elevated due to local regulations which have the effect of permitting residents to live rent-free. Demand from the recovering entertainment industry is returning and leasing pace was up 44% year-over-year in the third quarter.

On the San Francisco Peninsula in Northern California, work from home policies at major tech companies disrupted demand in San Mateo and Redwood City. The Pacifica neighborhood was impacted but has stabilized and our communities in San Jose, Marin County, and the East Bay have performed well.

Redevelopment and Development

Our second line of business is the redevelopment and some development of apartment communities. Through redevelopment activities, we expect to create value by repositioning communities within our portfolio. We undertake ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the redevelopment of an existing apartment community. When warranted, we rely on the expertise and credit of a third-party developer familiar with the local market to limit our exposure to construction risk. We invest to earn risk-adjusted returns in excess of those expected from the apartment communities sold in “paired trades” to fund the redevelopment or development. Of these two activities, we generally favor redevelopment because it permits adjustment of the scope and timing of spending to align with changing market conditions and customer preferences.

We execute redevelopments using a range of approaches. We prefer to limit risk by executing redevelopments using a short-cycle approach, in which we renovate an apartment community in stages. These short-cycle redevelopments can be completed one apartment home at a time, when that home is vacated and available for renovation, or one floor at a time, thereby limiting the number of down homes and lease-up risk. As a result, short-cycle redevelopments provide us the flexibility to maintain current earnings while aligning the

 

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timing of the completed apartment homes with market demand. When short-cycle redevelopments are not possible, we may engage in redevelopment activities where an entire building or community is vacated. We refer to these as long-cycle redevelopments. Redevelopment work may include seeking entitlements from local governments, which enhance the value of our existing portfolio by increasing density; that is, the right to add apartment homes to a site.

During the nine months ended September 30, 2020, we invested $186.4 million in redevelopment and development. We continued five long-cycle redevelopment and development projects already under construction, including the full redevelopment of the North Tower at Flamingo Point and 707 Leahy; and ground-up construction at The Fremont on the Anschutz Medical Campus; Eldridge Townhomes; and Prism. Our estimated cost to complete these projects is $109.9 million, an amount readily funded from our liquidity.

We have continued construction on two resumed short-cycle redevelopments at Bay Parc and the Center Tower at Flamingo Point. Our estimated cost to complete these projects is $9.6 million.

The following table summarizes our significant redevelopment and development communities as of September 30, 2020 (dollars in millions):

 

    Location     Homes
Approved for
Redevelopment 		    Homes
Completed 		    Homes
Leased 		    Total
Planned
Investment(1) 		    Investment
to Date 		    Expected
Initial
Occupancy(2) 		    Expected NOI
Stabilization(2) (3) 		 

Short-cycle:

               

Bay Parc

    Miami, FL       90       75       69     $ 27.7     $ 26.6       N/A       N/A  

Flamingo Point Center Tower

    Miami Beach, FL       58       18       20       16.0       7.5       N/A       N/A  

Long-cycle:

               

707 Leahy(4)

    Redwood City, CA       110       60       53       26.5       25.2       1Q 2020       2Q 2022  

Eldridge Townhomes(5)

    Elmhurst, IL       58       54       57       35.1       33.9       2Q 2020       1Q 2022  

Flamingo Point North Tower

    Miami Beach, FL       366       —         —         171.0       86.7       4Q 2021       2Q 2024  

The Fremont (6)

    Denver, CO (MSA)       253       98       85       87.0       85.5       3Q 2020       1Q 2023  

Parc Mosaic(7)

    Boulder, CO       226       226       215       124.6       123.8       3Q 2019       1Q 2022  

Prism(8)

    Cambridge, MA       136       —       —       73.2       51.6       1Q 2021       3Q 2023  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

      1,297       531       499     $ 561.1     $ 440.8      
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1)

Planned investment relates to the current phase of the redevelopment or development.

(2)

Delivery timing and stabilization is subject to change and are based on the best estimate at this time.

(3)

Represents the period in which we expect the communities to achieve stabilized rents and operating costs, generally five quarters after occupancy stabilization.

(4)

As of October 28, 2020, this community is 82% leased.

(5)

As of October 28, 2020, construction is complete and we have leased 57 out of 58 homes.

(6)

As of October 28, 2020, just over 100 apartment homes have been delivered and 82% have been leased. Completion of this community is expected in the fourth quarter 2020.

(7)

Construction is complete and, as of October 28, 2020, we have leased 97% of the apartment homes at rents consistent with underwriting.

(8)

Completion of this community is expected in the first quarter of 2021.

As of September 30, 2020, our total estimated net investment at redevelopment and development communities is $561.1 million, of which we have funded $440.8 million. We expect to fund the remaining estimated net investment of $120.3 million on these communities in 2020 and future years, on a leverage-neutral basis, with proceeds from sales of apartment communities with lower forecasted free cash flow (“FCF”) internal rates of return.

 

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During the three months ended September 30, 2020, we leased 144 redeveloped or newly developed apartment homes. As of September 30, 2020, our exposure to lease-up at long-cycle redevelopment and development communities was 684 apartment homes; 36 homes where construction is complete, 171 homes expected to be completed before year-end, and 477 homes expected to be delivered in 2021.

Portfolio Management and Capital Allocation

Our portfolio of apartment communities is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality, and is also diversified across several of the largest markets in the United States. We measure the quality of apartment communities in our portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance data and analysis. Under this rating system, we classify as “A” quality apartment communities those earning rents greater than 125% of local market average; as “B” quality apartment communities those earning rents between 90% and 125% of local market average; as “C+” quality apartment communities those earning rents greater than $1,100 per month, but lower than 90% of local market average; and as “C” quality apartment communities those earning rents less than $1,100 per month and lower than 90% of local market average. We classify as “B/B+” quality a portfolio that on average earns rents between 100% and 125% of local market average rents. Although some companies and analysts within the multifamily real estate industry use apartment community quality ratings of “A,” “B,” and “C,” some of which are tied to local market rent averages, the metrics used to classify apartment community quality as well as the period for which local market rents are calculated may vary from company to company. Accordingly, our rating system for measuring apartment community quality is neither broadly nor consistently used in the multifamily real estate industry.

The following table summarizes information about our portfolio relative to the market for the three months ended September 30, 2020:

 

Average revenue per Aimco apartment home(1)

   $ 2,212  

Portfolio average rents as a percentage of local market average rents

     112 % 

Percentage A (average revenue per Aimco apartment home $2,872)

     53 % 

Percentage B (average revenue per Aimco apartment home $1,951)

     29 % 

Percentage C+ (average revenue per Aimco apartment home $1,771)

     18 % 

 

(1)

Represents average monthly rental and other property revenues (excluding resident reimbursement of utility cost) divided by the number of occupied apartment homes as of the end of the period.

Our average monthly revenue per apartment home was $2,212 for the three months ended September 30, 2020, representing a decrease of approximately 2% compared to the same period in 2019.

We follow a disciplined paired trade policy in making investments. As part of our portfolio strategy, we seek to sell up to 10% of our portfolio annually and to reinvest the proceeds from such sales in accretive uses such as capital enhancements, redevelopments, some developments, and selective acquisitions with projected FCF internal rates of return higher than expected from the communities being sold. We prefer well-located real estate where land is a significant percentage of total value and provides potential upside from development or redevelopment. Through this disciplined approach to capital recycling, we increase the quality and expected growth rate of our portfolio.

As we execute our portfolio strategy, we expect to increase average revenue per Aimco apartment home at a rate greater than market rent growth, increase FCF margins, and maintain sufficient geographic and price point diversification to limit volatility and concentration risk.

Acquisitions

During the nine months ended September 30, 2020, we acquired for $89.6 million Hamilton on the Bay, located in Miami’s Edgewater neighborhood. The acquisition includes a 271-apartment home community located

 

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on the waterfront, approximately one mile north of our Bay Parc apartments, plus an adjacent development site. Current zoning allows for the construction of more than 380 additional apartment homes on the combined sites. We are now in planning to invest as much as $50 million in a substantial renovation of the existing building.

We continue to search for accretive acquisitions, including development opportunities.

Dispositions

During the nine months ended September 30, 2020, we sold one apartment community located in Annandale, Virginia with 219 homes at a price of $58.9 million, 3% better than its estimated gross asset value one year prior. Net sales proceeds from this transaction were $36.9 million. During the nine months ended September 30, 2020, we received a non-refundable deposit securing a contract to purchase an apartment community, which is expected to be sold later in the fourth quarter at a price of approximately $126 million, 3% better than its estimated gross asset value at December 31, 2019. Proceeds from this transaction are expected to be used to reduce leverage. As of September 30, 2020, we classified the apartment community as held for sale. On November 3, 2020, we sold this community.

Joint Venture Transaction

On September 8, 2020, we formed a joint venture with a passive institutional investor to own a portfolio of 12 multi-family communities with 4,051 apartment homes located in California. The communities were valued at $2.4 billion, or approximately $592,000 per unit, equivalent to an implied NOI cap rate of approximately 4.2%. The valuation is equal to 97% of our pre-COVID-19 valuation of the communities and confirms our previously published NAV. The joint venture has existing property debt of $1.22 billion and an implied equity value of $1.18 billion. In exchange for a 39% interest subject to $475 million of property debt, we received $461 million. We retain ownership of 61% of the joint venture and will control and operate the communities in exchange for property and asset management fees.

Life Science Developer Investment

During the nine months ended September 30, 2020, we made a $50 million commitment to IQHQ, a privately-held life-sciences real estate development company. In addition, we gained the right to collaborate with IQHQ on any multifamily component at its future development sites.

Balance Sheet

Leverage

We seek to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; build financial flexibility by maintaining ample unused and available credit; holding properties with substantial value unencumbered by property debt; maintaining an investment grade rating; and using equity when it enhances financial returns or reduces investment risk.

Our leverage includes our share of long-term, non-recourse, property debt encumbering apartment communities, outstanding borrowings on our revolving credit facility, our term loan, and other leverage. Please refer to the Liquidity and Capital Resources section for additional information regarding our leverage. Other leverage includes mezzanine equity instruments, including preferred OP Units and redeemable noncontrolling interests in a consolidated real estate partnership.

Our target leverage ratios are Net Leverage to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre to Adjusted Interest Expense and Preferred Distributions greater than 2.5x. We calculate Adjusted EBITDAre and

 

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Adjusted Interest Expense used in our leverage ratios based on the most recent three-month amounts, annualized, and trailing twelve months. Our leverage ratios for the three months ended September 30, 2020 and trailing twelve months ended September 30, 2020, are presented below:

 

     Annualized
Current
Quarter 		     Trailing
Twelve
Months 		 

Proportionate Debt to Adjusted EBITDAre

     7.2x        6.8x  

Net Leverage to Adjusted EBITDAre

     7.4x        7.0x  

Adjusted EBITDAre to Adjusted Interest Expense

     3.1x        3.4x  

Adjusted EBITDAre to Adjusted Interest Expense and Preferred Distributions

     3.0x        3.2x  

Under our revolving credit facility and term loan, we have agreed to maintain a fixed charge coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the trailing twelve months ended September 30, 2020, our fixed charge coverage ratio was 1.93x. We expect to remain in compliance with these covenants.

Please refer to the Leverage Ratios subsection of the Non-GAAP Measures section for further information about the calculation of our leverage ratios.

Liquidity

Our $1.0 billion liquidity consists of cash and restricted cash balances and available capacity on our revolving credit facility. As of September 30, 2020, we had cash and restricted cash, excluding amounts related to tenant security deposits, of $255.5 million and had the capacity to borrow up to $793.4 million on our revolving credit facility, after consideration of $6.6 million of letters of credit backed by the facility.

We manage our financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. As of September 30, 2020, we held unencumbered communities with an estimated fair value, based on GAV, of approximately $3.6 billion.

Financing Activity

During the nine months ended September 30, 2020, we prepaid $405 million of property debt using proceeds from our joint venture, incurring $7.8 million in prepayment penalties that have been excluded from Pro forma FFO. The loans had a weighted-average interest rate of 5.3%, lowering our weighted-average cost of leverage by 15 basis points. The prepayment of property debt lowers our interest expense such that the costs associated with the prepayment will be recovered in the first quarter of 2021. We also placed $688.5 million of new property debt, generating incremental proceeds of $370.2 million. The loans have a weighted-average term to maturity of 9.3 years and a weighted-average interest rate of 2.9%. We have no remaining debt maturities in 2020.

Also, during the nine months ended September 30, 2020, we secured a $350.0 million term loan. Proceeds from the loan were primarily used to repay borrowings on our $800.0 million revolving credit facility. Please refer to the Leverage and Capital Resources section for further information about the terms of our term loan.

Equity Capital Activities

2020 property sales, including the California Joint Venture, generated taxable gains in excess of our regular quarterly dividend. On October 21, 2020 our Board of Directors declared a $8.20 special dividend in the form of cash and stock.

 

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The special dividend includes the next two quarterly cash dividends, or $0.82 per share in the aggregate, accelerating the payment of the regular dividend expected in February of 2021. Additionally, shareholders in the aggregate will receive $7.38 per share in stock.

The dividend will be payable to shareholders of record on the close of business on November 4, 2020, with shareholders having the opportunity to elect to receive the special dividend in the form of all stock or prorated cash and stock, and will be paid on November 30, 2020, after trading hours. The number of shares distributed in the special dividend will be determined by the volume weighted average price of Aimco shares during the 10-trading day period ending on November 24, 2020.

In order to neutralize the dilutive impact of the stock issued in the special dividend, our Board also authorized a reverse stock split, effective on November 30, 2020, immediately following the special dividend. As a result, total shares outstanding following completion of both the special dividend and the reverse stock split are expected to be unchanged from the total shares outstanding immediately prior to the dividend. Some stockholders may have more shares and some may have fewer based on their individual elections. The reverse split will ensure comparability of per share results before and after these transactions.

Team and Culture

Our team and culture are keys to our success. Our intentional focus on a collaborative and productive culture based on respect for others and personal responsibility is reinforced by a preference for promotion from within. We focus on succession planning and talent development to produce a strong, stable team that is the enduring foundation of our success. We offer benefits reinforcing our value of caring for each other, including paid time for parental leave, paid time annually to volunteer in local communities, college scholarships for the children of team members, an emergency fund to help team members in crisis, financial support for our team members who are becoming United States citizens, and a bonus structure at all levels of the organization. We also pay full compensation and benefits for team members who are actively deployed by the United States military. Out of hundreds of participating companies in 2020, we were one of only six recognized as a “Top Workplace” in Colorado for each of the past eight years, and were one of only two real estate companies to receive a BEST award from the Association for Talent Development in recognition of our company-wide success in talent development, marking our third consecutive year receiving this award.

Results of Operations

Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we redevelop, acquire, and dispose of our apartment communities affect our operating results.

The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements included in Item 1.

Detailed Results of Operations for the Nine Months Ended September 30, 2020, Compared to September 30, 2019

Net income decreased by $337.9 million during the nine months ended September 30, 2020, compared to 2019, as described more fully below.

Property Operations

We have three segments: (i) Same Store, (ii) Redevelopment and Development, and (iii) Acquisition and Other Real Estate. Our Same Store segment includes communities that have reached a stabilized level of

 

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operations as of the beginning of a two-year comparable period and maintained it throughout the current and comparable prior year and are not expected to be sold within 12 months. Our Redevelopment and Development segment includes communities that are currently under construction, and those that have been completed in recent years that have not achieved and maintained stabilized operations for both the current and comparable prior year. Our Acquisition and Other Real Estate segment includes: (i) communities that we have acquired since the beginning of a two-year comparable period; (ii) communities that are subject to limitations on rent increases; (iii) communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale; (iv) communities that we expect to redevelop; and (v) certain commercial spaces.

As of September 30, 2020, our Same Store segment included 93 apartment communities with 27,610 apartment homes.

From December 31, 2019, to September 30, 2020, on a net basis, our Same Store segment increased by two apartment communities and 961 apartment homes. These changes consisted of:

 

  •  

the addition of one redeveloped apartment community with 940 apartment homes that was classified as Same Store upon maintaining stabilized operation for the entirety of the periods presented;

 

  •  

the addition of six acquired apartment communities with 1,480 apartment homes that were classified as Same Store because we have now owned them for the entirety of both periods presented;

 

  •  

the reduction of three apartment communities with 974 apartment homes that we have classified in Acquisition and Other Real Estate, as we are planning to redevelop these communities; and

 

  •  

the reduction of one apartment community with 219 apartment homes that was sold as of September 30, 2020; and

 

  •  

the reduction of one apartment community with 266 apartment homes due to it being classified as held for sale as of September 30, 2020.

As of September 30, 2020, our Redevelopment and Development segment included eight apartment communities with 2,521 apartment homes, and our Acquisition and Other Real Estate segment included 20 apartment communities with 2,670 apartment homes and one office building.

We use proportionate property net operating income to assess the operating performance of our communities. Proportionate property net operating income reflects our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements, for consolidated communities. Accordingly, the results of operations of our segments discussed below are presented on a proportionate basis and exclude the results of four apartment communities with 142 apartment homes that we do not consolidate. During the nine months ended September 30, 2020, we formed a joint venture with a passive institutional investor to own a portfolio of 12 multi-family communities in California. We have presented, in addition to the actual historical changes in results of operations of our segments, the results as if the California joint venture had closed at the beginning of the earliest period presented.

We do not include offsite costs associated with property management, casualty gains or losses, or the results of apartment communities sold or held for sale, reported in consolidated amounts, in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below.

Please refer to Note 8 to the condensed consolidated financial statements elsewhere in this information statement for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses.

 

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Proportionate Property Net Operating Income

The results of our segments for the nine months ended September 30, 2020 and 2019, as presented below, are based on segment classifications as of September 30, 2020.

 

     Nine Months Ended
September 30, 		     Historical Change     Ownership-
Effected
Change(1) 		 

(in thousands)

   2020      2019      $     %     $     %  

Rental and other property revenues, before utility reimbursements:

              

Same Store

   $ 534,395      $ 542,624      $ (8,229 )      (1.5 %)    $ (4,004 )      (0.8 %) 

Redevelopment and Development

     36,001        37,839        (1,838 )      (4.9 %)      (1,838 )      (4.9 %) 

Acquisition and Other Real Estate

     53,485        46,881        6,604       14.1 %      6,604       14.1 % 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     623,881        627,344        (3,463 )      (0.6 %)      762       0.1 % 

Property operating expenses, net of utility reimbursements:

              

Same Store

     145,259        146,895        (1,636 )      (1.1 %)      (868 )      (0.6 %) 

Redevelopment and Development

     14,636        14,736        (100 )      (0.7 %)      (100 )      (0.7 %) 

Acquisition and Other Real Estate

     20,045        17,403        2,642       15.2 %      2,642       15.2 % 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     179,940        179,034        906       0.5 %      1,674       1.0 % 

Proportionate property net operating income:

              

Same Store

     389,136        395,729        (6,593 )      (1.7 %)      (3,136 )      (0.9 %) 

Redevelopment and Development

     21,365        23,103        (1,738 )      (7.5 %)      (1,738 )      (7.5 %) 

Acquisition and Other Real Estate

     33,440        29,478        3,962       13.4 %      3,962       13.4 % 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 443,941      $ 448,310      $ (4,369 )      (1.0 %)    $ (912 )      (0.2 %) 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Reflects the change for the nine months ended September 30, 2020 and 2019, as if the California joint venture had closed on January 1, 2019.

For the nine months ended September 30, 2020, compared to 2019, after giving effect to the sale of partial interest in certain Same Store communities in the California joint venture, our Same Store proportionate property net operating income decreased by $3.1 million, or 0.9%. This decrease was attributable primarily to a $4.0 million, or 0.8%, decrease in rental and other property revenues due primarily to a 110 basis point decrease in average daily occupancy, a $4.3 million, or 90 basis point, increase in bad debt, and a $1.2 million, or 20 basis point, reduction in other rental income due to local restrictions on our contractual right to charge late fees, offset partially by a 180 basis point increase in residential rents. This decrease in proportionate property net operating income was offset partially by lower Same Store property operating expenses of $0.9 million. The change in Same Store property operating expenses were driven by a $2.2 million, or 3.2%, decrease in controllable operating expenses, offset partially by an increase in real estate taxes and insurance.

Redevelopment and Development proportionate property net operating income was relatively flat for the nine months ended September 30, 2020, compared to 2019.

Acquisition and Other Real Estate proportionate property net operating income increased by $4.0 million, or 13.4%, for the nine months ended September 30, 2020, compared to 2019, due primarily to the lease-up of One Ardmore acquired in April 2019 and the acquisition of 1001 Brickell Bay Drive in July 2019, offset partially by a decrease in revenues related to commercial tenants due primarily to the economic impacts of COVID-19 and governmental lockdown.

 

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Non-Segment Real Estate Operations

Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, write-off of straight-line rent receivables, and the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.

During the nine months ended September 30, 2020, we recognized $2.9 million of write-offs of straight-line rent receivables due to the impact of COVID-19 and governmental lockdown, and the resulting economic impact on our commercial tenants. No similar write-off was recognized in 2019.

Net operating income decreased for the nine months ended September 30, 2020, compared to 2019, by $15.4 million, due to the sale of apartment communities in 2020 and 2019.

Depreciation and Amortization

For the nine months ended September 30, 2020 and 2019, depreciation and amortization expense was relatively flat.

General and Administrative Expenses

For the nine months ended September 30, 2020, compared to 2019, general and administrative expenses decreased by $4.0 million, or 12.5%, due primarily to lower incentive compensation.

Investment Management Expenses

Investment management expenses for the nine months ended September 30, 2020, compared to 2019, were relatively flat.

Other Expenses, Net

Other expenses, net, includes costs associated with our risk management activities, partnership administration expenses, ground lease rent expense, and certain non-recurring items.

For the nine months ended September 30, 2020, compared to 2019, other expenses, net increased by $10.7 million, or 83.8%, due primarily to costs associated with the previously announced business separation and unrealized losses on our interest rate derivative, offset partially by restructuring costs incurred in 2019, a favorable incremental cash receipt in the first quarter of 2020 related to a previous settlement, and lower ground lease expense.

Interest Income

Interest income for nine months ended September 30, 2020, compared to 2019, increased $1.8 million, or 20.8%, due primarily to a gain recognized on the early payoff of a seller financing note.

Interest Expense

For the nine months ended September 30, 2020, compared to 2019, interest expense increased by $17.7 million, or 14.4%, due primarily to refinancing activity and interest expense related to our term loan, offset partially by an increase in capitalized interest related to our active redevelopments and developments. As a result of our refinancing activity, we incurred $14.5 million of prepayment penalties, offset partially by more favorable interest rates on refinanced fixed rate debt.

 

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Gain on Dispositions of Real Estate

During the nine months ended September 30, 2020, we sold one apartment community with 219 apartment homes for a gain on disposition of $47.2 million and net proceeds of $36.9 million. During the nine months ended September 30, 2019, we sold eight apartment communities with 2,605 apartment homes for a gain on dispositions of $356.9 million and net proceeds of $418.3 million.

The apartment communities sold were in a lower-rated locations within our primary markets and had average revenues per apartment home significantly below those of our retained portfolio.

Mezzanine Investment Income, Net

On November 26, 2019, we loaned $275.0 million to the partnership owning Parkmerced Apartments. During the nine months ended September 30, 2020, we recognized $20.6 million, of income in connection with the mezzanine loan. For the nine months ended September 30, 2020, we have received a cash payment of $0.6 million.

We have accrued all interest amounts due as required by GAAP. Our loan is secured by approximately $300 million of borrower equity. In the event we determine that a portion of the loan or accrued interest is not collectable, we will cease income recognition and, if appropriate, recognize an impairment.

Income Tax Benefit (Expense)

Certain of our operations, including property management and risk management, are conducted through taxable REIT subsidiaries, or TRS entities. Additionally, some of our apartment communities and 1001 Brickell Bay Drive are owned through TRS entities.

Our income tax benefit calculated in accordance with GAAP includes: (a) income taxes associated with the income or loss of our TRS entities including tax on gains on dispositions, for which the tax consequences have been realized or will be realized in future periods; (b) low income housing tax credits generated prior to the sale of our Asset Management business that offset REIT taxable income, primarily from retained capital gains; and (c) historic tax credits that offset income tax obligations of our TRS entities. Income taxes related to these items, as well as changes in valuation allowance and the establishment of incremental deferred tax items in conjunction with intercompany asset transfers (if applicable), are included in income tax benefit in our condensed consolidated statements of operations.

For the nine months ended September 30, 2020, we recognized income tax benefit of $7.9 million, compared to $1.9 million during the same period in 2019. The change is due primarily to income tax provision on the gain on dispositions of real estate in 2019 and an income tax benefit associated with 1001 Brickell Bay Drive, offset partially by an increase in state tax expense.

Non-GAAP Measures

Certain key financial indicators we use in managing our business and in evaluating our financial condition and operating performance are non-GAAP measures. Key non-GAAP measures we use are defined and described below, and for those non-GAAP measures used or disclosed within this quarterly report, we provide reconciliations of the non-GAAP measures to the most comparable financial measure computed in accordance with GAAP.

Free Cash Flow, as calculated for our retained portfolio, represents property net operating income, less spending for Capital Replacements, which represents our estimation of the capital additions made to replace capital assets consumed during our ownership period (further discussed under the Nareit Funds From Operations,

 

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Pro forma Funds From Operations, and Adjusted Funds From Operations heading and the Liquidity and Capital Resources heading). FCF margin as calculated for apartment communities sold represents the sold apartment community’s net operating income less $1,200 per apartment home of assumed annual capital replacement spending, as a percentage of the apartment community’s rental and other property revenues. Capital replacement spending represents a measure of capital asset usage during the period; therefore, we believe that FCF is useful to investors as a supplemental measure of apartment community performance because it takes into consideration costs incurred during the period to replace capital assets that have been consumed during our ownership.

Nareit Funds From Operations, Pro forma Funds From Operations, and Adjusted Funds From Operations

Nareit Funds From Operations (“Nareit FFO”) is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets such as machinery, computers, or other personal property. Nareit defines FFO as net income computed in accordance with GAAP, excluding: depreciation and amortization related to real estate; gains and losses from sales and impairment of depreciable assets and land used in our primary business; and income taxes directly associated with a gain or loss on the sale of real estate, and including our share of the FFO of unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine Nareit FFO. We calculate Nareit FFO attributable to Aimco common stockholders (diluted) by subtracting amounts allocated from Nareit FFO to participating securities.

In addition to Nareit FFO, we compute Pro forma FFO and AFFO, which are also non-GAAP financial measures that we believe are helpful to investors in understanding our short-term performance. Pro forma FFO represents Nareit FFO attributable to Aimco common stockholders (diluted), excluding certain amounts that are unique or occur infrequently.

In computing 2020 Pro forma FFO, we made the following adjustments to Nareit FFO:

 

  •  

Separation costs: we incurred costs in connection with the separation of our development platform. We excluded these costs from Pro forma FFO because we believe they are not representative of ongoing operating performance.

 

  •  

Transaction costs: we incurred certain transaction costs related to the California joint venture and other new business pursuits. We excluded these costs from Pro forma FFO because we believe they are not representative of ongoing operating performance.

 

  •  

Prepayment penalties: as a result of debt refinancing activity, we incurred debt extinguishment costs, net of income tax effect. We excluded these costs from Pro forma FFO because we believe these costs are not representative of ongoing operating performance.

 

  •  

Straight-line rent: in 2018, we assumed a 99-year ground lease with scheduled rent increases. Due to the terms of the lease, GAAP rent expense will exceed cash rent payments until 2076. We include the cash rent payments for this ground lease in Pro forma FFO but exclude the incremental straight-line non-cash rent expense. We include the rent expense for this lease in other expenses, net, in our condensed consolidated statements of operations.

 

  •  

Severance costs, litigation, and other, net: during the nine months ended September 30, 2020, we incurred an unrealized loss on a derivative agreement and other non-recurring costs. We excluded these costs from Pro Forma FFO because we believe they are not representative of current operating performance. These costs are included in other expenses, net, on our Consolidated Statements of Operations.

 

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In computing 2019 Pro forma FFO, we made the following adjustments to Nareit FFO:

 

  •  

Preferred equity redemption related costs: on May 16, 2019, we redeemed our Class A Preferred Perpetual Stock. We excluded the redemption-related costs from Pro forma FFO because we believe these costs are not representative of operating performance.

 

  •  

Prepayment penalties: as described above.

 

  •  

Straight-line rent: as described above.

 

  •  

Severance costs, litigation, and other, net: in 2019, we incurred severance and restructuring costs, costs related to our litigation with Airbnb, and other non-recurring costs. We excluded these amounts from Pro forma FFO because we believe these costs are not representative of operating performance. These costs are included in other expenses, net, on our Consolidated Statements of Operations.

AFFO represents Pro forma FFO reduced by Capital Replacements, which represent our estimation of the actual capital additions made to replace capital assets consumed during our ownership period. When we make capital additions at an apartment community, we evaluate whether the additions extend the useful life of an asset as compared to its condition at the time we purchased the apartment community. We classify as Capital Improvements those capital additions that meet this criterion, and we classify as Capital Replacements those that do not. AFFO is a key financial indicator we use to evaluate our short-term operational performance and is one of the factors that we use to determine the amounts of our dividend payments.

Nareit FFO, Pro forma FFO, and AFFO should not be considered alternatives to net income determined in accordance with GAAP, as indications of our performance. Although we use these non-GAAP measures for comparability in assessing our performance compared to other REITs, not all REITs compute these same measures and those who do may not compute them in the same manner. Additionally, computation of AFFO is subject to our definition of Capital Replacement spending. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs.

 

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For the nine months ended September 30, 2020 and 2019, Aimco’s Nareit FFO, Pro forma FFO, and AFFO are calculated as follows (in thousands, except per share data):

 

     Nine Months Ended
September 30, 		 
     2020      2019  

Net income attributable to Aimco common stockholders(1)

   $ 20,845      $ 332,805  

Adjustments:

     

Real estate depreciation and amortization, net of noncontrolling partners’ interest

     287,390        276,353  

Gain on dispositions and other, net of noncontrolling partners’ interest

     (47,204 )       (356,929 ) 

Income tax adjustments related to gain on dispositions and other tax-related items

     2,398        7,151  

Common noncontrolling interests in Aimco Operating Partnership’s share of above adjustments

     (12,453 )       3,962  

Amounts allocable to participating securities

     (54 )       101  
  

 

 

    

 

 

 

Nareit FFO attributable to Aimco common stockholders

   $ 250,922      $ 263,443  

Adjustments, all net of common noncontrolling interests in Aimco Operating Partnership and participating securities:

     

Separation costs

     11,930        —    

Transaction costs

     2,485        —    

Prepayment penalties, net

     13,514        1,604  

Straight-line rent

     1,902        3,590  

Preferred equity redemption related amounts

     —          3,864  

Severance costs, litigation, and other

     2,912        2,071  
  

 

 

    

 

 

 

Pro forma FFO attributable to Aimco common stockholders

   $ 283,665      $ 274,572  

Capital Replacements, net of common noncontrolling interests in Aimco Operating Partnership and participating securities

     (34,406 )       (34,273 ) 
  

 

 

    

 

 

 

AFFO attributable to Aimco common stockholders

   $ 249,259      $ 240,299  
  

 

 

    

 

 

 

Total share and dilutive share equivalents used to calculate Net income and Nareit FFO per share (2)

     148,628        147,692  

Adjustment to weight reverse stock split (3)

     —          828  
  

 

 

    

 

 

 

Pro forma shares and dilutive share equivalents used to calculate

Pro forma FFO and AFFO per share

     148,628        148,520  
  

 

 

    

 

 

 

Net income attributable to Aimco per common share – diluted

   $ 0.14      $ 2.26  

Nareit FFO per share—diluted

   $ 1.69      $ 1.78  

Pro forma FFO per share—diluted

   $ 1.91      $ 1.85  

AFFO per share—diluted

   $ 1.68      $ 1.62  

 

(1)

Represents the numerator for calculating Aimco’s earnings per common share in accordance with GAAP.

(2)

Represents the denominator for Aimco’s earnings per common share – diluted, calculated in accordance with GAAP.

(3)

During the three months ended March 31, 2019, we completed a reverse stock split and a special dividend paid primarily in stock. For stock splits, GAAP requires the restatement of weighted average shares as if the reverse stock split occurred at the beginning of the period presented; while shares issued in the special dividend are included in weighted average shares outstanding from the date issued. To minimize confusion and facilitate comparison of period-over-period Pro forma FFO and AFFO, we calculated pro forma weighted average shares for 2019 based on the effective date of the reverse stock split and ex-dividend date

 

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  for the shares issued in the special dividend, thereby eliminating the per-share impact of the GAAP treatment to Aimco’s reported Pro forma FFO and AFFO.

Leverage Ratios

As discussed under the Balance Sheet heading, our leverage strategy targets the ratio of Net Leverage to Adjusted EBITDAre to be below 7.0x and the ratio of Adjusted EBITDAre to Adjusted Interest Expense and Preferred Distributions to be greater than 2.5x. We believe these ratios, which are based in part on non-GAAP financial information, are commonly used by investors and analysts to assess the relative financial risk associated with companies within the same industry, and they are believed to be similar to measures used by rating agencies to assess entity credit quality.

Proportionate Debt, as used in our leverage ratios, is a non-GAAP measure and includes our share of the long-term, non-recourse property debt, outstanding borrowings under our revolving credit facility, and our term loan. Proportionate Debt excludes unamortized debt issuance costs because these amounts represent cash expended in earlier periods and do not reduce our contractual obligations. We reduce our recorded debt by the amounts of cash and restricted cash on-hand (which are primarily restricted under the terms of our property debt agreements), excluding tenant security deposits included in restricted cash, assuming the remaining amounts of cash and restricted cash would be used to reduce our outstanding leverage. We further reduce our recorded debt by the value of our investment in a securitization trust that holds certain of our property debt, as our payments of principal and interest associated with such property debt will ultimately repay our investments in the trust.

We believe Proportionate Debt is useful to investors as it is a measure of our net exposure to debt obligations. Proportionate Debt, as used in our leverage ratios, is calculated as set forth in the table below.

Preferred OP Units, as used in our leverage ratios, represents the redemption amount for the Aimco Operating Partnership’s preferred OP Units and, although perpetual in nature, is another component of our overall leverage.

The reconciliation of total indebtedness to Proportionate Debt and Net Leverage, as used in our leverage ratios as of September 30, 2020, is as follows (in thousands):

 

     September 30,
2020 		 

Total indebtedness

   $ 4,406,797  

Adjustments:

  

Debt issuance costs related to non-recourse property debt and term loan

     22,454  

Proportionate share adjustments related to debt obligations of consolidated and unconsolidated partnerships

     (481,387 ) 

Cash and restricted cash

     (268,491 ) 

Tenant security deposits included in restricted cash

     13,036  

Proportionate share adjustments related to cash and restricted cash held by consolidated and unconsolidated partnerships

     6,496  

Securitization trust investment and other

     (98,874 ) 
  

 

 

 

Proportionate Debt

   $ 3,600,031  
  

 

 

 

Preferred OP Units

     79,449  

Redeemable noncontrolling interests in consolidated real estate partnership

     4,371  
  

 

 

 

Net Leverage

   $ 3,683,851  
  

 

 

 

We calculated Adjusted EBITDAre used in our leverage ratios based on the most recent three-month amounts, annualized, and trailing twelve months. EBITDAre and Adjusted EBITDAre are non-GAAP measures,

 

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which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and allow for comparison of our credit strength to different companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income (loss) as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. Nareit defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation, and amortization expense, further adjusted for:

 

  •  

gains and losses on the dispositions of depreciated property;

 

  •  

impairment write-downs of depreciated property;

 

  •  

impairment write-downs of investments in unconsolidated partnerships caused by a decrease in the value of the depreciated property in such partnerships; and

 

  •  

adjustments to reflect Aimco’s share of EBITDAre of investments in unconsolidated entities.

EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted to exclude the effect of the following items for the reasons set forth below:

 

  •  

net income attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests, to allow investors to compare a measure of our earnings before the effects of our capital structure and indebtedness with that of other companies in the real estate industry;

 

  •  

the amount of interest income related to our investment in the subordinated tranches in a securitization trust holding primarily Aimco property debt, as we view our interest cost on this debt to be net of any interest income received from the investment; and

 

  •  

the amount by which GAAP rent expense exceeds cash rents for a long-term ground lease for which expense exceeds cash payments until 2076. The excess of GAAP rent expense over the cash payments for this lease does not reflect a current obligation that affects our ability to service debt.

 

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The reconciliation of net income to EBITDAre and Adjusted EBITDAre for the three months ended September 30, 2020 and twelve months ended September 30, 2020, as used in our leverage ratios, is as follows (in thousands):

 

     Three Months Ended
September 30, 2020 		    Twelve Months Ended
September 30, 2020 		 

Net (loss) income

   $ (24,815 )    $ 170,132  

Adjustments:

    

Interest expense

     50,519       186,503  

Income tax benefit

     (1,747 )      (9,052 ) 

Depreciation and amortization

     98,249       393,558  

Gain on disposition of real estate

     —         (193,443 ) 

Recovery of losses on notes receivable

     8       8  

Adjustment related to EBITDAre of unconsolidated partnerships

     212       846  
  

 

 

   

 

 

 

EBITDAre

   $ 122,426     $ 548,552  
  

 

 

   

 

 

 

Net loss attributable to noncontrolling interests in consolidated real estate partnerships

     154       69  

EBITDAre adjustments attributable to noncontrolling interests

     (2,771 )      (4,519 ) 

Interest income received on securitization investment

     (2,265 )      (8,778 ) 

Non-cash straight-line rent

     669       2,701  

Separation costs

     11,830       12,580  

Transaction costs

     2,620       2,620  

Pro forma California joint venture(1)

     (5,819 )      (31,358 ) 

Pro forma acquisition(2)

     178       978  

Separation costs and other adjustments, net(3)

     (1,981 )      6,994  
  

 

 

   

 

 

 

Adjusted EBITDAre

   $ 125,041     $ 529,839  
  

 

 

   

 

 

 

Annualized Adjusted EBITDAre

   $ 500,164    
  

 

 

   

 

(1)

Includes an adjustment to reflect the non-controlling interest impact of the California joint venture transaction as if the transaction closed on July 1, 2020, for the three months ended September 30, 2020, and October 1, 2019, for the trailing twelve months.

(2)

Includes an adjustment to reflect the acquisition of Hamilton on the Bay as if the transaction closed on July 1, 2020, for the three months ended September 30, 2020, and October 1, 2019, for the trailing twelve months.

(3)

For the three months ended September 30, 2020, separation costs and other adjustments, net, includes a $4.0 million reduction of Adjusted EBITDAre to remove the impact of two non-recurring events: (a) a $2.7 million adjustment related to casualty insurance reimbursements and (b) $1.3 million adjustment to incentive compensation for which annualization would distort our operating results, offset partially by $1.0 million of unrealized loss on a derivative agreement and $1.0 million of contributions related to rent control ballot measures in California that have been excluded because we believe they are not representative of future operating performance. For the twelve months ended September 30, 2020, separation costs and other adjustments, net, includes $3.1 million of incurred casualty losses, $2.0 million of unrealized loss on a derivative agreement, $1.0 million of contributions related to rent control ballot measures in California, and $0.9 million of separation costs that have been excluded because we believe they are not representative of future operating performance.

 

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The reconciliation of net income to EBITDAre and Adjusted EBITDAre for the three months ended September 30, 2019, is as follows (in thousands):

 

Net income

   $ 3,970  

Adjustments:

  

Interest expense

     42,011  

Income tax benefit

     (3,096 ) 

Depreciation and amortization

     97,538  

Gain on disposition of real estate

     (1,146 ) 

Adjustment related to EBITDAre of unconsolidated partnerships

     212  
  

 

 

 

EBITDAre

   $ 139,489  
  

 

 

 

Net income attributable to noncontrolling interests in Aimco Operating Partnership

     58  

EBITDAre adjustments attributable to noncontrolling interests

     (649 ) 

Interest income received on securitization investment

     (2,084 ) 

Straight-line rent and other (1)

     924  

Severance and restructuring costs (2)

     1,296  
  

 

 

 

Adjusted EBITDAre

   $ 139,034  
  

 

 

 

Annualized Adjusted EBITDAre

   $ 556,136  
  

 

 

 

 

(1)

Straight-line rent and other also includes other costs excluded from Adjusted EBITDAre that we believe are not representative of ongoing operating performance.

(2)

We incurred severance and restructuring costs in connection with office closures in 2019. We excluded such costs from Adjusted EBITDAre because we believe these costs are not representative of operating performance.

We calculated Adjusted Interest Expense, as used in our leverage ratios, based on the most recent three-month amounts, annualized, and trailing twelve months. Adjusted Interest Expense is a non-GAAP measure that we believe is meaningful for investors and analysts as it presents our share of current recurring interest requirements associated with leverage. Adjusted Interest Expense represents our proportionate share of interest expense on non-recourse property debt and interest expense on our revolving credit facility borrowings and term loan. We exclude from our calculation of Adjusted Interest Expense:

 

  •  

debt prepayment penalties, which are items that, from time to time, affect our interest expense, but are not representative of our scheduled interest obligations; and

 

  •  

the income we receive on our investment in the securitization trust that holds certain of our property debt, as this income is being generated indirectly from interest we pay with respect to property debt held by the trust.

Preferred Distributions represents the distributions paid on the Aimco Operating Partnership’s preferred OP Units. We add Preferred Distributions to Adjusted Interest Expense for a more complete picture of the interest and dividend requirements of our leverage.

 

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The reconciliation of interest expense to Adjusted Interest Expense and Preferred Distributions for the three months ended September 30, 2020 and twelve months ended September 30, 2020, as used in our leverage ratios, is as follows (in thousands):

 

     Three Months Ended
September 30, 2020 		    Twelve Months Ended
September 30, 2020 		 

Interest expense

   $ 50,519     $ 186,503  

Adjustments:

    

Proportionate share adjustments related to interest of consolidated and unconsolidated partnerships

     (1,043 )      (1,272 ) 

Debt prepayment penalties

     (7,930 )      (19,506 ) 

Interest income earned on securitization trust investment

     (2,265 )      (8,778 ) 
  

 

 

   

 

 

 

Adjusted Interest Expense

   $ 39,281     $ 156,947  
  

 

 

   

 

 

 

Preferred distributions

     1,687       7,323  
  

 

 

   

 

 

 

Adjusted Interest Expense and Preferred Distributions

   $ 40,968     $ 164,270  
  

 

 

   

 

 

 

Annualized Adjusted Interest Expense

   $ 157,124    
  

 

 

   

Annualized Adjusted Interest Expense and Preferred Distributions

   $ 163,872    
  

 

 

   

Liquidity and Capital Resources

Liquidity

Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flow from operations. Additional sources are proceeds from dispositions of apartment communities, proceeds from refinancing existing property debt, borrowings under new property debt, borrowings under our revolving credit facility, and proceeds from equity offerings.

As of September 30, 2020, our available liquidity exceeded $1.0 billion. We have commitments for, and expect to spend, approximately $111 million on long-cycle redevelopment and development projects underway.

Our available liquidity consists of:

 

  •  

$228.4 million in cash and cash equivalents;

 

  •  

$27.1 million of restricted cash, excluding amounts related to tenant security deposits, consists primarily of escrows held by lenders for capital additions, property taxes, and insurance; and

 

  •  

$793.4 million of available capacity to borrow under our revolving credit facility after consideration of $6.6 million of letters of credit backed by the facility.

Additional liquidity may also be provided through property debt financing at properties unencumbered by debt. As of September 30, 2020, we held unencumbered communities with an estimated fair market value, based on GAV, of approximately $3.6 billion.

Uses for liquidity include normal operating activities, payments of principal and interest on outstanding property debt, capital expenditures, dividends paid to stockholders, distributions paid to noncontrolling interest partners, and acquisitions of apartment communities. We use our cash and cash equivalents and our cash provided by operating activities to meet short-term liquidity needs. In the event that our cash and cash equivalents and cash provided by operating activities are not sufficient to cover our short-term liquidity needs, we have additional means, such as short-term borrowing availability and proceeds from apartment community sales and refinancings. We may use our revolving credit facility for working capital and other short-term

 

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purposes, such as funding investments on an interim basis. We expect to meet our long-term liquidity requirements, including redevelopment spending and apartment community acquisitions, through primarily non-recourse, long-term borrowings, the issuance of equity securities (including OP Units), the sale of apartment communities, and cash generated from operations. Additionally, we expect to meet our liquidity requirements associated with our debt maturities. Our revolving credit facility matures on January 22, 2022, and our term loan matures on April 20, 2021, prior to consideration of its one-year extension option.

The following table summarizes the payments due under our non-recourse property debt commitments, excluding debt issuance costs, as of September 30, 2020 (in thousands):

 

     Total      Less than
One Year
(2020) 		     1-3 Years
(2021-2022) 		     3-5 Years
(2023-2024) 		     More than
Five Years
(2025 and
Thereafter) 		 

Non-recourse property debt

   $ 4,079,251      $ 18,656      $ 472,602      $ 578,427      $ 3,009,566  

During the nine months ended September 30, 2020, we placed $688.5 million of new property debt for incremental proceeds of $370.2 million.

Leverage and Capital Resources

The availability of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to historical levels. Recent events have increased volatility in interest rates, resulting in substantial movements, both up and down, in short periods of time. Capital is still available, but with fewer sources than in past periods. Any adverse changes in the lending environment could negatively affect our liquidity. We believe we have mitigated much of this exposure by reducing our short and intermediate term maturity risk through refinancing such loans with long-dated, fixed-rate property debt. However, if property financing options become unavailable for our future debt needs, we may consider alternative sources of liquidity, such as reductions in capital spending or proceeds from apartment community dispositions.

As of September 30, 2020, approximately 89% of our leverage consisted of property-level, non-recourse, long-dated, amortizing debt. Approximately 98% of our property-level debt is fixed-rate, which provides a hedge against increases in interest rates, capitalization rates, and inflation. The weighted-average remaining term to maturity of our property-level debt was 8.2 years. On average, 5.0% of our unpaid principal balances will mature each year from 2021 through 2023.

While our primary source of leverage is property-level, non-recourse, long-dated, fixed-rate, amortizing debt, we also have a credit facility with a syndicate of financial institutions. As of September 30, 2020, we had no outstanding borrowings under our revolving credit facility and had capacity to borrow up to $793.4 million after consideration of $6.6 million of letters of credit backed by the facility.

During the nine months ended September 30, 2020, we amended our Second Amended and Restated Senior Secured Credit Agreement to include a $350.0 million term loan that matures on April 20, 2021. The term loan represents approximately 9% of our total leverage, includes a one-year extension option, and bears interest at 30-day LIBOR plus 185-basis points with a 50-basis point LIBOR floor.

As of September 30, 2020, our outstanding preferred OP Units represented approximately 2% of our total leverage. Preferred OP Units are redeemable at the holder’s option; however, for illustrative purposes, we compute the weighted-average maturity of our total leverage assuming a 10-year maturity on the units.

The combination of non-recourse property-level debt, borrowings under our revolving credit facility, term loan, preferred OP Units, and redeemable noncontrolling interests in a consolidated real estate partnership

 

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comprise our total leverage. The weighted-average remaining term to maturity for our total leverage described above was 7.6 years as of September 30, 2020.

Under the revolving credit facility and term loan, we have agreed to maintain a Fixed Charge Coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the trailing 12-month period ended September 30, 2020, our Fixed Charge Coverage ratio was 1.93x. We expect to remain in compliance with this covenant during the next 12 months.

We like the discipline of financing our investments in real estate through the use of fixed-rate, amortizing, non-recourse property debt, as the amortization gradually reduces our leverage and reduces our refunding risk, and the fixed-rate provides a hedge against increases in interest rates, and the non-recourse feature avoids entity risk.

Changes in Cash, Cash Equivalents, and Restricted Cash

The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing and financing activities, which are presented in our condensed consolidated statements of cash flows in Item 1 of this report.

Operating Activities

For the nine months ended September 30, 2020, net cash provided by operating activities was $265.9 million. Our operating cash flow is affected primarily by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment communities. Cash provided by operating activities for the nine months ended September 30, 2020, decreased by $12.9 million compared to 2019. The decrease was due to lower contribution from our Same Store and Redevelopment and Development communities, which were negatively impacted by the pandemic and governmental lockdown, and lower net operating income associated with communities sold. The decrease was offset partially by higher contribution from our Acquisition and Other Real Estate communities.

Investing Activities

For the nine months ended September 30, 2020, our net cash used in investing activities of $356.0 million consisted primarily of capital expenditures and cash used in the purchase of Hamilton on the Bay, offset partially by proceeds from the disposition of one apartment community.

Total capital additions at apartment communities totaled $258.3 million and $296.1 million during the nine months ended September 30, 2020 and 2019, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.

We categorize capital spending for communities in our portfolio broadly into seven primary categories:

 

  •  

capital replacements, which do not increase the useful life of an asset from its original purchase condition. Capital replacements represent capital additions made to replace the portion of our investment in acquired apartment communities consumed during our period of ownership;

 

  •  

capital improvements, which represent capital additions made to replace the portion of acquired apartment communities consumed prior to our period of ownership;

 

  •  

capital enhancements, which may include kitchen and bath remodeling, energy conservation projects, and investments in more durable, longer-lived materials designed to reduce costs, all of which differ from redevelopment additions in that they are generally lesser in scope and do not significantly disrupt property operations;

 

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  •  

initial capital expenditures, which represent capital additions contemplated in the underwriting of our recently acquired communities;

 

  •  

redevelopment additions, which represent capital additions intended to enhance the value of the apartment community through the ability to generate higher average rental rates, and may include costs related to entitlement, which enhance the value of a community through increased density, and costs related to renovation of exteriors, common areas, or apartment homes;

 

  •  

development additions, which represent construction and related capitalized costs associated with the ground-up development of apartment communities; and

 

  •  

casualty capital additions, which represent capitalized costs incurred in connection with the restoration of an apartment community after a casualty event.

We exclude the amounts of capital spending related to commercial spaces and to apartment communities sold or classified as held for sale at the end of the period from the foregoing measures. We have also excluded from these measures indirect capitalized costs, which are not yet allocated to communities with capital additions, and their related capital spending categories.

A summary of the capital spending for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, are presented below (in thousands):

 

     Nine Months Ended
September 30, 		 
     2020      2019  

Capital replacements

   $ 28,330      $ 27,834  

Capital improvements

     9,066        13,528  

Capital enhancements

     23,178        66,007  

Redevelopment

     106,873        74,666  

Development

     79,486        93,461  

Initial capital expenditures

     3,989        15,200  

Casualty

     7,411        5,420  
  

 

 

    

 

 

 

Total apartment community capital additions

   $ 258,333      $ 296,116  

Plus: additions related to commercial spaces

     2,391        4,221  

Plus: additions related to apartment communities sold or held for sale

     356        4,362  
  

 

 

    

 

 

 

Consolidated capital additions

   $ 261,080      $ 304,699  

Plus: net change in accrued capital spending

     11,189        (11,950 ) 
  

 

 

    

 

 

 

Capital expenditures per condensed consolidated statement of cash flows

   $ 272,269      $ 292,749  
  

 

 

    

 

 

 

For the nine months ended September 30, 2020 and 2019, we capitalized $10.8 million and $8.0 million of interest costs, respectively, and $25.5 million and $26.9 million of other direct and indirect costs, respectively.

We invested $23.2 million in capital enhancements and $186.4 million in redevelopment and development during the nine months ended September 30, 2020. Capital enhancement spend decreased $42.8 million for the nine months ended September 30, 2020, compared to 2019, due primarily to the delay of certain capital projects in response to the potential economic impacts of COVID-19 and the governmental lockdown. The increase in redevelopment spending is driven by the full redevelopments of the North Tower at Flamingo Point and 707 Leahy. Further details regarding our redevelopment and development activities, including apartment communities constructed and delivered as of September 30, 2020, is discussed in the Executive Overview section above.

 

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Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2020 increased by $423.0 million compared to nine months ended September 30, 2019. The change was due primarily to cash proceeds from the sale of a partial interest in the California joint venture, cash proceeds from our term loan, and lower payments to equity holders, offset partially by higher principal repayments on non-recourse debt and higher payments on our revolving credit facility.

Equity Transactions

The following table presents Aimco’s dividend and distribution activity during the nine months ended September 30, 2020 (in thousands):

 

Cash distributions paid to holders of OP Units

   $ 15,551  

Cash distributions paid to holders of noncontrolling interests in consolidated real estate partnerships

     312  

Cash dividends paid by Aimco to common stockholders

     183,003  
  

 

 

 

Total cash dividends and distributions paid by Aimco

   $ 198,866  
  

 

 

 

Future Capital Needs

We expect to fund any future acquisitions, redevelopment, development, and other capital spending principally with proceeds from apartment community sales, short-term borrowings, debt and equity financing, and operating cash flows. Our near-term business plan does not contemplate the issuance of equity. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for 2020 and beyond.

For the Years Ended December 31, 2019, 2018, and 2017

Executive Overview

Our principal financial objective is to provide predictable and attractive returns to our equity holders. We measure our long-term total return using Net Asset Value, or NAV, which is used by many investors because the value of company assets can be readily estimated, even for non-earning assets such as land or properties under development. NAV has the advantage of incorporating the investment decisions of thousands of real estate investors, enhancing comparability among companies that have differences in their accounting, avoiding disparity that can result from application of GAAP to investment properties and various ownership structures. Some investors focus on multiples of AFFO and Nareit FFO. We use Pro forma FFO as a secondary measure of operational performance. In 2019, AFFO per share grew $0.04, to $2.20 per share.

Year-over-year as of December 31, 2019, our NAV per share increased by about 3.9%.

Financial Highlights

Net income attributable to common stockholders per common share, on a dilutive basis, decreased by $1.19 during the year ended December 31, 2019 compared to 2018, primarily due to lower gains from dispositions.

We sold our Asset Management business in July 2018, accepting near-term earnings dilution as the price of an increased long-term growth rate. In 2019, we overcame these earnings headwinds and Pro forma FFO per share increased by $0.05, or 2.0%, for the year ended December 31, 2019 compared to 2018. For the three months ended December 31, 2019 compared to 2018, the first comparative period without the Asset Management business, our Pro forma FFO and AFFO per share increased 5% and 12%, respectively.

 

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The year-over-year increase in Pro Forma FFO was due primarily to contribution from our same store segment’s (“Same Store”) property net operating income growth of 4.3%, driven by a 3.8% increase in revenue, partially offset by a 2.4% increase in expenses. The increase in Same Store net operating income was offset partially by earnings dilution from the sale of the Asset Management business and lower tax benefit. AFFO per share also increased by $0.04, or 1.9%, for the year ended December 31, 2019 compared to 2018 due to the $0.05 increase in Pro forma FFO per share, partially offset by a $0.01 per share increase in capital replacement spending.

Our business is organized around five areas of strategic focus: operational excellence; redevelopment and development; portfolio management; balance sheet; and team and culture. The results from the execution of our business plan in 2019 are further described in the sections that follow.

Operational Excellence

We own and operate a portfolio of apartment communities, diversified by both geography and price point. As of December 31, 2019, our portfolio included 124 apartment communities with 32,839 apartment homes in which we held an average ownership of approximately 99%. Approximately 80% of the value of our portfolio, measured by gross asset value (the estimated fair value of our communities), was attributable to Same Store communities.

Our property management team produced solid results for our portfolio for the year ended December 31, 2019. Same Store highlights include:

 

  •  

Average daily occupancy of 97.1%, 60 basis points higher than the year ended 2018;

 

  •  

Net operating income increased 4.3% with a 73.7% net operating income margin, 40 basis points higher than the margin for the year ended 2018; and

 

  •  

Rent increases on renewals and new leases averaged 4.9% and 1.9%, respectively, for a weighted average increase of 3.4%, 40 basis points higher than the year ended 2018.

Our focus on efficient operations through productivity initiatives such as centralization of administrative tasks, optimization of economies of scale at the corporate level, increased automation, and investment in more durable, longer-lived materials has helped us control operating expenses. These and other innovations contributed to limiting growth in Same Store controllable operating expense, defined as property expenses less taxes, insurance, and utility expenses, compounding for the past 12 years at an annual rate of negative 0.2%. Our 2019 controllable operating expenses were flat compared to 2018.

Redevelopment and Development

Our second line of business is the redevelopment and some development of apartment communities. Through redevelopment activities, we expect to create value by repositioning communities within our portfolio. We undertake ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the redevelopment of an existing community. When warranted, we rely on the expertise and credit of a third-party developer familiar with the local market to limit our exposure to construction risk. Over the past five years, we have spent approximately $1.0 billion on redevelopment and development, targeting free cash flow internal rates of return of approximately 9% to 11% on these investments.

We invest to earn risk-adjusted returns in excess of those expected from the apartment communities sold in paired trades to fund the redevelopment or development. Of these two activities, we generally favor redevelopment because it permits adjustment to the scope and timing of spending to align with changing market conditions and customer preferences.

During the year ended December 31, 2019, we invested $229.8 million in redevelopment and development, an increase of approximately 30% compared to 2018. We continued redevelopment activities at Bay Parc and the

 

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ground-up construction at Parc Mosaic and The Fremont on the Anschutz Medical Campus. We also began the redevelopment of the North Tower at Flamingo Point and 707 Leahy, and ground-up construction at Eldridge Townhomes adjacent to our Elm Creek apartment community.

The following table summarizes our significant redevelopment and development communities (dollars in millions):

 

    

Location

  Apartment
Homes
Approved for
Redevelopment 		    Apartment
Homes
Completed 		    Percentage of
Completed
Homes
Leased 		    Estimated Net
Redevelopment
Investment 		    Expected
Initial
Occupancy 		 

Short-cycle redevelopments:

            

Bay Parc

   Miami, FL     105       60       97 %    $ 28.3       N/A  

Long-cycle redevelopments:

            

707 Leahy(1)

   Redwood City, CA     110       —         —   %      23.7       1Q 2020  

Eldridge (formerly Elm Creek) Townhomes

   Elmhurst, IL     58       —         —   %      35.1       2Q 2020  

Flamingo Point(2)

   Miami Beach, FL     886       —         —   %      280.0       3Q 2021  

The Fremont

   Denver, CO (MSA)     253       —         —   %      87.0       3Q 2020  

Parc Mosaic(3)

   Boulder, CO     226       185       59 %      123.4       3Q 2019  
    

 

 

   

 

 

     

 

 

   

Total

       1,638       245       $ 577.5    
    

 

 

   

 

 

     

 

 

   

 

(1)

At 707 Leahy, we completed construction on the first building, containing 12 apartment homes, in January. Construction on the remaining homes is on schedule to be complete during the three months ending June 30, 2020.

(2)

At Flamingo Point, we completed construction on the entryway, retail, and amenities during the three months ended December 31, 2019, and continued the full renovation of the North Tower.

(3)

At Parc Mosaic, we completed three buildings in 2019, the first in August, the second in October, and the third in late December. As of December 31, 2019, the first two buildings were 81% leased and in January, we welcomed the first residents of the third building. The fourth, and final, building was delayed slightly and is now expected to be finished during the three months ending March 31, 2020. Notwithstanding this delay, we expect to achieve stabilized occupancy during the three months ending December 31, 2020, consistent with prior projections.

As of December 31, 2019, our total estimated net investment at redevelopment and development communities is $577.5 million, with a projected weighted-average net operating income yield on these investments of 5.3%, assuming untrended rents. As of December 31, 2019, $309.2 million of this total has been funded. The remaining estimated net investment of $268.3 million on these communities is expected to be funded in 2020 and future years, on a leverage-neutral basis, with proceeds from sales of apartment communities with lower forecasted free cash flow internal rates of return.

When possible, we prefer redevelopments that can be completed one apartment home at a time, when that home is vacated and available for renovation, or one floor at a time, thereby limiting the number of down homes and lease-up risk. We currently have six short-cycle projects, including Bay Parc, ongoing in our portfolio. During the year ended December 31, 2019, we completed 150 apartment homes, with another 21 homes under construction as of December 31, 2019.

During the year ended December 31, 2019, we leased 251 redeveloped or newly developed apartment homes. As of December 31, 2019, our exposure to lease-up at active redevelopment and developments was 866 apartment homes, or less than 3% of our homes.

Please see “Liquidity and Capital Resources—Redevelopment and Development” for additional information regarding our redevelopment and development investment during the year ended December 31, 2019.

 

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Portfolio Management

Our portfolio of apartment communities is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality, and is also diversified across several of the largest markets in the United States. We measure the quality of apartment communities in our portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance and analysis. Under this rating system, we classify as “A” quality apartment communities those earning rents greater than 125% of local market average; as “B” quality apartment communities those earning rents between 90% and 125% of local market average; as “C+” quality apartment communities those earning rents greater than $1,100 per month, but lower than 90% of local market average; and as “C” quality apartment communities those earning rents less than $1,100 per month and lower than 90% of local market average. We classify as “B/B+” quality a portfolio that on average earns rents between 100% and 125% of local market average rents. Although some companies and analysts within the multifamily real estate industry use apartment community quality ratings of “A,” “B,” and “C,” some of which are tied to local market rent averages, the metrics used to classify apartment community quality as well as the period for which local market rents are calculated may vary from company to company. Accordingly, this rating system for measuring apartment community quality is neither broadly nor consistently used in the multifamily real estate industry.

The following table summarizes information about our portfolio relative to the market for the three months ended December 31, 2019:

 

Average revenue per Aimco apartment home(1)

   $ 2,272  

Portfolio average rents as a percentage of local market average rents

     113 % 

Percentage A (4Q 2019 average revenue per Aimco apartment home $2,943)

     54 % 

Percentage B (4Q 2019 average revenue per Aimco apartment home $2,006)

     29 % 

Percentage C+ (4Q 2019 average revenue per Aimco apartment home $1,782)

     17 % 

 

(1)

Represents average monthly rental and other property revenues (excluding resident reimbursement of utility cost) divided by the number of occupied apartment homes as of the end of the period.

Our average revenue per apartment home was $2,272 for the three months ended December 31, 2019, representing an increase of 7% compared to the same period in 2018, and a 7.2% compounded annual growth rate over the past five years. This increase is due to growth in Same Store revenue as well as our acquisition activities, lease-up of redevelopment and acquisition communities, and the sale of communities with average monthly revenues per apartment home lower than those of the retained portfolio.

During the year ended December 31, 2019, we reallocated capital from slower-growth markets such as Chicago and reinvested the proceeds in higher-growth markets such as Miami, Denver, and Boston.

As part of our portfolio strategy, we may seek to sell communities with lower expected free cash flow internal rates of return and reinvest the proceeds from such sales in accretive uses such as capital enhancements, share repurchases, and selective acquisitions with projected free cash flow internal rates of return higher than expected from the communities being sold. Through this disciplined approach to capital allocation, we will increase the quality and expected growth rate of our portfolio.

As we execute our portfolio strategy, we expect to increase average revenue per Aimco apartment home at a rate greater than market rent growth, increase free cash flow margins, and maintain sufficient geographic and price point diversification to limit volatility and concentration risk.

Acquisitions

We follow a disciplined paired trade policy in making investments. We evaluate potential acquisitions seeking free cash flow internal rates of returns higher than those of the communities being sold. We prefer well-located real estate where land is a significant percentage of total value and provides potential upside from development or redevelopment.

 

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During the year ended December 31, 2019, we acquired three properties: One Ardmore in Ardmore, Pennsylvania; Prism (50 Rogers), a community under construction in Cambridge, Massachusetts; and 1001 Brickell Bay Drive in Miami, Florida. Together, these acquisitions have an expected weighted-average free cash flow internal rate of return of 9%, approximately 300 basis points better than expected from the properties being sold, or to be sold, in paired trades to fund the acquisitions.

Mezzanine Investment

On November 26, 2019, we made a five-year, $275.0 million mezzanine loan at a 10% annual rate to the partnership owning Parkmerced Apartments. The loan is secured by a second-priority deed of trust. We simultaneously received a 10-year option to acquire a 30% interest in the partnership at an exercise price of $1.0 million, increased by 30% of future capital spending to progress development and redevelopment of Parkmerced Apartments.

Parkmerced Apartments is a 152-acre site in the southwest corner of San Francisco, currently improved with 3,221 apartment homes completed shortly before and after World War II. These apartment homes are subject to City of San Francisco rent control. The development of the site is governed by a development agreement that allows for 8,900 total residential units, with the new units exempt from City of San Francisco rent control. The partnership, which is the borrower and in which we have the option to acquire 30% ownership, owns 3,165 of the existing rent-controlled apartment homes, which excludes apartment homes transferred as part of an earlier phase of development to which we are not a party, as well as the vested right to develop 4,093 of the new market-rate homes.

The mezzanine loan provides us with current income with minimal expected downside risk. The option is expected to provide us with an opportunity to participate in substantial value creation from the vested development rights.

Dispositions

During the year ended December 31, 2019, we sold 12 apartment communities, generating net proceeds of $619.4 million used to fund acquisitions, redevelopment, development, the repurchase of Aimco shares in the fourth quarter of 2018, and other capital investments. We delayed approximately $300 million of planned fourth quarter 2019 and January 2020 sales. While this delay temporarily increased leverage, we expect a better execution as the transaction market remains deep, liquid, and attractively priced.

Balance Sheet

Leverage

Our leverage strategy seeks to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; build financial flexibility by maintaining ample unused and available credit as well as holding properties with substantial value unencumbered by property debt; and use partners’ capital when it enhances financial returns or reduces investment risk.

Our leverage includes our share of long-term, non-recourse property debt encumbering apartment communities, outstanding borrowings on the revolving credit facility, outstanding preferred equity, and redeemable noncontrolling interests in a consolidated real estate partnership. Please see “—Liquidity and Capital Resources” for additional information regarding our leverage.

 

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Our target leverage ratios are Proportionate Debt and Preferred Equity to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends greater than 2.5x. Our leverage ratios for the three months ended December 31, 2019, are presented below:

 

Proportionate Debt to Adjusted EBITDAre

     7.4x  

Proportionate Debt and Preferred Equity to Adjusted EBITDAre

     7.6x  

Adjusted EBITDAre to Adjusted Interest Expense

     3.7x  

Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends

     3.5x  

We calculate Adjusted EBITDAre and Adjusted Interest Expense used in our leverage ratios based on the most recent three month amounts, annualized. The sales delay mentioned above increased Proportionate Debt to Adjusted EBITDAre and Proportionate Debt and Preferred Equity to Adjusted EBITDAre by 0.3x as of December 31, 2019. We expect a gradual decline in leverage to EBITDAre ratios throughout 2020, reaching approximately 6.4x and 6.5x, respectively, at year end. In future years, we expect earnings growth from completed redevelopments will increase EBITDAre and further reduce our leverage ratios.

Please see “—Non-GAAP Measures—Leverage Ratios” for further information about the calculation of our leverage ratios.

Refinancing Activity

During the year ended December 31, 2019, we financed $772.6 million of new non-recourse, fixed-rate property debt. These loans have a weighted-average interest rate of 3.32%, a weighted-average term to maturity of 11.4 years and contributed an approximately 29 basis point decrease in our annual cost of leverage compared to 2018.

Liquidity

Our liquidity consists of cash balances and available capacity on our revolving credit facility. As of December 31, 2019, we had cash and restricted cash of $177.7 million and had the capacity to borrow up to $517.8 million on our revolving credit facility, after consideration of $7.2 million letters of credit backed by the facility. We use our credit facility primarily for working capital and other short-term purposes and to secure letters of credit.

We manage our financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. As of December 31, 2019, we held unencumbered apartment communities with an estimated fair market value, based on GAV, of approximately $2.4 billion.

Two credit rating agencies rate our creditworthiness, using different methodologies and ratios for assessing our credit, and both have rated our credit and outlook as BBB- (stable), an investment grade rating. Although some of the ratios they use are similar to those we use to measure our leverage, there are differences in our methods of calculation and therefore our leverage ratios disclosed above are not indicative of the ratios that may be calculated by these agencies.

Equity Capital Activities

On February 3, 2019, Aimco’s board of directors declared a special dividend on the common stock that consisted of $67.1 million in cash and 4.5 million shares of Aimco Common Stock. The special dividend also included the regular quarterly cash dividend of $0.39 per share. Simultaneously, Aimco’s board of directors authorized a reverse stock split, effective on February 20, 2019, in which every 1.03119 Aimco common share was combined into one Aimco common share, which was effective at the close of business on February 20, 2019. Taken together, the total number of shares outstanding after the stock dividend and reverse split was unchanged from the number of shares outstanding immediately prior to the two actions. Please refer to Notes 7 and 8 to the consolidated financial statements for further information regarding these transactions.

 

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On January 28, 2020, our board of directors declared a quarterly cash dividend of $0.41 per share of Aimco Common Stock, representing an increase of 5% compared to the regular quarterly dividends paid in 2019. This amount was payable on February 28, 2020, to stockholders of record on February 14, 2020.

Team and Culture

Our team and culture are keys to our success. Our intentional focus on a collaborative and productive culture based on respect for others and personal responsibility is reinforced by a preference for promotion from within. We focus on succession planning and talent development to produce a strong, stable team that is the enduring foundation of our success. We offer benefits reinforcing our value of caring for each other, including paid time for parental leave, paid time annually to volunteer in local communities, college scholarships for the children of team members, an emergency fund to help team members in crisis, financial support for our team members who are becoming United States citizens, and a bonus structure at all levels of the organization. We also pay full compensation and benefits for team members who are actively deployed by the United States military. Out of hundreds of participating companies in 2019, Aimco was one of only seven recognized as a “Top Workplace” in Colorado for each of the past seven years. Aimco was also recognized as a Top Workplace in the Bay Area in 2019. Also in 2019, Aimco was the only real estate company to receive a BEST award from the Association for Talent Development in recognition of our company-wide success in talent development, marking our second consecutive year receiving this award.

Results of Operations

Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we redevelop, acquire, and dispose of our apartment communities affect our operating results.

The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the consolidated financial statements, which are included elsewhere in this information statement.

Year Ended December 31, 2019, Compared to December 31, 2018

Net income attributable to Aimco decreased by $192.1 million for the year ended December 31, 2019 compared to 2018, as described more fully below.

Property Management

We have four segments: Same Store, Redevelopment and Development, Acquisition, and Other Real Estate. Our Same Store segment includes communities that have reached a stabilized level of operations as of the beginning of a two-year comparable period and maintained it throughout the current and comparable prior year and are not expected to be sold within 12 months. Our Redevelopment and Development segment includes communities that are currently under construction that have not achieved a stabilized level of operations, and those that have been completed in recent years that have not achieved and maintained stabilized operations for both the current and comparable prior year. Our Acquisition segment includes those communities that we have acquired since the beginning of a two-year comparable period. Our Other Real Estate segment primarily includes apartment communities that are subject to limitations on rent increases, apartment communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale, certain retail spaces, and 1001 Brickell Bay Drive.

As of December 31, 2019, our Same Store segment included 91 apartment communities with 26,649 apartment homes.

 

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From December 31, 2018, to December 31, 2019, on a net basis, our Same Store segment decreased by two apartment communities and increased by 744 apartment homes. These changes consisted of:

 

  •  

the addition of eight redeveloped and developed apartment communities with 3,008 apartment homes previously classified in the Redevelopment and Development segment, now classified as Same Store upon maintaining stabilized operations for the entirety of the periods presented;

 

  •  

the addition of one apartment community with 463 apartment homes, previously classified in the Acquisition segment, now classified as Same Store because we have now owned it for the entirety of both periods presented;

 

  •  

the addition of one apartment community with 246 apartment homes, previously classified in the Other Real Estate segment, which maintained stabilized operations for the entirety of the periods presented following a casualty event;

 

  •  

the addition of one apartment community with 72 apartment homes that we separated into a newly branded stand-alone community from an existing community that was previously classified in the Redevelopment and Development segment, resulting in an increase of one community with no change in the total number of apartment homes;

 

  •  

the reduction of two apartment communities with 153 apartment homes for which we commenced redevelopment during the period and were reclassified to the Redevelopment and Development segment;

 

  •  

the reduction of one apartment community with 78 apartment homes that we expect to sell within 12 months that is now classified in the Other Real Estate segment; and

 

  •  

the reduction of 10 apartment communities with 2,814 apartment homes that were sold as of December 31, 2019.

As of December 31, 2019, our Redevelopment and Development segment included seven apartment communities with 3,143 apartment homes, our Acquisition segment included seven apartment communities with 1,590 apartment homes, and our Other Real Estate segment included 15 apartment communities with 1,315 apartment homes and one office building.

We use proportionate property net operating income to assess the operating performance of our communities. Proportionate property net operating income reflects our share of rental and other property revenues, excluding resident utility reimbursement, less direct property operating expenses, net of resident utility reimbursement, for consolidated communities. Accordingly, the results of operations of our segments discussed below are presented on a proportionate basis and exclude the results of four apartment communities with 142 apartment homes that we do not consolidate.

We do not include offsite costs associated with property management, casualty losses, or the results of apartment communities sold or held for sale, reported in consolidated amounts, in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below.

Please refer to Note 13 to the consolidated financial statements, which are included elsewhere in this information statement, for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues attributable to real estate and property operating expenses attributable to real estate.

 

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Proportionate Property Net Operating Income

The results of our segments for the years ended December 31, 2019 and 2018, as presented below, are based on the apartment community classifications as of December 31, 2019.

 

     Year Ended
December 31, 		               
(in thousands)    2019      2018      $ Change      % Change  

Rental and other property revenues, before utility reimbursements:

           

Same Store

   $ 691,379      $ 665,835      $ 25,544        3.8 % 

Redevelopment and Development

     75,522        76,687        (1,165 )       (1.5 %) 

Acquisition

     42,038        27,923        14,115        50.5 % 

Other Real Estate

     45,105        37,647        7,458        19.8 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     854,044        808,092        45,952        5.7 % 

Property operating expenses, net of utility reimbursements:

           

Same Store

     181,802        177,466        4,336        2.4 % 

Redevelopment and Development

     27,919        27,836        83        0.3 % 

Acquisition

     11,715        7,689        4,026        52.4 % 

Other Real Estate

     17,717        14,910        2,807        18.8 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     239,153        227,901        11,252        4.9 % 

Proportionate property net operating income:

           

Same Store

     509,577        488,369        21,208        4.3 % 

Redevelopment and Development

     47,603        48,851        (1,248 )       (2.6 %) 

Acquisition

     30,323        20,234        10,089        49.9 % 

Other Real Estate

     27,388        22,737        4,651        20.5 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 614,891      $ 580,191      $ 34,700        6.0 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2019, compared to 2018, our Same Store proportionate property net operating income increased by $21.2 million, or 4.3%. This increase was attributable primarily to a $25.5 million, or 3.8%, increase in rental and other property revenues due to higher average revenues of $69 per apartment home comprised of increases in rental rates and a 60 basis point increase in average daily occupancy. Renewal rents increased by 4.9% and new lease rents increased by 1.9%, resulting in a weighted-average increase of 3.4%. The increase in Same Store rental and other property revenues was offset partially by a $4.3 million, or 2.4%, increase in property operating expenses due primarily to higher real estate taxes. Controllable operating expenses, which exclude utility costs, real estate taxes, and insurance, were flat for the year ended December 31, 2019, compared to 2018.

Redevelopment and Development proportionate property net operating income decreased by $1.2 million, or 2.6%, for the year ended December 31, 2019, compared to 2018. This decrease was attributable primarily to de-leasing at Flamingo Point and 707 Leahy in preparation for redevelopment, offset partially by increased occupancy driven by the lease-up of Park Towne Place.

Acquisition proportionate property net operating income increased by $10.1 million, or 49.9%, for the year ended December 31, 2019, compared to 2018. This increase was attributable primarily to the 2019 acquisition of One Ardmore and a full period of operating activity at the four Philadelphia communities acquired in 2018, compared to eight months of operations during the year ended December 31, 2018.

Other Real Estate proportionate property net operating income increased by $4.7 million, or 20.5%, for the year ended December 31, 2019, compared to 2018 due primarily to the acquisition of 1001 Brickell Bay Drive in 2019.

 

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Year Ended December 31, 2018, Compared to December 31, 2017

Net income attributable to Aimco and net income attributable to AIR OP increased by $350.5 million and $370.4 million, respectively, for the year ended December 31, 2018, as compared to 2017, as described more fully below.

Proportionate Property Net Operating Income

As of December 31, 2018, excluding apartment communities sold during 2019, our Same Store segment consisted of 83 Same Store apartment communities with 23,091 apartment homes, our Redevelopment and Development segment included 13 apartment communities with 6,294 apartment homes, our Acquisition segment included seven apartment communities with 1,943 apartment homes, and our Other Real Estate segment included 15 apartment communities with 1,483 apartment homes.

The results of our segments for the years ended December 31, 2018 and 2017, as presented below, are based on the apartment community classifications as of December 31, 2018, and exclude amounts related to apartment communities sold during 2019. Based on the nature of our apartment community classifications, there is no comparison of the years ended December 31, 2018 and 2017. The results of operations for these communities are reflected in the table below.

 

     Year Ended
December 31, 		               
(in thousands)    2018      2017      $ Change      % Change  

Rental and other property revenues, before utility reimbursements:

           

Same Store

   $ 534,389      $ 517,429      $ 16,960        3.3 % 

Redevelopment and Development

     182,662        160,045        22,617        14.1 % 

Acquisition

     48,474        17,475        30,999        177.4 % 

Other Real Estate

     42,567        41,226        1,341        3.3 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     808,092        736,175        71,917        9.8 % 

Property operating expenses, net of utility reimbursements:

           

Same Store

     138,187        133,517        4,670        3.5 % 

Redevelopment and Development

     60,277        56,475        3,802        6.7 % 

Acquisition

     14,031        7,040        6,991        99.3 % 

Other Real Estate

     15,406        14,727        679        4.6 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     227,901        211,759        16,142        7.6 % 

Proportionate property net operating income:

           

Same Store

     396,202        383,912        12,290        3.2 % 

Redevelopment and Development

     122,385        103,570        18,815        18.2 % 

Acquisition

     34,443        10,435        24,008        230.1 % 

Other Real Estate

     27,161        26,499        662        2.5 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 580,191      $ 524,416      $ 55,775        10.6 % 
  

 

 

    

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2018, compared to 2017, Same Store proportionate property net operating income increased by $12.3 million, or 3.2%. This increase was attributable primarily to a $17.0 million, or 3.3%, increase in rental and other property revenues due to higher average revenues of $53 per apartment home comprised of increases in rental rates and a 60 basis point increase in average daily occupancy. Renewal rents increased by 4.9% and new lease rents increased by 1.9%, resulting in a weighted-average increase of 3.4%. The increase in Same Store and other property revenues was offset partially by a $4.7 million, or 3.5%, increase in property operating expenses due primarily to increases in real estate taxes and repairs and maintenance costs.

 

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During the year ended December 31, 2018, compared to 2017, controllable operating expenses increased by $1.0 million, or 1.5%.

Redevelopment and Development proportionate property net operating income increased by $18.8 million, or 18.2%, for the year ended December 31, 2018, compared to 2017 due to leasing activities at communities, offset partially by decreases due to apartment homes taken out of service for redevelopment.

Acquisition proportionate property net operating income increased by $24.0 million, or 230.1%, for the year ended December 31, 2018, compared to 2017 due to the 2018 acquisitions of Bent Tree Apartments, Avery Row, and four apartment communities in Philadelphia.

Non-Segment Real Estate Operations

Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, and the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.

For the years ended December 31, 2019, 2018, and 2017, casualty losses totaled $9.0 million, $4.0 million, and $8.2 million, respectively. Casualty losses during the year ended December 31, 2019, included one major claim due to storm-related flooding at our One Canal apartment community and several other claims due to fire damage. Casualty losses for the year ended December 31, 2018, included several claims due primarily to storm and fire damage, offset partially by recovery from insurance carriers for insured losses in excess of policy limits. Casualty losses were elevated during the year ended December 31, 2017, due primarily to hurricane damage.

For the years ended December 31, 2019, 2018, and 2017, apartment communities that were sold or classified as held for sale generated net operating income of $16.6 million, $54.6 million, and $91.1 million, respectively.

Asset Management Results

For the year ended December 31, 2019, there was no net operating income attributable to the Asset Management business, which we sold in July 2018.

For the years ended December 31, 2018 and 2017, net operating income attributable to the Asset Management business was $28.9 million and $51.8 million, respectively.

Depreciation and Amortization

For the year ended December 31, 2019, compared to 2018 and the year ended December 31, 2018, compared to 2017, depreciation and amortization expense increased by $2.4 million and $11.6 million, respectively, due primarily to apartment communities acquired in 2019 and 2018 and renovated apartment homes placed in service after their completion. This increase was offset partially by decreases in depreciation associated with apartment communities sold and with communities owned by partnerships served by our Asset Management business, which we sold in 2018.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2019, were relatively flat compared to the year ended December 31, 2018.

For the year ended December 31, 2018, compared to 2017, general and administrative expenses increased $2.6 million, due primarily to higher variable incentive compensation cost.

 

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Other Expenses, Net

Other expenses, net, includes costs associated with our risk management activities, partnership administration expenses, and certain non-recurring items.

For the year ended December 31, 2019, compared to 2018, other expenses, net, increased by $15.3 million, related primarily to the resolution of our litigation against Airbnb in 2018 and an increase in rent expense associated with our ground leases.

For the year ended December 31, 2018, compared to 2017, other expenses, net, decreased by $7.4 million, due primarily to the resolution of our litigation against Airbnb and settlement of litigation related to the challenge to the title of the La Jolla Cove property, which we acquired in 2014.

Provision for Real Estate Impairment Loss

We recognized no provisions for impairment losses during the years ended December 31, 2019 or 2018.

In January 2018, we agreed to sell our interests in the entities owning the La Jolla Cove property in settlement of legal actions filed in 2014 by a group of disappointed buyers who had hoped to acquire the property. As a result of the settlement, we recognized in our 2017 results a gross impairment loss of $35.8 million, $25.6 million of which related to the establishment of a deferred tax liability assumed in connection with our acquisition of the business entities. The tax liability was assumed by the buyer, resulting in no economic loss to us. The remaining $10.2 million loss was offset by cash distributions paid to us during our ownership and avoided legal costs for continued litigation. On an economic basis, we agreed to sell these entities at roughly our purchase price, adjusted for retained cash distributions and avoided legal costs.

Interest Income

Interest income for the year ended December 31, 2019, was relatively flat compared to the year ended December 31, 2018.

For the year ended December 31, 2018, compared to 2017, interest income increased $2.6 million, due primarily to interest earned on the seller financing notes received as consideration in the sale of the La Jolla Cove property.

Interest Expense

For the year ended December 31, 2019, compared to 2018, interest expense, which includes the amortization of debt issuance costs, decreased by $31.8 million due primarily to lower interest on property-level debt following refinancing and debt payoff activity, including the 2018 repayment of our term loan, a decrease in property-level debt attributable to sold communities, and an increase in capitalized interest attributable to redevelopment and development communities. This decrease was offset partially by interest on property-level debt assumed in connection with our acquisitions and a $9.9 million decrease in prepayment penalties.

For the year ended December 31, 2018, compared to 2017, interest expense increased by $6.0 million. The increase was due primarily to debt prepayment penalties of $14.9 million incurred in connection with 2018 refinancing of property-level debt that was scheduled to mature in 2019, 2020, and 2021, offset partially by a decrease in mortgage interest expense for communities sold and the sale of the Asset Management business in July 2018, and lower corporate-level interest.

 

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Gain on Dispositions of Real Estate and the Asset Management Business

The table below summarizes dispositions of apartment communities from our portfolio during the years ended December 31, 2019, 2018, and 2017 (dollars in millions):

 

     Year Ended December 31,  
     2019      2018(1)      2017  

Number of apartment communities sold

     12        4        5  

Gross proceeds

   $ 696.2      $ 242.3      $ 397.0  

Net proceeds(2)

   $ 619.4      $ 235.7      $ 385.3  

Gain on dispositions

   $ 503.2      $ 175.2      $ 297.9  

 

(1)

During the year ended December 31, 2018, we sold for $590 million our Asset Management business and our four Hunters Point communities, which are excluded from the table above.

(2)

Net proceeds are after repayment of debt, if any, net working capital settlements, payment of transaction costs, and debt prepayment penalties, if applicable.

The apartment communities sold from our portfolio during 2019, 2018, and 2017 were primarily located outside of our primary markets or in lower-rated locations within our primary markets and had average revenues per apartment home significantly below those of our retained portfolio.

Income from Unconsolidated Real Estate Partnerships

Income from unconsolidated real estate partnerships for the year ended December 31, 2019, was relatively flat compared to the year ended December 31, 2018.

For the year ended December 31, 2018, compared to 2017, income from unconsolidated real estate partnerships decreased by $7.6 million, due primarily to the derecognition of the final NAPICO property in 2017, which resulted in a gain.

Income Tax Benefit

Certain of our operations, including risk management, are conducted through taxable REIT subsidiaries, or TRS entities. Additionally, some of our apartment communities and 1001 Brickell Bay Drive are owned through TRS entities.

Our income tax benefit calculated in accordance with GAAP includes: (a) income taxes associated with the income or loss of our TRS entities including tax on gains on dispositions, for which the tax consequences have been realized or will be realized in future periods; (b) low income housing tax credits generated prior to the sale of our Asset Management business that offset “real estate investment trust taxable income,” primarily from retained capital gains; and (c) historic tax credits that offset income tax obligations of our TRS entities. Income taxes related to these items, as well as changes in valuation allowance and the establishment of incremental deferred tax items in conjunction with intercompany asset transfers (if applicable), are included in income tax benefit in our consolidated statements of operations.

For the year ended December 31, 2019, compared to 2018, income tax benefit decreased $9.9 million. The decrease is due primarily to lower tax benefit recognized in connection with the intercompany transfer of assets and release of a valuation allowance in 2018 related to sale of our Asset Management business, as well as lower tax benefit from historic tax credits. This decrease is offset partially by a lower tax provision on gains on dispositions.

For the year ended December 31, 2018, compared to 2017, income tax benefit decreased by $17.8 million. The decrease is due primarily to the reversal of a $19.3 million net tax benefit we recognized as a result of the December 2017 tax reform legislation in 2017 and higher tax expense related to gains on sale of real estate for communities held through TRS entities.

 

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Non-GAAP Measures

Various key financial indicators we use in managing our business and in evaluating our financial condition and operating performance are non-GAAP measures. Key non-GAAP measures we use are defined and described below, and for those non-GAAP measures used or disclosed within this annual report, we provide reconciliations of the non-GAAP measures to the most comparable financial measure computed in accordance with GAAP.

Free Cash Flow, as calculated for our retained portfolio, represents an apartment community’s property net operating income, less spending for Capital Replacements, which represents our estimation of the capital additions made to replace capital assets consumed during our ownership period (further discussed under the Nareit Funds From Operations, Pro forma Funds From Operations, and Adjusted Funds From Operations heading). Free cash flow margin as calculated for apartment communities sold represents the sold apartment community’s net operating income less $1,200 per apartment home of assumed annual capital replacement spending, as a percentage of the apartment community’s rental and other property revenues. Capital replacement spending represents a measure of capital asset usage during the period; therefore, we believe that free cash flow is useful to investors as a supplemental measure of apartment community performance because it takes into consideration costs incurred during the period to replace capital assets that have been consumed during our ownership.

Net Asset Value

Net Asset Value (“NAV”) is calculated beginning with GAV, represented as the fair value of AIR Predecessor assets along with its other tangible assets; such as cash and restricted cash, accounts receivable and other assets, less the estimated fair value of AIR Predecessor liabilities. GAV is calculated using methods management believes to be appropriate based on the characteristics of the communities. For valuation purposes, the AIR Predecessor segregates its portfolio into the following categories: Stabilized portfolio; Redevelopment and Development; and Other Real Estate. Communities in these categories are valued as follows:

 

  •  

AIR Predecessor’s Stabilized portfolio is valued using a direct capitalization rate (“cap rate”) method based on the AIR Predecessor’s proportionate share of annualized property NOI, less a 2% management fee, and market cap rates. Market cap rates are determined on a property-by-property basis, based primarily on information published by CBRE Capital Advisors’ (“CBRE”) cap rate survey. CBRE is a nationally recognized provider of real estate data. Such survey includes ranges of current cap rates based on the following community characteristics: market in which the community is located; infill or suburban location within the market; property quality grade; and whether the community is stabilized or value-add.

 

  •  

AIR Predecessor categorizes the communities in its Stabilized portfolio using the framework described above and, using its judgment and detailed knowledge of each community’s condition and location, to select a cap rate within the range provided in CBRE’s cap rate survey. Alternatively, if AIR Predecessor is actively marketing a community for sale, the cap rate used for the community may differ from CBRE’s cap rate survey based upon the actual bids the Company receives. The range of cap rates included in CBRE’s cap rate survey related to AIR Predecessor’s valuation as of March 31, 2020 ranged from 4.5% to 5.1%, resulting in a weighted average cap rate used in AIR Predecessor’s valuation of its Stabilized portfolio of approximately 4.7%.

 

  •  

The Stabilized portfolio comprised approximately 87% of AIR Predecessor’s GAV as of March 31, 2020.

 

  •  

AIR Predecessor’s Redevelopment and Development portfolio is valued using discounted estimated cash flows using discount rates that ranged from 4.7% to 5.8%. The Redevelopment and Development portfolio comprised approximately 10% of AIR Predecessor’s GAV as of March 31, 2020.

 

  •  

AIR Predecessor’s Other Real Estate portfolio is valued using the Company’s historical cost which management believes approximated fair value given the recent acquisition of the related properties. Other Real Estate comprised approximately 3% of AIR Predecessor GAV as of March 31, 2020.

 

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To calculate NAV, GAV is reduced by AIR Predecessor’s liabilities, such as the fair value of its debt and other tangible liabilities; such as, accounts payable and accrued and other liabilities. These liabilities are expected to be settled in cash through the normal course of operations. AIR Predecessor estimates the fair value of its debt using both income and market approaches, including a comparison of contractual terms to observable and unobservable inputs such as market interest rate risk spreads, contractual rates, remaining periods to maturity, collateral quality, and loan to value ratios.

NAV is a non-GAAP measure and represents the estimated fair value of assets net of liabilities attributable to Aimco’s common stockholders and AIR OP’s common unitholders on a diluted basis. We believe NAV is considered useful by some investors in real estate companies because the value of company assets can be readily estimated, even for non-earning assets such as land or properties under development. NAV has the advantage of incorporating the investment decisions of thousands of real estate investors. We believe it enhances comparability among companies that have differences in their accounting. Although, NAV is not identical to liquidation value in that some costs and benefits are disregarded, it is often considered a floor with upside for value ascribed to the operating platform. NAV also provides an objective basis for the perceived quality and predictability of future cash flows as well as their expected growth as these are factors considered by real estate investors.

Our estimated NAV per share and the quoted share price of Aimco Common Stock are not necessarily equal. Although we use NAV for comparability in assessing our value creation compared to other REITs, not all REITs publish these measures and those who do may not compute them in the same manner. Accordingly, there can be no assurance that our basis for computing these measures is comparable with that of other REITs.

We report NAV on a semiannual basis, as of the end of the first and third quarters. NAV will fluctuate over time. This NAV information should not be relied upon as representative of the amount a stockholder could expect to receive in a liquidation event, now or in the future. Certain assets are excluded as are certain liabilities, such as taxes and transaction costs associated with a liquidation. In addition, NAV is based on management’s subjective judgments, assumptions, and opinions as of the date of determination. We assume no obligation to revise or update NAV to reflect subsequent or future events or circumstances. Our NAV estimate is subject to a variety of risks and uncertainties, many of which are beyond our control, including, without limitation, those described in the section entitled “Risk Factors.”

 

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NAV does not represent stockholder’s equity in accordance with GAAP and should not be considered an alternative to Aimco’s total equity, which we believe is the most directly comparable GAAP measure. A reconciliation of NAV to Aimco’s total equity, as of September 30, 2019, is provided below (in millions, except per share data):

 

Total equity

   $ 1,786  

Fair value adjustment for portfolio

  

Consolidated real estate, at depreciated cost

     (6,051 ) 

Fair value of real estate(1)

  

Stabilized portfolio fair value(2)

     11,592  

Non-stabilized portfolio fair value(3)

     1,706  

Fair value adjustment for non-recourse property debt

  

Non-recourse property debt, net

     4,255  

Fair value of non-recourse property debt(4)

     (4,329 ) 

Adjustments to present other tangible assets, liabilities, and preferred equity at fair value(5)

     91  
  

 

 

 

Estimated NAV

   $ 9,050  
  

 

 

 

Total shares, units, and dilutive share equivalents(6)

     157  
  

 

 

 

Estimated NAV per weighted-average common share and unit—diluted

   $ 58  
  

 

 

 

 

(1)

We compute NAV by estimating the value of our communities, using methods we believe are appropriate based on the characteristics of the communities. For purposes of estimating NAV, real estate at fair value disclosed above includes wholly owned apartment communities and 1001 Brickell Bay Drive, plus our proportionate share of communities held by non-wholly owned entities (both consolidated and unconsolidated). A reconciliation of our consolidated apartment communities to those communities included in total real estate at fair value in the table above is as follows:

 

Consolidated apartment communities as of September 30, 2019

     128  

Plus: Unconsolidated apartment communities

     4  
  

 

 

 

Apartment communities in total real estate at fair value for NAV

     132  
  

 

 

 

For valuation purposes at September 30, 2019, we segregated these 132 properties into the following categories: stabilized portfolio and non-stabilized portfolio.

(2)

As of September 30, 2019, our stabilized portfolio includes 121 communities that had reached stabilized operations and were not expected to be sold within 12 months. We value this portfolio using a direct capitalization rate method based on the annualized proportionate property net operating income, for the three months ended September 30, 2019, less a 2% management fee. Market property management fees range between 2.0% and 3.0% with larger, higher quality portfolios at the lower end of that range. The weighted-average estimated capitalization rate as applied to the annualized proportionate property net operating income was 4.9%, which we calculate on a property-by-property basis, based primarily on information published by a third party. Community characteristics that we use to determine comparable market capitalization rates include: the market in which the community is located; infill or suburban location within the market; property quality grade; and whether the community is stabilized or value-add. We used this valuation method for approximately 87% of real estate fair value at September 30, 2019.

(3)

The non-stabilized portfolio includes three communities under development and four communities under redevelopment as of September 30, 2019. We valued these communities by discounting projected future cash flows. Key assumptions used to estimate the value of these communities include: revenues, which are

 

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  based on in-place rents, projected submarket rent growth to community stabilization based on projections published by third parties and adjusted for the impacts of redevelopment; expenses, which are based on estimated operating costs adjusted for inflation and a management fee equal to 2% of projected revenue; estimated remaining costs to complete construction; and a terminal value based on current market capitalization rates plus five basis points per year from September 30, 2019, to community stabilization. Discount rates applied to estimated future cash flows of these communities ranged between 5.10% and 6.30%, depending on construction and lease-up progress as of September 30, 2019. We used this valuation method for approximately 11% of the real estate fair value at September 30, 2019. The non-stabilized portfolio also included three recently acquired apartment communities, 1001 Brickell Bay Drive, and certain land investments valued at our cost plus incremental investment subsequent to acquisition. We used this valuation method for approximately 2% of real estate fair value at September 30, 2019. Our calculation of NAV does not include such future values as air rights, the potential for increased density, nor the potential for completion of future phases of redevelopments.
(4)

We calculate the fair value of indebtedness related to real estate as the carrying value of our non-recourse property debt adjusted for the mark-to-market asset on our fixed-rate property debt as of September 30, 2019, plus the outstanding balance on the revolving credit facility, which approximates its fair value as of September 30, 2019. The fair value of debt takes into account the duration of the existing property debt, as well as the quality of property pledged as its security, its loan to value ratio, and debt service coverage. For purposes of estimating NAV, the fair value of debt includes our proportionate share of debt related to non-wholly owned entities (both consolidated and unconsolidated).

(5)

Other tangible assets consist of cash, restricted cash, accounts receivable, and other assets for which we reasonably expect to receive cash through the normal course of operations or another future event. Other tangible liabilities consist of accounts payable, accrued liabilities, and other tangible liabilities we reasonably expect to settle in cash through the normal course of operations or another future event. Other tangible assets and liabilities were generally valued at their carrying amounts and reduced by the noncontrolling interests’ portion of these amounts and exclude intangible assets and liabilities reflected on our consolidated balance sheet. For purposes of this NAV calculation, we have assigned no realizable value to right of use assets, goodwill, or other intangible assets. We also exclude deferred income and right of use related lease liabilities from the NAV calculation. We exclude from this NAV calculation deferred income, which includes below market lease liabilities, recognized in accordance with GAAP in connection with the purchase of the related apartment communities, and cash received in prior periods and required to be deferred under GAAP. We also adjust other tangible liabilities to reflect removal of the deferred tax liability associated with 1001 Brickell Bay Drive, which is not expected to be paid during our ownership of the property. We include the value of our deferred tax asset, as the value of the asset is expected to be realized in the normal course of business.

(6)

Total shares, units, and dilutive share equivalents represents Aimco Common Stock, partnership units in AIR OP, participating unvested restricted shares, and the dilutive effect of common stock equivalents outstanding as of September 30, 2019.

Nareit Funds From Operations, Pro forma Funds From Operations, and Adjusted Funds From Operations

Nareit FFO is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets such as machinery, computers, or other personal property. Nareit defines FFO as net income computed in accordance with GAAP, excluding: depreciation and amortization related to real estate; gains and losses from sales and impairment of depreciable assets and land used in our primary business; and income taxes directly associated with a gain or loss on the sale of real estate, and including our share of the FFO of unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine Nareit FFO. We calculate Nareit FFO attributable to Aimco common stockholders (diluted) by subtracting dividends on preferred stock and amounts allocated from Nareit FFO to participating securities.

 

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In addition to Nareit FFO, we compute Pro forma FFO and AFFO, which are also non-GAAP financial measures that we believe are helpful to investors in understanding our short-term performance. Pro forma FFO represents Nareit FFO attributable to Aimco common stockholders (diluted), excluding certain amounts that are unique or occur infrequently.

In computing 2019 Pro forma FFO, we made the following adjustments to Nareit FFO:

 

  •  

Prepayment penalties: as a result of refinancing activity in 2019, we incurred debt extinguishment costs. We excluded such costs from Pro forma FFO because we believe these costs are not representative of ongoing operating performance.

 

  •  

Straight-line rent: in 2018, we assumed a 99-year ground lease with scheduled rent increases. Due to the terms of the lease, GAAP rent expense will exceed cash rent payments until 2076. We include the cash rent payments for this ground lease in Pro forma FFO but exclude the incremental straight-line non-cash rent expense. We include the rent expense for this lease in other expenses, net, in our consolidated statements of operations.

 

  •  

Preferred equity redemption-related amounts: on May 16, 2019, we redeemed our Class A Perpetual Preferred Stock. We excluded the redemption-related costs from Pro forma FFO because we believe these costs are not representative of operating performance.

 

  •  

Casualty losses: in 2019, we incurred casualty losses due to storm-related flooding in downtown Boston that caused damage to our One Canal apartment community. We excluded these costs from Pro forma FFO because of the unusual nature of the weather event that caused the loss.

 

  •  

Severance and restructuring costs: in 2019, we incurred severance and restructuring costs in connection with the closure and relocation of administrative functions from our Greenville and Indianapolis offices to our Denver office. We excluded such costs from Pro forma FFO because we believe these costs are not representative of operating performance.

In computing 2018 Pro forma FFO, we made the following adjustments to Nareit FFO:

 

  •  

Prepayment penalties: in 2018, we addressed approximately half of our property loans maturing in 2019, 2020, and 2021. In connection with this activity, we incurred debt extinguishment costs, which we have excluded from Pro forma FFO because we believe these costs are not representative of operating performance.

 

  •  

Severance and restructuring costs: in connection with the sale of our Asset Management business in 2018, we incurred severance and restructuring costs. We excluded such costs from Pro forma FFO because we believe these costs are not representative of operating performance.

 

  •  

Litigation: during 2018, we were engaged in litigation with Airbnb, which was resolved in December 2018. Due to the unpredictable nature of these proceedings, we excluded from Pro Forma FFO related amounts recognized, net of income tax effect. We include these costs in other expenses, net, in our consolidated statements of operations.

 

  •  

Tax benefit due to valuation allowance release: due to the sale of the Asset Management business in 2018, we determined that a valuation allowance was no longer necessary. We excluded the effect of the establishment of the valuation allowance from Pro forma FFO and, as such, excluded the benefit from its release.

 

  •  

Change in lease accounting: effective January 1, 2019, we adopted accounting guidance that changed how we recognize costs incurred to obtain resident leases. For comparability of Pro forma FFO between periods, we have recast 2018 as if the new standard was effective as of January 1, 2018. AFFO is unchanged by the new standard.

 

  •  

Tax provision related to tax reform legislation: in connection with the Tax Cuts and Jobs Act signed into law in December 2017, we recognized income tax benefit in 2017 and adjusted the estimated impact of tax reform upon the conclusion of our analysis of the effects during 2018. We excluded such amounts from Pro forma FFO as we believe these costs are not representative of operating performance.

 

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AFFO represents Pro forma FFO reduced by Capital Replacements, which represent our estimation of the actual capital additions made to replace capital assets consumed during our ownership period. When we make capital additions at an apartment community, we evaluate whether the additions extend the useful life of an asset as compared to its condition at the time we purchased the apartment community. We classify as Capital Improvements those capital additions that meet this criterion, and we classify as Capital Replacements those that do not. AFFO is a key financial indicator we use to evaluate our short-term operational performance and is one of the factors that we use to determine the amounts of our dividend payments.

Nareit FFO, Pro forma FFO, and AFFO should not be considered alternatives to net income determined in accordance with GAAP, as indications of our performance. Although we use these non-GAAP measures for comparability in assessing our performance compared to other REITs, not all REITs compute these same measures and those who do may not compute them in the same manner. Additionally, computation of AFFO is subject to our definition of Capital Replacement spending. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs.

For the years ended December 31, 2019, 2018, and 2017, Aimco’s Nareit FFO, Pro forma FFO, and AFFO are calculated as follows (in thousands, except per share data):

 

     2019      2018      2017  

Net income attributable to Aimco common stockholders(1)

   $ 466,144      $ 656,597      $ 306,861  

Adjustments:

        

Real estate depreciation and amortization, net of noncontrolling partners’ interest

     370,746        368,961        352,109  

Gain on dispositions and other, net of noncontrolling partners’ interest

     (503,168 )       (669,450 )       (262,583 ) 

Income tax adjustments related to gain on dispositions and other tax-related items(2)

     10,107        27,310        (8,265 ) 

Common noncontrolling interests in AIR OP’s share of above adjustments

     6,448        14,063        (3,810 ) 

Amounts allocable to participating securities

     163        402        (81 ) 
  

 

 

    

 

 

    

 

 

 

Nareit FFO attributable to Aimco common stockholders

   $ 350,440      $ 397,883      $ 384,231  

Adjustments, all net of common noncontrolling interests in AIR OP, participating securities and tax effect:

        

Prepayment penalties, net

     6,367        14,089        —    

Straight-line rent

     4,472        —       

Preferred equity redemption-related amounts

     3,864        —          —    

Casualty losses

     2,913        —       

Severance and restructuring costs

     2,499        1,282        —    

Litigation, net

     147        (8,558 )       —    

Tax benefit due to valuation allowance release

     —          (19,349 )       —    

Change in lease accounting

     —          (2,922 )    

Tax provision (benefit) related to tax reform legislation

     —          273        (498 ) 
  

 

 

    

 

 

    

 

 

 

Pro forma FFO attributable to Aimco common stockholders

   $ 370,702      $ 382,698      $ 383,733  

Capital Replacements, net of common noncontrolling interests in AIR OP and participating securities

     (43,837 )       (45,560 )       (51,760 ) 
  

 

 

    

 

 

    

 

 

 

 

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     2019      2018      2017  

AFFO attributable to Aimco common stockholders

   $ 326,865      $ 337,138      $ 331,973  
  

 

 

    

 

 

    

 

 

 

Total share and dilutive share equivalents used to calculate Net income and Nareit FFO per share(3)

     147,944        151,334        152,060  

Adjustment to weight reverse stock
split(4)

     621        4,719        4,736  
  

 

 

    

 

 

    

 

 

 

Pro forma shares and dilutive share equivalents used to calculate Pro forma FFO and AFFO per share

     148,565        156,053        156,796  
  

 

 

    

 

 

    

 

 

 

Net income attributable to Aimco per common share—diluted

   $ 3.15      $ 4.34      $ 2.02  

Nareit FFO per share—diluted

   $ 2.37      $ 2.63      $ 2.53  

Pro Forma FFO per share—diluted

   $ 2.50      $ 2.45      $ 2.45  

AFFO per share—diluted

   $ 2.20      $ 2.16      $ 2.12  

 

(1)

Represents the numerator for calculating Aimco’s earnings per common share in accordance with GAAP please refer to Note 11 to the consolidated financial statements, which are included elsewhere in this information statement.

(2)

For the year ended December 31, 2019, income taxes related to gain on dispositions and other items primarily included tax on the gain on sale of apartment communities. For the year ended December 31, 2018, income taxes related to gain on dispositions and other items includes tax on the gain on the sale of the Asset Management business, as well as tax on the gain on the sale of apartment communities during the year ended December 31, 2018.

(3)

Represents the denominator for Aimco’s earnings per common share—diluted, calculated in accordance with GAAP.

(4)

During the three months ended March 31, 2019, we completed a reverse stock split and a special dividend paid primarily in stock. For stock splits, GAAP requires the restatement of weighted-average shares as if the reverse stock split occurred at the beginning of the period presented; while shares issued in the special dividend are included in weighted-average shares outstanding from the date issued. To minimize confusion and facilitate comparison of period-over-period Pro forma FFO and AFFO, we calculated pro forma weighted-average shares for the years ended December 31, 2019, 2018, and 2017 based on the effective date of the reverse stock split and ex-dividend date for the shares issued in the special dividend, thereby eliminating the per-share impact of the GAAP treatment to Aimco’s reported Pro forma FFO and AFFO.

Please see “—Results of Operations” for discussion of our Pro forma FFO and AFFO results for 2019, as compared to 2018.

Leverage Ratios

As discussed under the section entitled “—Executive Overview—Balance Sheet,” our leverage strategy targets the ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDAre to be below 7.0x and the ratio of Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends to be greater than 2.5x. We believe these ratios, which are based in part on non-GAAP financial information, are commonly used by investors and analysts to assess the relative financial risk associated with companies within the same industry, and they are believed to be similar to measures used by rating agencies to assess entity credit quality.

Proportionate Debt, as used in our leverage ratios, is a non-GAAP measure and includes our share of the long-term, non-recourse property debt and outstanding borrowings under our revolving credit facility. Proportionate Debt excludes unamortized debt issuance costs because these amounts represent cash expended in earlier periods and do not reduce our contractual obligations. We reduce our recorded debt by the amounts of

 

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cash and restricted cash on-hand, which are primarily restricted under the terms of our property debt agreements, assuming these amounts would be used to reduce our outstanding leverage. We further reduce our recorded debt by the value of our investment in a securitization trust that holds certain of our property debt, as our payments of principal and interest associated with such property debt will ultimately repay our investments in the trust.

We believe Proportionate Debt is useful to investors as it is a measure of our net exposure to debt obligations. Proportionate Debt, as used in our leverage ratios, is calculated as set forth in the table below.

Preferred Equity, as used in our leverage ratios, represents the redemption amounts for AIR OP Preferred Units. Preferred Equity, although perpetual in nature, is another component of our overall leverage.

The reconciliation of total indebtedness to Proportionate Debt and Preferred Equity, as used in our leverage ratios as of December 31, 2019, is as follows (in thousands):

 

     December 31, 2019  

Total indebtedness

   $ 4,505,590  

Adjustments:

  

Debt issuance costs related to non-recourse property debt

     20,749  

Proportionate share adjustments related to debt obligations of consolidated and unconsolidated partnerships

     (7,722 ) 

Cash and restricted cash

     (177,702 ) 

Proportionate share adjustments related to cash and restricted cash held by consolidated and unconsolidated partnerships

     1,107  

Securitization trust investment and other

     (94,251 ) 
  

 

 

 

Proportionate Debt

   $ 4,247,771  
  

 

 

 

Preferred Equity

     97,064  

Redeemable noncontrolling interests in consolidated real estate partnership

     4,716  
  

 

 

 

Proportionate Debt and Preferred Equity

   $ 4,349,551  
  

 

 

 

We calculated Adjusted EBITDAre used in our leverage ratios based on the most recent three month amounts, annualized. EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and allow for comparison of our credit strength to different companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income (loss) as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. Nareit defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation, and amortization expense, further adjusted for:

 

  •  

gains and losses on the dispositions of depreciated property;

 

  •  

impairment write-downs of depreciated property;

 

  •  

impairment write-downs of investments in unconsolidated partnerships caused by a decrease in the value of the depreciated property in such partnerships; and

 

  •  

adjustments to reflect Aimco’s share of EBITDAre of investments in unconsolidated entities.

We define Adjusted EBITDAre as EBITDAre adjusted to exclude the effect of the following items for the reasons set forth below:

 

  •  

net income attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests, to allow investors to compare a

 

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measure of our earnings before the effects of our capital structure and indebtedness with that of other companies in the real estate industry;

 

  •  

the amount of interest income related to our investment in the subordinated tranches in a securitization trust holding primarily Aimco property debt, as we view our interest cost on this debt to be net of any interest income received from the investment; and

 

  •  

the amount by which GAAP rent expense exceeds cash rents for a long-term ground lease for which expense exceeds cash payments until 2076. The excess of GAAP rent expense over the cash payments for this lease does not reflect a current obligation that affects our ability to service debt.

EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. The reconciliation of net income to EBITDAre and Adjusted EBITDAre for the three months ended December 31, 2019, as used in our leverage ratios, is as follows (in thousands):

 

     Three Months Ended
December 31, 2019 		 

Net income

   $ 142,766  

Adjustments:

  

Interest expense

     45,846  

Income tax benefit

     (1,193 ) 

Depreciation and amortization

     97,144  

Gain on dispositions of real estate

     (146,239 ) 

Adjustment related to EBITDAre of unconsolidated partnerships

     211  
  

 

 

 

EBITDAre

   $ 138,535  
  

 

 

 

Net income attributable to noncontrolling interests in consolidated real estate partnerships

     (84 ) 

EBITDAre adjustments attributable to noncontrolling interests

     (615 ) 

Interest income received on securitization investment

     (2,127 ) 

Straight-line rent

     657  

Severance and restructuring costs(1)

     800  

Casualty losses(2)

     2,913  

Other adjustments, net(3)

     2,656  
  

 

 

 

Adjusted EBITDAre

   $ 142,735  
  

 

 

 

Annualized Adjusted EBITDAre

   $ 570,940  
  

 

 

 

 

(1)

In 2019, we incurred severance and restructuring costs in connection with office closures and relocation of administrative functions from our Greenville and Indianapolis offices to our Denver office. We excluded such costs from Adjusted EBITDAre because we believe these costs are not representative of operating performance.

(2)

We incurred casualty losses due to storm-related flooding in downtown Boston that caused damage to our One Canal apartment community. We excluded such costs from Adjusted EBITDAre because of the unusual nature of the weather event that caused the loss.

(3)

Other adjustments, net include the impact of common noncontrolling interest in AIR OP. The adjustments include (i) earnings, net of transaction costs and related amortization, on our mezzanine investment in Parkmerced as if the transaction had closed on October 1, 2019; and (ii) the removal of operating results for four properties sold during the period of $2.6 million as if those transactions had closed on October 1, 2019.

For the years ended December 31, 2018 and 2017, we calculated Adjusted EBITDA and Annualized Adjusted EBITDA.

 

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We believe Adjusted EBITDA provides investors relevant and useful information because it allows investors to view income from our operations on an unleveraged basis, before the effects of taxes, depreciation and amortization, gains or losses on sales of and impairment losses related to real estate, and various other items described below. Adjusted EBITDA represents Aimco’s share of the consolidated amount of our net income, adjusted to exclude the effect of the following items for the reasons set forth below:

 

  •  

Adjusted Interest Expense to allow investors to compare a measure of our earnings before the effects of our indebtedness with that of other companies in the real estate industry;

 

  •  

preferred dividends, to allow investors to compare a measure of our performance before the effects of our capital structure with that of other companies in the real estate industry;

 

  •  

income taxes, to allow investors to measure our performance independent of income taxes, which may vary significantly from other companies within our industry due to leverage and tax planning strategies, among other factors;

 

  •  

depreciation and amortization, gains or losses on dispositions and impairment losses related to real estate, for similar reasons to those set forth in our discussion of FFO, Pro forma FFO and AFFO in the preceding section; and

 

  •  

other items, including gains on dispositions of non-depreciable assets, as these are items that periodically affect our operations but that are not necessarily representative of our ability to service our debt obligations.

The reconciliation of net income to Adjusted EBITDA for the three months ended December 31, 2018 and 2017, is as follows (in thousands):

 

     Three Months Ended
December 31, 2018 		    Three Months Ended
December 31, 2017 		 

Net income attributable to Aimco common stockholders

   $ 5,226     $ 262,097  

Adjustments:

    

Adjusted interest expense

     38,424       42,219  

Income tax benefit

     (409 )      (17,248 ) 

Depreciation and amortization, net of noncontrolling interest

     91,249       97,418  

Gain on dispositions and other

     2,311 (1)      (255,516 )(2) 

Preferred stock dividends

     2,148       2,149  

Net income attributable to noncontrolling interests in AIR OP

     2,291       14,374  

Pro forma adjustment

     3,342 (3)      (4,248 )(4) 
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 144,582     $ 141,245  
  

 

 

   

 

 

 

Annualized Adjusted EBITDA

   $ 578,328     $ 564,980  
  

 

 

   

 

 

 

 

(1)

Gain on dispositions and other for the three months ended December 31, 2018 is inclusive of related income taxes and net of noncontrolling partners’ interests.

(2)

Gain on dispositions and other for the three months ended December 31, 2017 is net of income taxes and noncontrolling partners’ interests.

(3)

Our Adjusted EBITDA has been calculated on a pro forma basis to adjust for significant items impacting the three months ended December 31, 2018 for which annualization would distort the results.

(4)

We adjusted our calculation of Adjusted EBITDA to reflect the disposition of five apartment communities sold during the period as if they had closed on October 1, 2017, because the proceeds from these sales were used to reduce leverage as of December 31, 2017.

We calculate Adjusted Interest Expense, as used in our leverage ratios, based on the most recent three months, annualized. Adjusted Interest Expense is a non-GAAP measure that we believe is meaningful for

 

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investors and analysts as it presents our share of current recurring interest requirements associated with leverage. Adjusted Interest Expense represents our proportionate share of interest expense on non-recourse property debt and interest expense on our revolving credit facility borrowings. We exclude from our calculation of Adjusted Interest Expense:

 

  •  

debt prepayment penalties, which are items that, from time to time, affect our interest expense, but are not representative of our scheduled interest obligations; and

 

  •  

the income we receive on our investment in the securitization trust that holds certain of our property debt, as this income is being generated indirectly from interest we pay with respect to property debt held by the trust.

Preferred Dividends represents the distributions paid on AIR OP Preferred Units. We add Preferred Dividends to Adjusted Interest Expense for a more complete picture of the interest and dividend requirements of our leverage.

The reconciliation of interest expense to Adjusted Interest Expense and Preferred Dividends for the three months ended December 31, 2019, as used in our leverage ratios, is as follows (in thousands):

 

     Three Months Ended
December 31, 2019 		 

Interest expense

   $ 45,846  

Adjustments:

  

Proportionate share adjustments related to interest of consolidated and unconsolidated partnerships

     (77 ) 

Debt prepayment penalties and other non-interest items

     (5,034 ) 

Interest income earned on securitization trust investment

     (2,127 ) 
  

 

 

 

Adjusted Interest Expense

   $ 38,608  
  

 

 

 

Preferred dividends

     1,908  
  

 

 

 

Adjusted Interest Expense and Preferred Dividends

   $ 40,516  
  

 

 

 

Annualized Adjusted Interest Expense

   $ 154,432  
  

 

 

 

Annualized Adjusted Interest Expense and Preferred Dividends

   $ 162,064  
  

 

 

 

Liquidity and Capital Resources

Liquidity

Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flow from operations. Additional sources are proceeds from dispositions of apartment communities, proceeds from refinancing existing property debt, borrowings under new property debt, borrowings under our revolving credit facility, and proceeds from equity offerings.

As of December 31, 2019, our primary sources of liquidity were as follows:

 

  •  

$142.9 million in cash and cash equivalents;

 

  •  

$34.8 million of restricted cash, which consists primarily of escrows related to resident security deposits and reserves and escrows held by lenders for capital additions, property taxes, and insurance; and

 

  •  

$517.8 million of available capacity to borrow under our revolving credit facility after consideration of $275 million currently drawn and $7.2 million of letters of credit backed by the facility.

 

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Our principal uses for liquidity include normal operating activities, payments of principal and interest on outstanding property debt, capital expenditures, dividends paid to stockholders, distributions paid to noncontrolling interest partners, and acquisitions of apartment communities. We use our cash and cash equivalents and our cash provided by operating activities to meet short-term liquidity needs. In the event that our cash and cash equivalents and cash provided by operating activities are not sufficient to cover our short-term liquidity needs, we have additional means, such as short-term borrowing availability and proceeds from apartment community sales and refinancings. We may use our revolving credit facility for working capital and other short-term purposes, such as funding investments on an interim basis. We expect to meet our long-term liquidity requirements, such as debt maturities, redevelopment spending, and apartment community acquisitions, through primarily non-recourse, long-term borrowings, the issuance of equity securities (including partnership units in AIR OP), the sale of apartment communities, and cash generated from operations.

As of December 31, 2019, we also held unencumbered apartment communities with an estimated fair market value, based on GAV, of approximately $2.4 billion.

Leverage and Capital Resources

The availability of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to historical levels and many lenders are active in the market. However, any adverse changes in the lending environment could negatively affect our liquidity. We believe we have mitigated much of this exposure by reducing our short and intermediate term maturity risk through refinancing such loans with long-dated, fixed-rate property debt. However, if property financing options become unavailable for our future debt needs, we may consider alternative sources of liquidity, such as reductions in capital spending or proceeds from apartment community dispositions.

Two credit rating agencies rate our creditworthiness and both have rated our credit and outlook as BBB- (stable), an investment grade rating. Our investment grade rating would be useful in accessing capital through the sale of bonds in private or public transactions. However, our intention and historical practice has been to raise debt capital in the form of property-level, non-recourse, long-dated, fixed-rate, amortizing debt, the cost of which is generally less than that of recourse debt, and the terms of which also provide for greater balance sheet safety.

As of December 31, 2019, approximately 91.8% of our leverage consisted of property-level, non-recourse, long-dated, amortizing debt. Approximately 96.0% of our property-level debt is fixed-rate, which provides a hedge against increases in interest rates, capitalization rates, and inflation. The weighted-average remaining term to maturity of our property-level debt was 7.5 years. On average, 7.4% of our unpaid principal balances will mature each year from 2020 through 2022.

During 2019, we financed $772.6 million of new non-recourse, fixed-rate property debt. These loans have a weighted-average interest rate of 3.32%, a weighted-average remaining term to maturity of 11.4 years, and contributed to an approximately 29 basis point decrease in our annual cost of leverage compared to 2018.

While our primary source of leverage is property-level, non-recourse, long-dated, fixed-rate, amortizing debt, we also have a revolving credit facility with a syndicate of financial institutions. As of December 31, 2019, we had $275.0 million of outstanding borrowings under our revolving credit facility, which represented 6.0% of our total leverage.

As of December 31, 2019, our outstanding AIR OP Preferred Units represented approximately 2.1% of our total leverage. AIR OP Preferred Units are redeemable at the holder’s option; however, for illustrative purposes, we compute the weighted-average maturity of our total leverage assuming a 10-year maturity on the units.

The combination of non-recourse property-level debt, borrowings under our revolving credit facility, AIR OP Preferred Units, and redeemable noncontrolling interests in a consolidated real estate partnership comprise

 

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our total leverage. The weighted-average remaining term to maturity for our total leverage described above was 7.3 years as of December 31, 2019.

Under the revolving credit facility, we have agreed to maintain a Fixed Charge Coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the year ended December 31, 2019, our Fixed Charge Coverage ratio was 2.06x, compared to ratio of 2.05x for the year ended December 31, 2018. We expect to remain in compliance with this covenant during the next 12 months.

We like the discipline of financing our investments in real estate through the use of fixed-rate, amortizing, non-recourse property debt, as the amortization gradually reduces our leverage and reduces our refunding risk, and the fixed-rate provides a hedge against increases in interest rates, and the non-recourse feature avoids entity risk.

Changes in Cash, Cash Equivalents, and Restricted Cash

The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing, and financing activities, which are presented in our consolidated statements of cash flows, which are included elsewhere in this information statement.

Operating Activities

For the year ended December 31, 2019, our net cash provided by operating activities was $374.5 million. Our operating cash flow is affected primarily by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment communities. Cash provided by operating activities for the year ended December 31, 2019, decreased by $21.9 million compared to 2018, due to lower net operating income associated with communities sold and the Asset Management business sold in 2018, offset partially by improved operating results of our Same Store communities and increased contribution from our Acquisition and Other Real Estate communities.

Investing Activities

For the year ended December 31, 2019, net cash used in investing activities of $205.4 million consisted primarily of the cash payment for the mezzanine loan and related transaction costs, the acquisitions of 1001 Brickell Bay Drive, One Ardmore, and Prism, and capital expenditures, offset partially by proceeds from the disposition of 12 apartment communities.

Capital additions for our segments totaled $396.0 million, $329.3 million, and $310.5 million during the years ended December 31, 2019, 2018, and 2017, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.

We categorize capital spending for communities in our portfolio broadly into seven primary categories:

 

  •  

capital replacements, which do not increase the useful life of an asset from its original purchase condition. Capital replacements represent capital additions made to replace the portion of our investment in acquired apartment communities consumed during our period of ownership;

 

  •  

capital improvements, which represent capital additions made to replace the portion of acquired apartment communities consumed prior to our period of ownership;

 

  •  

capital enhancements, which may include kitchen and bath remodeling, energy conservation projects, and investments in more durable, longer-lived materials designed to reduce costs, all of which differ from redevelopment additions in that they are generally lesser in scope and do not significantly disrupt property management;

 

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  •  

initial capital expenditures, which represent capital additions contemplated in the underwriting of our recently acquired communities;

 

  •  

redevelopment additions, which represent capital additions intended to enhance the value of the apartment community through the ability to generate higher average rental rates, and may include costs related to entitlement, which enhance the value of a community through increased density, and costs related to renovation of exteriors, common areas, or apartment homes;

 

  •  

development additions, which represent construction and related capitalized costs associated with the ground-up development of apartment communities; and

 

  •  

casualty capital additions, which represent capitalized costs incurred in connection with the restoration of an apartment community after a casualty event.

We exclude the amounts of capital spending related to commercial spaces and to apartment communities sold or classified as held for sale at the end of the period from the foregoing measures. We have also excluded from these measures indirect capitalized costs, which are not yet allocated to communities with capital additions, and their related capital spending categories.

A summary of the capital spending for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying consolidated statements of cash flows for the years ended December 31, 2019, 2018, and 2017, are presented below (dollars in thousands):

 

     Year Ended December 31,  
     2019      2018      2017  

Capital replacements

   $ 36,245      $ 33,613      $ 30,714  

Capital improvements

     12,240        13,722        16,392  

Capital enhancements

     87,824        95,595        86,405  

Redevelopment

     110,996        112,630        154,724  

Development

     118,781        61,185        14,249  

Initial capital expenditures

     22,913        6,406        —  

Casualty

     7,017        6,118        7,974  
  

 

 

    

 

 

    

 

 

 

Total capital additions

   $ 396,016      $ 329,269      $ 310,458  

Plus: additions related to commercial spaces

     5,559        1,245        1,428  

Plus: additions related to apartment communities sold or held for sale and Asset Management business

     3,321        18,203        42,343  
  

 

 

    

 

 

    

 

 

 

Consolidated capital additions

   $ 404,896      $ 348,717      $ 354,229  

Plus: net change in accrued capital spending

     (11,435 )       (8,228 )       3,875  
  

 

 

    

 

 

    

 

 

 

Capital expenditures per consolidated statement of cash flows

   $ 393,461      $ 340,489      $ 358,104  
  

 

 

    

 

 

    

 

 

 

For the years ended December 31, 2019, 2018, and 2017, we capitalized $11.8 million, $7.6 million, and $7.6 million of interest costs, respectively, and $37.8 million, $36.8 million, and $36.0 million of other direct and indirect costs, respectively.

Redevelopment and Development

As of December 31, 2019, our total estimated net investment in approved and active redevelopment and development is $577.5 million, with a projected weighted-average net operating income yield on these investments of 5.3%, assuming untrended rents. Of this total, we have funded $309.2 million as of December 31, 2019. We expect to fund the remaining estimated net investment of $268.3 million on these communities in 2020 and future years, on a leverage-neutral basis, with proceeds from sales of apartment communities with lower forecasted free cash flow internal rates of return.

 

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We execute redevelopments using a range of approaches. We prefer to limit risk by executing redevelopments using a short-cycle approach, in which we renovate an apartment community in stages. Shorter cycles provide us the flexibility to maintain current earnings while aligning the timing of the completed apartment homes with market demand. We currently have six short-cycle projects, including Bay Parc, ongoing in our portfolio. During 2019, we completed 150 apartment homes, with another 21 homes under construction as of December 31, 2019.

When short-cycle redevelopments are not possible, we may engage in redevelopment activities where an entire building or community is vacated. Additionally, we undertake some ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the redevelopment of an existing apartment community. The following table summarizes our investments related to these long-cycle developments and redevelopments as of December 31, 2019 (dollars in millions):

 

    Location   Apartment
Homes
Approved for
Redevelopment
or Development 		    Estimated Net
Redevelopment
Investment(1) 		    Inception-to-
Date Net
Investment 		    Expected
Stabilized
Occupancy(2) 		    Expected NOI
Stabilization(3) 		 

707 Leahy

  Redwood
City, CA 		    110     $ 23.7     $ 10.7       3Q 2020       4Q 2021  

Eldridge (formerly Elm Creek) Townhomes

  Elmhurst, IL     58       35.1       15.8       2Q 2021       3Q 2022  

Flamingo Point

  Miami
Beach, FL 		    886       280.0       74.4       4Q 2022       1Q 2024  

The Fremont

  Denver, CO
(MSA) 		    253       87.0       61.4       3Q 2021       4Q 2022  

Parc Mosaic

  Boulder, CO     226       123.4       122.3       4Q 2020       1Q 2022  
   

 

 

   

 

 

   

 

 

     

Total

      1,533     $ 549.2     $ 284.6      
   

 

 

   

 

 

   

 

 

     

 

(1)

Estimated net redevelopment investment represents the total actual or estimated investment, net of tax and other credits earned as a direct result of our redevelopment or development of the community.

(2)

Expected stabilized occupancy represents the period in which we expect to achieve stabilized occupancy, generally greater than 90%.

(3)

Expected net operating income, NOI, stabilization represents the period in which we expect the communities to achieve stabilized rents and operating costs, generally five quarters after occupancy stabilization.

During the year ended December 31, 2019, we invested $229.8 million in redevelopment and development. Further details regarding our redevelopment and development activities, including apartment communities constructed and delivered during the year ended December 31, 2019, is discussed in the Executive Overview section above.

We expect our total development and redevelopment spending to range from $250 million to $300 million for the year ending December 31, 2020.

Financing Activities

For the year ended December 31, 2019, our net cash used in financing activities of $64.0 million was attributed to the items discussed below.

Net borrowings on our revolving credit facility of $114.6 million primarily relate to the timing of short-term working capital needs.

 

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Principal payments on property loans during the period totaled $520.0 million, consisting of scheduled principal amortization of $79.7 million and repayments of $440.3 million.

Proceeds from non-recourse property debt borrowings during the period consisted of the closing of 10 fixed-rate, amortizing, non-recourse property loans totaling $774.6 million.

Repurchases of Preferred Stock of $125.0 million represents the cash paid upon redemption of our Class A Perpetual Preferred Stock during the 2019.

Net cash used in financing activities also includes $266.2 million of payments to equity holders, as further detailed below.

Equity Transactions

The following table presents Aimco’s dividend activity during the year ended December 31, 2019 (in thousands):

 

Cash distributions paid to holders of OP units

   $ 21,107  

Cash distributions paid to holders of noncontrolling interests in consolidated real estate partnerships

     513  

Cash dividends paid by Aimco to preferred stockholders

     3,246  

Cash dividends paid by Aimco to common stockholders

     241,288  
  

 

 

 

Total cash dividends and distributions paid by Aimco

   $ 266,154  
  

 

 

 

Contractual Obligations

This table summarizes information contained elsewhere in this information statement regarding payments due under contractual obligations and commitments as of December 31, 2019 (in thousands):

 

     Total      Less than
One Year
(2020) 		     1-3 Years
(2021-2022) 		     4-5 Years
(2023-2024) 		     More than
Five Years
(2025 and
Thereafter) 		 

Non-recourse property debt(1)

   $ 4,251,339      $ 171,107      $ 1,021,270      $ 673,661      $ 2,385,301  

Revolving credit facility
borrowings(2)

     275,000        —          275,000        —          —    

Interest related to debt(3)

     1,021,589        174,275        269,600        200,503        377,211  

Operating lease obligations(4)

     452,042        5,156        10,196        8,755        427,935  

Construction obligations(5)

     254,462        187,546        66,916        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,254,432      $ 538,084      $ 1,642,982      $ 882,919      $ 3,190,447  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes scheduled principal amortization and maturity payments.

(2)

Includes outstanding borrowings on our revolving credit facility assuming repayment at the contractual maturity date. Our revolving credit facility is subject to an annual variable commitment fee (currently 0.25% of aggregate commitments), which is not included in the amounts above.

(3)

Includes interest related to both fixed-rate and variable-rate non-recourse property debt, and our variable-rate revolving credit facility borrowings. Interest related to variable-rate debt is estimated based on the rate effective as of December 31, 2019. Please refer to Note 5 to the consolidated financial statements, which are presented in our consolidated statements of cash flows, which are included elsewhere in this information statement, for a description of average interest rates associated with our debt.

 

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(4)

Operating lease obligations include both ground and office leases. Our ground leases expire in years ranging from 2070 to 2117.

(5)

Represents estimated obligations pursuant to construction contracts related to our redevelopment, development and other capital spending. Please refer to Note 6 to the consolidated financial statements, which are included elsewhere in this information statement, for additional information regarding these obligations.

In addition to the amounts presented in the table above, as of December 31, 2019, we had $97.1 million (liquidation value) of redeemable AIR OP Preferred Units outstanding with annual distribution yields ranging from 1.92% to 8.75%. The distributions that accrue on the redeemable AIR OP Preferred Units are cumulative and are paid quarterly.

Additionally, we may enter into commitments to purchase goods and services in connection with the operations of our apartment communities. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to our historical expenditures.

Future Capital Needs

In addition to the items set forth in “Contractual Obligations” above, we expect to fund any future acquisitions, redevelopment, development, and other capital spending principally with proceeds from apartment community sales, short-term borrowings, debt and equity financing, and operating cash flows. Our near-term business plan does not contemplate the issuance of equity.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Capitalized Costs

We capitalize costs, including certain indirect costs, incurred in connection with our capital additions activities, including redevelopments and developments, other tangible apartment community improvements, and replacements of existing community components. Included in these capitalized costs are payroll costs associated with time spent by employees in connection with the planning, execution, and control of all capital addition activities at the community level. We characterize as “indirect costs” an allocation of certain department costs, including payroll, at the area operations and corporate levels that clearly relate to capital addition activities. We also capitalize interest, property taxes, and insurance during periods in which redevelopments and developments are in progress. We commence capitalization of costs, including certain indirect costs, incurred in connection with our capital addition activities, at the point in time when activities necessary to get communities ready for their intended use begin. These activities include when communities or apartment homes are undergoing physical construction, as well as when homes are held vacant in advance of planned construction; provided that other activities such as permitting, planning, and design are in progress. We cease the capitalization of costs when the communities or components thereof are substantially complete and ready for their intended use, which is typically when construction has been completed and homes are available for occupancy. We charge costs including ordinary repairs, maintenance, and resident turnover costs to property operating expense, as incurred. Please see “—Liquidity and Capital Resources—Investing Activities” for a summary of costs capitalized during the periods presented.

Impairment of Long-Lived Assets

Real estate and other long-lived assets to be held and used are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate

 

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that the carrying amount of an apartment community may not be recoverable, we make an assessment of its recoverability by comparing the carrying amount to our estimate of the undiscounted future cash flows, excluding interest charges, of the community. If the carrying amount exceeds the estimated aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the community.

As part of our portfolio strategy, we seek to sell up to 10% of our portfolio annually and to reinvest the proceeds from such sales in accretive uses such as capital enhancements, redevelopments, occasional developments, share repurchases, and selective acquisitions with projected free cash flow internal rates of return higher than expected from the communities being sold. As we execute this strategy, we evaluate alternatives to sell or reduce our interest in apartment communities that do not align with our long-term investment strategy, although there is no assurance that we will sell or reduce our investment in such communities during the desired time frame. For any communities that are sold or meet the criteria to be classified as held for sale during the next 12 months, the reduction in the estimated holding period for these communities may result in impairment losses.

Quantitative and Qualitative Disclosures About Market Risk

Our chief market risks are refunding risk, that is the availability of property debt or other cash sources to refund maturing property debt, and repricing risk, that is the possibility of increases in base interest rates and credit risk spreads. We use predominantly long-dated, fixed-rate, amortizing, non-recourse property debt in order to avoid the refunding and repricing risks of short-term borrowings. We use short-term debt financing and working capital primarily to fund short-term uses and generally expect to refinance such borrowings with cash from operating activities, proceeds from apartment community sales, long-term debt, or equity financings. We make limited use of derivative financial instruments and we do not use them for trading or other speculative purposes.

Market Risk Associated with Loans Secured by Our Portfolio

As of December 31, 2019, on a consolidated basis, we had approximately $170.1 million of variable-rate property-level debt outstanding and $275.0 million of variable-rate borrowings under our revolving credit facility. We estimate that a change in 30-day LIBOR of 100 basis points with constant credit risk spreads would reduce or increase interest expense by approximately $4.5 million on an annual basis.

As of December 31, 2019, we had approximately $177.7 million in cash and cash equivalents and restricted cash, a portion of which bears interest at variable rates, which may offset somewhat a change in rates on our variable-rate debt discussed above.

We estimate the fair value of debt instruments as described in Note 12 to the consolidated financial statements, which are presented in our consolidated statements of cash flows, which are included elsewhere in this information statement. The estimated fair value of total indebtedness, including our revolving credit facility, was approximately $4.6 billion as of December 31, 2019, inclusive of a $47.3 million mark-to-market liability. The mark-to-market liability as of December 31, 2018 was approximately $43.8 million.

If market rates for consolidated fixed-rate debt in our portfolio were higher by 100 basis points with constant credit risk spreads, the estimated fair value of consolidated debt discussed above would decrease from $4.6 billion in the aggregate to $4.4 billion. If market rates for consolidated debt discussed above were lower by 100 basis points with constant credit risk spreads, the estimated fair value of consolidated fixed-rate debt would increase from $4.6 billion in the aggregate to $4.8 billion.

 

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BUSINESS AND PROPERTIES

Our Company

The board of directors of Aimco has announced a plan to create AIR by separating assets approximating 10% of the GAV, as of March 31, 2020, of Aimco. The Separation will result in two, focused and independent companies: (I) AIR, with assets approximating 90% (prior to giving effect to certain transactions, which proceeds are intended to reduce leverage) of Aimco’s GAV, as of March 31, 2020, which is expected to provide a simple and transparent way to invest in the multifamily sector, combining (i) a narrow focus on allocating capital only to stabilized apartment communities; (ii) a high-quality and diversified portfolio of stabilized multifamily properties, (iii) best-in-class property operations, (iv) low financial leverage, (v) limited execution risk, (vi) low overhead costs as a percentage of GAV, and (vii) public market liquidity for its shares; and (II) “New” Aimco, with assets approximating 10% of Aimco’s GAV, as of March 31, 2020, which is expected to continue the business of redeveloping and developing apartment communities, while also pursuing other accretive transactions.

Each of AIR and Aimco will have its own distinctive focus. The AIR business plan is to: (i) invest only in stabilized apartment communities; (ii) own a high-quality and diversified portfolio of stabilized multifamily properties; (iii) emphasize its comparative advantage in property operations, with high customer-defined satisfaction and retention, low rate of growth in controllable operating expenses, and high operating margins; (iv) maintain a strong balance sheet with leverage, net of cash and receivables, and weighted average interest expense, net of interest income, comparable to or lower than peers; (v) reduce execution risk through elimination of redevelopment and development activities; and (vi) operate with overhead costs estimated at about 15 basis points of GAV, lower than peers as a percentage of GAV. AIR has sold or will sell assets sufficient to reduce financial leverage by approximately $2 billion. We believe that AIR’s simplified business, focused on the ownership and active management of stabilized apartment communities, will be more readily understood and valued by investors and will be more predictable due to strong operations and reduced exposure to the execution risk of redevelopment and development. We intend for AIR to have a strong balance sheet with leverage, net of cash and loans receivable, and a weighted average interest expense, net of interest income, at or below peer averages. We also expect AIR to issue corporate level debt when its cost is lower than that of non-recourse property debt. We further expect that AIR’s FFO will increase and be more predictable, supporting higher dividends, as a result of the elimination of earnings dilution from properties with lower leverage and reduced or no earnings during their development, redevelopment or lease-up, lower overhead costs due primarily to the elimination of overhead costs related to redevelopment and development activities.

AIR will retain substantially all of Aimco’s existing employees, including its property management team, and Aimco will employ approximately 50 of Aimco’s existing employees. AIR will initially provide Aimco with property management services and customary administrative and support services. AIR, directly and through subsidiaries in which it owns all of the outstanding common equity, will be the general and special limited partner of AIR OP. AIR OP will hold substantially all of AIR’s assets and manage the daily operations of AIR’s business directly and indirectly through certain subsidiaries.

Tom Keltner will be elected Chairman of the AIR board of directors. Terry Considine will be a member of the AIR board of directors and will also serve as AIR’s Chief Executive Officer, working with an experienced executive team wholly dedicated to AIR, including Lisa Cohn, as President and General Counsel, Keith Kimmel, as President, Property Operations, Paul Beldin, as Executive Vice President and Chief Financial Officer, and Conor Wagner, as Senior Vice President and Chief Investment Officer. In addition, Terry Considine will be a member of Aimco’s board of directors with specific responsibilities during the next two years to support the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors, which is expected to include six independent directors who have not previously served on the Aimco board of directors.

The AIR portfolio is expected to include 98 apartment communities, which had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point. The AIR portfolio will include garden

 

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style, mid-rise, and high-rise apartment communities with eight important geographic concentrations: Boston; Philadelphia; Washington D.C.; Miami; Denver; the San Francisco Bay Area; Los Angeles; and San Diego; and a focus on properties with high land value located in submarkets with outsized growth prospects. The Aimco board of directors believes the geographic and price point diversification will reduce the volatility of AIR’s rental revenue by avoiding undue concentration in any particular market and by exposure to a range of price-points that have different advantages over various economic and housing cycles.

AIR is expected to own properties with an estimated GAV of $10.4 billion, and an estimated NAV, of $7.8 billion, in each case, as of March 31, 2020.

Aimco will own the redevelopment and development business and a portfolio of assets that is expected to consist of (i) the Excluded Seed Properties, which are stabilized multifamily properties primarily located in the Boston and San Diego areas; and (ii) the Additional Excluded Properties, which are a collection of certain other investments and redevelopment properties.

Aimco will be well-capitalized with an estimated GAV of $1.3 billion, and an estimated NAV of $1.2 billion, each as of March 31, 2020 (in each case, without giving effect to the value of the Initial Leased Properties or the Separate Portfolio Assets).

Aimco is also expected to own the Separate Portfolio Assets with an estimated GAV of $0.9 billion, securing property debt of approximately $0.7 billion, including purchase money notes payable to AIR of approximately $0.5 billion.

AIR does not intend to redevelop or develop apartment communities, reducing the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. At the time of the Separation, the Initial Leased Properties are expected to be under construction or in lease-up, including North Tower at Flamingo Point in Miami Beach, Florida, The Fremont on the Anschutz Medical Campus in Aurora, Colorado, Prism in Cambridge, Massachusetts, and 707 Leahy Apartments in Redwood City, California. These properties will be leased to Aimco and, under each such lease, the terms thereof will be on an arm’s-length basis, including the initial term and extensions and the initial annual rent, which will be based on the then-current fair market value of the leased property and market NOI cap rates, subject to certain adjustments and periodic escalation as set forth in such lease. Further, under the terms of the leases, Aimco will have the option to complete the on-going redevelopment and development of such properties and their lease-ups (provided that once Aimco elects to commence the same, it will use commercially reasonable efforts to diligently pursue it to completion).

AIR’s expected business activities following the completion of the Separation are summarized below.

Ownership of Apartment Communities and Management of Our Portfolio

We will own a portfolio of 98 apartment communities (including the Initial Leased Properties), which had 26,599 apartment homes as of September 30, 2020, diversified by both geography and price point, in which we will hold an average ownership of approximately 93.5%, as of September 30, 2020, measured by GAV. Our portfolio will include garden style, mid-rise, a high rise apartment communities with eight important geographic concentrations, focusing on properties with high land value located in submarkets with outsized growth prospects. The portfolio is diversified across several of the largest markets in the United States and is also diversified across “A,” “B,” and “C+” price points, averaging “B+” in quality. For a description of this rating system, see “Business and Properties—Properties.”

We will target geographic diversification in our portfolio in order to reduce the volatility of our rental revenue by avoiding undue concentration in any particular market. Similarly, we will seek price point diversification to better manage rental rate volatility. Our portfolio will seek to include about one-half “A” rated

 

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properties, and about one-half “B” and “C+” rated properties. We believe the diversity of price points allows us to benefit from price-points that have different advantages over various economic and housing cycles. Our price point “A” apartment communities typically provide higher margins but have tenants with fast growing incomes that are more susceptible to competitive housing supply, while our price point “B” and “C” apartment communities typically provide lower margins but have less volatile rental rates and are less susceptible to competitive housing supply. We also plan to maintain a dynamic capital allocation and market selection process and expect to decrease over time our investment in jurisdictions with high unfunded public liabilities and to increase our allocation to locations with lower public tax burdens, including the southeastern United States.

We may choose to improve the quality of our portfolio through our relationship with Aimco, as we may lease certain properties to Aimco for development or redevelopment and lease-up in accordance with the Master Leasing Agreement. Under these leases Aimco will have the option, but not an obligation, to terminate the leases once the properties reach and maintain stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception). We will manage our portfolio to allocate investment capital to enhance rent growth and increase long-term capital values through routine investments in property upgrades (such as upgrading kitchens, bathrooms and other interior design aspects) and through portfolio design, emphasizing land value as well as location and submarket.

As part of our portfolio strategy, we may seek to sell communities with lower expected free cash flow internal rates of return and reinvest the proceeds from such sales in accretive uses such as capital enhancements, share repurchases, and selective acquisitions of stabilized communities with projected free cash flow internal rates of return higher than expected from the communities being sold. When the cost of capital is favorable, we will look to grow through the acquisition of stabilized apartment communities that we believe we can operate better than their previous owners. Through this disciplined approach to capital allocation, we expect to increase the quality and expected growth rate of our portfolio.

Redevelopment and Development

We do not intend to redevelop or develop apartment communities, reducing the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. Instead, we may choose to improve the quality of our portfolio through our relationship with Aimco, as we may lease certain properties to Aimco for development or redevelopment and lease-up. Aimco will redevelop and develop properties for us and increase occupancy at properties that are not stabilized due to a recently completed redevelopment or development, commencing with the Initial Leased Properties. In addition, we may engage third parties to complete certain development, redevelopment or lease-up projects for us and we may engage in transactions, including joint venture transactions, with Aimco or other third parties relating to redevelopment or development projects.

We expect to lease the Initial Leased Properties (and additional properties, as may be mutually agreed between us and Aimco in the future, subject to the approval of each of AIR’s and Aimco’s independent directors) to Aimco pursuant to leases entered into in accordance with the Master Leasing Agreement for a percentage of then-current fair market value. Aimco will then have the option to redevelop, develop or lease-up the property with the goal of maximizing long-term value of the community. Upon completion of the redevelopment and development and lease-up, Aimco will have the option, but not an obligation, to terminate any of the leases for these properties once they reach and maintain stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception), and receive payment for the redevelopment or development-related improvements, either by payment from AIR of a sum equal to 95% of the difference between the then-current fair market value of the property less the fair market value of the property at the time of lease inception if AIR exercises an option to pay such fee, or through a sale of the property to a third party (by AIR and Aimco), with AIR guaranteed to receive an amount attributable to the fair market value of the property at the time of lease inception and Aimco retaining any excess proceeds. In the event of such sale of the property, Aimco may also elect to purchase the property at a purchase price equal to the fair market value

 

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thereof at the time of lease inception (and may subsequently sell the property to a third party, subject to AIR’s right of first refusal during the first year following Aimco’s acquisition). If AIR elects not to pay the fee for the redevelopment or development-related improvements, and Aimco declines to so purchase the property or cause its sale to a third party, Aimco may elect to rescind its termination of the applicable lease and instead continue such lease in effect in accordance with its terms. If Aimco does not exercise (or rescinds) its right to terminate a lease, Aimco will have the option to assign the lease to a third party, subject to our consent and right of first refusal.

Aimco may also source its own opportunities and acquire other properties or portfolios from third parties that it believes can be redeveloped or developed or leased-up to become stabilized properties and we will have an option to purchase such properties prior to or once the redevelopment and development and lease-ups are completed. If we, subject to our discretion, agree to acquire any such properties, we will acquire such property from Aimco at then-current fair market value. If we do not acquire such properties, Aimco will be permitted to retain such properties or sell them to third parties.

Property Management

We will also manage and operate apartment communities. In addition to managing our own properties, pursuant to the Property Management Agreements, we initially will provide property management services and certain other property-related services to Aimco for the majority of its properties, and Aimco will generally be obligated to pay to us a property management fee based on an agreed percentage of revenue collected and such other fees as may be mutually agreed for various other services. See “Our Relationship with Aimco Following the Separation.”

We will seek to continuously improve properties under our management by: employing service-oriented, well-trained team members; taking advantage of advances in technology; increasing automation; centralizing operational tasks where efficient to do so; standardizing business processes, operational measurements, and internal reporting; and enhancing financial controls over field operations. Our focus will be on the following:

 

  •  

Customer Satisfaction. Our operating culture will be focused on residents and providing them with a high level of customer service in a clean, safe, and respectful living environment. We will regularly monitor and evaluate our performance by providing customers with numerous opportunities to grade our work and will use this customer feedback as a daily management tool. We also intend to publish these customer evaluations online as important and credible information for prospective customers. Certain aspects of our on-site operations will be automated to enable current and future residents to interact with us using methods that are efficient and effective for them, such as making online requests for service work, and executing leases and lease renewals. In addition, we will emphasize the quality of our on-site team members through recruiting, training, and retention programs, which, with continuous and real-time customer feedback, is expected to contribute to improved customer service. We believe that greater customer satisfaction leads to higher resident retention and increased occupancy rates, which in turn leads to increased revenue and reduced costs.

 

  •  

Resident Selection and Retention. We believe that neighbors are a meaningful part of the customer experience, together with the location of the community and the physical quality of the apartment homes. Part of our property management strategy will be to focus on attracting and retaining stable, credit-worthy residents who are also good neighbors and are likely to live with us longer. We will have explicit criteria for resident selection, which we will apply to new and renewal leases, including creditworthiness and behavior in accordance with our apartment community standards and our written “Good Neighbor Commitment.”

 

  •  

Revenue Management and Ancillary Services. We will have a centralized revenue management system that leverages people, processes, and technology to work in partnership with our local property management teams to implement rental rate pricing strategies. We are focused on careful measurements of on-site operations, as we believe that timely and accurate collection of apartment community performance and resident profile data allows us to maximize revenue for our customers through better property management and leasing decisions. We seek to maximize revenue for our

 

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customers by performing timely data analysis of new and renewal pricing for each apartment home, thereby enabling us to adjust rents quickly in response to changes in supply and demand and minimize vacancy time. We also generate incremental revenue for our customers by providing or facilitating the provision of services to our residents, including, at certain apartment communities, telecommunications services, parking options, package lockers, and storage space rental.

 

  •  

Controlling Expenses. Innovation is the foundation of our cost control efforts. Innovative activities we intend to undertake include: taking advantage of economies of scale at the corporate level through electronic procurement, which reduces complexity and increases purchasing volume discounts; focusing on life cycle costs by investing in more durable, longer-lived materials, which reduce turn times and costs; and leveraging technology through such items as smart home capabilities, website design, and package lockers, which meet today’s customer preference for self-service. Additionally, our efforts to maximize resident retention through our resident selection process described above is expected to result in in reduced turn costs.

 

  •  

Improving and Maintaining Apartment Community Quality. We believe that the physical condition and amenities of the apartment communities we operate are important factors in our ability to maintain and increase rental rates. We intend to invest in the maintenance and improvement of these communities primarily through capital additions that extend the usefulness of the community or enhance its condition.

Our Management Team

In connection with the Separation, AIR will retain substantially all of Aimco’s existing employees, including its property management team, and Aimco will employ approximately 50 of Aimco’s existing employees. Each of AIR and Aimco will have senior management teams focused on the performance of each company’s respective businesses and value-creation opportunities. We believe that the separation of the Aimco and AIR portfolios, and an experienced senior management team at each of Aimco and AIR will result in the respective businesses each receiving the senior management focus and attention required for each business to realize its potential.

Our senior management team has a collective track record of successful redevelopment and development projects, active management of real estate operations, or real estate portfolio management, all within a REIT environment. Our senior management team averages 12 years working together. Tom Keltner will be elected Chairman of the AIR board of directors. Terry Considine will be a member of the AIR board of directors and will also serve as AIR’s Chief Executive Officer. Mr. Considine has served as Chief Executive Officer of Aimco since July 1994. Mr. Considine will resign as Chief Executive Officer of Aimco in connection with the Separation and will continue to serve Aimco with specific responsibilities during the next two years to support the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors. During the two years when Mr. Considine will have specific responsibilities to the Aimco board of directors, he will not accept compensation from Aimco that would serve to increase his current compensation, provided that, AIR and Aimco have agreed that following the Separation, Aimco will reimburse AIR for base salary, short-term incentive amounts, and long-term incentive amounts paid by AIR to Mr. Considine under his employment agreement with AIR that are in excess of $1 million annually. In addition, Mr. Considine will serve on the boards of directors of both AIR and Aimco, but will not serve as Chairman of either. Mr. Considine (in addition to any other directors serving on both boards of directors) will recuse himself from voting as a member of either board of directors during the approval or disapproval of any transactions between the two companies. In addition, our senior management team will include Lisa Cohn, as President and General Counsel, Keith Kimmel, as President, Property Operations, Paul Beldin, as Executive Vice President and Chief Financial Officer, and Conor Wagner, as Senior Vice President and Chief Investment Officer.

Management’s compensation is designed to be aligned with strategy and performance and to incentivize growth and returns. See “Management—Executive Compensation.”

 

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In addition, we will have a board of directors that meets the NYSE independence requirements, including being comprised of a majority of independent directors, and AIR will separate the roles of Chairman of the board of directors and Chief Executive Officer. Effective as of the Separation, AIR will withdraw from MUTA. To enable AIR’s management team to prioritize operations during a turbulent economy and to execute a smooth transition to a pure-play business model, the Aimco board of directors decided unanimously to classify the AIR board of directors for two years. Class I will serve until the 2021 annual meeting of stockholders, and all classes will stand for annual election at the 2022 annual meeting and thereafter. By having opted out of MUTA, AIR will not be able to reclassify its board without stockholder approval.

REIT Status

We will elect to be treated as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2020. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our “real estate investment trust taxable income,” which is generally equivalent to net taxable ordinary income (and may be all cash or a combination of cash and stock satisfying the requirements of applicable law). See “U.S. Federal Income Tax Considerations.”

Strengths

The Separation is intended to provide us and Aimco with the necessary structure, management, and strategy to create stockholder value. In particular, we believe that AIR will have the following strengths following the Separation:

 

  •  

Focused business model. AIR will focus solely on the ownership and active management of a high-quality and diversified portfolio of stabilized apartment communities. We believe that a singular and clear focus will create a business that is more readily understood and valued by investors. We expect that AIR will be more predictable due to strong operations and reduced exposure to the execution risk of redevelopment and development, and we intend to provide returns to our investors through what we expect to be stable and consistent revenue, principally through collection of rent from the properties we own. AIR will use its senior management team to manage portfolio and capital allocations, including the acquisition or sale of properties, continuing upgrades and re-investment, as well as establish and execute balance sheet strategies, and oversee third-party property management.

 

  •  

Diversified real estate portfolio. AIR’s real estate portfolio, with properties in eight important geographic concentrations, among other markets, provides geographic diversification in order to reduce the volatility of our rental revenue by avoiding undue concentration in any particular market. AIR’s portfolio is also diversified by price point and quality. We seek price point diversification to allows us to benefit from price-points that have different advantages over various economic and housing cycles. Our price point “A” apartment communities typically provide higher margins but have tenants with fast growing incomes that are more susceptible to competitive housing supply, while our price point “B” and “C” apartment communities typically provide lower margins but have less volatile rental rates and are less susceptible to competitive housing supply.

 

  •  

Investment in low risk asset classes. AIR is expected to limit its exposure to risk by (i) investing in a transparent and well understood asset class, maintaining a diversified portfolio of high quality, multifamily properties whose cash flows are predictable and with generally stable growth, and minimizing the risk of redevelopment and development, and (ii) maintaining a balance sheet with leverage consistent with peer averages.

 

  •  

Ability to obtain redeveloped and developed properties from Aimco. Although Aimco and AIR will be focused and independent companies, we believe there are potential benefits to each from the opportunities they have to work together in the future when it is in their respective interests. AIR may benefit from Aimco’s acceleration of the development or redevelopment of certain of AIR’s properties

 

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that have potential for redevelopment or development in the future. Specifically, we may choose to improve the quality of our portfolio through our relationship with Aimco, as we may lease certain properties to Aimco for development or redevelopment and lease-up. Under these leases Aimco will have the option, but not an obligation, to terminate the leases once the properties reach and maintain stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception). We will have a purchase option with respect to any real property owned or, subject to the consent of the landlord, leased by Aimco for which redevelopment has been substantially completed by Aimco (if applicable) and that has reached a specified occupancy for a minimum time period (excluding the Excluded Seed Properties, the Additional Excluded Properties, the Separate Portfolio Assets, and properties leased from AIR pursuant to the Master Leasing Agreement).

 

  •  

Management team with relevant experience and incentives aligned with stockholders. AIR’s senior management team will focus solely on AIR’s business and will be incentivized to make decisions that are in the best interests of AIR. AIR will also have asset managers and internal auditors to oversee its performance, and both management and board investment committees to review and approve transactions. AIR’s senior management team has a collective track record of active management of real estate operations and real estate portfolio management, all within a REIT environment.

 

  •  

Experienced leader with incentives aligned with stockholders’ interests. Terry Considine will serve as AIR’s Chief Executive Officer. Mr. Considine has served as Chief Executive Officer of Aimco since July 1994. In addition, Mr. Considine has over 45 years of experience in the real estate and other industries. As a substantial equity holder in AIR, we believe Mr. Considine’s interests will be well-aligned with the interests of AIR’s stockholders.

Strategy

 

  •  

Diversified investments. We intend to own a portfolio of stabilized properties in top United States markets and focus on properties with high land value located in submarkets with outsized growth prospects. We also intend to maintain a balanced multifamily portfolio consisting of properties diversified across “A,” “B,” and “C” price points, allowing AIR to benefit from price-points that have different advantages over various economic and housing cycles.

 

  •  

High quality portfolio with strong property management operations. We will actively manage our portfolio, aiming to maintain high quality properties attractive to customers with above average incomes and prospects. Our apartment communities will generally be equipped with smart home technology and other amenities. We will aim to drive rent growth based on high levels of resident retention through strong customer selection and satisfaction, coupled with disciplined innovation resulting in sustained cost control, to maximize net operating income growth and margins.

 

  •  

Cautious use of financial leverage. We expect to operate at leverage levels lower than that historically associated with Aimco and at levels in line with our peers. We intend to have a strong, low-cost, low-leverage balance sheet that is flexible and maintains a well-laddered maturity schedule, and plan to target pro forma leverage ratio (net debt / normalized EBITDA) of 5.5:1. Specifically, our leverage immediately after the Separation is expected to be principally comprised of single asset, non-recourse, property level debt. We will consider issuing corporate debt when its cost is lower than non-recourse property debt.

 

  •  

Reduced Execution Risk. We will be able to reduce the execution risk, overhead costs, and vacancy expense associated with redevelopment and development, construction, and lease-ups. Instead, we are expected to benefit from a series of valuable opportunities to transact with Aimco when it is in our interests to enhance our portfolio, while limiting our exposure to such risks.

 

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Properties

Our portfolio is diversified by both geography and price point and consists of market rate apartment communities. Our portfolio includes garden style, mid-rise, and high-rise apartment communities with eight important geographic concentrations, among other markets, focusing on properties with high land value located in submarkets with outsized growth prospects. We intend to seek predictable rent growth from such properties, which are diversified across “A,” “B,” and “C+” price points, averaging “B+” in quality. As of June 30, 2020, our portfolio consisted of roughly one-half “A” rated properties and one-half “B” and “C+” rated properties.

We measure the quality of apartment communities in our portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance and analysis. Under this rating system, we classify as “A” quality apartment communities those earning rents greater than 125% of local market average; as “B” quality apartment communities those earning rents between 90% and 125% of local market average; as “C+” quality apartment communities those earning rents greater than $1,100 per month, but lower than 90% of local market average; and as “C” quality apartment communities those earning rents less than $1,100 per month and lower than 90% of local market average. We classify as “B/B+” quality a portfolio that on average earns rents between 100% and 125% of local market average rents. Although some companies and analysts within the multifamily real estate industry use apartment community quality ratings of “A,” “B,” and “C,” some of which are tied to local market rent averages, the metrics used to classify apartment community quality as well as the period for which local market rents are calculated may vary from company to company. Accordingly, this rating system for measuring apartment community quality is neither broadly nor consistently used in the multifamily real estate industry.

Our 98 apartment communities had 26,599 apartment homes as of September 30, 2020, with the largest community containing 2,113 apartment homes. We will hold an average ownership of approximately 93.5% measured by GAV, resulting in our share of apartment homes being 24,878 as of September 30, 2020. These apartment communities offer residents a range of amenities, including resort pools with cabanas, grills, clubhouses, spas, fitness centers, package lockers, dog parks, electric vehicle chargers, and large open spaces. Many of the apartment homes offer features such as smart home technology, granite countertops, wood flooring, stainless steel appliances, fireplaces, spacious closets, washer and dryer connections, balconies, and patios.

The majority of our properties will be encumbered by property debt. At the completion of the Separation and at AIR’s pro rata share, our properties are expected to be encumbered by, in the aggregate, $3.1 billion of property debt with a weighted average interest rate of 3.59% and a weighted-average maturity of 7.9 years. The estimated aggregate GAV (as of March 31, 2020) of the properties that will be unencumbered at the completion of the Separation at which time AIR’s share will be $2.5 billion.

We will have a purchase option with respect to any real property owned or, subject to the consent of the landlord, leased by Aimco for which redevelopment has been substantially completed by Aimco (if applicable) and that has reached a specified occupancy for a minimum time period (excluding the Excluded Seed Properties, the Additional Excluded Properties, the Separate Portfolio Assets, and properties leased from AIR pursuant to the Master Leasing Agreement). See “Our Relationship with Aimco Following the Separation—Master Leasing Agreement—Right of First Offer/Purchase Option” for more details.

 

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Below is a summary of properties that we are expected to own at the completion of the Separation, as of March 31, 2020:

 

     Percent of
Total
GAV 		    Number of
Apartment
Communities 		     AIR’s
Share of
Apartment
Homes(1) 		     Unit
Weighted
Rent v.
Market 		    Property
Grade(2) 		 

Los Angeles

     21.5 %      13        3,499        146.7 %      A  

Greater Washington

     12.4 %      11        5,215        87.9 %      C+  

Philadelphia

     12.0 %      9        2,669        167.9 %      A  

Bay Area

     10.6 %      10        1,767        97.5 %      B  

Boston

     9.9 %      12        2,598        94.7 %      B  

Miami

     9.6 %      5        2,098        109.5 %      B+  

San Diego

     7.2 %      8        2,104        103.1 %      B  

Denver

     7.1 %      8        2,240        104.9 %      B  

Other Markets

     9.7 %      22        2,688        122.4 %      B+  

Total

     100.0 %      98        24,878       

 

(1)

Share of Apartment Homes is as of September 30, 2020.

(2)

Average quality rating based on REIS market data as of March 31, 2020.

We expect to lease the Initial Leased Properties (and additional properties, as may be mutually agreed between us and Aimco in the future, subject to the approval of each of AIR’s and Aimco’s independent directors) to Aimco pursuant to leases entered into in accordance with the Master Leasing Agreement for a percentage of then-current fair market value. Aimco will then have the option to redevelop, develop or lease-up the property with the goal of maximizing long-term value of the community. Upon completion of the redevelopment and development and lease-up, Aimco will have the option, but not an obligation, to terminate any of the leases for these properties once they reach and maintain stabilization (so long as the fair market value of the property at stabilization is not less than the fair market value of such property at lease inception), and receive payment for the redevelopment or development-related improvements, either by payment from AIR of a sum equal to 95% of the difference between the then-current fair market value of the property less the fair market value of the property at the time of lease inception if AIR exercises an option to pay such fee, or through a sale of the property to a third party (by AIR and Aimco), with AIR guaranteed to receive an amount attributable to the fair market value of the property at the time of lease inception and Aimco retaining any excess proceeds. In the event of such sale of the property, Aimco may also elect to purchase the property at a purchase price equal to the fair market value thereof at the time of lease inception (and may subsequently sell the property to a third party, subject to AIR’s right of first refusal during the first year following Aimco’s acquisition). If AIR elects not to pay the fee for the redevelopment or development-related improvements, and Aimco declines to so purchase the property or cause its sale to a third party, Aimco may elect to rescind its termination of the applicable lease and instead continue such lease in effect in accordance with its terms. If Aimco does not exercise (or rescinds) its right to terminate a lease, Aimco will have the option to assign the lease to a third party, subject to our consent and right of first refusal.

Employees

In connection with the Separation, AIR will retain approximately 850 of Aimco’s existing employees (including Aimco’s existing property management employees), and Aimco will employ approximately 50 of Aimco’s existing employees.

Certain of our employees will provide services to Aimco following the Separation pursuant to the Master Services Agreement. See “Our Relationship with Aimco Following the Separation.”

Competition

In attracting and retaining residents to occupy our apartment communities and the apartment communities that we manage, we will compete with numerous other housing providers and property managers. Our apartment

 

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communities and the apartment communities we manage will compete directly with other rental apartments, as well as condominiums and single-family homes that are available for rent or purchase in the markets in which these apartment communities are located. Principal factors of competition include rent or price charged, attractiveness of the location and apartment community, and the quality and breadth of services. The number of competitive apartment communities relative to demand in a particular area has a material effect on our ability to lease apartment homes at these apartment communities and on the rents charged. In certain markets, there exists an oversupply of newly constructed apartment homes, single-family homes, and condominiums relative to consumer demand, which affects the pricing and occupancy of these rental apartments.

We also will compete with other real estate investors, including other apartment REITs, pension and investment funds, partnerships, and investment companies in acquiring, redeveloping, developing, managing, obtaining financing for, and disposing of apartment communities. This competition will affect our ability to acquire or lease apartment communities we want to add to our portfolio and the price that we will pay in such acquisitions or leases; our ability to finance or refinance communities in our portfolio and the cost of such financing; and our ability to dispose of communities we no longer desire to retain in our portfolio and the timing and price available to us when we seek to dispose of such communities. We expect to grow our portfolio through our relationship with Aimco, as we intend to lease certain properties to Aimco for which Aimco will have the option to complete the development or redevelopment and lease-up thereof (provided that once Aimco elects to commence the redevelopment, development and/or lease-up of such properties, it will use commercially reasonable efforts to diligently pursue the same to completion). We will have the option to make a payment to Aimco if Aimco terminates the lease for any such property once the applicable property has reached and maintained stabilization, based on the difference between the then-current fair market value of the property less the fair market value of the property at lease inception (at a small discount thereto). If Aimco is not successful in redeveloping and developing new communities, our ability to acquire discounted communities in the future and grow our portfolio will be affected.

We believe that the Separation and associated transactions will position us to identify and successfully capitalize on opportunities that meet our investment objectives. For a discussion of the risks associated with competitive conditions affecting our and Aimco’s businesses, see “Risk Factors—Risks Related to Our Business.”

Regulation

General

Apartment communities and their owners are subject to various laws, ordinances, and regulations, including those related to real estate broker licensing and regulations relating to recreational facilities such as swimming pools, activity centers, and other common areas. Changes in laws increasing the potential liability for environmental conditions existing on communities or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction, and safety requirements, may result in significant unanticipated expenditures, which would adversely affect our net income and cash flows from operating activities. In addition, existing rent control laws, as well as future enactment of rent control or rent stabilization laws, or other laws regulating multifamily housing, may reduce rental revenue or increase operating costs in particular markets.

Environmental

Various federal, state, and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present at an apartment community. These materials may include lead-based paint, asbestos, polychlorinated biphenyls, and petroleum-based fuels. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the release or presence of such materials. In connection with the ownership, operation, and management of apartment communities, we could potentially be liable for

 

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environmental liabilities or costs associated with our current communities, communities we acquire or manage in the future, or communities we previously owned or operated in the past. See “Risk Factors—Risks Related to Our Business—Potential liability or other expenditures associated with potential environmental contamination may be costly.”

REIT Qualification

We will elect to be subject to tax as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ending December 31, 2020. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders, and the concentration of ownership of our capital stock. We believe that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.

Legal Proceedings

General

In addition to the matters described below, we may become party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which may be covered by our general liability insurance program, and some of which may have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

Separation

It is expected that, pursuant to the Separation Agreement: (i) any liability arising from or relating to legal proceedings related to the Separation, the Restructuring, or the related transactions will generally be assumed by Aimco and that Aimco will indemnify us and our subsidiaries (and our respective directors, officers, employees, and agents, and certain other related parties) against any losses arising from or relating to such legal proceedings; and (ii) we will bear (either directly or through indemnification to Aimco) (x) any indemnifiable losses in respect of liabilities of the type covered by Aimco’s general liability insurance policy that were incurred but not yet reported as of the Separation and (y) any liabilities in excess of $10 million in the aggregate arising out of litigation matters related to pre-closing occurrences (that are not related to the Separation, the Restructuring, the related transactions, or other liabilities allocated to Aimco pursuant to the terms of the Separation Agreement). Aimco is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its business, which will be subject to the indemnities to be provided by Aimco to us or us to Aimco, as applicable. The ultimate outcome of these matters cannot be predicted. The resolution of any such legal proceedings, either individually or in the aggregate, could have a material adverse effect on Aimco’s business, financial position or results of operations, which, in turn, could have a material adverse effect on our business, financial position or results of operations if Aimco is unable to meet its indemnification obligations.

Environmental

Various federal, state, and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or for

 

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personal injury, disease, disability, or other infirmities related to the alleged presence of hazardous materials. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate. Generally, environmental liabilities will be allocated to the property owner in connection with the Separation pursuant to the Separation Agreement.

For environmental liabilities related to properties that are no longer owned by Aimco or AIR at the time of the Separation (including with respect to the liabilities described in the next two paragraphs), pursuant to the terms of the Separation Agreement, New OP will bear the first $17.5 million of such liabilities, in the aggregate, and AIR OP will bear any such liabilities in excess of $17.5 million. As a result, although we or certain of our subsidiaries may have legal liabilities to third parties in connection with these environmental liabilities, New OP will be required to indemnify us in respect of any of our indemnifiable losses up to $17.5 million in the aggregate related to such matters subject to the terms and conditions of the Separation Agreement, and AIR would bear (either directly or through indemnification obligations to Aimco) any excess liabilities above such amount.

Aimco is engaged in discussions with the Environmental Protection Agency, or EPA, regarding contaminated groundwater near an Indiana apartment community that has not been owned by Aimco since 2008. The contamination allegedly derives from a dry cleaner that operated on Aimco’s former property, prior to Aimco’s ownership. Aimco undertook a voluntary remediation of the dry cleaner contamination under state oversight. In 2016, the EPA listed Aimco’s former community and a number of residential communities in the vicinity on the National Priorities List, or NPL (i.e., as a Superfund site). In May 2018, Aimco prevailed on its federal judicial appeal vacating the Superfund listing. Aimco continues to work with EPA to formulate an agreed order to reimburse EPA costs and finish clean-up of the site outside the Superfund program. Although the outcome of this process is uncertain, Aimco does not expect their resolution to have a material adverse effect on its consolidated financial condition, results of operations or cash flows. The liabilities associated with this matter will be allocated, and certain indemnification rights will be provided, pursuant to the Separation Agreement, as described in more detail in the paragraph above.

Aimco also has a contingent environmental liability related to a property in Lake Tahoe, California. An entity owned by Aimco was the former general partner of a now-dissolved partnership that previously owned a site where a laundromat with a self-service dry-cleaning machine operated. That entity and the current property owner have been remediating the site since 2009, under the oversight of the Lahontan Regional Water Quality Control Board, or Lahontan. In May 2017, Lahontan issued a final cleanup and abatement order that names four potentially responsible parties, acknowledges that there may be additional responsible parties, and requires the named parties to perform additional groundwater investigation and corrective actions with respect to onsite and offsite contamination. Aimco appealed the final order and on June 1, 2020, the court vacated the Order against Aimco. However, there are still civil suits pending related to this contingent liability. Although the outcome of this process is uncertain, Aimco does not expect the resolution to have a material adverse effect on its or our consolidated financial condition, results of operations, or cash flows. The liabilities associated with this matter will be allocated, and certain indemnification rights will be provided, pursuant to the Separation Agreement, as described in. more detail in the paragraph above.

We have determined that our legal obligations to remove or remediate certain potentially hazardous materials may be conditional asset retirement obligations, as defined by GAAP. Except in limited circumstances where the asset retirement activities are expected to be performed in connection with a planned construction project or apartment community casualty, we believe that the fair value of our asset retirement obligations cannot be reasonably estimated due to significant uncertainties in the timing and manner of settlement of those obligations. Asset retirement obligations, with respect to those assets and liabilities that will be allocated to us in the Separation, that are reasonably estimable as of December 31, 2019, are immaterial to our consolidated financial condition, results of operations, and cash flows.

 

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Insurance

Our primary lines of insurance coverage will be property, general liability, and workers’ compensation. We believe that our insurance coverages adequately insure our apartment communities against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood, terrorism, and other perils, and adequately insure us against other risk. Our coverage includes deductibles, retentions, and limits that are customary in the industry. We have established loss prevention, loss mitigation, claims handling, and litigation management procedures to manage our exposure.

 

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MANAGEMENT

Directors

Set forth below is certain information, as of November 17, 2020, with respect to the directors who are expected to serve on AIR’s board of directors following the Separation. We may present additional nominees for election to the board of directors prior to the Separation. All such nominees will be presented to AIR’s board of directors for election prior to the Separation. Each director will hold office until his or her successor is duly elected or appointed and qualified or until his or her earlier death, retirement, disqualification, resignation or removal.

Our charter that will become effective contemporaneously with the Separation will provide that our board of directors shall consist of a number of directors as fixed by the board of directors in a manner set forth in the bylaws, but in no event shall be fewer than three. Our bylaws will further provide that the number of directors may be changed by the board of directors to a number not greater than nine. We expect that our board of directors initially will consist of nine directors.

Our charter will provide that our board of directors will initially be divided into three classes, denominated as Class I, Class II and Class III. Class I will serve until the 2021 annual meeting of our stockholders, at which annual meeting such Class will be elected to a term expiring at the 2022 annual meeting of our stockholders. Class II and Class III will serve until the 2022 annual meeting of our stockholders. Commencing with the 2022 annual meeting of our stockholders, our board of directors will no longer be classified, and each director shall be elected annually for a term of one year expiring at the next succeeding annual meeting. Class I is expected to initially be comprised of Robert A. Miller, Kathleen M. Nelson and Michael A. Stein, Class II is expected to initially be comprised of Thomas L. Keltner, John D. Rayis and Ann Sperling and Class III is expected to initially be comprised of Terry Considine, Devin I. Murphy and Nina A. Tran.

Our board of directors will also take action substantially concurrent with the Separation to resolve that, following the 2022 annual meeting of our stockholders, we will be prohibited from electing to be subject to Section 3-803, Section 3-804(a)-(c) and Section 3-805 of Subtitle 8 of Title 3 of the Maryland General Corporation Law, commonly referred to as the “Maryland Unsolicited Takeover Act,” or “MUTA,” which resolutions will be reflected in articles supplementary to our charter.

Mr. Keltner will serve as Chairman of the Board. Messrs. Considine, Miller, and Stein will also continue to serve on the board of directors of Aimco after the Separation. Upon completion of the Separation, we believe a majority of our board of directors will be determined to be independent, as defined under the NYSE listing requirements.

 

Name

   Age     

Position

Thomas L. Keltner

     74      Chairman of the board of directors

Terry Considine

     73      Director and Chief Executive Officer

Robert A. Miller

     74      Director

Devin I. Murphy

     60      Director

Kathleen M. Nelson

     75      Director

John D. Rayis

     66      Director

Ann Sperling

     65      Director

Michael A. Stein

     71      Director

Nina A. Tran

     52      Director

Thomas L. Keltner. Mr. Keltner will serve as the Chairman of the board of directors of AIR. Mr. Keltner was first elected as a director of Aimco in April 2007 and is currently Chairman of Aimco’s Compensation and Human Resources Committee. He is also a member of Aimco’s Audit, Nominating and Corporate Governance, and Redevelopment and Construction Committees. Mr. Keltner served as Executive Vice President and Chief

 

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Executive Officer—Americas and Global Brands for Hilton Hotels Corporation from March 2007 through March 2008, which concluded the transition period following Hilton’s acquisition by The Blackstone Group. Mr. Keltner joined Hilton Hotels Corporation in 1999 and served in various roles. Mr. Keltner has more than 20 years of experience in the areas of hotel development, acquisition, disposition, franchising and management. Prior to joining Hilton Hotels Corporation, from 1993 to 1999, Mr. Keltner served in several positions with Promus Hotel Corporation, including President, Brand Performance and Development. Before joining Promus Hotel Corporation, he served in various capacities with Holiday Inn Worldwide, Holiday Inns International and Holiday Inns, Inc. In addition, Mr. Keltner was President of Saudi Marriott Company, a division of Marriott Corporation, and was a management consultant with Cresap, McCormick and Paget, Inc. Mr. Keltner will bring particular expertise to AIR’s board of directors in the areas of property operations, marketing, branding, development and customer service.

Terry Considine. Mr. Considine will serve on AIR’s board of directors and will also be AIR’s Chief Executive Officer. Mr. Considine has been Chairman of the board of directors and Chief Executive Officer of Aimco since July 1994. In connection with the Separation, Mr. Considine will resign as Chairman of the board and as Chief Executive Officer of Aimco and will remain a member of Aimco’s board of directors and will have specific responsibilities during the next two years to support the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors. Mr. Considine also serves on the board of directors of Intrepid Potash, Inc., a publicly held producer of potash. Mr. Considine has over 45 years of experience in the real estate and other industries. Among other real estate ventures, in 1975 Mr. Considine founded and subsequently managed the predecessor companies that became Aimco at its initial public offering in 1994.

Robert A. Miller. Mr. Miller was first elected as a director of Aimco in April 2007. Mr. Miller is a member of Aimco’s Redevelopment and Construction, Audit, Compensation and Human Resources, and Nominating and Corporate Governance Committees. Mr. Miller served as Executive Vice President and Chief Operating Officer, International of Marriott Vacations Worldwide Corporation (“MVWC”) from 2011 to 2012, when he retired from this position, and serves as President of RAMCO Advisors LLC, an investment advisory and business consulting firm. Mr. Miller served as the President of Marriott Leisure from 1997 to November 2011, when Marriott International elected to spin-off its subsidiary entity, Marriott Ownership Resorts, Inc., by forming a new parent entity, MVWC, as a new publicly held company. Prior to his role as President of Marriott Leisure, from 1984 to 1988, Mr. Miller served as Executive Vice President & General Manager of Marriott Vacation Club International and then as its President from 1988 to 1997. In 1984, Mr. Miller and a partner sold their company, American Resorts, Inc., to Marriott. Mr. Miller co-founded American Resorts, Inc. in 1978, and it was the first business model to encompass all aspects of timeshare resort development, sales, management and operations. Prior to founding American Resorts, Inc., from 1972 to 1978, Mr. Miller was Chief Financial Officer of Fleetwing Corporation, a regional retail and wholesale petroleum company. Prior to joining Fleetwing, Mr. Miller served for five years as a staff accountant for Arthur Young & Company. Mr. Miller is past Chairman and currently a director of the American Resort Development Association and is past Chairman and director of the ARDA International Foundation. Mr. Miller also currently serves as a director on the board of Welk Hospitality Group, Inc. As a successful real estate entrepreneur and corporate executive, Mr. Miller will bring particular expertise to AIR’s board of directors in the areas of operations, management, marketing, sales, and development, as well as finance and accounting.

Devin I. Murphy. Mr. Murphy was first elected as a director of Aimco in April 2020. Mr. Murphy is on Aimco’s Audit, Compensation and Human Resources, Nominating and Corporate Governance, and Redevelopment and Construction Committees. Mr. Murphy serves as President of Phillips Edison & Company, an owner and operator of grocery-anchored shopping centers. He previously served as Vice Chairman of Investment Banking at Morgan Stanley. Mr. Murphy began his real estate career in 1986 when he joined the real estate group at Morgan Stanley as an Associate. Prior to rejoining Morgan Stanley in June 2009, Mr. Murphy was a managing partner of Coventry Real Estate Advisors, a real estate private equity firm, which sponsors institutional investment funds that acquire and develop retail properties. Before joining Coventry, Mr. Murphy served as global head of real estate investment banking for Deutsche Bank Securities, Inc. Mr. Murphy was with

 

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Morgan Stanley for 15 years before joining Deutsche Bank. He held a number of senior positions at Morgan Stanley, including co-head of U.S. real estate investment banking and head of the private capital markets group. Mr. Murphy is an independent director and member of the Audit Committee of CoreCivic, Inc., a NYSE listed REIT that is the nation’s leading provider of high quality corrections and detention management facilities. He is an advisory director of Hawkeye Partners, a real estate private equity firm headquartered in Austin, Texas, and of Trigate Capital, a real estate private equity firm headquartered in Dallas, Texas. Mr. Murphy will bring particular expertise to AIR’s board of directors in the areas of investment banking, real estate finance, and capital markets.

Kathleen M. Nelson. Ms. Nelson was first elected as a director of Aimco in April 2010 and is currently Chairman of Aimco’s Nominating and Corporate Governance Committee and a member of Aimco’s Audit, Compensation and Human Resources, and Redevelopment and Construction Committees. Ms. Nelson has an extensive background in commercial real estate and financial services with over 40 years of experience, including 36 years at TIAA-CREF. She held the position of Managing Director/Group Leader and Chief Administrative Officer for TIAA-CREF’s mortgage and real estate division. Ms. Nelson developed and staffed TIAA’s real estate research department. She retired from this position in December 2004 and founded and serves as president of KMN Associates LLC, a commercial real estate investment advisory and consulting firm. In 2009, Ms. Nelson co-founded and serves as Managing Principal of Bay Hollow Associates, LLC, a commercial real estate consulting firm, which provides counsel to institutional investors. Ms. Nelson served as the International Council of Shopping Centers’ chairman for the 2003-04 term and has been an ICSC Trustee since 1991. She is a member of various ICSC committees. Ms. Nelson serves on the board of directors of CBL & Associates Properties, Inc., which is a publicly held REIT that develops and manages retail shopping properties. Ms. Nelson is also on the board of directors and is Lead Director of Dime Community Bankshares, Inc., a publicly traded bank holding company, based in Brooklyn, New York. She has served as an advisor to the Rand Institute Center for Terrorism Risk Management Policy and on the board of the Greater Jamaica Development Corporation. Ms. Nelson serves on the Advisory Board of the Beverly Willis Architectural Foundation and is a member of the Anglo American Real Property Institute. Ms. Nelson will bring particular expertise to the AIR board of directors in the areas of institutional real estate investing, real estate finance and investment.

John D. Rayis. Mr. Rayis was first elected as a director of Aimco in April 2020. Mr. Rayis is on Aimco’s Audit, Compensation and Human Resources, Nominating and Corporate Governance, and Redevelopment and Construction Committees. In December 2016, Mr. Rayis retired as a partner of global law firm Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”), where he practiced tax law for 34 years. He retired as Of Counsel at Skadden in December 2018. Mr. Rayis advised clients on a variety of complex corporate, partnership, and REIT tax law matters. Mr. Rayis repeatedly has been selected for inclusion in Chambers Global: The World’s Leading Lawyers for Business in the “Capital Markets: REITs” category, in Chambers USA, America’s Leading Lawyers for Business as one of America’s leading REIT tax lawyers, and in The Best Lawyers in America. Mr. Rayis will bring particular expertise to AIR’s board of directors in the areas of corporate, tax, and securities law, governance, and strategic alliances.

Ann Sperling. Ms. Sperling was first elected as a director of Aimco in May 2018 and is currently Chairman of Aimco’s Redevelopment and Construction Committee. Ms. Sperling is also a member of Aimco’s Audit, Compensation and Human Resources, and Nominating and Corporate Governance Committees. Ms. Sperling has over 35 years of real estate and management experience, including roles in commercial real estate investment and development and leadership roles in public real estate companies in the areas of operations, finance, transactions and marketing. She has served as Senior Director of Trammell Crow Company, the development subsidiary of the public company, CBRE, since October 2013, focusing on the capitalization and execution of new commercial developments. From October 2009 through May 2013, she served in two roles at Jones Lang LaSalle, the public real estate investment and services firm, first as Chief Operating Officer, Americas, and then as President, Markets West. As COO, she oversaw operations, finance, marketing, research, legal and engineering and served on the governance focused Global Operating Committee. From October 2007 through June 2009, Ms. Sperling was Managing Director of Catellus, then a mixed-use development and investment subsidiary of the public REIT, ProLogis, where she was responsible for operations, finance and marketing, prior to this subsidiary’s preparation

 

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for sale. Previously, between 1982 and 2006, Ms. Sperling held a variety of roles at the public development and services firm, Trammell Crow Company, the last role of which was as Senior Managing Director and Area Director, responsible for all facets of operations, finance, transactions and marketing for the Rocky Mountain Region, prior to the firm’s merger with CBRE in 2006. Ms. Sperling serves on the Advisory Board of Cadence Capital and the Gates Center for Regenerative Medicine. Ms. Sperling will bring particular expertise to AIR’s board of directors in the areas of real estate investment and development, operations, marketing, and finance.

Michael A. Stein. Mr. Stein was first elected as a director of Aimco in October 2004 and is currently a member of Aimco’s Audit, Compensation and Human Resources, Nominating and Corporate Governance, and Redevelopment and Construction Committees. From January 2001 until its acquisition by Eli Lilly in January 2007, Mr. Stein served as Senior Vice President and Chief Financial Officer of ICOS Corporation, a biotechnology company based in Bothell, Washington. From October 1998 to September 2000, Mr. Stein was Executive Vice President and Chief Financial Officer of Nordstrom, Inc. From 1989 to September 1998, Mr. Stein served in various capacities with Marriott International, Inc., including Executive Vice President and Chief Financial Officer from 1993 to 1998. Mr. Stein serves on the board of directors of InvenTrust Properties Corp., an open-air shopping center REIT headquartered in Downers Grove, Illinois. He also serves on the InvenTrust audit and nominating and corporate governance committees. Mr. Stein previously served on the boards of directors of Nautilus, Inc., Getty Images, Inc., and Providence Health & Services. As the former audit committee chairman or audit committee member of two NYSE-listed companies, the former chief financial officer of two NYSE-listed companies, and having served in various capacities with Arthur Andersen from 1971 to 1989, including as a partner from 1981 to 1989, Mr. Stein will bring particular expertise to AIR’s board of directors in the areas of corporate and real estate finance, and accounting and auditing for large and complex business operations.

Nina A. Tran. Ms. Tran was first elected as a director of Aimco effective in March 2016 and is currently the Chairman of Aimco’s Audit Committee. Ms. Tran is also a member of Aimco’s Compensation and Human Resources, Nominating and Corporate Governance, and Redevelopment and Construction Committees. Ms. Tran has over 25 years of real estate and financial management experience, building and leading finance and accounting teams. Ms. Tran currently serves as the Chief Financial Officer for Veritas Investments, a real estate investment manager that owns and operates mixed use real estate properties in the San Francisco Bay Area. From 2013 to 2016, Ms. Tran served as the Chief Financial Officer of Starwood Waypoint Residential Trust, a leading publicly traded REIT that owns and operates single-family rental homes. Prior to joining Starwood Waypoint, Ms. Tran spent 18 years at AMB Property Corporation (now Prologis, Inc.), the largest publicly traded global industrial REIT. Ms. Tran served as Senior Vice President and Chief Accounting Officer, and most recently as Chief Global Process Officer, where she helped lead the merger integration between AMB and Prologis. Prior to joining AMB, Ms. Tran was a Senior Associate with PricewaterhouseCoopers, one of the big four public accounting firms. Ms. Tran is a certified public accountant (CPA) (inactive). Ms. Tran serves on the Advisory Board of the Asian Pacific Fund. Ms. Tran will bring particular expertise to AIR’s board of directors in the areas of accounting, financial control and business processes.

 

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Below is a summary of the qualifications and expertise of the nominees for election as directors, including expertise relevant to our business.

 

Summary of
Director
Qualifications and
Expertise

   Terry
Considine 		     Thomas L.
Keltner 		     Robert A.
Miller 		     Devin I.
Murphy 		     Kathleen M.
Nelson 		     John D.
Rayis 		     Ann
Sperling 		     Michael A.
Stein 		     Nina A.
Tran 		 

Accounting and Auditing for Large Business Organizations

           X        X                 X        X  

Business Operations

     X        X        X        X        X           X        X        X  

Capital Markets

     X              X        X              X        X  

Corporate Governance

     X              X        X        X           X     

Customer Service

        X        X                    

Executive

     X        X        X        X        X           X        X        X  

Financial Expertise and Literacy

     X        X        X        X        X        X        X        X        X  

Information Technology

                          X        X  

Investment and Finance

     X        X        X        X        X        X        X        X        X  

Legal

     X                    X           

Marketing and Branding

        X        X                 X        

Property Management and Operations

     X        X        X           X           X        X        X  

Real Estate

     X        X        X        X        X        X        X        X        X  

Talent Development and Management

     X        X        X        X        X        X        X        X        X  

Executive Officers

The following table shows the names and ages, as of November 17, 2020, of the individuals who are expected to serve as our executive officers, and the positions each such executive officer will hold, following the Separation. A description of the business experience of each for at least the past five years follows the table.

 

Name

   Age     

Position

Terry Considine

     73      Chief Executive Officer

Lisa R. Cohn

     51      President and General Counsel

Keith M. Kimmel

     49      President, Property Operations

Paul L. Beldin

     46      Executive Vice President and Chief Financial Officer

Conor Wagner

     39      Senior Vice President and Chief Investment Officer

 

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Terry Considine. Mr. Considine will serve on AIR’s board of directors and will also be AIR’s Chief Executive Officer. Mr. Considine has been Chairman of the board of directors and Chief Executive Officer of Aimco since July 1994. In connection with the Separation, Mr. Considine will resign as Chairman of the board and as Chief Executive Officer of Aimco and will remain a member of Aimco’s board of directors and will have specific responsibilities during the next two years to support the establishment and growth of the Aimco business, reporting directly to the Aimco board of directors. Mr. Considine also serves on the board of directors of Intrepid Potash, Inc., a publicly held producer of potash. Mr. Considine has over 45 years of experience in the real estate and other industries. Among other real estate ventures, in 1975 Mr. Considine founded and subsequently managed the predecessor companies that became Aimco at its initial public offering in 1994.

Lisa R. Cohn. Ms. Cohn is the President and General Counsel of AIR. Ms. Cohn was appointed Executive Vice President, General Counsel and Secretary of Aimco in December 2007. In addition to serving as general counsel, Ms. Cohn had responsibility for construction services, asset quality and service, insurance and risk management. She was also responsible for Aimco’s acquisition activities in the western region and disposition activities nationwide. Ms. Cohn has previously served as chairman of Aimco’s investment committee. From January 2004 to December 2007, Ms. Cohn served as Aimco’s Senior Vice President and Assistant General Counsel. She joined Aimco in July 2002 as Vice President and Assistant General Counsel. Prior to joining Aimco, Ms. Cohn was in private practice with the law firm of Hogan & Hartson LLP with a focus on public and private mergers and acquisitions, venture capital financing, securities, and corporate governance.

Keith M. Kimmel. Mr. Kimmel is the President, Property Operations of AIR. Mr. Kimmel was appointed as Aimco’s Executive Vice President of Property Operations in January 2011. From September 2008 to January 2011, Mr. Kimmel served as Aimco’s Area Vice President of property operations for the western region. Prior to that, from March 2006 to September 2008, he served as Aimco’s Regional Vice President of property operations for California. He joined Aimco in March of 2002 as a Regional Property Manager. Prior to joining Aimco, Mr. Kimmel was with Casden Properties from 1998 through 2002, and was responsible for the operation of the new construction and high-end product line. Mr. Kimmel began his career in the multifamily real estate business in 1992 as a leasing consultant and on-site manager.

Paul L. Beldin. Mr. Beldin is the Executive Vice President and Chief Financial Officer of AIR. Mr. Beldin joined Aimco in 2008 as Senior Vice President and Chief Accounting Officer. Prior to joining Aimco, from October 2007 to March 2008, Mr. Beldin served as Chief Financial Officer of APRO Residential Fund. Prior to that, from May 2005 to September 2007, Mr. Beldin served as Chief Financial Officer of America First Apartment Investors, Inc., then a publicly traded company. From 1996 to 2005, Mr. Beldin was with the firm of Deloitte & Touche, LLP, serving in numerous roles, including Audit Senior Manager and in the firm’s national office as an Audit Manager in SEC Services. Mr. Beldin is a certified public accountant.

Conor Wagner. Mr. Wagner is the Senior Vice President and Chief Investment Officer of AIR. Mr. Wagner joined Aimco as Vice President in 2018. At Aimco, Mr. Wagner had day-to-day finance responsibilities supporting portfolio strategy and transactional underwriting. Before joining Aimco, Mr. Wagner was an analyst on Green Street Advisors’ residential research team, where he co-led coverage of the apartment and single-family rental sectors. Prior to joining Green Street in 2014, he worked on the buy side as a long-short equity analyst. Mr. Wagner holds the Chartered Financial Analyst designation.

AIR OP

Through Sub REIT 2, a wholly owned subsidiary of AIR, AIR will be the general partner of AIR OP. Except as otherwise expressly provided in the AIR OP partnership agreement, all management powers over the business and affairs of AIR OP are exclusively vested in the general partner. AIR OP will have no directors or executive officers. See “Description of AIR OP Partnership Units and Summary of AIR OP Partnership Agreement.”

 

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Independence of Directors

The board of directors has determined that to be considered independent, an outside director may not have a direct or indirect material relationship with AIR, AIR OP or any of our subsidiaries (directly or as a partner, stockholder or officer of an organization that has a relationship with us). A material relationship is one that impairs or inhibits, or has the potential to impair or inhibit, a director’s exercise of critical and disinterested judgment on behalf of us and our stockholders. In determining whether a material relationship exists, our board of directors will consider all relevant facts and circumstances, including whether the director or a family member is a current or former employee of AIR, family member relationships, compensation, business relationships and payments, and charitable contributions between us and an entity with which a director is affiliated (as an executive officer, partner or substantial stockholder). Our board of directors will consult with our counsel to ensure that such determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent director,” including, but not limited to, those categorical standards set forth in Section 303A.02 of the listing standards of the NYSE as in effect from time to time.

Thomas L. Keltner, Robert A. Miller, Devin I. Murphy, Kathleen M. Nelson, John D. Rayis, Ann Sperling, Michael A. Stein, and Nina A. Tran will be independent directors.

Board Composition, Refreshment, and Director Tenure

AIR will be focused on having a well-constructed and high performing board. To that end, the Nominating and Corporate Governance Committee will select nominees for director based on, among other things, breadth and depth of experience, knowledge, skills, expertise, integrity, ability to make independent analytical inquiries, understanding of AIR’s business environment, and willingness to devote adequate time and effort to board responsibilities. The Nominating and Corporate Governance Committee will structure the AIR board of directors such that there are directors of varying tenures, with new directors and perspectives joining the board every few years while retaining the institutional memory of longer-tenured directors. Longer-tenured directors, balanced with less-tenured directors, enhance the board’s oversight capabilities. The AIR board of directors has been compiled with the intention of advancing AIR’s strategic priorities.

Committees of the Board of Directors

Prior to the Separation, we expect that our board of directors will establish the following committees, each of which will operate under a written charter that will be posted to our website at aircommunities.com prior to the Separation:

Audit Committee

The audit committee will be established in accordance with Rule 10A-3 under the Exchange Act and the NYSE listing requirements. The primary responsibilities of the audit committee will be to, among other things:

 

  •  

oversee AIR’s accounting and financial reporting processes, and audits of AIR’s financial statements;

 

  •  

directly responsible for the appointment, compensation, and oversight of the independent auditors and the lead engagement partner, and makes its appointment based on a variety of factors;

 

  •  

review the scope and overall plans for, and results of, the annual audit and internal audit activities;

 

  •  

oversee management’s negotiation with Ernst & Young LLP concerning fees, and exercises final approval over all Ernst & Young LLP fees;

 

  •  

consult with management and Ernst & Young LLP with respect to AIR’s processes for risk assessment and enterprise risk management. Areas involving risk that are reported on by management and considered by the Audit Committee, the other board of director committees, or the board of directors, include: operations, liquidity, leverage, finance, financial statements, the financial reporting process, accounting, legal matters, regulatory compliance, information technology and data protection, compensation, and human resources;

 

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  •  

consult with management and Ernst & Young LLP regarding, and provides oversight for, AIR’s financial reporting process, internal control over financial reporting, and AIR’s internal audit function;

 

  •  

review and approve AIR’s policy about the hiring of former employees of independent auditors;

 

  •  

review and approve AIR’s policy for the pre-approval of audit and permitted non-audit services by the independent auditor, and reviews and approves any such services provided pursuant to such policy;

 

  •  

receive reports pursuant to AIR’s policy for the submission and confidential treatment of communications from team members and others concerning accounting, internal control, and auditing matters;

 

  •  

review and discuss with management and Ernst & Young LLP quarterly earnings releases prior to their issuance and quarterly reports on Form 10-Q and annual reports on Form 10-K prior to their filing;

 

  •  

review the responsibilities and performance of AIR’s internal audit function, approve the hiring, promotion, demotion, or termination of the lead internal auditor, and oversee the lead internal auditor’s periodic performance review and changes to his or her compensation;

 

  •  

review with management the scope and effectiveness of AIR’s disclosure controls and procedures, including for purposes of evaluating the accuracy and fair presentation of AIR’s financial statements in connection with the certifications made by the CEO and CFO;

 

  •  

meet regularly with members of AIR’s management and with Ernst & Young LLP, including periodic meetings in executive session;

 

  •  

perform an annual review of AIR’s independent auditor, including an assessment of the firm’s experience, expertise, communication, cost, value, and efficiency, and including external data relating to audit quality and performance, including recent Public Company Accounting Oversight Board reports on Ernst & Young LLP and its peer firms;

 

  •  

perform an annual review of the lead engagement partner of AIR’s independent auditor and the potential successors for that role; and

 

  •  

periodically evaluates independent audit service providers.

The audit committee will be entirely composed of members who meet the independence requirements set forth by the SEC, in the NYSE listing requirements, and the audit committee charter. Each member of the audit committee will be financially literate in accordance with the NYSE listing requirements and at least one member of the audit committee will be an audit committee financial expert under SEC rules and the NYSE listing standards. The initial members of the audit committee will be determined prior to the Separation.

Nominating and Corporate Governance Committee

The primary responsibilities of the nominating and corporate governance committee will be to, among other things:

 

  •  

focus on board of director candidates and nominees, and specifically:

 

  •  

plan for board refreshment and succession planning for directors;

 

  •  

identify and recommend to the board individuals qualified to serve on the board;

 

  •  

identify, recruit, and, if appropriate, interview candidates to fill positions on the board, including persons suggested by stockholders or others; and

 

  •  

review each board member’s suitability for continued service as a director when his or her term expires and when he or she has a change in professional status, and recommends whether or not the director should be re-nominated;

 

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  •  

focus on board composition and procedures as a whole and recommends, if necessary, measures to be taken so that the board reflects the appropriate balance of knowledge, experience, skills, and expertise required for the board as a whole;

 

  •  

develop and recommend to the board a set of corporate governance principles applicable to AIR and its management;

 

  •  

maintain a related party transaction policy and oversee any potential related party transactions;

 

  •  

oversee a systematic and detailed annual evaluation of the board, committees, and individual directors in an effort to continuously improve the function of the board;

 

  •  

oversee AIR’s commitment to environmental, social, and governance issues, and disclosure related thereto;

 

  •  

consider corporate governance matters that may arise and develops appropriate recommendations, including providing the forum for the board to consider important matters of public policy and vet stockholder input on a variety of matters; and

 

  •  

review annually AIR’s public policy advocacy efforts and political and charitable contributions.

The nominating and corporate governance committee will be entirely composed of members who meet the independence requirements set forth by the SEC, in the NYSE listing requirements, and the nominating and corporate governance committee charter. The initial members of the nominating and corporate governance committee will be determined prior to Separation.

Compensation and Human Resources Committee

The primary responsibilities of the compensation committee will be to, among other things:

 

  •  

responsible for succession planning in all leadership positions, both in the short-term and the long-term, with particular focus on CEO succession in the short-term and the long-term;

 

  •  

oversee AIR’s management of the talent pipeline process;

 

  •  

oversee the goals and objectives of AIR’s executive compensation plans;

 

  •  

annually evaluate the performance of the CEO;

 

  •  

determine the CEO’s compensation;

 

  •  

negotiate and provide for the documentation of any employment agreement (or amendment thereto) with the CEO, as applicable;

 

  •  

review the decisions made by the CEO as to the compensation of the other executive officers;

 

  •  

approve and grant any equity compensation;

 

  •  

review and discuss the Compensation Discussion & Analysis with management;

 

  •  

oversee AIR’s submission to a stockholder vote of matters relating to compensation, including advisory votes on executive compensation, and the frequency of such votes, incentive and other compensation plans, and amendments to such plans;

 

  •  

consider the results of stockholder advisory votes on executive compensation and take such results into consideration in connection with the review and approval of executive officer compensation;

 

  •  

review stockholder proposals and advisory stockholder votes relating to executive compensation matters and recommend to the board AIR’s response to such proposals and votes;

 

  •  

review compensation arrangements to evaluate whether incentive and other forms of pay encourage unnecessary or excessive risk taking;

 

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  •  

review and approve the terms of any compensation “clawback” or similar policy or agreement between AIR and AIR’s executive officers;

 

  •  

review periodically the goals and objectives of AIR’s executive compensation plans, and amend, or recommend that the board amend, these goals and objectives if appropriate; and

 

  •  

oversee AIR’s culture, with a particular focus on collegiality, collaboration, and team-building.

The compensation committee will be entirely composed of members who meet the independence requirements set forth by the SEC, in the NYSE listing requirements, and the compensation committee charter. The initial members of the compensation committee will be determined prior to the Separation. For more information on the responsibilities and activities of the committee, including its processes for determining executive compensation, see the section entitled “Executive Compensation.”

Other Committees

Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

Compensation Committee Interlocks and Insider Participation

None of our directors will have interlocking or other relationships with other boards of directors, compensation committees or our executive officers that would require disclosure under Item 407(e)(4) of Regulation S-K.

Compensation of Directors

The AIR director compensation program will be subject to the review and approval of AIR’s board of directors or a committee thereof after the Separation. Director compensation for the period prior to any change approved by AIR’s board of directors or a committee thereof will be as described below.

Treatment of outstanding Aimco equity-based compensation awards held by AIR non-employee directors in connection with the Separation is described above.

Compensation for non-employee directors of AIR will be a mix of cash and equity-based compensation. Mr. Considine, who will serve as an employee director following the Separation, will not receive any additional compensation for his service as a member of AIR’s board of directors.

Annual Compensation

The table below describes the components of compensation for non-employee directors:

 

Compensation Element

   Amount  

Annual Cash Retainer

   $ 90,000  

Stock Awards(1)

   $ 170,432  

 

(1)

Except for Devin I. Murphy and John D. Rayis who received prorated awards note below, each independent director received an annual award of 3,200 shares of Aimco Common Stock, which shares were awarded on January 28, 2020. Messrs. Murphy and Rayis received prorated awards of 2,400 shares each of Aimco Common Stock. The closing price of Aimco Common Stock on the NYSE on January 28, 2020, was $53.26. Excluding Messrs. Murphy and Rayis, the independent directors also received an annual cash retainer of $90,000. Messrs. Murphy and Rayis received prorated cash retainers of $67,500 each for their service as independent directors. Directors will not receive meeting fees in 2020.

 

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In formulating its recommendation for director compensation, the Nominating and Corporate Governance Committee will review director compensation for independent directors of companies in the real estate industry and companies of comparable market capitalization, revenue, and assets, and considers compensation trends for other NYSE-listed companies and S&P 500 companies. The Nominating and Corporate Governance Committee also will consider the relatively small size of AIR’s board of directors as compared to other boards, the participation of each Independent Director on each committee, and the resulting workload on the directors. In addition, the Nominating and Corporate Governance Committee will consider the overall cost of the board of directors to AIR and the cost per director.

AIR’s board of directors will determine the compensation to be paid to the individuals who will serve as our directors following the Separation.

AIR Stock Award and Incentive Plan

We expect to adopt a performance incentive plan prior to the Separation (the “Plan”) to promote our success and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain, and reward selected employees, officers, directors, consultants, and advisors. Our board of directors or one or more committees appointed by our board of directors will administer the Plan. The Plan may authorize stock options, stock appreciation rights, restricted stock, stock bonuses or other forms of awards granted or denominated in AIR Common Stock or AIR OP Common Units, as well as cash incentive awards (which is further described in this information statement under the heading “AIR 2020 Stock Award and Incentive Plan”).

Code of Business Conduct and Ethics

Prior to the Separation, we intend to adopt a Code of Business Conduct and Ethics, effective as of the time of our listing on the NYSE. The Code of Business Conduct and Ethics will be posted on our website (aircommunities.com) and is also available in print to stockholders, upon written request to our corporate secretary. If, in the future, we amend, modify or waive a provision in the Code of Business Conduct and Ethics, rather than filing a Current Report on Form 8-K, we intends to satisfy any applicable disclosure requirement under Item 5.05 of Form 8-K by posting such information on our website (aircommunities.com), as necessary.

Corporate Governance Guidelines and Director Stock Ownership

Prior to the Separation, we intend to adopt a Corporate Governance Guidelines, effective as of the time of our listing on the NYSE. These guidelines will be available on our website (aircommunities.com) and are also available in print to stockholders, upon written request to our corporate secretary. In general, the Corporate Governance Guidelines address director qualification standards, director responsibilities, the role of the lead independent director, director access to management and independent advisors, director compensation, director orientation and continuing education, the role of the board of directors in planning management succession, stock ownership guidelines and retention requirements, and an annual performance evaluation of the board of directors.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

We expect to adopt an executive compensation program (the “Compensation Program”) to reward performance and governance practices in connection with the Compensation Program. AIR will be a pay-for-performance organization. AIR is expected to start by setting target total compensation near the median of target total compensation for AIR’s peers as identified below, both as a measure of fairness and also to provide an economic incentive to remain with AIR. Actual compensation is expected to vary from target compensation based on AIR’s results. Each officer’s annual cash incentive compensation, “short-term incentive” or STI, will be based in part on AIR’s performance against corporate, rather than personal, goals. The more senior the officer, the greater the percentage of his or her STI that will be based on Aimco’s performance against its corporate goals. AIR’s longer term compensation, “long-term incentive” or LTI, follows a similar tiered structure. Each officer’s LTI will be based in part on AIR’s “total shareholder return” or TSR, relative to its peers, with executive officers having a greater share of their LTI based on relative TSR. In the case of Mr. Considine, his entire LTI award is expected to be “at risk” based on AIR’s relative TSR. LTI will be measured and vest over time, typically a period of four years, so that officers bear longer term exposure to the decisions they make.

To reinforce alignment of stockholder and management interests, AIR will also have stock ownership guidelines that require substantial equity holdings by executive officers, as described further below.

Introduction

As discussed above, AIR is currently part of Aimco and not an independent company, and its Compensation and Human Resources Committee has not yet been formed. This Compensation Discussion and Analysis describes the historical compensation practices of AIR Predecessor and outlines certain aspects of AIR’s anticipated compensation structure for its executive officers following the Separation. After the Separation, AIR’s executive compensation programs, policies, and practices for its executive officers will be subject to the review and approval of AIR’s Compensation and Human Resources Committee.

The individuals who have been selected prior to November 17, 2020 to serve as AIR’s executive officers are listed below.

 

  1.

Terry Considine is expected to serve as AIR’s Chief Executive Officer and as a director on AIR’s board of directors commencing upon the Separation. Mr. Considine will continue to hold his current role of Chairman, President and Chief Executive Officer of AIR Predecessor until the Separation.

 

  2.

Paul Beldin is expected to serve as Executive Vice President and Chief Financial Officer of AIR commencing upon the Separation. Mr. Beldin will continue to hold his current role of Executive Vice President and Chief Financial Officer of AIR Predecessor until the Separation.

 

  3.

Lisa Cohn is expected to serve as President and General Counsel of AIR commencing upon the Separation. Ms. Cohn will continue to hold her current role of Executive Vice President, General Counsel and Secretary of AIR Predecessor until the Separation.

 

  4.

Keith Kimmel is expected to serve as AIR’s President, Property Operations, commencing upon the Separation. Mr. Kimmel will continue to hold his current role of Executive Vice President of Property Operations of AIR Predecessor until the Separation.

 

  5.

Conor Wagner is expected to serve as AIR’s Senior Vice President and Chief Investment Officer, commencing upon the Separation. Mr. Wagner will continue to hold his current role of Vice President, Finance at AIR Predecessor until the Separation.

Of this group of executive officers, Messrs. Considine, Beldin and Kimmel and Ms. Cohn were “named executive officers” (a term that refers to the group of executive officers including the principal executive officer,

 

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principal financial officer and three other most highly compensated executive officers, “NEOs”) of AIR Predecessor in 2019. In 2020, Mr. Wagner will be a named executive officer of AIR by virtue of his status as one of the three most highly compensated officers with AIR.

Summary of Executive Compensation Program and Governance Practices

Below we summarize certain executive compensation programs and governance practices in 2019, including practices AIR Predecessor implemented to drive performance and practices AIR Predecessor avoided because we believe they would not serve AIR Predecessor’s stockholders’ long-term interests.

 

What AIR Predecessor Does

Pays for performance. A significant portion of executive pay is not guaranteed, but rather is at risk and tied to key financial and value creation metrics that are set in advance and disclosed to stockholders. All of the incentive compensation (both STI and LTI) for Mr. Considine is subject to the achievement of various performance objectives. For the other NEOs, all STI compensation, and two-thirds of target LTI compensation, is subject to the achievement of various performance objectives.
Balances short-term and long-term incentives. The incentive programs provide a balance of annual and longer-term incentives, with LTI compensation vesting over multiple years comprising a substantial percentage of target total compensation.
Uses multiple performance metrics. These mitigate the risk of the undue influence of a single metric by utilizing multiple performance measures. Such measures differ for STI and LTI.
Caps award payouts. Amounts or shares that can be earned under the STI plan and LTI plan are capped.
Uses market-based approach for determining NEO target pay. Target total compensation for NEOs is set near the median for peer comparators. The Committee (as defined below) reviews the peer comparator group annually.
Maintains stock ownership guidelines and holding periods after vesting until ownership guidelines are met. The Company has the following minimum stock ownership requirements: CEO – lesser of five times base salary or 150,000 shares; CFO – lesser of five times base salary or 75,000 shares; and other executive officers – lesser of four times base salary or 25,000 shares. All NEOs met these requirements as of January 28, 2020.
Includes double-trigger change in control provisions. Equity awards include “double trigger” provisions requiring both a change in control and a subsequent termination of employment (other than for cause) for accelerated vesting to occur.
Uses an independent compensation consulting firm. The Company engages an independent compensation consulting firm that specializes in the REIT industry. The Committee engages a separate independent compensation consultant.
Maintains a clawback policy. In the event of a financial restatement resulting from misconduct by an executive, the clawback policy allows the Company to recoup incentive compensation paid to the executive based on the misstated financial information. The policy covers all forms of bonus, incentive and equity compensation.
Conducts a risk assessment. The Committee annually conducts a compensation risk assessment to determine whether the compensation policies and practices, or components thereof, create risks that are reasonably likely to have a material adverse effect on the Company.
Acts through an independent Compensation Committee (the “Committee”). The Committee consists entirely of independent directors.

 

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What AIR Predecessor Does Not Do

Guarantee salary increases, bonuses or equity grants. The Company does not guarantee annual salary increases or bonuses. The Company makes no guaranteed commitments to grant equity-based awards.
Provide excise tax gross-up payments. The Company will not enter into contractual arrangements that include excise tax gross-up payments.
Reprice options. The Company has never repriced the per-share exercise price of any outstanding stock options. Repricing of stock options is not permitted under the Company’s Second Amended and Restated 2015 Stock Award and Incentive Plan (the “2015 Plan”) without first obtaining approval from the stockholders of the Company.
Pay dividends or dividend equivalents on unearned performance shares. Performance share award agreements provide for the payment of dividends only if and after the shares are earned. Dividends accrue during the performance period and are paid once shares are earned.
Provide more than minimal personal benefits. The Company does not provide executives with more than minimal perquisites, such as reserved parking spaces.

What We Pay and Why: Components of Executive Compensation

AIR Predecessor’s executive compensation philosophy to provide pay for performance and stockholder alignment underlies its 2019 compensation structure. We expect that this philosophy will initially guide AIR’s executive compensation structure following the separation. Total compensation for AIR Predecessor’s executive officers is comprised of the following components:

 

Compensation Component

  

Form

  

Purpose

Base Salary

   Cash    Provide a salary that is competitive with market.

STI

   Cash    Reward executive for achieving short-term business objectives.

LTI

   Restricted stock, Long-Term Incentive Plan units, and/or stock options, subject to performance and/or time vesting, typically over four years.    Align executive’s compensation with stockholder objectives and provide an incentive to take a longer-term view of AIR Predecessor’s performance.

 

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LTI compensation directly ties the interests of executives to the interests of our stockholders, and comprises a substantial proportion of compensation for AIR Predecessor’s NEOs, as follows:

 

CEO

2019 Target Pay Mix

 

Other NEOs

2019 Target Pay Mix

 

LOGO

 

 

LOGO

CEO Pay Overview

The Committee determined the compensation for Mr. Considine. In setting Mr. Considine’s target total compensation for 2019, the Committee considered, among other things, the peer group compensation data as discussed below and Mr. Considine’s expertise and experience. The Committee devised a compensation plan for Mr. Considine that resulted in approximately 10% base salary, 26% based on AIR Predecessor’s performance against its 2019 corporate goals, and 64% based on relative TSR, making more of Mr. Considine’s target compensation tied to TSR than any of his peers. Mr. Considine’s target compensation mix is illustrated as follows:

 

LOGO

How the Committee determined the amount of target total compensation for executive officers in 2019

In addition to reviewing the performance of, and determining the compensation for, the CEO, the Committee also reviewed the decisions made by the CEO as to the compensation of AIR Predecessor’s other executive officers. Base salary, target STI, and target LTI are generally set near the median base salary, target STI, and target LTI for peer comparators.

 

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How peer comparators are identified

AIR Predecessor considers enterprise GAV, as reported by Green Street Advisors, to be an imprecise, but reasonable representation of the complexity of a real estate business and of the responsibilities of its leaders. In addition to GAV, AIR Predecessor also reviews other factors, including gross revenues, number of properties, and number of employees, to determine if these factors provide any additional insight into the work and requirements of its leaders. Based on this analysis, AIR Predecessor included as “peers” for 2019 compensation the following 20 real estate companies:

 

Peer Group

American Homes 4 Rent

   Kilroy Realty Corp.

Alexandria Real Estate Equities, Inc.

   Kimco Realty

Brixmor Property Group, Inc.

   Liberty Property Trust

Camden Property Trust

   Macerich Company

Douglas Emmett, Inc.

   Mid-America Apartment Communities, Inc.

Duke Realty Corp.

   Regency Centers Corp.

Equity LifeStyle Properties

   SL Green Realty Corp.

Extra Space Storage, Inc.

   Sun Communities, Inc.

Federal Realty Investment Trust

   Taubman Centers, Inc.

HCP, Inc.

   UDR, Inc.

At the time 2019 compensation targets were established, approximately half of these real estate companies had a larger GAV, and approximately half of these real estate companies had a smaller GAV, than does AIR Predecessor. Due to changes in GAV for AIR Predecessor and its peers during 2018, American Homes 4 Rent, Equity LifeStyle Properties, HCP, Inc., and SL Green Realty Corp. were added to the peer group for 2019 in replacement of DDR Corp., Healthcare Trust of America, Inc., Host Hotels & Resorts, Inc., and Omega Healthcare Investors.

For Mr. Kimmel, whose position as Executive Vice President, Property Operations, does not have a good benchmark outside of the multifamily industry, AIR Predecessor used a multifamily peer group for benchmarking his 2019 compensation, consisting of the following six multifamily real estate companies: AvalonBay Communities, Inc., Camden Property Trust, Essex Property Trust, Equity Residential, Mid-America Apartment Communities, Inc., and UDR, Inc.

Risk analysis of AIR Predecessor’s compensation programs

The Committee considers risk-related matters when making decisions with respect to executive compensation and has determined that neither AIR Predecessor’s executive compensation program nor any of its non-executive compensation programs create risk-taking incentives that are reasonably likely to have a material adverse effect on the organization. AIR Predecessor’s compensation programs align management incentives with the long-term interests of the Company.

 

AIR Predecessor’s Compensation Program Discourages Excessive Risk-Taking

Limits on STI. The compensation of executive officers and other team members is not overly weighted toward STI. Moreover, STI is capped.
Use of LTI. LTI is included in target total compensation for all but a couple of officers and typically vests over a period of four years. The vesting period encourages officers to focus on sustaining AIR Predecessor’s long-term performance. Executive officers with more responsibility for strategic and operating decisions have a greater percentage of their target total compensation allocated to LTI. LTI is capped at two times target, or 200%, for the CEO, and 1.67 times target, or 167%, for the other NEOs.

 

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AIR Predecessor’s Compensation Program Discourages Excessive Risk-Taking

Stock ownership guidelines and required holding periods after vesting. AIR Predecessor’s stock ownership guidelines require all executive officers to hold a specified amount of AIR Predecessor equity. Any executive officer who has not yet satisfied the stock ownership requirements for his or her position must retain LTI after its vesting until stock ownership requirements are met. These policies ensure each executive officer has a substantial amount of personal wealth tied to long-term holdings in AIR Predecessor stock.
Shared performance metrics across the organization. A portion of STI for all officers and corporate team members is based upon AIR Predecessor’s performance against its publicly communicated corporate goals, which are core to the long-term strategy of AIR Predecessor’s business and are reviewed and approved by the Committee. One hundred percent of Mr. Considine’s STI, and 75% of the STI for the other NEOs, is based upon AIR Predecessor’s performance against its corporate goals. In addition, having shared performance metrics across the organization reinforces AIR Predecessor’s focus on a collegial and collaborative team environment.
LTI based on TSR. A portion of LTI for all officers is based on relative TSR. In general, the more senior level the officer, the greater the percentage of LTI that is based on relative TSR rather than time-vesting. One hundred percent of Mr. Considine’s LTI, and a substantial proportion of the LTI for the other NEOs, is based on relative TSR.
Multiple performance metrics. AIR Predecessor had six corporate goals for 2019. In addition, through AIR Predecessor’s performance management program, Managing Aimco Performance, or MAP, which sets and monitors performance objectives for every team member, each team member has several different individual performance goals that are set at the beginning of the year and approved by management. Each of the NEOs had an average of six individual goals for 2019. Having multiple performance metrics inherently reduces excessive or unnecessary risk-taking, as incentive compensation is spread among a number of metrics rather than concentrated in a few.

 

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PRINCIPAL ELEMENTS OF AIR PREDECESSOR EXECUTIVE COMPENSATION PROGRAM

Base Salaries

To attract and retain talented and qualified executives, AIR Predecessor provided competitive base salaries, which AIR Predecessor targeted at the market median. Each year the Committee of AIR Predecessor reviewed the recommendations of the Chief Executive Officer for base salary adjustments for AIR Predecessor executives relative to peer market data for similar roles. The Chief Executive Officer had no involvement in the Committee’s determination of his own base salary. AIR anticipates following a similar methodology in setting base salaries.

2019 Base Salaries for AIR Named Executive Officers

For 2019, Mr. Considine’s base compensation was $700,000, unchanged from the previous two years, and well below the median for CEOs of his experience, expertise and tenure in AIR Predecessor’s peer group. For 2019, base compensation for all other NEOs was $450,000, unchanged from 2018, near the median base compensation paid by peer comparators for similar positions.

Short-Term Incentive Compensation

AIR Predecessor’s Objectives

The Committee determined Mr. Considine’s STI by the extent to which AIR Predecessor met six designated corporate goals, which are described below and are referred to as AIR Predecessor’s Key Performance Indicators, or KPIs.

For the other NEOs of AIR Predecessor, calculation of STI was determined by two components: AIR Predecessor’s performance against the KPI; and each officer’s achievement of his or her individual MAP goals. For example, if an executive’s target STI was $400,000 and weighted 75% on KPIs, then 75% of that amount, or $300,000, varied based on KPI results and 25% of that amount, or $100,000, varied based on MAP results. As actual KPI results were 132.94% of target in 2019, then the executive would receive 132.94% of $300,000 ($398,820) for the KPI portion of his STI, and if MAP results were 100%, such hypothetical executive would receive 100% of the $100,000, for a total STI payment of $498,820.

AIR Predecessor’s KPIs reflect AIR Predecessor’s five areas of strategic focus (operations, redevelopment and development, portfolio management/capital allocation, balance sheet, and team). Stated differently, AIR Predecessor compensates its leadership on executing exactly the same business strategy communicated to stockholders and analysts. Specifically, AIR Predecessor’s KPIs consisted of the following five corporate goals that were reviewed with, and approved by, the Committee, each weighted as described:

 

  1.

Operations (35% of KPI)

 

  2.

Redevelopment and Portfolio Management/Capital Allocation (10% of KPI)

 

  3.

Balance Sheet (10% of KPI)

 

  4.

Team (10% of KPI)

 

  5.

Financial Results (35% of KPI)

These goals aligned executive officers with the publicly communicated, long-term goals of the Company without encouraging them to take unnecessary and excessive risks. Threshold performance paid out at 50%; target performance paid out at 100%; and maximum performance paid out at 200%.

Performance below threshold resulted in no payout. For some goals, where performance was between threshold and target or between target and maximum, the amount of the payout was interpolated.

 

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The following is a tabular presentation of the performance criteria and results for 2019, explained in detail in the paragraphs that follow:

 

Performance Measures

 

Goal
Weighting

 

Threshold
50%

 

Target 100%

 

Maximum
200%

 

Actual

 

Payout

Operations

  35%          

2019 Same Store NOI Achievement

  35%   3%<Budget   Budget   3%>Budget   0.50% > Budget   40.83%

Property Operations Subtotal:

  40.83%

Redevelopment and Portfolio Management/Capital Allocation

  10%          

Redevelopment Investment and Returns, and Transactions That Improve AIR Predecessor’s Portfolio Quality

  10%   —     Based on, for redevelopment, estimated value creation for the project, and completion of projects on time and on budget and rental rates compared to underwriting, and for transactions, Free Cash Flow internal rates of return.   —     Invested $230M in redevelopment and development projects in 2019. On track with major projects in Boulder, Miami Beach, and Redwood City. Delivered 335 new or fully renovated homes. Achieved rental rates in line with or ahead of underwriting. Reallocated capital from slower-growth markets to higher-growth markets. Acquired three properties that together have an expected 9% weighted average Free Cash Flow internal rate of return, approximately 300 bps better than expected from properties being sold, or to be sold, in paired trades to fund the acquisitions.   13.60%

Redevelopment and Portfolio Management Subtotal:

  13.60%

Balance Sheet

  10%          

Leverage Ratios and Balance Sheet Activities Adding Financial Flexibility

  10%   —     Based on Ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDAre, and balance sheet activities that add financial flexibility.   —     Ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDAre for 2019 was 7.6x. At year end: AIR Predecessor held cash and restricted cash of $177M and had the capability to borrow up to $518M under its revolving credit facility; and held unencumbered communities with an estimated fair value of approximately $2.4B.   7.50%

Balance Sheet Subtotal:

  7.50%

Team

  10%          

Team Member Engagement Scores

  5%   4.00   4.20   4.75   4.35   6.36%

On-Site Team Engagement, Retention and Efficiency

  5%   —     Based on on-site team engagement scores, team member retention ratios and efficiency gains.   —     On-site team member engagement for 2019 was a record 4.45 out of 5. Reduced on-site voluntary turnover by 27% and on-site overall turnover by 21%. Made further efficiency gains.   9.00%

Team and Culture Subtotal:

  15.36%

Financial Results

  35%          

AFFO Per Share

  35%   $2.07   $2.17   $2.27   $2.231   55.65%

Financial Results Subtotal:

  55.65%

Total

  100%           132.94%

 

(1)

Full year AFFO as reported in AIR Predecessor’s Fourth Quarter 2019 Earnings Release dated January 30, 2020, was $2.20 per share, or $0.03 lower. There are a very limited number of items (such as non-recurring

 

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  income and capital replacement spending in excess of budget) that are unusual, infrequent, or otherwise deemed by management and the Committee to be appropriate to exclude from the calculation of AFFO for purposes of AIR Predecessor’s compensation plan, in order to ensure that thoughtful business decisions are not influenced by compensation implications. The additions and subtractions to reported AFFO are reviewed and approved by the Committee. For 2019, this process resulted in a net upward adjustment of $0.03 to reported AFFO. In the past five years, such adjustments have been upward four times and downward one time.

For all numeric goals, the target performance metrics were AIR Predecessor’s 2019 budget goals. AIR Predecessor has a rigorous budgeting process that includes an evaluation of prior performance, market data, and peer performance. AIR Predecessor’s budget strategy is to set ambitious, achievable goals. AIR Predecessor’s 2019 performance – which included peer-leading Same Store revenue growth of 3.8%, NOI growth of 4.3%, and peer-leading NOI margin of 73.7% – is a reflection of AIR Predecessor’s effective and successful budgeting strategy.

An explanation of the objective of each goal and performance levels and payouts for each goal is set forth below.

Same Store NOI Achievement (35% of KPI). The primary objective of this goal was to fulfill AIR Predecessor’s strategic objective of driving rent growth based on high levels of resident retention, through superior customer selection and satisfaction, coupled with disciplined innovation resulting in sustained cost control, to maximize NOI margins. For 2019, the range for the Same Store NOI achievement goal was as follows: “Threshold” equated to achievement of three percent unfavorable to 2019 budgeted Same Store NOI; “Target” equated to achievement of 2019 budgeted Same Store NOI; and “Maximum” equated to three percent favorable to 2019 budgeted Same Store NOI. AIR Predecessor’s Same Store NOI achievement for 2019 was 0.50% favorable to budgeted Same Store NOI. This resulted in a payout on the Same Store NOI achievement goal of 40.83% for each of the NEOs.

Redevelopment Investment and Returns, and Transactions That Improve AIR Predecessor’s Portfolio Quality (10% of KPI). The primary objective of this goal was to fulfill AIR Predecessor’s strategic objectives for redevelopment and portfolio management/capital allocation, two of AIR Predecessor’s five areas of strategic focus. Large and/or complex redevelopment and development projects provided increased weighting toward the total goal weighting of 10%, with smaller scale projects provided lower weighting toward the total goal weighting. Achievement for each project was determined with reference to the 2019 budgeted investment and scope for the project, and was based on the extent to which the project work was completed on time and within budget, as well as whether expected returns on investment were achieved. For 2019, AIR Predecessor invested $230 million in redevelopment and development projects, up 30% from 2018, and was on track with its major projects in Boulder, Colorado, Miami Beach, Florida, and Redwood City, California. AIR Predecessor delivered 335 new or fully renovated homes. AIR Predecessor achieved rental rates in line with or ahead of underwriting. Additionally, AIR Predecessor reallocated capital from slower-growth markets such as Chicago and reinvested the proceeds in higher-growth markets such as Miami, Denver, and Boston. AIR Predecessor acquired three properties: One Ardmore in Ardmore, Pennsylvania; Prism (50 Rogers), under construction in Cambridge, Massachusetts; and 1001 Brickell Bay Drive in Miami, Florida. Together, these acquisitions have an expected 9% weighted average Free Cash Flow internal rate of return, approximately 300 basis points better than expected from the properties being sold, or to be sold, in paired trades to fund the acquisitions. This resulted in a payout of 13.60% for each of the NEOs.

Leverage Ratios and Other Balance Sheet Activities Adding Financial Flexibility (10% of KPI). The primary objective of this goal was to fulfill AIR Predecessor’s strategic objective of utilizing safe property debt that is low-cost, long-dated, amortizing, and non-recourse, limiting entity and refunding risk while maintaining asset flexibility. Achievement was based on the ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDAre and balance sheet activities that added financial flexibility. AIR Predecessor’s ratio of Proportionate

 

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Debt and Preferred Equity to Adjusted EBITDAre for 2019 was 7.6x. At December 31, 2019, AIR Predecessor held cash and restricted cash of $177 million and had the capability to borrow up to $518 million under its revolving credit facility, after consideration of $7 million of letters of credit backed by the facility. At December 31, 2019, AIR Predecessor held communities that are not encumbered by debt with an estimated fair market value of approximately $2.4 billion. This resulted in a payout on the balance sheet goal of 7.50% for each of the NEOs.

Team Member Engagement Scores (5% of KPI). The primary objective of this goal was to fulfill AIR Predecessor’s strategic objective of producing a strong, stable team that is the enduring foundation of AIR Predecessor success. Every team member is surveyed via a third-party, confidential survey on his or her annual anniversary of employment. The team member engagement score consists of the average of the responses to the questions that comprise the engagement index, on a scale of 1 to 5, for all team members who complete the survey during the year. For 2019 compensation, the range for team member engagement scores was as follows: “Threshold” equated to 4.00; “Target” equated to 4.20; and “Maximum” equated to 4.75. For 2019, AIR Predecessor’s team member engagement score was 4.35, resulting in a payout of 6.36% for each of the NEOs.

On-Site Team Engagement, Retention, and Efficiency (5% of KPI). The primary objective of this goal was to maintain a highly engaged, stable workforce at our communities, enhanced by innovations in efficiency, all of which further AIR Predecessor’s strategic objective of maximizing NOI margins. Achievement was based on on-site team engagement scores, team member retention ratios, and efficiency gains. AIR Predecessor’s on-site team member engagement score was a record 4.45 out of 5. AIR Predecessor reduced on-site voluntary turnover by 27% and on-site overall turnover by 21%, each as compared to 2018. This resulted in a payout on the on-site engagement, retention, and efficiency goal of 9.00% for each of the NEOs.

AFFO Per Share (35% of KPI). The primary objective of the AFFO goal was to increase AIR Predecessor’s current period financial result. Nareit FFO is a commonly used measure of REIT performance, which the National Association of Real Estate Investment Trusts (“Nareit”) defines as net income computed in accordance with GAAP, excluding: depreciation and amortization related to real estate; gains and losses from sales or impairment of depreciable assets and land used in the primary business of the REIT; and income taxes directly associated with a gain or loss on sale of real estate; and including AIR Predecessor’s share of Nareit FFO of unconsolidated partnerships and joint ventures. AIR Predecessor computes Nareit FFO in accordance with the guidance set forth by Nareit. Pro forma FFO represents Nareit FFO as defined above, excluding certain amounts that are unique or occur infrequently. AFFO represents Pro forma FFO reduced by capital replacements and is AIR Predecessor’s primary measure of current period performance.

For 2019 compensation, the range for the AFFO goal was set as follows: “Threshold” equated to $2.07 per share; “Target” equated to $2.17 per share; and “Maximum” equated to $2.27 per share. AIR Predecessor’s AFFO was $2.23 per share. This resulted in a payout on the AFFO per share goal of 55.65% for each of the NEOs.

Due to AIR Predecessor’s achievement of certain goals and outperformance on others, AIR Predecessor’s overall KPI performance was 132.94%. Accordingly, each executive officer was awarded 132.94% of the portion of his or her target STI attributable to KPI.

Various of the key financial indicators we use in managing our business and in evaluating our financial condition and operating performance are non-GAAP measures. Key non-GAAP measures we use are defined, described and, where appropriate, reconciled to the most comparable financial measures computed in accordance with GAAP under the Non-GAAP Measures heading within Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019.

Long-Term Incentive Compensation Awards for 2019

Under the 2019 LTI program, three forms of LTI were granted to NEOs on January 29, 2019, including: (1) performance-based long-term incentive units in our operating partnership (“LTIP Units”), which were granted

 

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only to Mr. Considine, representing 100% of his 2019 LTI award; (2) performance-based restricted stock, which was granted to Messrs. Beldin and Kimmel and Ms. Cohn, representing two-thirds of their 2019 LTI awards; and (3) time-based restricted stock, which was granted to Messrs. Beldin and Kimmel and Ms. Cohn, representing one-third of their 2019 LTI awards, with 25% of the grants vesting on each anniversary of the grant date. AIR Predecessor refers to the performance-based LTIP Units and the performance-based restricted stock as “performance-based LTI awards,” because the number of such LTIP Units and the amount of restricted stock that vests, if any, is determined based on AIR Predecessor’s relative TSR performance during a forward looking, three-year performance period, as described in detail below. In 2019, Mr. Considine’s LTI Equity mix was 100% performance-based, based entirely on relative TSR, and 2/3 performance-based and 1/3 time-based the for the other NEOs.

The amount of performance-based LTI awards granted in 2019 that may vest are determined in accordance with the following TSR performance metrics:

 

     Metric and Performance Level(1)
(relative performance stated as basis
points above or below index
performance)(2) 		 
     Threshold      Target      Maximum  

Relative to NAREIT Apartment Index

     -250 bps        +50 bps        +400 bps  

Relative to MSCI US REIT Index

     -350 bps        +50 bps        +500 bps  

 

(1)

The relative metrics above reflect the metrics used for the awards made in 2019 for the three-year forward looking performance period ending on December 31, 2021.

(2)

If absolute TSR for the three-year forward looking performance period is negative, any portion of the LTI award achieved above target will not vest until absolute TSR is once again positive.

Such metrics apply to both the LTIP Units granted to Mr. Considine and the performance-based restricted stock granted to Messrs. Beldin and Kimmel and Ms. Cohn. The Committee set threshold performance to pay out at 50%; target performance to pay out at 100%; and maximum performance to pay out at 200%. Performance below threshold will result in no payout. If performance is between threshold and target or between target and maximum, the amount of the payout will be interpolated. Performance-based LTI awards vest 50% following the end of the three-year performance period (based on attainment of TSR targets), and 50% one year later, for a four-year plan from start to finish, illustrated below, subject to the grantee’s continued service to AIR Predecessor, and subject to a delay if absolute TSR for the three-year forward looking performance period is negative.

 

LOGO

Mr. Considine’s LTIP Units are intended to constitute profits interests within the meaning of the Code. As described above, the number of Mr. Considine’s LTIP Units granted in 2019 that may vest is determined based

 

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on AIR Predecessor’s relative TSR performance over the course of a forward-looking, three-year performance period, with 50% of such number of LTIP Units generally vesting at the later of the time performance is determined or the third anniversary of the grant date and 50% vesting on the fourth anniversary of the grant date. Mr. Considine will be able to participate in the appreciation of value of AIR Predecessor that took place after his LTIP Units were granted, subject to their vesting. For the purpose of calculating the number of shares subject to Mr. Considine’s LTIP Units, the target dollar amount was divided by $12.03, which price was calculated by a third-party financial firm with particular expertise in the valuation of such LTIP Units. The LTIP Units have a conversion price of $49.24, which is the closing price of AIR Predecessor’s stock on the grant date and equal to the fair market value of AIR Predecessor’s Common Stock on the grant date. Additional details regarding the structure of LTIP Units can be found in the Fifth Amended and Restated Agreement of Limited Partnership of the Aimco Operating Partnership, dated as of July 29, 1994, as amended and restated as of April 8, 2019, and the Form of Performance Vesting LTIP II Unit Agreement, both of which are incorporated by reference into AIR Predecessor’s Annual Report on Form 10-K for the year ended December 31, 2019, as Exhibits 10.1 and 10.19, respectively.

For the purpose of calculating the number of shares of restricted stock to be granted to each of Messrs. Beldin and Kimmel and Ms. Cohn, the dollar amount allocated to restricted stock was divided by $48.18 per share, which was the average of the closing trading prices of AIR Predecessor’s Common Stock on the five trading days up to and including the grant date. The five-day average was used to mute the effect of any single day spikes or declines. Two-thirds of such shares were allocated to Messrs. Beldin and Kimmel and Ms. Cohn’s target amount of performance-based restricted stock and one-third were allocated to their time-based restricted stock award. The share award agreements to which the performance-based restricted shares were granted do not provide for the payment of dividends until the shares are earned. Dividends accrue during the performance period.

NEO Compensation for 2019

CEO Compensation. The Committee determined Mr. Considine’s STI for 2019 would be based entirely on AIR Predecessor’s performance against the six designated corporate goals. The Committee calculated Mr. Considine’s STI by multiplying his STI target of $1.75 million by 132.94%, which was the Committee’s payout determination having reviewed AIR Predecessor’s overall performance on the six corporate goals. The Committee granted Mr. Considine’s LTI in the form of LTIP Units on January 29, 2019, for the three-year performance period from January 1, 2019, through December 31, 2021; the LTI grant is entirely at risk, based on relative returns over the performance period. Mr. Considine’s 2019 target compensation and incentive compensation is summarized as follows:

 

            Target Total Incentive      2019 Incentive Compensation  
            Compensation      STI      LTI  

Target Total
Compensation ($)

   Paid Base ($)      STI ($)      LTI ($)      ($)(1)      Time-Based
Equity ($) 		     Performance-
Based Equity –
Profits Interest
LTIP Units ($)(2) 		 

6,725,000

     700,000        1,750,000        4,275,000        2,326,450        —          4,275,000  

 

(1)

Amount shown reflects the amount of 2019 STI paid to Mr. Considine.

(2)

Amount shown reflects a 100% payout that would result from achieving “target” performance. Actual payout may range from 0% to 200% of this amount depending on performance results over the forward looking, three-year performance period ending December 31, 2021. The number of LTIP Units that are earned, if any, will vest with respect to 50% following the end of the three-year performance period and 50% one year later, for a four-year vesting period.

Other NEO Compensation. As noted above, for Messrs. Beldin and Kimmel and Ms. Cohn, an allocation of the target STI was made as follows: 75% of the target STI was calculated based on AIR Predecessor’s

 

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performance against KPI and 25% of the target STI was calculated based on each executive’s achievement of his or her individual MAP goals. As noted above, AIR Predecessor’s KPI performance was 132.94%. Accordingly, each was awarded 132.94% of the portion of his or her STI attributable to KPI (i.e., 75% of the target STI amount shown below).

In determining the MAP achievement component of 2019 STI, Mr. Considine determined that: Mr. Beldin’s MAP achievement would be paid at 100% of target for his contributions to finance and accounting and to AIR Predecessor’s balance sheet; Ms. Cohn’s MAP achievement would be paid at 100% for her leadership over legal matters, insurance, risk management, property dispositions, west transactions, asset quality and service, and human resources; and Mr. Kimmel’s MAP achievement would be paid at 160% for his contributions to AIR Predecessor’s operating results, including peer-leading Same Store revenue growth and NOI margin and strong results in customer satisfaction and retention. The Committee reviewed Mr. Considine’s determinations. As described in detail beginning on page 172, LTI for the other NEOs was granted on January 29, 2019, in the form of restricted stock. Target compensation and incentive compensation for 2019 for the other NEOs is summarized as follows:

 

                                 2019 Incentive Compensation ($)  
                   Target Total Incentive
Compensation 		     STI      LTI  
     Target Total
Compensation
($) 		     Paid Base ($)      STI ($)      LTI ($)      ($)(1)      Equity -
Restricted
Stock ($)(2) 		     Equity -
Restricted
Stock ($)(3) 		 

Mr. Beldin

     1,070,000        450,000        250,000        370,000        311,763        123,333        246,667  

Ms. Cohn

     2,100,000        450,000        550,000        1,100,000        685,878        366,667        733,333  

Mr. Kimmel

     1,600,000        450,000        425,000        725,000        593,746        241,667        483,333  

 

(1)

Amounts shown reflect the 2019 STI paid to each of Messrs. Beldin, Kimmel, and Ms. Cohn.

(2)

Comprises one-third of the LTI target, vesting ratably over four years, and is for the purpose of attracting and retaining key talent integral to the success of AIR Predecessor.

(3)

Comprises two-thirds of the LTI target. Amounts shown reflect a 100% payout of the performance-based shares resulting from achieving “target” performance. Actual payouts will be in a range of 0% to 200% of these amounts, depending on performance results for the three-year performance period from January 1, 2019, through December 31, 2021.

Determination Regarding 2017 Performance Share Awards. As part of the 2017 LTI program, AIR Predecessor granted performance-share awards that might be earned based on relative TSR as compared to the NAREIT Apartment Index (60% weighting) and the REIT Index (40% weighting) over a three-year performance period ending on December 31, 2019, with awards vesting 50% following the end of the three-year performance period (based on attainment of TSR targets) and 50% one year later, for a four-year plan from start to finish. On January 27, 2020, the Committee determined that AIR Predecessor’s three-year TSR was 1,000 basis points lower than the NAREIT Apartment Index and 410 basis points higher than the REIT Index for the three-year performance period ending on December 31, 2019, resulting in the number of shares being earned at 72% of target. Accordingly, for the NEOs, 50% of the earned shares vested on January 31, 2020, and the remaining 50% of the earned shares will vest on January 31, 2021.

 

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The chart below summarizes the results for the 2017, 2016, and 2015 performance share awards, and provides performance as of December 31, 2019, for the “in progress” 2019 and 2018 and performance share awards.

 

Long-Term Incentive Plan Award Status

Three-Year
Performance
Period

   2015      2016      2017      2018      2019      2020      2021      Status    CEO %
Payout(1) 		   Other
NEOs(2)

2019—2021

                 33% Completed      Tracking Between
Threshold and Target 		   26%(3)    51%(3)

2018—2020

              67% Completed         Tracking Between
Threshold and Target 		   80%(3)    87%(3)

2017—2019

           100% Completed            Payout Achieved
Between Threshold and
Target 		   72%    81%

2016—2018

        100% Completed               Maximum Payout
Achieved 		   200%(4)    167%(4)

2015—2017

     100% Completed                  Maximum Payout
Achieved 		   200%(5)    167%(5)

 

(1)

100% of the LTI award for the CEO is performance-based, or at risk, based entirely on relative TSR.

(2)

Two-thirds of the LTI awards for the other NEOs are performance-based, or at risk, based on relative TSR, and the remaining one-third of the LTI awards are for the purpose of retention, or time-based. Payouts shown include the time-based portion of the awards.

(3)

Amounts reflect performance of “in progress” awards as of December 31, 2019.

(4)

AIR Predecessor’s relative TSR result for 2016 LTI was 406%, exceeding the plan’s maximum performance level of 200%. Thus, the LTI payout for the CEO, whose LTI is based entirely on relative TSR, was capped at 200%, and the LTI payout for the other NEOs, incorporating the one-third portion of the award that is time-based, was capped at 167%.

(5)

AIR Predecessor’s relative TSR result for 2015 LTI was 289%, exceeding the plan’s maximum performance level of 200%. Thus, the LTI payout for the CEO, whose LTI is based entirely on relative TSR, was capped at 200%, and the LTI payout for the other NEOs, incorporating the one-third portion of the award that is time-based, was capped at 167%.

Post-Employment Compensation and Employment and Severance Arrangements

401(k) Plan

AIR Predecessor provides a 401(k) plan that is offered to all AIR Predecessor team members. In 2019, AIR Predecessor matched 25% of participant contributions to the extent of the first 4% of the participant’s eligible compensation. For 2019, the maximum match by AIR Predecessor was $2,800, which was the amount that AIR Predecessor matched for each of Messrs. Considine, Beldin and Kimmel, and Ms. Cohn’s 2019 401(k) contributions. AIR Predecessor provided an additional discretionary match in the amount of $1,200 to all team members in 2020 for AIR Predecessor’s achievement of greater than 125% on its 2019 corporate goals. AIR Predecessor’s prior year discretionary match was $1,000.

Other than the 401(k) plan, AIR Predecessor does not provide post-employment benefits. AIR Predecessor does not have a pension plan, a supplemental executive retirement plan or any other similar arrangements.

Executive Employment Arrangements

Replacement of Legacy Employment Agreement. On December 29, 2008, AIR OP entered into an employment agreement with Mr. Considine (the “2008 Employment Agreement”). On December 21, 2017, AIR OP entered into an employment agreement with Mr. Considine (the “2017 Employment Agreement”) to replace

 

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the 2008 Employment Agreement. The 2017 Employment Agreement was entered into to reflect current practice and update the terms of Mr. Considine’s employment with the Company. In connection with the execution of the 2017 Employment Agreement, Mr. Considine did not receive any additional equity awards or signing bonus. The Committee evaluated the terms of the 2017 Employment Agreement in comparison to those of the CEOs of AIR Predecessor’s peers and other comparable companies.

2017 Employment Agreement. The 2017 Employment Agreement was for a two-year term. On December 19, 2019, the Committee extended the term of the 2017 Employment Agreement for an additional two years, from January 1, 2020, through December 31, 2021. The remaining terms and conditions of the 2017 Employment Agreement are unchanged.

The 2017 Employment Agreement provides for a base salary of $700,000, subject to future increase. Mr. Considine also continues to be eligible to participate in the Company’s performance-based incentive compensation plan with a target annual short-term incentive award opportunity of not less than $1.4 million (the “Target STI”), and a target long-term incentive award opportunity of not less than $4.025 million, both subject to future increase.

Pursuant to the 2017 Employment Agreement, upon termination of Mr. Considine’s employment by AIR Predecessor without cause, by Mr. Considine for good reason, or upon a termination for reason of disability, Mr. Considine is generally entitled to: (a) a lump sum cash payment equal to the sum of (i) three times the sum of his base salary at the time of termination, and (ii) the Target STI; (b) any short-term incentive bonus earned but unpaid for a prior fiscal year (the “Prior Year STI”); (c) a pro rata portion of the short-term incentive bonus he would have earned for the year in which the termination occurs, based on the actual achievement of the applicable performance targets (the “Pro Rata STI”); and (d) immediate and full acceleration of any outstanding unvested equity awards, with all outstanding stock options (including options previously vested) remaining exercisable until the expiration of the applicable option term. In the event of Mr. Considine’s retirement, Mr. Considine will be entitled to: (a) the Prior Year STI; (b) the Pro Rata STI; and (c) accelerated vesting of outstanding and unvested equity awards, if any, that vest solely on a time basis and continued vesting of all outstanding unvested equity awards that vest based on the achievement of performance targets according to actual achievement of the applicable performance targets. If Mr. Considine’s employment is terminated due to his death, Mr. Considine’s estate will receive payment of any earned but unpaid base salary and vested accrued benefits, the Prior Year STI, and the Pro Rata STI, and all outstanding equity awards will become immediately and fully vested and be treated in accordance with the terms of the applicable award agreement.

Under the 2017 Employment Agreement, Mr. Considine is not entitled to any additional or special payments upon the occurrence of a change in control.

In the event payments to Mr. Considine are subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, the payments will be either (a) delivered in full, or (b) delivered as to such lesser extent that would result in no portion of such payments being subject to the excise tax, whichever results in the receipt by Mr. Considine of the greater amount on an after-tax basis.

The 2017 Employment Agreement also contains customary confidentiality provisions, a limited mutual non-disparagement provision, and non-competition, non-solicitation and no-hire provisions.

None of Messrs. Beldin or Kimmel or Ms. Cohn has an employment agreement.

Executive Severance Arrangements

AIR Predecessor has an executive severance policy that provides that AIR Predecessor shall seek stockholder approval or ratification of any future severance agreement for any senior executive officer that provides for benefits, such as lump-sum or future periodic cash payments or new equity awards, in an amount in

 

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excess of 2.99 times such executive officer’s base salary and bonus. Compensation and benefits earned through the termination date, the value of vesting or payment of any equity awards outstanding prior to the termination date, pro rata vesting of any other long-term awards, or benefits provided under plans, programs or arrangements that are applicable to one or more groups of employees in addition to senior executives are not subject to the policy. It has been AIR Predecessor’s longstanding practice not to provide excessive severance arrangements.

Executive Severance Policy. On February 22, 2018, the Committee adopted the Apartment Investment and Management Company Executive Severance Policy (the “Executive Severance Policy”). The Executive Severance Policy supersedes and replaces any employment agreement or other plan, policy or practice involving the payment of severance benefits to participants under the Executive Severance Policy. AIR Predecessor’s Executive Vice Presidents, as determined on the records of the Company and any other entities through which the operations of the Company are conducted, are eligible to participate in the Executive Severance Policy. Each of Messrs. Beldin and Kimmel and Ms. Cohn are participants under the Executive Severance Policy; however, the Chief Executive Officer, Mr. Considine, is not a participant under the Executive Severance Policy.

The Executive Severance Policy provides that if the Company terminates a participant’s employment without “Cause,” or if the participant terminates his or her employment for “Good Reason” (each as defined in the Executive Severance Policy), then the participant will be eligible to receive the following benefits:

 

  •  

a lump sum payment equal to the sum of (i) the annual base salary for the calendar year of the date of termination, and (ii) the average annual bonus paid to the participant in the most recent three years; and

 

  •  

18 months of continued health benefits coverage at the Company’s expense.

The vesting and exercise of any equity awards held by a participant on the date of termination will be determined in accordance with the applicable incentive plan and award agreement.

Pursuant to the terms of the Executive Severance Policy, if the Company terminates a participant’s employment without Cause, or if the participant terminates his or her employment for Good Reason, in either case, within the period commencing six months prior to and ending 12 months following a “Change in Control” (as defined in the Executive Severance Policy), then in lieu of the severance benefits described above the participant will be eligible to receive the following benefits:

 

  •  

a lump sum payment equal to two times the sum of (i) the annual base salary for the calendar year of the date of termination, and (ii) the average annual bonus paid to the Eligible Executive in the most recent three years;

 

  •  

18 months of continued health benefits coverage at the Company’s expense; and

 

  •  

100% accelerated vesting of any unvested equity awards then-held by the participant.

The Executive Severance Policy provides that if the employment of the participant is terminated by reason of the participant’s death or disability, then the participant will be eligible to receive a pro-rated bonus for the year of termination. In addition, the vesting and exercise of any equity awards held by the participant at the time of his or her death or disability will be determined in accordance with the applicable incentive plan and award agreement.

In the event that any payment or benefit payable to a participant under the Executive Severance Policy would result in the imposition of excise taxes under the “golden parachute” provisions of Section 280G of the Internal Revenue Code, then such payments and benefits will either be made and/or provided in full or will be reduced such that the excise tax under Section 280G is not applicable, whichever is least economically disadvantageous to the participant. The Executive Severance Policy does not provide for any excise tax or other tax “gross-up” payment.

All severance payments and benefits under the Executive Severance Policy are subject to applicable withholding obligations, the participant’s execution and non-revocation of a release of claims, and compliance

 

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with certain non-competition, non-disclosure and non-solicitation covenants set forth in a restrictive covenant agreement that is appropriate for the participant’s position.

The Executive Severance Policy will remain in effect, subject to amendment, until terminated by the board of directors. The board of directors may terminate or amend the Executive Severance Policy at any time, so long as at least 90 days’ prior notice is provided to any participant if the termination or amendment of the Executive Severance Policy would materially or adversely affect the rights of the participant.

Non-Competition and Non-Solicitation Agreements

Effective in January 2002 for Mr. Considine, and in connection with their employment and/or promotions by AIR Predecessor for Messrs. Beldin, and Kimmel and Ms. Cohn, AIR Predecessor entered into certain non-competition and non-solicitation agreements with each executive. Mr. Considine’s 2002 non-competition and non-solicitation agreement was replaced by his 2008 and 2017 Employment Agreements. Pursuant to these agreements, each of these NEOs agreed that during the term of his or her employment with the Company and for a period of two years following the termination of his or her employment, except in circumstances where there was a change in control of the Company, he or she would not (i) be employed by a competitor of the Company named on a schedule to the agreement, (ii) solicit other employees to leave the Company’s employment, or (iii) solicit customers of AIR Predecessor to terminate their relationship with the Company. The agreements further required that the NEOs protect AIR Predecessor’s trade secrets and confidential information. For Messrs. Beldin, and Kimmel, and Ms. Cohn, the agreements provide that in order to enforce the above-noted non-competition condition following the executive’s termination of employment by the Company without cause, each such executive will receive, for a period not to extend beyond the earlier of 24 months following such termination or the date of acceptance of employment with a non-competitor, (i) non-compete payments in an amount, if any, to be determined by the Company in its sole discretion and (ii) a monthly payment equal to two-thirds of such executive’s monthly base salary at the time of termination. For purposes of these agreements, “cause” is defined to mean, among other things, the executive’s (i) breach of the agreement, (ii) failure to perform required employment services, (iii) misappropriation of Company funds or property, (iv) conviction, plea of guilty, or plea of no contest to a crime involving fraud or moral turpitude, or (v) negligence, fraud, breach of fiduciary duty, misconduct or violation of law.

Equity Award Agreements

Double Trigger Vesting Upon Change in Control. The award agreements pursuant to which restricted stock, LTIP Unit and/or stock option awards have been granted to Messrs. Considine, Beldin, and Kimmel and Ms. Cohn, as applicable, provide that if (i) a change in control occurs and (ii) the executive’s employment with the Company is terminated either by the Company without cause or by the executive for good reason, in either case, within twelve months following the change in control, then (a) for time-based options and/or restricted stock, all outstanding shares of restricted stock and/or unvested stock options shall become immediately and fully vested and exercisable, and all vested options will remain exercisable for the remainder of the term of the option, and (b) for performance-based options, restricted stock and/or LTIP Unit awards, shares, unvested options and/or units will vest based on the higher of actual or target performance through the truncated performance period ending on the date of the change in control, and all vested options will remain exercisable for the remainder of the term of the option.

Accelerated Vesting Upon Termination of Employment Due to Death or Disability. Pursuant to the 2017 Employment Agreement, as set forth above, if Mr. Considine’s employment is terminated due to his death or disability, and all outstanding equity awards will become immediately and fully vested and be treated in accordance with the terms of the applicable award agreement. The award agreements pursuant to which restricted stock, LTIP Unit and/or stock option awards have been granted to Messrs. Considine, Beldin, and Kimmel and Ms. Cohn, as applicable, provide that upon a termination of employment due to death or disability, then (a) for time-based options and/or restricted stock, all outstanding shares of restricted stock and/or unvested stock options

 

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shall become immediately and fully vested and exercisable, and all vested options will remain exercisable for the remainder of the term of the option, and (b) for performance-based options, restricted stock and/or LTIP Unit awards, shares, unvested options and/or units will vest based on the higher of actual or target performance through the date of termination, and all vested options will remain exercisable for the remainder of the term of the option.

Other Benefits; Perquisite Philosophy

AIR Predecessor’s executive officer benefit programs are substantially the same as for all other eligible officers and employees. AIR Predecessor does not provide executives with more than minimal perquisites, such as reserved parking places.

Stock Ownership Guidelines and Required Holding Periods After Vesting

AIR Predecessor believes that it is in the best interest of AIR Predecessor’s stockholders for AIR Predecessor’s executive officers to own AIR Predecessor stock. Every year, the Committee and Mr. Considine review AIR Predecessor’s stock ownership guidelines, each executive officer’s holdings in light of the stock ownership guidelines, and each executive officer’s accumulated realized and unrealized stock option and restricted stock gains.

Equity ownership guidelines for all executive officers are determined as a minimum of the lesser of a multiple of the executive’s base salary or a fixed number of shares. The Committee and management have established the following stock ownership guidelines for AIR Predecessor’s executive officers:

 

Officer Position

  

Ownership Target

Chief Executive Officer

   Lesser of 5x base salary or 150,000 shares

Chief Financial Officer

   Lesser of 5x base salary or 75,000 shares

Other Executive Vice Presidents

   Lesser of 4x base salary or 25,000 shares

Any executive who has not satisfied the stock ownership guidelines must, until the stock ownership guidelines are satisfied, hold 50% of after tax shares of restricted stock for at least three years from the date of vesting, and hold 50% of shares acquired upon option exercises (50% calculated after exercise price plus taxes) for at least three years from the date of exercise.

Each of Messrs. Considine, Beldin, and Kimmel and Ms. Cohn exceeded the ownership targets established in AIR Predecessor’s stock ownership guidelines as of January 28, 2020.

Role of Outside Consultants

The Committee has the authority under its charter to engage the services of outside advisors, experts and others to assist the Committee. In 2019, the Committee engaged Board Advisory as its independent compensation consultant. At the direction of the Committee, Board Advisory coordinated and consulted with Ms. Johnson regarding executive compensation matters. Board Advisory provided the Committee with an independent view of both market data and plan design. AIR Predecessor management has engaged FPL Associates, L.P. (“FPL”) to review AIR Predecessor’s executive compensation plan. Neither Board Advisory nor FPL provided other services to the Company. The Committee has assessed the independence of Board Advisory and FPL pursuant to SEC rules and has concluded that they are independent.

Base Salary, Incentive Compensation, and Equity Grant Practices

Base salary adjustments typically take effect on January 1. The Committee (for Mr. Considine) and Mr. Considine, in consultation with the Committee (for the other executive officers), determine incentive compensation in late January or early February. STI is typically paid in February or March. LTI is granted on a date determined by the Committee, typically in late January or early February.

 

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AIR Predecessor grants equity in three scenarios: in connection with incentive compensation, as discussed above; in connection with certain new-hire or promotion packages; and for purposes of retention.

With respect to LTI, the Committee sets the grant date for the restricted stock, LTIP Unit, and stock option grants. The Committee sets grant dates at the time of its final compensation determination, generally in late January or early February. The date of determination and date of award are not selected based on share price. In the case of new-hire packages that include equity awards, grants are made on the employee’s start date or on a date designated in advance based on the passage of a specific number of days after the employee’s start date. For non-executive officers, as provided for in the 2015 Plan, the Committee has delegated the authority to make equity awards, up to certain limits, to the Chief Financial Officer (Mr. Beldin) and/or Corporate Secretary (Ms. Cohn). The Committee and Mr. Beldin and Ms. Cohn time grants without regard to the share price or the timing of the release of material non-public information and do not time grants for the purpose of affecting the value of executive compensation.

Accounting Treatment and Tax Deductibility of Executive Compensation

The Committee generally considers the accounting treatment and tax implications of the compensation awarded or paid to our executives. Grants of equity compensation awards under our long-term incentive program are accounted for under FASB ASC Topic 718. Section 162(m) of the Internal Revenue Code was amended on December 22, 2017, by the Tax Cuts and Jobs Act (the “Tax Act”). Under the Tax Act, Section 162(m) applies to each employee who serves as the Company’s principal executive officer or principal financial officer during the taxable year, each other employee of the Company who is among the three most highly compensated officers during such taxable year, and any other employee who was a covered employee of the Company for any preceding taxable year beginning after December 31, 2016. The Tax Act also eliminated the performance-based compensation exception with respect to tax years beginning after December 31, 2017, but includes a transition rule with respect to compensation that is provided pursuant to a written binding contract in effect on November 2, 2017, and not materially modified after that date. The Company has awarded, and will continue to award, compensation as it considers appropriate that does not qualify for deductibility under Section 162(m).

 

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GOING FORWARD AIR COMPENSATION ARRANGEMENTS

Overview

Immediately after the distribution, AIR’s executive compensation program will be similar to Aimco’s executive compensation program, and will generally be comprised of base salary, a short-term incentive award, long-term incentive awards and limited executive perquisites.

In connection with the Separation, AIR generally expects to adopt or assume Aimco’s compensation and benefit plans, including retirement plans and health and welfare plans, that will be similar to those in effect at Aimco before the Separation. AIR will also adopt an executive severance policy, as described below, and the 2020 Stock Award and Incentive Plan (the “2020 Plan”), the 2020 Employee Stock Purchase Plan (the “2020 ESPP”), and the 2007 Stock Award and Incentive Plan (solely for the purposes of the Aimco assumed equity awards) (which are described in this information statement under the headings “Apartment Income REIT Corp. 2020 Stock Award and Incentive Plan” and “Apartment Income REIT Corp. 2007 Stock Award and Incentive Plan,” and “Apartment Income REIT Corp. 2020 Employee Stock Purchase Plan,” respectively). In addition, AIR’s executive compensation philosophy and practices will initially mirror those at Aimco, including STI and LTI compensation, as described above. Following the distribution, the AIR Compensation and Human Resources Committee (the “AIR Compensation Committee”) will consider and develop AIR’s compensation programs, plans, philosophy and practices, consistent with AIR’s business needs and goals.

AIR Compensation Consultant and Peer Group

In anticipation of the Separation, FPL has been retained by the Committee to serve as the initial compensation consultant to AIR commencing on the distribution.

Also in connection with compensation determinations for 2021 compensation, the AIR Compensation Committee will approve an initial Compensation Peer Group for AIR that is anticipated to consist of the following companies: Kilroy Realty Corp, MGM Growth Properties LLC, Kimco Realty Corp, American Homes 4 Rent, Equity Lifestyle Properties, Inc., Gaming & Leisure Properties, Inc., Regency Centers Corp, Federal Realty Investment Trust, Douglas Emmett, Inc., CyrusOne Inc., The Macerich Company, Omega Healthcare Investors, Inc., Brixmor Property Group, Inc., American Campus Communities, Inc., Park Hotels & Resorts Inc., Healthcare Trust of America, Inc., JBG Smith Properties, Hudson Pacific Properties, Inc., Americold Realty Trust and Taubman Centers, Inc. These companies were selected based on the following criteria: similarity to AIR in size, geographic footprint and operational complexity, taking into account factors such as revenue, market capitalization, global scope of operations, manufacturing footprint and research and development activities. Although the Compensation Peer Group after the distribution will be determined by the AIR Compensation Committee, it is expected that the AIR Compensation Peer Group described above will be considered in AIR’s initial executive compensation decisions.

Employment Agreements with AIR Named Executive Officers

AIR OP entered into the 2017 Employment Agreement with Mr. Considine, which shall remain in effect following the Separation, as amended to reflect his role at AIR following the Separation. None of Messrs. Beldin, Kimmel or Wagner or Ms. Cohn has an employment agreement. AIR may determine to enter into employment agreements with them in the future.

AIR Executive Severance Policy

AIR will adopt the Executive Severance Policy to become effective upon, and subject to, the occurrence of the distribution. The eligible participants under the severance plan would include AIR named executive officers and other executive officers. Each of Messrs. Beldin, Kimmel, and Wagner and Ms. Cohn will be eligible to participate in the Executive Severance Policy; however, the Chief Executive Officer, Mr. Considine, will not be eligible to participate in the Executive Severance Policy.

 

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It is anticipated that the Executive Severance Policy will provide that if AIR terminates a participant’s employment without “Cause,” or if the participant terminates his or her employment for “Good Reason” (each as defined in the Executive Severance Policy), then the participant will be eligible to receive the following benefits:

 

  •  

a lump sum payment equal to the sum of (i) the annual base salary for the calendar year of the date of termination, and (ii) the average annual bonus paid to the participant in the most recent three years; and

 

  •  

18 months of continued health benefits coverage at AIR expense.

The vesting and exercise of any equity awards held by a participant on the date of termination will be determined in accordance with the applicable incentive plan and award agreement.

Pursuant to the anticipated terms of the Executive Severance Policy, if AIR terminates a participant’s employment without Cause, or if the participant terminates his or her employment for Good Reason, in either case, within the period commencing six months prior to and ending 12 months following a “Change in Control” (as defined in the Executive Severance Policy), then in lieu of the severance benefits described above the participant will be eligible to receive the following benefits:

 

  •  

a lump sum payment equal to two times the sum of (i) the annual base salary for the calendar year of the date of termination, and (ii) the average annual bonus paid to the Eligible Executive in the most recent three years;

 

  •  

18 months of continued health benefits coverage at AIR’s expense; and

 

  •  

100% accelerated vesting of any unvested equity awards then-held by the participant.

It is anticipated that the Executive Severance Policy will provide that if the employment of the participant is terminated by reason of the participant’s death or disability, then the participant will be eligible to receive a pro-rated bonus for the year of termination. In addition, the vesting and exercise of any equity awards held by the participant at the time of his or her death or disability will be determined in accordance with the applicable incentive plan and award agreement.

It is also anticipated that the Executive Severance Policy will provide that in the event that any payment or benefit payable to a participant under the Executive Severance Policy would result in the imposition of excise taxes under the “golden parachute” provisions of Section 280G of the Internal Revenue Code, then such payments and benefits will either be made and/or provided in full or will be reduced such that the excise tax under Section 280G is not applicable, whichever is least economically disadvantageous to the participant. The Executive Severance Policy will not provide for any excise tax or other tax “gross-up” payment.

Pursuant to the anticipated terms of the Executive Severance Policy, all severance payments and benefits under the Executive Severance Policy will be subject to applicable withholding obligations, the participant’s execution and non-revocation of a release of claims, and compliance with certain non-competition, non-disclosure and non-solicitation covenants set forth in a restrictive covenant agreement that is appropriate for the participant’s position.

It is anticipated that the Executive Severance Policy will remain in effect, subject to amendment, until terminated by AIR’s board of directors, and that AIR’s board of directors may terminate or amend the Executive Severance Policy at any time, so long as at least 90 days’ prior notice is provided to any participant if the termination or amendment of the Executive Severance Policy would materially or adversely affect the rights of the participant.

Stock Ownership Guidelines and Required Holding Periods after Vesting

AIR Chief Executive Officer, Chief Financial Officer and other executive vice presidents will be required to own AIR common stock. Every year, AIR’s Compensation Committee and Mr. Considine will review AIR’s stock ownership guidelines, each executive officer’s holdings in light of the stock ownership guidelines, and each executive officer’s accumulated realized and unrealized stock option and restricted stock gains.

 

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Equity ownership guidelines for all executive officers will be determined as a minimum of the lesser of a multiple of the executive’s base salary or a fixed number of shares. AIR’s Compensation Committee and management will establish stock ownership guidelines for AIR’s executive officers, in their sole and absolute discretion.

 

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SUMMARY COMPENSATION TABLE

The table below summarizes the compensation attributable to the principal executive officer, principal financial officer, and the three other most highly compensated executives in 2019, for the years 2019, 2018, and 2017.

 

Name and Principal
Position

   Year      Salary
($) 		     Bonus
($) 		     Stock
Awards
($) (1) 		    Option
Awards
($) (2) 		     Non-Equity
Incentive Plan
Compensation
($) (3) 		     All Other
Compensation
($) (4) 		     Total ($)  

Terry Considine — Chairman of the Board of Directors, President and Chief Executive Officer

     2019        700,000        —          4,275,005  (5)      —          2,326,450        4,000        7,305,455  
     2018        700,000        —          4,011,053       —          2,058,600        3,750        6,773,403  
     2017        700,000        —          2,102,139       2,012,510        1,532,860        3,100        6,350,609  

Paul L. Beldin — Executive Vice President and Chief Financial Officer

     2019        450,000        —          410,214  (6)      —          311,763        4,000        1,175,977  
     2018        450,000        —          744,437       —          575,685        3,750        1,773,872  
     2017        400,000        —          720,919       50,002        418,980        3,100        1,593,001  

Lisa R. Cohn — Executive Vice President, General Counsel and Secretary

     2019        450,000        —          1,219,532  (7)      —          685,878        4,000        2,359,410  
     2018        450,000        —          1,042,179       —          670,900        3,750        2,166,829  
     2017        400,000        —          1,031,164       —          586,225        3,100        2,020,489  

Keith M. Kimmel — Executive Vice President of Property Operations

     2019        450,000        —          803,764  (8)      —          593,746        4,000        1,851,510  
     2018        450,000        —          719,605       —          456,398        3,750        1,629,753  
     2017        400,000        —          747,611       —          421,671        3,100        1,572,382  

 

(1)

This column represents the aggregate grant date fair value of stock awards in the year granted computed in accordance with FASB ASC Topic 718. For additional information on the valuation assumptions with respect to the grants reflected in this column for 2019, refer to the Share-Based Compensation footnote to Aimco’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019.

 

 

The amounts shown in this column for 2019 include the grant date fair value of the performance-based restricted stock awards or performance-based LTIP Unit awards, as applicable, granted in 2019 based on the probable outcome of the performance condition to which such awards are subject, which was calculated by a third-party consultant using a Monte Carlo valuation model in accordance with FASB ASC Topic 718. Based on the foregoing, the grant date fair value is $12.03 per LTIP Unit as to Mr. Considine’s performance-based LTI award, $55.50 per share for the performance-based restricted stock awards granted to each of Messrs. Beldin and Kimmel and Ms. Cohn that are based on relative TSR performance. The grant

 

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  date fair value of the performance-based LTIP Unit award based on a grant date fair value of $12.03 per LTIP Unit, assuming achievement at the maximum level of performance, is $8,550,010 for Mr. Considine.

 

 

The grant date fair value of the performance-based restricted stock awards that are based on relative TSR performance, assuming achievement at the maximum level of performance, is $568,320 for Mr. Beldin, $1,689,531 for Ms. Cohn, and $1,113,552 for Mr. Kimmel.

 

(2)

This column represents the aggregate grant date fair value of the option awards in the year granted computed in accordance with FASB ASC Topic 718.

(3)

For 2019, the amounts shown for Messrs. Considine, Beldin and Kimmel and Ms. Cohn represent the 2019 STI amounts that were paid on February 25, 2020.

(4)

Includes discretionary matching contributions under Aimco’s 401(k) plan.

(5)

Equity awards for Mr. Considine in 2019 include a 2019 LTI award consisting of 355,362 performance-based LTIP Units for the forward looking, three-year performance period from January 1, 2019, through December 31, 2021, with the number of units earned, if any, vesting 50% following the end of the three-year performance period and 50% one year later.

(6)

Stock awards for Mr. Beldin in 2019 include a 2019 LTI award consisting of the following: (i) 2,560 shares of time-based restricted stock, vesting 25% on each anniversary of the grant date; and (ii) 5,120 shares of performance-based restricted stock for the forward looking, three-year performance period from January 1, 2019, through December 31, 2021, with the number of shares or option shares earned, if any, vesting 50% following the end of the three-year performance period and 50% one year later.

(7)

Stock awards for Ms. Cohn in 2019 include a 2019 LTI award consisting of the following: (i) 7,611 shares of time-based restricted stock, vesting 25% on each anniversary of the grant date; and (ii) 15,221 shares of performance-based restricted stock for the forward looking, three-year performance period from January 1, 2019, through December 31, 2021, with the number of shares earned, if any, vesting 50% following the end of the three-year performance period and 50% one year later.

(8)

Stock awards for Mr. Kimmel in 2019 include a 2019 LTI award consisting of the following: (i) 5,016 shares of time-based restricted stock, vesting 25% on each anniversary of the grant date; and (ii) 10,032 shares of performance-based restricted stock for the forward looking, three-year performance period from January 1, 2019, through December 31, 2021, with the number of shares earned, if any, vesting 50% following the end of the three-year performance period and 50% one year later.

 

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GRANTS OF PLAN-BASED AWARDS IN 2019

The following table provides details regarding plan-based awards granted to the named executive officers during the year ended December 31, 2019.

 

Name

  Grant
Date 		    Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards (1) 		    Estimated Future Payouts
Under Equity Incentive
Plan Awards (2) 		    All
Other
Stock
Awards:
Number
of Shares
of Stock
or
Units (#)
(3) 		    All other Option Awards
Number of Securities
Underlying Options 		    Exercise
or Base
Price of
Options
Awards
($/Sh) 		    Grant
Date
Fair
Value of
Stock
and
Option
Awards
($) (4) 		 
  Threshold
($) 		    Target ($)     Maximum
($) 		    Threshold
(#) 		    Target
(#) 		    Maximum
(#) 		    Threshold
(#) 		    Target
(#) 		    Maximum
(#) 		 

Terry Considine

    1/29/2019       875,000       1,750,000       3,500,000                    
    1/29/2019             177,681       355,362       710,724                 4,275,005  

Paul L. Beldin

    1/29/2019       125,000       250,000       500,000                    
    1/29/2019                   2,560               126,054  
    1/29/2019             2,560       5,120       10,240                 284,160  

Lisa R. Cohn

    1/29/2019       275,000       550,000       1,100,000                    
    1/29/2019                   7,611               374,766  
    1/29/2019             7,611       15,221       30,442                 844,766  

Keith M. Kimmel

    1/29/2019       212,500       425,000       850,000                    
    1/29/2019                   5,016               246,988  
    1/29/2019             5,016       10,032       20,064                 556,776  

 

(1)

On January 29, 2019, the Committee made determinations of target total incentive compensation for 2019 based on achievement of Aimco’s six corporate goals for 2019, and achievement of specific individual objectives. Target total incentive compensation amounts were as follows: Mr. Considine — $6.025 million; Mr. Beldin — $620,000; Ms. Cohn — $1.65 million; Mr. Kimmel — $1.15 million. The awards in this column indicate the 2019 STI portion of these target total incentive amounts — at threshold, target and maximum performance levels. The actual 2019 STI awards earned by each of Messrs. Considine, Beldin and Kimmel, and Ms. Cohn are as disclosed in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.” See the discussion above under “CD&A — Total Compensation for 2019 — Short-Term Incentive Compensation for 2019.”

(2)

For each of Messrs. Considine, Beldin, and Kimmel and Ms. Cohn the amounts in this column include the number of shares underlying performance-based LTIP Units (in the case of Mr. Considine) or performance-based restricted stock (in the case of Messrs. Beldin and Kimmel and Ms. Cohn) granted on January 29, 2019, pursuant to their 2019 LTI award that may be earned – at threshold, target and maximum performance levels – based on relative TSR (60% of each award is based on the Company’s TSR relative to the NAREIT Apartment Index and 40% of each award is based on the Company’s TSR relative to the REIT Index) over a three-year period from January 1, 2019, to December 31, 2021, with the number of units or shares earned, if any, vesting 50% on the later of the third anniversary of the grant date or the date on which performance is determined (but no later than March 15, 2022), and 50% on the fourth anniversary of the grant date.

(3)

The amounts in this column reflect the number of shares of time-based restricted stock granted pursuant to the 2019 LTI award, vesting 25% on each anniversary of the grant date. The number of shares of restricted stock was determined based on the average of the closing trading prices of Aimco Common Stock on the NYSE on the five trading days up to and including the grant date, or $48.18.

(4)

This column represents the aggregate grant date fair value of equity awards in the year granted computed in accordance with FASB ASC Topic 718. For additional information on the valuation assumptions with respect to the grants reflected in this column, refer to the Share-Based Compensation footnote to Aimco’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019.

 

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The amounts shown in this column include the grant date fair value of the performance-based restricted stock awards or LTIP Unit awards, as applicable, based on the probable outcome of the performance condition to which such awards are subject, which was calculated by a third-party consultant using a Monte Carlo valuation model in accordance with FASB ASC Topic 718.

 

 

Based on the foregoing, the grant date fair value is $12.03 per LTIP Unit as to Mr. Considine’s performance-based LTI award, $55.50 per share for the performance-based restricted stock awards granted to each of Messrs. Beldin and Kimmel and Ms. Cohn that are based on relative TSR performance. The grant date fair value of the performance-based LTIP Unit award, assuming achievement at the maximum level of performance, is $8,550,010 for Mr. Considine. The grant date fair value of the performance-based restricted stock awards that are based on relative TSR performance, assuming achievement at the maximum level of performance, is $568,320 for Mr. Beldin, $1,689,531 for Ms. Cohn, and $1,113,552 for Mr. Kimmel.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2019

The following table shows outstanding stock option awards classified as exercisable and unexercisable as of December 31, 2019, for the NEOs. The table also shows unvested and unearned stock awards assuming a market value of $51.65 per share (the closing market price of the Company’s Common Stock on the New York Stock Exchange on December 31, 2019).

 

    Option Awards     Stock Awards  
Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable 		    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable 		    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#) 		    Option
Exercise
Price
($) 		    Option
Expiration
Date 		    Number
of Shares
or Units of
Stock That
Have Not
Vested (#) 		    Market
Value of
Shares or
Units of
Stock
That Have
Not Vested
($) (1) 		    Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (#) 		    Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($) (1) 		 

Terry Considine

        127,218 (2)      44.07       1/31/2027           177,681 (3)      428,211 (3) 
    192,404 (4)      192,405 (4)        38.73       1/26/2026           290,944 (5)      5,086,113  
    238,530 (6)          39.05       2/12/2025       32,755 (7)      1,691,744      
              51,309 (8)      2,650,110      

Paul L. Beldin

        3,161 (9)      44.07       1/31/2027           2,562 (10)      132,327  
    9,054 (11)      9,055 (11)        38.73       1/26/2026           11,997 (12)      619,645  
              7,328 (13)      378,491      
              8,247 (14)      425,958      
              2,561 (15)      132,276      
              5,989 (16)      309,332      
              4,241 (17)      219,048      
              2,660 (18)      137,389      
              1,789 (19)      92,402      

Lisa R. Cohn

                  7,615 (10)      393,315  
                  16,786 (12)      866,997  
              10,857 (20)      560,764      
              13,301 (8)      686,997      
              7,615 (15)      393,315      
              6,288 (21)      324,775      
              3,770 (22)      194,721      
              1,663 (23)      85,894      

Keith M. Kimmel

    7,294 (4)      7,294 (4)        38.73       1/26/2026           5,019 (10)      259,231  
                  11,578 (12)      598,004  
              7,872 (20)      406,589      
              10,929 (8)      564,483      
              5,019 (15)      259,231      
              4,342 (21)      224,264      
              2,733 (22)      141,159      
              1,608 (23)      83,053      

 

(1)

The information on unvested stock shown above has been adjusted, where applicable, to reflect additional shares received as a result of the special dividend paid in February 2020. Amounts reflect the number of shares subject to the award that have not vested multiplied by the market value of $51.65 per share, which was the closing market price of Aimco Common Stock on the NYSE on December 31, 2019.

(2)

This option was granted on January 31, 2017. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2017, through December 31, 2019, of which 50% vested on January 31, 2020, and the remaining 50% will vest on January 31, 2021, as described earlier in this proxy.

 

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(3)

This performance-based LTIP Unit award was granted on January 29, 2019, and, subject to relative TSR metrics set forth earlier in this proxy, vests 50% following the end of the three-year forward looking performance period and 50% on the fourth anniversary of the grant date. The amount shown in the table is the award at threshold, with the market value calculated by multiplying the threshold number of LTIP Units by $2.41 (which is the market value of $51.65 per share at fiscal year-end minus the closing price on the date of grant of $49.24).

(4)

This option was granted on January 26, 2016. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2016, through December 31, 2018, of which 50% vested on January 26, 2019, and the remaining 50% vested on January 26, 2020, as described earlier in this proxy.

(5)

This performance-based LTIP Unit award was granted on January 30, 2018, and, subject to relative TSR metrics set forth earlier in this proxy, vests 50% following the end of the three-year forward looking performance period and 50% on the fourth anniversary of the grant date. The amount shown in the table is the award at target.

(6)

This option was granted on February 12, 2015, and vested 25% on each anniversary of the grant date.

(7)

This performance-based LTIP Unit award was granted on January 31, 2017. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2017, through December 31, 2019, of which 50% vested on January 31, 2020, and the remaining 50% will vest on January 31, 2021, as described earlier in this proxy.

(8)

This performance-based restricted stock award was granted on January 26, 2016. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2016, through December 31, 2018, of which 50% vested on January 26, 2019, and the remaining 50% vested on January 26, 2020, as described earlier in this proxy.

(9)

This option was granted on January 31, 2017. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2017, through December 31, 2019, of which 50% vested on January 31, 2020, and the remaining 50% will vest on January 31, 2022.

(10)

This performance-based restricted stock award was granted on January 29, 2019 and, subject to relative TSR metrics set forth earlier in this proxy, vests 50% following the end of the three-year forward looking performance period and 50% on the fourth anniversary of the grant date. The amount shown in the table is the award at threshold.

(11)

This option was granted on January 26, 2016. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2016, through December 31, 2018, as described earlier in this proxy, of which 50% vested on January 26, 2019, 37.5% vested on January 26, 2020, and 12.5% vests on January 26, 2022.

(12)

This restricted stock award was granted on January 30, 2018, and, subject to relative TSR metrics, vests 50% following the end of the three-year forward looking performance period and 50% on the fourth anniversary of the grant date. The amount shown in the table is the award at target.

(13)

This performance-based restricted stock award was granted on January 31, 2017. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2017, through December 31, 2019, of which 50% vested on January 31, 2020, and the remaining 50% will vest on January 31, 2022.

(14)

This performance-based restricted stock award was granted on January 26, 2016. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2016, through December 31, 2018, as described earlier in this proxy, of which 50% vested on January 26, 2019, 37.5% vested on January 26, 2020, and 12.5% vests on January 26, 2022.

(15)

This restricted stock award was granted on January 29, 2019, and vests 25% on each anniversary of the grant date.

(16)

This restricted stock award was granted on January 30, 2018, and vests 100% on the fourth anniversary of the grant date.

 

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(17)

This restricted stock award was granted on January 31, 2017, and vested 25% on the first anniversary of the grant date and 75% will vest on the fifth anniversary of the grant date.

(18)

This restricted stock award was granted on January 26, 2016, and vested 25% on each of the first, second anniversaries of the grant date and 50% will vest on the sixth anniversary of the grant date.

(19)

This restricted stock award was granted on January 26, 2016, and vested 25% on each of the first, second, and third anniversaries of the grant date and will vest 12.5% on each of the fifth and sixth anniversaries of the grant date.

(20)

This performance-based restricted stock award was granted on January 31, 2017. The amount shown in the table represents the portion of the award that was earned based on our relative TSR performance for the three-year performance period from January 1, 2017, through December 31, 2019, of which 50% vested on January 31, 2020, and the remaining 50% will vest on January 31, 2021, as described earlier in this proxy.

(21)

This restricted stock award was granted on January 30, 2018, and vests 25% on each anniversary of the grant date.

(22)

This restricted stock award was granted on January 31, 2017, and vests 25% on each anniversary of the grant date.

(23)

This restricted stock award was granted on January 26, 2016, and vested 25% on each anniversary of the grant date.

(24)

This performance-based restricted stock award was granted on January 26, 2016, with vesting determined according to achievement of development-related objectives for the performance period beginning January 1, 2016, through December 31, 2018. The amount shown is the actual amount achieved for the three-year performance period, of which 50% vested on January 26, 2019, and the remaining 50% vested on January 26, 2020.

 

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OPTION EXERCISES AND STOCK VESTED IN 2019

The following table sets forth certain information regarding options and stock awards exercised and vested, respectively, during the year ended December 31, 2019, for the persons named in the Summary Compensation Table above.

 

     Option Awards      Stock Awards  

Name

   Number of
Shares Acquired
on Exercise (#) 		     Value Realized
on Exercise ($) (1) 		     Number of
Shares Acquired
on Vesting (#) 		     Value Realized
on Vesting ($) (2) 		 

Terry Considine

     —          —          147,785        7,243,007  

Paul L. Beldin

     3,644        121,819        10,872        532,897  

Lisa R. Cohn

     —          —          38,323        1,879,002  

Keith M. Kimmel

     —          —          26,745        1,311,547  

 

(1)

Amounts reflect the difference between the exercise price of the option and the market price at the time of exercise.

(2)

Amounts reflect the market price of the stock on the day the shares of restricted stock vested.

 

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The NEOs are entitled to certain severance payments and benefits upon a qualifying termination of employment or, in the case of a change in control, double trigger accelerated vesting of equity awards in the event of a qualifying termination of employment that occurs within one year following a change in control. The terms of these arrangements are described under “CD&A — Post-Employment Compensation and Employment and Severance Arrangements — Executive Employment Arrangements, Executive Severance Arrangements and Equity Award Agreements” above.

In the table that follows, potential payments and other benefits payable upon termination of employment and change in control situations are set out as if the conditions for payments had occurred and/or the terminations took place on December 31, 2019. In setting out such payments and benefits, amounts that had already been earned as of the termination date are not shown. Also, benefits that are available to all full-time regular employees when their employment terminates are not shown. The amounts set forth below are estimates of the amounts that could be paid out to the NEOs upon their termination. The actual amounts to be paid out can only be determined at the time of such NEOs’ separation from Aimco. The following table summarizes the potential payments under various scenarios if they had occurred on December 31, 2019.

 

    Value of Accelerated Stock and Stock Options ($)(1)     Severance ($)  

Name

  Change
in
Control
Only 		    Double
Trigger
Change in
Control 		    Death or
Disability 		    Termination
Without
Cause 		    Termination
For Good
Reason 		    Death     Disability     Termination
Without
Cause 		    Termination
For Good
Reason 		    Termination
Without
Cause or
For Good
Reason
in
Connection
with a
Change in
Control 		 

Terry Considine

    —         13,734,546       13,734,546       13,734,546       13,734,456       —         3,877,019 (3)(4)      3,877,019 (4)      3,877,019 (4)      3,877,019 (4) 

Paul L. Beldin

    —         2,719,030       2,719,030       —         —         —         311,763 (5)      969,615 (6)      969,615 (6)      1,910,111 (7) 

Lisa R. Cohn

    —         3,898,550       3,898,550       —         —         —         685,878 (5)      1,123,642 (6)      1,123,642 (6)      2,219,742 (7) 

Keith M. Kimmel

    —         2,889,384       2,889,384       —         —         —         593,746 (5)      997,028 (6)      997,028 (6)      1,964,657 (7) 

 

(1)

Amounts reflect value of accelerated restricted stock, LTIP Units, and options using the closing market price on December 31, 2019, of $51.65 per share.

(2)

Amounts assume the agreements were enforced by the Company and that non-compete payments in an aggregate amount equal to two-thirds of the executive’s monthly base salary would be payable for 24 months following the executive’s termination of employment by the Company without cause.

(3)

Amount does not reflect the offset for long-term disability benefit payments in the case of a qualifying disability under Aimco’s long-term disability insurance plan.

(4)

Amount consists of (i) a lump sum cash payment equal to the sum of (a) three times the sum of Mr. Considine’s base salary, or $2.1 million, and (b) Mr. Considine’s 2019 target STI of $1.75 million, and (ii) 24 months of medical coverage reimbursement at an estimated amount of $27,019, as payable pursuant to the terms of Mr. Considine’s employment agreement with the Company.

(5)

Amount consists of a lump sum cash payment equal to the amount of 2019 STI paid, as payable pursuant to the Executive Severance Policy.

(6)

Amount consists of (i) a lump sum cash payment equal to the sum of base salary and the average of the amount of STI paid for the previous three years, and (ii) 18 months of medical coverage reimbursement at an estimated amount of $29,399, as payable pursuant to the Executive Severance Policy.

(7)

Amount consists of (i) a lump sum cash payment equal to two times the sum of base salary and the average of the amount of STI paid for the previous three years, and (ii) 18 months of medical coverage reimbursement at an estimated amount of $29,399, as payable pursuant to the Executive Severance Policy.

 

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APARTMENT INCOME REIT CORP. 2020 STOCK AWARD AND INCENTIVE PLAN

Prior to the Separation, AIR will adopt the 2020 Plan. Aimco, as our sole stockholder, will approve the 2020 Plan prior to the Separation, and the 2020 Plan will become effective as of the date of the Separation. AIR equity-based compensation awards into which certain outstanding Aimco equity-based compensation awards are converted upon the Separation will be issued pursuant to the 2020 Plan.

The following description is a summary of certain terms of the 2020 Plan, filed as Exhibit 10.13 to the registration statement on Form 10, of which this information statement is a part. This summary is qualified in its entirety by reference to the full text of the 2020 Plan.

Purpose and Eligibility

The purpose of the 2020 Plan will be to reinforce the long-term commitment to AIR’s success of those directors, officers, employees, consultants and advisors of AIR and its subsidiaries who are or will be responsible for such success; to facilitate the ownership of AIR’s stock by such individuals, thereby reinforcing the alignment of their interests with those of AIR’s stockholders; and to assist AIR in attracting and retaining officers and other employees with experience and ability. The 2020 Plan will provide for the granting of stock options, stock appreciation rights, restricted stock, deferred stock, performance shares, other incentive awards, cash-based awards, and the issuance of partnership units of AIR OP designated as “LTIP Units” (collectively referred to in this proxy statement as “awards”).

The AIR Compensation Committee selects the employees, consultants, and directors who will be granted awards under the 2020 Plan on the basis of their service to AIR and its subsidiaries. The actual number of individuals who will receive awards cannot be determined in advance because the AIR Compensation Committee has the discretion to select the participants. All of our employees, directors, and consultants will be eligible to participate in the 2020 Plan.

Administration

AIR’s Compensation Committee, which will administer the 2020 Plan, will be comprised solely of independent directors, and all Committee members will be both “independent directors,” as defined by Rule 16b-3 under the Exchange Act, and “non-employee directors,” for purposes of Section 162(m). AIR’s Compensation Committee will have the authority to interpret the 2020 Plan, determine the terms and conditions of awards granted under the 2020 Plan, adopt, alter and repeal such administrative rules, guidelines and practices governing the 2020 Plan, interpret the terms and provisions of the 2020 Plan and any awards issued thereunder (and any agreements relating thereto), correct any defect or supply any omission or reconcile any inconsistency in the 2020 Plan, supervise the administration of the 2020 Plan and make all other determinations necessary and/or advisable for the administration of the 2020 Plan. AIR’s Compensation Committee may, with the consent of a participant, amend the terms of any existing award previously granted to the participant, in a manner consistent with the 2020 Plan. AIR’s Compensation Committee may also authorize loans to participants in connection with the grant of awards, on terms and conditions determined solely by AIR’s Compensation Committee. However, in order to comply with the Sarbanes-Oxley Act of 2002, AIR will not provide loans to executive officers. All decisions made by the AIR Compensation Committee pursuant to the provisions of the 2020 Plan shall be final, conclusive, and binding on all persons.

The AIR Compensation Committee may in its sole and absolute discretion delegate to the Chief Financial Officer of AIR or the Secretary of AIR, or both, any or all of the administrative duties and authority of the AIR Compensation Committee under the 2020 Plan, other than the authority to (a) make grants to employees who are “officers” of AIR within the meaning of Rule 16(a)-1(b) of the Exchange Act or whose total compensation is required to be reported to AIR’s stockholders under the Exchange Act, (b) determine the price, timing or amount of such grants or (c) determine any other matter required by Rule 16b-3 under the Exchange Act to be determined

 

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in the sole and absolute discretion of the AIR Compensation Committee. Any such delegation by the AIR Compensation Committee will include a limitation as to the amount of AIR Common Stock underlying awards that may be granted during such period of the delegation and contain guidelines as to the determination of the exercise price and the vesting criteria. The AIR Compensation Committee may revoke or amend the terms of a delegation at any time pursuant to the terms of the 2020 Plan.

Amendment and Termination; No Repricing; Section 409A; Minimum Vesting

Amendment of the Plan. AIR’s board of directors may amend, alter or discontinue the 2020 Plan, but no amendment, alteration, or discontinuation may be made that would impair the rights of a participant under any award previously granted without the participant’s consent. Stockholder approval is required for any amendment that would increase the maximum number of shares that may be sold or issued under the 2020 Plan or alter the class of employees eligible to participate in the 2020 Plan. With respect to any other amendments of the 2020 Plan, AIR’s board of directors may in its discretion determine that such amendments will only become effective upon approval by the stockholders of AIR, if AIR’s board of directors determines that such stockholder approval may be advisable, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under federal or state securities law, federal or state tax law or any other laws or for the purposes of satisfying applicable stock exchange listing requirements.

Amendment of Awards; No Repricing. AIR’s Compensation Committee may amend the terms of any award previously granted, prospectively or retroactively, but no such amendment will impair the rights of any holder without his or her consent. Notwithstanding the foregoing or any other provision of the 2020 Plan, AIR’s Compensation Committee may not, without prior approval of Aimco’s stockholders, seek to effect any repricing of any previously granted, “underwater” stock option or stock appreciation right by: amending or modifying the terms of the stock option or stock appreciation right to lower the exercise price; canceling the underwater stock option or stock appreciation right and granting either replacement stock options or stock appreciation rights having a lower exercise price; or other awards or cash in exchange; or repurchasing the underwater stock options or stock appreciation rights.

Section 409A. To the extent that AIR’s Compensation Committee determines that any award granted under the 2020 Plan is subject to Section 409A of the Code (“Section 409A”), then the 2020 Plan and any agreement covering such award will be interpreted in accordance with Section 409A. In the event that AIR’s Compensation Committee determines that any award may be subject to Section 409A, AIR’s Compensation Committee may adopt such amendments to the 2020 Plan and any award agreement or adopt other policies and procedures or take any other actions, that AIR’s Compensation Committee determines are necessary or appropriate to avoid the imposition of taxes on the award under Section 409A, either through compliance with the requirements of Section 409A or with an available exemption therefrom.

Minimum Vesting. No award may vest prior to the first anniversary of its date of grant; provided, however, that, notwithstanding the foregoing, awards that result in the issuance of an aggregate of up to 5% of the shares of stock available for grant under the 2020 Plan may be granted under the 2020 Plan without regard to such minimum vesting.

Termination of Plan. No awards other than incentive stock options will be granted pursuant to the 2020 Plan on or after the tenth anniversary of the 2020 Plan’s effective date, but awards previously granted may extend beyond that date. No incentive stock option may be granted following the tenth anniversary of the date on which the 2020 Plan was adopted by AIR’s board of directors, but incentive stock options previously granted may extend beyond that date.

Death; Termination of Employment; Restrictions on Transfer

AIR’s Compensation Committee will provide in the award agreements whether and to what extent awards will be exercisable upon termination of employment or service for any reason, including death or disability, of any participant in the 2020 Plan.

 

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Awards will not be transferable by a participant except by will or the laws of descent and distribution, pursuant to a qualified domestic relations order, as defined under the Code, or Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or the rules thereunder, and will be exercisable during the lifetime of a participant only by such participant or his guardian or legal representative; provided that AIR’s Compensation Committee may provide otherwise for the transferability of stock options under such terms and conditions as AIR’s Compensation Committee determines and sets forth in the award agreement. Awards will not be transferable for value.

Stock Options

Stock options granted under the 2020 Plan may be incentive stock options intended to qualify under the provisions of Code Section 422 (“ISOs”) or nonqualified stock options (“NSOs”) which do not so qualify. Subject to the 2020 Plan, AIR’s Compensation Committee will determine the number of shares to be covered by each option and the conditions and limitations applicable to the exercise of the option. AIR’s Compensation Committee will determine the exercise price of AIR Common Stock that is subject to an option on the date the option is granted. The exercise price may not be less than the fair market value of AIR Common Stock on the date of grant. The term of options will be determined by AIR’s Compensation Committee, but may not exceed 10 years from the date of grant; provided that the term of an ISO granted to a 10% holder may not exceed five years from the date of grant. In no event will more than 1,500,000 shares be available for issuance pursuant to ISOs.

Stock Appreciation Rights

Stock appreciation rights (“SARs”) may be granted under the 2020 Plan either alone or in conjunction with all or part of any award under the 2020 Plan. Subject to the 2020 Plan, AIR’s Compensation Committee will determine the number of shares to be covered by each SAR award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. A SAR granted under the 2020 Plan will entitle its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of AIR Common Stock over a specified price fixed by AIR’s Compensation Committee (which price may not be less than the fair market value of AIR Common Stock on the date of grant).

Restricted Stock, Deferred Stock, Performance Shares, and LTIP Units

AIR’s Compensation Committee will determine the number of shares to be covered by awards of restricted stock, deferred stock or performance shares, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Restricted stock granted under the 2020 Plan will be nontransferable and subject to a substantial risk of forfeiture until specific conditions are met as set forth in the 2020 Plan and in any statement evidencing the grant. A grant of deferred stock creates a right to receive AIR Common Stock at the end of a specified deferral period. Performance shares are shares of AIR Common Stock subject to restrictions based upon the attainment of performance objectives. LTIP Units are awards of units of AIR OP intended to constitute “profits interests” (within the meaning of the Code and related IRS guidance) and may be subject to performance-based or time-based vesting conditions. Provided applicable requirements set forth in the award and the partnership agreement of AIR OP are satisfied, LTIP Units may be converted into common units of AIR OP.

Cash-Based Awards

AIR’s Compensation Committee will be authorized to grant cash-based awards, the value of which may be linked to any one or more of the performance criteria or other specific criteria determined by AIR’s Compensation Committee, in each case, on a specified date or dates or over any period or periods determined by AIR’s Compensation Committee.

Without limiting the generality of the foregoing, AIR’s Compensation Committee may grant cash-based awards to a participant in the form of a cash bonus payable upon the attainment of objective performance goals,

 

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or such other criteria, whether or not objective, which are established by AIR’s Compensation Committee, in each case, on a specified date or dates or over any period or periods determined by AIR’s Compensation Committee. Any such bonuses paid to a participant that are intended to be performance-based compensation (as discussed in the following section) will be based upon objectively determinable bonus formulas established in accordance with the provisions of the 2020 Plan relating to performance-based compensation.

Performance-Based Compensation

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, which, among other things, amended Code Section 162(m) to eliminate the “qualified performance-based compensation” exception effective for tax years after December 31, 2017, subject to a transition rule under which the changes to Code Section 162(m) will not apply to compensation payable pursuant to a written binding contract that was in effect on November 2, 2017, and is not materially modified after that date. The 2020 Plan also permits the AIR Compensation Committee to grant awards that are based on the attainment of performance criteria as determined by the AIR Compensation Committee, in its sole discretion, which are not intended to constitute “qualified performance-based compensation.”

Securities Subject to 2020 Plan

The total number of shares of AIR Common Stock reserved and available for issuance under the 2020 Plan will be 3,000,000 shares. If any shares of AIR Common Stock subject to an award granted under the 2020 Plan are forfeited, cancelled, exchanged or surrendered or if an award granted under the 2020 Plan terminates or expires without a distribution of shares of AIR Common Stock to the participant, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, such shares will again be available for awards under the 2020 Plan. If shares of AIR Common Stock are surrendered or withheld as payment of either the exercise price of an award granted under the 2020 Plan and/or withholding taxes in respect of such an award, such shares of AIR Common Stock will not be returned to the 2020 Plan and will not be available for future awards under the 2020 Plan. Upon the exercise of any award granted in tandem with any other award, such related award will be cancelled to the extent of the number of shares of AIR Common Stock as to which the award is exercised and, notwithstanding the foregoing, such number of shares of AIR Common Stock will no longer be available for awards under the 2020 Plan. Upon the exercise of an SAR, the number of shares of AIR Common Stock reserved and available for issuance under the 2020 Plan will be reduced by the full number of shares of AIR Common Stock with respect to which such award is being exercised. Each LTIP Unit issued pursuant to the 2020 Plan is treated as a share of stock for purposes of calculating the aggregate number of shares of AIR Common Stock available for issuance under the 2020 Plan.

Pursuant to the 2020 Plan, the maximum number of shares of AIR Common Stock subject to awards granted to any non-employee director during any calendar year, taken together with any cash fees paid to such non-employee director with respect to each calendar year shall not exceed $750,000 in total value (calculating the value of any such awards based on the grant date fair market value of such awards for financial reporting purposes).

In the event of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting AIR Common Stock, a substitution or adjustment will be made in (i) the kind and aggregate number of shares reserved for issuance under the 2020 Plan, (ii) the kind, number and option price of shares subject to outstanding stock options granted under the 2020 Plan, and (iii) the kind, number and purchase price of shares issuable pursuant to awards of restricted stock, deferred stock and performance shares, to maintain the same estimated fair value of the award before and after the equity restructuring. The form of such adjustment and estimate of fair value will be determined by AIR’s Compensation Committee, in its sole discretion. Such other substitutions or adjustments will be made respecting awards hereunder as may be determined by AIR’s Compensation Committee, in its sole discretion. An adjusted option price will also be used to determine the amount payable by AIR in connection with SARs awarded under the 2020 Plan. In addition, AIR’s

 

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Compensation Committee may provide, in its discretion, for the cancellation of any outstanding awards and payment in cash or other property in exchange therefor; provided that if the exercise price of any outstanding award is equal to or greater than the fair market value of the shares, cash or other property covered by that award, the AIR Compensation Committee may cancel the award without the payment of any consideration to the participant.

Tax Withholding

The 2020 Plan provides that, with the approval of AIR’s Compensation Committee, a participant may satisfy the tax withholding obligations related to an award by paying cash, by electing to have AIR withhold from delivery of shares of AIR Common Stock or by delivering already owned unrestricted shares of AIR Common Stock, in each case, having a value not exceeding the applicable amount of tax required to be withheld, or, if applicable, such other withholding amount as mutually agreed upon by AIR and the participant (provided, in the case of any participant who is an officer or director of AIR or whose transactions in AIR Common Stock are subject to Section 16 of the Exchange Act, such other amount is approved in advance by AIR’s Compensation Committee). The number of shares of AIR Common Stock which may be withheld will be valued at their fair market value on the date of withholding or, in the sole discretion of AIR (determined in the case of any participant who is an officer or director of AIR or whose transactions in AIR Common Stock are subject to Section 16 of the Exchange Act, solely by AIR’s Compensation Committee), the date immediately prior to the date that taxes are required to be withheld. Fractional share amounts shall be settled in cash.

Federal Income Tax Consequences

The following discussion is for general information only and is based on the Federal income tax laws now in effect, which are subject to change, possibly retroactively. This summary does not discuss all aspects of Federal income taxation that may be important to individual participants. Moreover, this summary does not address specific state, local or foreign tax consequences. This summary assumes that AIR Common Stock acquired under the 2020 Plan will be held as a “capital asset” (generally, property held for investment) under the Code.

Nonqualified Stock Options

A participant will generally not be subject to Federal income taxation upon the grant of an NSO. Rather, at the time of exercise of an NSO, the participant will recognize ordinary income for Federal income tax purposes in an amount equal to the excess of the fair market value of the shares purchased over the option price. AIR will generally be entitled to a tax deduction at such time and in the same amount that the participant recognizes ordinary income.

Incentive Stock Options

A participant is generally not subject to Federal income taxation upon the grant of an ISO or upon its timely exercise. Exercise of an ISO will be timely if made during its term and if the participant remains an employee of AIR or of any parent or subsidiary of AIR at all times during the period beginning on the date of grant of the ISO and ending on the date three months before the date of exercise (or one year before the date of exercise in the case of a disabled employee). Exercise of an ISO will also be timely if made by the legal representative of a participant who dies (i) while in the employ of AIR or of any parent or subsidiary of AIR or (ii) within three months after termination of employment (or one year in the case of a disabled employee). The tax consequences of an untimely exercise of an ISO will be determined in accordance with the rules applicable to NSOs. (See “Federal Income Tax Consequences — Nonqualified Stock Options.”)

If shares of AIR Common Stock acquired pursuant to a timely exercised ISO are later disposed of, the participant will, except as noted below with respect to a “disqualifying disposition,” recognize a capital gain or loss equal to the difference between the amount realized upon such sale and the option price. Under these circumstances, AIR will not be entitled to any deduction for Federal income tax purposes in connection with either the exercise of the ISO or the sale of the AIR Common Stock by the participant.

 

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If, however, a participant disposes of shares of AIR Common Stock acquired pursuant to the exercise of an ISO prior to the expiration of two years from the date of grant of the ISO or within one year from the date the AIR Common Stock is transferred to him upon exercise (a “disqualifying disposition”), generally (i) the participant will realize ordinary income at the time of the disposition in an amount equal to the excess, if any, of the fair market value of the AIR Common Stock at the time of exercise (or, if less, the amount realized on such disqualifying disposition) over the option exercise price, and (ii) any additional gain recognized by the participant will be subject to tax as capital gain. In such case, AIR may claim a deduction for Federal income tax purposes at the time of such disqualifying disposition for the amount taxable to the participant as ordinary income. The amount by which the fair market value of the AIR Common Stock on the exercise date of an ISO exceeds the option price will be an item of adjustment for purposes of the “alternative minimum tax” rules under the Code.

Stock Appreciation Rights

No taxable income is recognized upon receipt of a stock appreciation right. The participant will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount equal to the excess of the fair market value of the underlying shares on the exercise date over the exercise price, and the participant will be required to satisfy the tax withholding requirements applicable to such income. AIR will generally be entitled to a tax deduction at such time and in the same amount that the participant recognizes ordinary income.

Restricted Stock, Deferred Stock and Performance Shares

A participant who receives shares of stock subject to restrictions will not recognize any taxable income at the time those shares are issued but will have to report as ordinary income, as and when those shares subsequently vest, an amount equal to the excess of (i) the fair market value of the shares on the vesting date over (ii) the cash consideration (if any) paid for the shares. The recipient may, however, generally elect under Section 83(b) of the Code to include as ordinary income in the year the unvested shares are issued an amount equal to the excess of (i) the fair market value of those shares on the issue date over (ii) the cash consideration (if any) paid for such shares. If the Section 83(b) election is made, the recipient will not recognize any additional income as and when the shares subsequently vest. Aimco will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the recipient with respect to the issued shares. The deduction will in general be allowed for AIR’s taxable year in which such ordinary income is recognized by the recipient.

LTIP Units

A participant generally will not recognize any taxable income at the time of the grant or vesting of LTIP Units; provided that (i) the LTIP Units qualify as “profits interests” within the meaning of the Code and related IRS guidance; (ii) the participant does not dispose of the LTIP Units within two years of issuance; and (iii) certain other requirements are satisfied. As a holder of LTIP Units, a participant will be required to report on his or her income tax return his or her allocable share of AIR OP’s income, gains, losses, deductions and credits pursuant to the terms of the partnership agreement of AIR OP, regardless of whether AIR OP actually makes a cash distribution to the participant. Distributions by AIR OP to the participant on account of all interests in AIR OP held by the participant, will generally be taxable to the participant to the extent that such distributions exceed the participant’s tax basis in such interests. Any such gain will generally be capital gain, but a portion may be treated as ordinary income, depending on the assets of AIR OP at that time. Upon the exchange of the LTIP Units (or the common units into which the LTIP Units may be convertible) for shares of AIR Common Stock, or the sale of the LTIP Units, the participant will generally recognize gain or loss to the extent that the amount the participant receives plus the portion of AIR OP’s liabilities allocated to the LTIP Units exceeds the participant’s tax basis in the LTIP Units. The gain generally will be taxable at capital gains rates but may be subject to tax at higher rates depending on the assets of AIR OP at the time of such disposition. The tax consequences may be similar with respect to any redemption by AIR OP of such interests in exchange for cash. Generally, no deduction is available to AIR upon the grant, vesting or disposition of the LTIP Units.

 

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Cash-Based Awards

The holder will generally recognize ordinary income in the year when the cash is delivered upon satisfaction of the conditions of the award. The amount of that income will be equal to the amount of the cash, and the holder will be required to satisfy the tax withholding requirements applicable to such income. AIR will generally be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder. The deduction will be allowed for the taxable year in which such ordinary income is recognized.

Section 409A of the Code

Certain types of awards under the 2020 Plan may constitute, or provide for, a deferral of compensation subject to Section 409A. To the extent applicable, awards granted under the 2020 Plan are intended to be structured and interpreted in a manner to either comply with or be exempt from Section 409A. To the extent that AIR’s Compensation Committee determines that any award may be subject to Section 409A, the AIR Compensation Committee may adopt such amendments to the 2020 Plan and any award agreement or adopt other policies and procedures or take any other actions, that the AIR Compensation Committee determines are necessary or appropriate to avoid the imposition of taxes on the award under Section 409A, either through compliance with the requirements of Section 409A or with an available exemption therefrom.

New Plan Benefits

It is not possible to determine at this time what future awards will be granted under the 2020 Plan.

 

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APARTMENT INCOME REIT CORP. 2020 EMPLOYEE STOCK PURCHASE PLAN

Purpose and Eligibility

The purpose of the 2020 ESPP is to provide eligible employees of AIR, the Partnership (as defined in the 2020 ESPP) or any subsidiary of AIR or the Partnership (each, an “Employer”) the opportunity to purchase common stock of AIR through accumulated payroll deductions. It is the intention of AIR that the 2020 ESPP will not qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. As of November 17, 2020, approximately 800 of our employees would be eligible to participate in the 2020 ESPP.

Administration

The 2020 ESPP is administered by AIR’s board of directors or the Committee. In practice, the Committee is responsible for administering the 2020 ESPP. AIR’s board of directors and the Committee have the authority to interpret the 2020 ESPP and the terms of the purchase rights granted under the 2020 ESPP, to adopt such rules for the administration, interpretation, and application of the 2020 ESPP as are consistent with the 2020 ESPP, and to interpret, amend or revoke any such rules. AIR’s board of directors or the Committee may, in their discretion, delegate to the Chief Financial Officer of AIR or the Secretary of AIR, or both, any or all of the administrative duties under the 2020 ESPP, other than the authority to amend the 2020 ESPP in a manner that would require stockholder approval of such amendment or terminate the 2020 ESPP.

Duration, Amendment and Termination

AIR’s board of directors may amend or terminate the 2020 ESPP at any time. No such termination or amendment may adversely affect options previously granted, except in connection with select changes in AIR’s capitalization, the dissolution or liquidation of AIR, or in connection with a Corporate Transaction (as defined in the 2020 ESPP).

Unless earlier terminated by AIR’s board of directors, the 2020 ESPP will expire on the tenth anniversary of the effective date.

Offering Periods

The 2020 ESPP is implemented by a series of consecutive three-month offering periods that generally begin on the first trading day on or after January 1, April 1, July 1 and October 1 of each year, or at such other time or times as may be determined by the Committee, and ending on the last trading day on or before the immediately following March 31, June 30, September 30 and December 31, respectively, or at such other time or times as may be determined by the Committee.

Participation in the 2020 ESPP

The 2020 ESPP permits an eligible employee to contribute up to 15% of the employee’s eligible compensation (as defined in the 2020 ESPP) through automatic payroll deductions. The maximum number of shares an employee may purchase during each fiscal year is 2,000 shares.

Purchase Price; Payment of Purchase Price

The price of AIR Common Stock offered under the 2020 ESPP is an amount equal to 95% of the closing price of the AIR Common Stock at the end of each offering period. The purchase price of the shares is accumulated by payroll deductions over the offering period.

Withdrawal; Termination of Employment

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returned to them. If an employee withdraws from an offering period, the employee may not re-enroll in the 2020 ESPP for the same offering period. Participation ends automatically upon termination of employment with the Employer.

Participation in the 2020 ESPP and any offering period will continue during any paid leave of absence. An employee’s participation in an offering period will cease upon any unpaid leave of absence; provided that payroll deductions that accumulated prior to such leave of absence may be used to purchase shares under the 2020 ESPP.

Corporate Transactions

In the event of a sale of all or substantially all of the assets of AIR or a merger, consolidation or other capital reorganization of AIR, or any other transaction or series of related transactions in which AIR’s stockholders immediately prior thereto own less than 50% of the voting stock of AIR (or its successor or parent) immediately thereafter, outstanding purchase rights under the 2020 ESPP will be assumed or an equivalent purchase right will be substituted by the successor corporation or such successor corporation’s parent or subsidiary. In the event that the successor corporation refuses to assume or substitute for outstanding purchase rights, the offering period then in progress shall be shortened and a new purchase date will be set, as of which date any offering period then in progress will terminate. The new purchase date will be on or before the date of the consummation of the corporate transaction, and AIR will notify each participating employee in writing accordingly.

Securities Subject to Plan

An aggregate of 75,000 shares of AIR Common Stock has been reserved for issuance under the 2020 ESPP. The shares may consist, in whole or in part, of authorized and unissued shares or treasury shares of AIR Common Stock.

In the event of a Change in Capitalization (as defined in the 2020 ESPP), which includes an increase, reduction, change or exchange of shares for a different number of shares or the distribution of an extraordinary dividend, the Committee will conclusively determine the appropriate equitable adjustments, if any, to be made under the 2020 ESPP, including, without limitation, adjustments to the number of shares that have been authorized for issuance under the 2020 ESPP, as well as the purchase price of each purchase right under the 2020 ESPP that has not yet been exercised.

Stockholder Rights

No participant in the 2020 ESPP has stockholder rights with respect to any shares of AIR Common Stock covered by a purchase right under the 2020 ESPP until the shares are purchased on the participant’s behalf and issued to the participant.

Transferability

Neither a participant’s payroll deductions nor any rights with regard to the exercise of a purchase right or any rights to receive shares of AIR Common Stock under the 2020 ESPP may be assigned, transferred, pledged or otherwise disposed of in any way, other than by the laws of descent and distribution or to the participant’s designated beneficiary in the event of such participant’s death.

Other Restrictions

Shares acquired through the exercise of options granted under the 2020 ESPP are subject to the restrictions on ownership and transfer set forth in AIR’s charter and any additional restrictions on ownership and transferability of the common stock issuable pursuant to the 2020 ESPP as the Committee deems appropriate.

 

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Shares issuable upon the exercise of options granted under the 2020 ESPP may not be purchased if, in the sole and absolute discretion of the Committee, the exercise of such option would likely result in the following: (i) the participant’s ownership of AIR Common Stock being in violation of the stock ownership limits set forth in AIR’s charter; (ii) income to AIR that could impair AIR’s status as a “real estate investment trust,” or (iii) a transfer, at any one time, of more than one-tenth of one percent (0.1%) of AIR’s total stock from AIR to the Partnership pursuant to AIR’s charter.

Federal Income Tax Consequences

The following discussion is for general information only and is based on the Federal income tax laws now in effect, which are subject to change, possibly retroactively. This summary does not discuss all aspects of Federal income taxation that may be important to individual participants. Moreover, this summary does not address specific state, local or foreign tax consequences. This summary assumes that AIR Common Stock acquired under the 2020 ESPP will be held as a “capital asset” (generally, property held for investment) under the Code.

A participant will generally not be subject to Federal income taxation upon the grant of a stock purchase right under the 2020 ESPP. Rather, at the time of purchase, the participant will recognize ordinary income for Federal income tax purposes in an amount equal to the excess of the fair market value of the shares purchased over the purchase price. AIR will generally be entitled to a tax deduction at such time and in the same amount that the participant recognizes ordinary income. Any taxable income recognized in connection with the exercise of a stock purchase right by an employee of AIR is subject to tax withholding by AIR. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

 

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APARTMENT INCOME REIT CORP. 2007 STOCK AWARD AND INCENTIVE PLAN

Prior to the Separation, AIR will adopt the Apartment Income REIT Corp. 2007 Stock Award and Incentive Plan (the “2007 Plan”), solely for purposes of the assumed equity awards under Aimco’s prior plan. No additional equity awards will be granted under the 2007 Plan. Aimco, as our sole stockholder, will approve the 2007 Plan prior to the Separation, and the 2007 Plan will become effective as of the date of the Separation. AIR equity-based compensation awards into which certain outstanding Aimco equity-based compensation awards are converted upon the Separation will be issued pursuant to the 2007 Plan.

The following description is a summary of certain terms of the 2007 Plan, filed as Exhibit 10.9 to the registration statement on Form 10 of which this information statement is a part. This summary is qualified in its entirety by reference to the full text of the 2007 Plan.

Purpose and Eligibility

The purpose of the 2007 Plan is to reinforce the long-term commitment to AIR’s success of those directors, officers, employees, consultants and advisors of AIR and its subsidiaries who are or will be responsible for such success; to facilitate the ownership of AIR Common Stock by such individuals, thereby reinforcing the alignment of their interests with those of AIR’s stockholders; and to assist AIR in attracting and retaining officers and other employees with experience and ability. The 2007 Plan provides for the granting of stock options, stock appreciation rights, and awards of restricted stock, deferred stock and performance shares (collectively referred to as “incentive awards”), but only stock option awards and restricted stock awards will be outstanding pursuant to awards granted under Aimco’s prior plan and converted into awards of AIR at the time of the Separation.

Administration, Amendment and Termination

The AIR Compensation Committee is responsible for administering the 2007 Plan. The AIR Compensation Committee includes all independent directors, and all AIR Compensation Committee members are both “independent directors,” as defined by Rule 16b-3 under the Exchange Act, and “non-employee directors,” for purposes of Section 162(m) of the Code. The AIR Compensation Committee has the authority to interpret the 2007 Plan, determine the terms and conditions of incentive awards and make all other determinations necessary and/or advisable for the administration of the 2007 Plan. The AIR Compensation Committee may, with the consent of a participant, amend the terms of any existing incentive award previously granted to the participant, in a manner consistent with the 2007 Plan. The AIR Compensation Committee may also authorize loans to participants in connection with the grant of incentive awards, on terms and conditions determined solely by the AIR Compensation Committee. However, in order to comply with the Sarbanes-Oxley Act of 2002, Aimco will not provide loans to executive officers.

AIR’s board of directors may amend, alter, suspend, discontinue, or terminate the 2007 Plan; provided that no such amendment, alteration, suspension, discontinuation or termination may be made without stockholder approval if such approval is necessary to comply with any tax, securities or regulatory law or requirement with which AIR’s board of directors intends the 2007 Plan to comply; provided, further, that AIR’s board of directors may not reduce the exercise price of outstanding options by amending the terms of such options without first obtaining approval from AIR’s stockholders.

Unless earlier terminated by AIR’s board of directors, the 2007 Plan will expire on the tenth anniversary of the effective date.

Death, Termination of Employment; Restrictions on Transfer

The AIR Compensation Committee will provide in the incentive award agreements whether and to what extent incentive awards will be exercisable upon termination of employment or service for any reason, including death or disability, of any participant in the 2007 Plan.

 

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Incentive awards will not be transferable by a participant except by will or the laws of descent and distribution, pursuant to a qualified domestic relations order, as defined under the Code, or ERISA, or the rules thereunder, and will be exercisable during the lifetime of a participant only by such participant or his guardian or legal representative; provided that the AIR Compensation Committee may provide otherwise for the transferability of stock options under such terms and conditions as the AIR Compensation Committee determines and sets forth in the award agreement. Incentive awards will not be transferable for value.

Stock Options

Stock options granted under the 2007 Plan may be incentive stock options intended to qualify as ISOs or NSOs which do not so qualify. Subject to the 2007 Plan, the AIR Compensation Committee determines the number of shares to be covered by each option and the conditions and limitations applicable to the exercise of the option. The AIR Compensation Committee determines the exercise price of AIR Common Stock that is subject to an option on the date the option is granted. The exercise price may not be less than the fair market value of AIR Common Stock on the date of grant. The term of options will be determined by the AIR Compensation Committee and may not exceed 10 years from the date of grant; provided that the term of an ISO granted to a 10% holder may not exceed five years from the date of grant.

Stock Appreciation Rights

SARs may be granted under the 2007 Plan either alone or in conjunction with all or part of any incentive award under the 2007 Plan. Subject to the 2007 Plan, the AIR Compensation Committee determines the number of shares to be covered by each SAR award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. A SAR granted under the 2007 Plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of AIR Common Stock over a specified price fixed by the AIR Compensation Committee (which price may not be less than the fair market value of AIR Common Stock on the date of grant).

Restricted Stock, Deferred Stock, and Performance Shares

Subject to the 2007 Plan, the AIR Compensation Committee determines the number of shares to be covered by awards of restricted stock, deferred stock or performance shares, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Restricted stock granted under the 2007 Plan is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met as set forth in the 2007 Plan and in any statement evidencing the grant. A grant of deferred stock creates a right to receive AIR Common Stock at the end of a specified deferral period. Performance shares are shares of AIR Common Stock subject to restrictions based upon the attainment of performance objectives.

Securities Subject to Plan

Shares subject to the unexercised portion of any incentive award that expires, terminates or is canceled and shares issued pursuant to an incentive award that we reacquire will again become available for the grant of further incentive awards under the 2007 Plan. However, shares that are surrendered or withheld as payment of either the exercise price of an incentive award and/or withholding taxes in respect of such an award will not be returned to the 2007 Plan and the reserve will be reduced by the full number of shares exercised pursuant to the grant of SARs, regardless of the number of shares upon which payment is made. The 2007 Plan provides that the maximum number of shares with respect to which incentive awards may be granted to any individual in any given calendar year is 100% of the shares.

In the event of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting AIR Common Stock, a substitution or adjustment will be made in (i) the kind and aggregate number of shares reserved for issuance under the 2007 Plan, (ii) the kind, number and option price of

 

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shares subject to outstanding stock options granted under the 2007 Plan, and (iii) the kind, number and purchase price of shares issuable pursuant to awards of restricted stock, deferred stock and performance shares, to maintain the same estimated fair value of the award before and after the equity restructuring. The form of such adjustment and estimate of fair value shall be determined by the AIR Compensation Committee, in its sole discretion. Such other substitutions or adjustments will be made respecting awards hereunder as may be determined by the AIR Compensation Committee, in its sole discretion. An adjusted option price will also be used to determine the amount payable by AIR in connection with SARs awarded under the 2007 Plan. In addition, the AIR Compensation Committee may provide, in its discretion, for the cancellation of any outstanding incentive awards and payment in cash or other property in exchange therefor.

Federal Income Tax Consequences

The federal income tax consequences relating to the incentive awards will be the same as those described above with respect to the federal income tax consequences of the respective incentive awards under the 2020 Plan (see the section entitled “Apartment Income REIT Corp. 2020 Stock Award and Incentive Plan––Federal Income Tax Consequences”).

New Plan Benefits

As noted above, the sole purpose of the 2007 Plan will be to govern the terms of equity awards granted pursuant to one of Aimco’s prior equity plans that shall be assumed in connection with the Separation.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of immediately prior to the applicable Separation, all of the outstanding shares of AIR Common Stock will be directly owned by Aimco and all of the outstanding New OP Units will be directly owned by AIR OP. In connection with the Separation, AIR OP will distribute all of the outstanding New OP Units to holders of AIR OP Common Units, including AIR and AIR OP GP (with AIR and AIR OP GP further distributing their New OP Units to Aimco), on a pro rata basis. Thereafter, Aimco will distribute all of the outstanding AIR Common Stock to Aimco common stockholders as of the record date on a pro rata basis.

The following table provides information with respect to the expected beneficial ownership of AIR Common Stock immediately following the Separation by (1) each person who we believe will be a beneficial owner of more than 5% of the outstanding shares of AIR Common Stock, (2) each of our directors and named executive officers, and (3) all directors, director nominees and executive officers as a group. We based the share amounts on each person’s beneficial ownership of Aimco Common Stock as of November 17, 2020, unless we indicate some other basis for the share amounts, and assuming a distribution ratio of one share of AIR Common Stock for each one share of Aimco Common Stock.

To the extent our directors and officers own Aimco Common Stock at the completion of the Separation, they will participate in the Separation on the same terms as other holders of Aimco Common Stock.

Except as otherwise noted in the footnotes below, each person or entity identified below has sole voting and investment power with respect to such securities. Following the Separation, AIR will have issued and outstanding an aggregate of 148,865,947 shares of AIR Common Stock, based upon 148,865,947 shares of Aimco Common Stock issued and outstanding as of November 17, 2020, applying the distribution ratio of one share of AIR Common Stock for each one share of Aimco Common Stock held as of the record date, and without accounting for cash in lieu of fractional shares.

 

Name and Address(1) of Beneficial Owner

   Number of
shares of
AIR
Common
Stock(2) 		    Percentage of
AIR Common
Stock
Outstanding(3) 		    Number of
AIR OP
Partnership
Units(4) 		    Percentage
Ownership of
AIR(5) 		 

Directors and Executive Officers:

        

Terry Considine

     1,068,485 (6)      0.72 %      2,472,312 (7)      2.24 % 

Thomas L. Keltner

     44,249       *       —         *  

Robert A. Miller

     84,342       *       —         *  

Devin I. Murphy

     2,400       *       —         *  

Kathleen M. Nelson

     45,129       *       —         *  

John D. Rayis

     2,427       *       —         *  

Ann Sperling

     9,019       *       —         *  

Michael A. Stein

     47,622       *       —         *  

Nina A. Tran

     16,056       *       —         *  

Lisa Cohn

     170,269       *       —         *  

Keith Kimmel

     103,661 (8)      *       —         *  

Paul Beldin

     128,314 (9)      *       —         *  

Conor Wagner

     —         —         —         —    

All directors and executive officers as a group (13 persons)

     1,721,973 (10)      1.16 %      2,472,312       2.63 % 

 

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Name and Address(1) of Beneficial Owner

   Number of
shares of
AIR
Common
Stock(2) 		    Percentage of
AIR Common
Stock
Outstanding(3) 		    Number of
AIR OP
Partnership
Units(4) 		     Percentage
Ownership of
AIR(5) 		 

5% or Greater Holders:

         

The Vanguard Group, Inc.

     24,394,914 (11)      16.39 %      —          15.50 % 

100 Vanguard Blvd.

         

Malvern, Pennsylvania 19355

         

BlackRock Inc.

     12,539,197 (12)      8.42 %      —          7.97 % 

55 East 52nd Street

         

New York, New York 10055

         

Cohen & Steers, Inc.

     11,538,241 (13)      7.75 %      —          7.33 % 

280 Park Avenue 10th Floor

         

New York, New York 10017

         

State Street Corporation

     8,610,439 (14)      5.78 %      —          5.47 % 

One Lincoln Street

         

Boston, Massachusetts 02111

         

FMR LLC

     8,600,643 (15)      5.78 %      —          5.47 % 

245 Summer Street

         

Boston, Massachusetts 02110

         

 

*

Less than 0.5%

(1)

The address of all the directors and executive officers listed above are in the care of Apartment Income REIT Corp., 4582 S. Ulster Street, Suite 1700, Denver, CO 80237.

(2)

Excludes shares of AIR Common Stock issuable upon redemption of AIR OP Common Units.

(3)

Represents the number of shares of AIR Common Stock beneficially owned by each person divided by the total number of shares of AIR Common Stock outstanding. Any shares of AIR Common Stock that may be acquired by a person within 60 days upon the exercise of options, warrants, rights or conversion privileges or pursuant to the power to revoke, or the automatic termination of, a trust, discretionary account or similar arrangement are deemed to be beneficially owned by that person and are deemed outstanding for the purpose of computing the percentage of outstanding shares of AIR Common Stock owned by that person, but not any other person.

(4)

Through Sub REIT 2, AIR acts as general partner of AIR OP, the operating partnership in AIR’s structure. At the completion of the Separation, AIR will hold approximately 95% of the AIR OP Common Units. Upon amendment of the AIR OP limited partnership agreement, generally, after a holding period of 12 months, AIR OP Common Units may be tendered for redemption and, upon tender, may be acquired by AIR for shares of AIR Common Stock at an exchange ratio of one share of AIR Common Stock for AIR OP Common Unit (subject to adjustment). If AIR acquired all AIR OP Common Units for AIR Common Stock (without regard to the ownership limits set forth in AIR’s charter), these shares of AIR Common Stock would constitute approximately 5% of the then outstanding shares of AIR Common Stock. AIR OP Common Units are subject to certain restrictions on transfer.

(5)

Represents the number of shares of AIR Common Stock beneficially owned, divided by the total number of shares of AIR Common Stock outstanding, assuming, in both cases, that all 8,479,095 AIR OP Common Units outstanding immediately after the Separation, are redeemed in exchange for shares of AIR Common Stock (notwithstanding any holding period requirements, and AIR’s ownership limits). See note (4) above.

(6)

Includes the following shares of which Mr. Considine disclaims beneficial ownership: 33,998 shares held by Mr. Considine’s spouse; and 166,660 shares held by a non-profit foundation in which Mr. Considine has shared voting and investment power. Also includes 686,948 shares subject to options that are exercisable within 60 days

(7)

Includes 543,207 AIR OP Common Units held by Mr. Considine. Includes 179,735 AIR OP Common Units held by an entity in which Mr. Considine has sole voting and investment power, 1,591,672 AIR OP Common Units held by Titahotwo Limited Partnership RLLLP, a registered limited liability limited

 

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  partnership for which Mr. Considine serves as the general partner and holds a 0.5% ownership interest, and 157,698 AIR OP Common Units held by Mr. Considine’s spouse, for which Mr. Considine disclaims beneficial ownership.
(8)

Includes 14,588 shares subject to options that are exercisable within 60 days.

(9)

Includes 17,425 shares subject to options that are exercisable within 60 days.

(10)

Includes 718,961 shares subject to options that are exercisable within 60 days.

(11)

Beneficial ownership information is based on information contained in an Amendment No. 17 to Schedule 13G filed with the SEC on February 11, 2020, by The Vanguard Group, Inc. According to the schedule, The Vanguard Group, Inc. has sole voting power with respect to 340,288 shares and sole dispositive power with respect to 24,055,031 shares of Aimco Common Stock and shared voting power with respect to 172,206 shares of Aimco Common Stock and shared dispositive power with respect to 339,883 shares of Aimco Common Stock.

(12)

Beneficial ownership information is based on information contained in Schedule 13G filed with the SEC on February 5, 2020, by BlackRock Inc. According to the schedule, BlackRock Inc. has sole voting power with respect to 11,662,589 shares of Aimco Common Stock.

(13)

Beneficial ownership information is based on information contained in Schedule 13G filed with the SEC on February 14, 2020, by Cohen & Steers, Inc. on behalf of itself and affiliated entities. According to the schedule, Cohen & Steers, Inc. and Cohen & Steers Capital Management, Inc. (which is held 100% by Cohen & Steers, Inc.) have sole voting power over 6,588,989 shares of Aimco Common Stock and have sole dispositive power over 11,538,241 shares of Aimco Common Stock.

(14)

Beneficial ownership information is based on information contained in Schedule 13G filed with the SEC on February 13, 2020, by State Street Corporation. According to the schedule, State Street Corporation has shared voting power with respect to 7,199,364 shares of Aimco Common Stock.

(15)

Beneficial ownership information is based on information contained in Schedule 13G filed with the SEC on February 7, 2020, by FMR LLC.

 

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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

Relationship between Aimco and AIR

Following the Separation

After the Separation, we and Aimco will operate as two, focused and independent companies. To set forth our relationship from and after the Separation, we and Aimco intend to enter into certain other agreements prior to the Separation, including, among others, the Separation Agreement, the Employee Matters Agreement, the Master Leasing Agreement, and certain other agreements. In addition, we will enter into the Master Services Agreement with Aimco, pursuant to which we will provide Aimco with customary administrative and support services, and the Property Management Agreements with Aimco, pursuant to which we will provide Aimco with property management services and other property-related services. We will also be the beneficiaries of three-year, $534 million, notes payable by Aimco’s subsidiary, Aimco JO. See “Our Relationship with Aimco Following the Separation.”

Although each of AIR and Aimco will have an independent board of directors and independent management and will be incentivized to make decisions that are in the best interests of its respective business, Mr. Considine, along with Messrs. Miller and Stein, will serve on both AIR’s and Aimco’s boards of directors, however, such directors will recuse themselves from voting as members of either board of directors during the approval or disapproval of any transactions between the two companies.

Procedures for Approval of Related Person Transactions

We recognize that related person transactions can present potential or actual conflicts of interest and create the appearance that our decisions are based on considerations other than the best interests of AIR and our stockholders. Accordingly, as a general matter, it is our preference to avoid related person transactions. Nevertheless, we recognize that there are situations where related person transactions may be in, or may not be inconsistent with, the best interests of AIR and our stockholders. The Nominating and Corporate Governance Committee, pursuant to a written policy approved by the AIR board of directors, has oversight for related person transactions. The Nominating and Corporate Governance Committee will review transactions, arrangements or relationships in which (1) the aggregate amount involved will or may be expected to exceed $100,000 in any calendar year, (2) AIR (or any AIR entity) is a participant, and (3) any related party has or will have a direct or indirect interest (other than an interest arising solely as a result of being a director of another corporation or organization that is a party to the transaction or a less than 10 percent beneficial owner of another entity that is a party to the transaction). The Nominating and Corporate Governance Committee will also give its standing approval for certain types of related person transactions such as certain employment arrangements, director compensation, transactions with another entity in which a related person’s interest is only by virtue of a non-executive employment relationship or limited equity position, and transactions in which all stockholders receive pro rata benefits.

Aimco and AIR may enter into additional arrangements from time to time. Pursuant to our Property Management Agreements, Master Services Agreement, and Master Leasing Agreement with Aimco, certain transactions, arrangements, or relationships between or among us and our subsidiaries and affiliates, on the one hand, and Aimco and its subsidiaries and affiliates, on the other hand, will be subject to (x) the approval of a majority of our independent directors and (y) the approval of a majority of Aimco’s independent directors.

 

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OUR RELATIONSHIP WITH AIMCO FOLLOWING THE SEPARATION

After the Separation, we and Aimco will operate as two, focused and independent companies. To set forth our relationship from and after the Separation, we expect to enter into the following agreements with Aimco, among others: the Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, the Master Services Agreement, and the Master Leasing Agreement.

The Separation Agreement, the Employee Matters Agreement, the Property Management Agreements, the Master Services Agreement, and the Master Leasing Agreement are material agreements that are described below and have been filed as exhibits to the registration statement on Form 10, of which this information statement is a part, and summaries of each of these agreements set forth the terms of the agreements that we believe are material. These summaries are qualified in their entirety by reference to the full text of the applicable agreements, which are incorporated by reference into this information statement. The terms of the agreements described below that will be in effect at the completion of and following the Separation have not yet been finalized. Changes to these agreements, some of which may be material, may be made prior to the Separation.

Separation Agreement

The Separation Agreement will contain the key provisions relating to the Separation of AIR’s assets and liabilities from Aimco. It will also contain other agreements that govern certain aspects of our relationship with Aimco and its subsidiaries that will continue after the Separation.

Transfer of Assets and Assumption of Liabilities

The Separation Agreement will allocate the assets and liabilities of Aimco prior to the Separation between us and Aimco and describe when and how any required transfers and assumptions of assets and liabilities will occur.

The Separation

The Separation Agreement will govern the rights and obligations of the parties regarding the Separation. On the distribution date, Aimco will distribute, on a pro rata basis, all of the shares of AIR Common Stock to Aimco’s stockholders as of the record date.

Conditions

The Separation Agreement will provide that the Separation is subject to multiple customary conditions that must be satisfied or waived by Aimco, in its sole discretion. For further information regarding these conditions, see “The Separation—Conditions to the Separation.” Even if all of the conditions have been satisfied, Aimco may, in its sole discretion, terminate and abandon the Separation or any related transaction at any time prior to the distribution date.

Access to Information

The Separation Agreement will provide that the parties will exchange, for a period of seven years, certain information required to comply with requirements imposed on the requesting party by a government authority for use in any proceeding or to satisfy audit, accounting, claims defense, regulatory filings, litigation or similar requirements, for use in compensation, benefit or welfare plan administration or other bona fide business purposes, or to comply with its obligations under the Separation Agreement or any ancillary agreement. In addition, the parties will use commercially reasonable efforts to make available to each other directors, officers, other employees, and agents as witnesses in any legal, administrative, or other proceeding in which the other party may become involved to the extent reasonably required.

 

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Releases, Allocation of Liabilities, and Indemnification

The Separation Agreement will provide for a full and complete release and discharge of all liabilities existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur, or any conditions existing or alleged to have existed at or before the Separation, between Aimco and us, except as expressly set forth in the Separation Agreement.

The Separation Agreement will generally provide that (other than with respect to tax liabilities, whose treatment is described below) (i) AIR OP will indemnify Aimco and its affiliates and each of their respective current and former directors, officers, employees, and agents against any and all losses relating to (a) liabilities arising out of our business and operations, whether arising before, at, or after the Separation (and certain other liabilities allocated to AIR or AIR OP pursuant to the Separation Agreement), (b) any breach by us of any provision of the Separation Agreement or any ancillary agreement, and (c) any untrue statement or alleged untrue statement of a material fact or omission, or alleged omission, to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to information contained in the registration statement or the document (other than information that relates solely to Aimco’s business), and (ii) that New OP will indemnify us and our affiliates and each of our respective current and former directors, officers, employees, and agents against any and all losses relating to (a) liabilities of Aimco as of the Separation (other than liabilities arising out of our business and operations, whether arising before, at, or after the Separation (and certain other liabilities allocated to AIR or AIR OP pursuant to the Separation Agreement)), (b) any breach by Aimco of any provision of the Separation Agreement or any ancillary agreement, and (c) any untrue statement or alleged untrue statement of a material fact or omission, or alleged omission, to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to information contained in the registration statement on Form 10, of which this information statement is a part, but only if such information relates solely to Aimco’s business.

The Separation Agreement will provide that (a) AIR OP will assume liability for (and indemnify Aimco and its affiliates with respect to) property taxes on AIR properties, all other taxes related to AIR entities, transfer taxes with respect to the properties that will be held by Aimco after the Separation and arising in connection with the Restructuring and the Separation, and all taxes and costs arising from challenges to the intended tax treatment of the transactions, if any (although all parties agree to use commercially reasonable efforts to mitigate the net economic impact of any tax treatment challenge), and (b) New OP will assume liability for (and indemnify AIR and its affiliates with respect to) all property taxes with respect to the properties that will be held by Aimco after the Separation, and all other taxes related to the entities that will be owned (directly or indirectly) by Aimco after the Separation.

The Separation Agreement will also establish dispute resolution procedures with respect to claims subject to indemnification and related matters.

Termination

The Separation Agreement will provide that it may be terminated, and the Separation may be abandoned at any time by Aimco prior to the distribution.

Expenses

New OP will generally be responsible for all costs and expenses incurred and payable on or prior to the distribution date in connection with the Separation (including costs and expenses incurred by either party prior to, on, or after the distribution date with respect to the execution and delivery of our credit facilities), except as expressly set forth in the Separation Agreement or in any ancillary agreement, or otherwise agreed in writing, provided, however, that certain costs and expenses relating to legal and tax counsel, financial advisors and accounting advisory work related to the Separation will be allocated to AIR OP. Except as expressly set forth in the Separation Agreement or in any ancillary agreement, or as otherwise agreed in writing, all costs and expenses that arise or are payable after the distribution date in connection with the Separation will otherwise be paid by the party that incurs the applicable costs and expenses.

 

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Employee Matters Agreement

In connection with the Separation Agreement, Aimco, AIR, and AIR OP will enter into an Employee Matters Agreement to allocate liabilities and responsibilities relating to employment matters, employee compensation and benefits plans and programs, and other related matters.

The Employee Matters Agreement will govern Aimco’s and AIR’s compensation and employee benefit obligations relating to employees of AIR and Aimco following the closing of the transactions, and it generally will allocate liabilities and responsibilities relating to employee compensation and benefit plans and programs for such employees between Aimco and AIR. The Employee Matters Agreement will provide that AIR will establish compensation and benefit plans and programs (or assume sponsorship of Aimco compensation and benefit plans) for the AIR employees, at the times set forth therein.

The Employee Matters Agreement will also outline how any equity awards relating to shares of Aimco Common Stock will be adjusted to reflect the impact of the Separation. Specifically, it is expected that each outstanding time or performance-vesting Aimco equity award will be converted into awards both of shares of Aimco Common Stock and of shares of AIR Common Stock. The number of shares of Aimco Common Stock or AIR Common Stock subject to each converted award (and the applicable exercise price with respect to converted stock option awards) will be determined in a manner intended to preserve the aggregate value of the original Aimco equity award as measured immediately before the Separation. Similarly, the Employee Matters Agreement will also outline how equity awards relating to units of AIR OP will be adjusted to reflect the impact of the distribution of New OP Units. As with the Aimco equity awards, it is expected that each outstanding time or performance-vesting AIR OP equity award will be converted into awards both of units of AIR OP and of units of New OP. The number of units of AIR OP and the number of units in New OP subject to each converted award will be determined in a manner intended to preserve the aggregate value of the original AIR OP equity award as measured immediately before the distribution of New OP Units.

The Employee Matters Agreement also will set forth the general principles relating to employee matters, including with respect to the assignment of employees, employee benefits, and recognition of employee service credit under the AIR benefit plans.

Property Management Agreement

Pursuant to the Property Management Agreements, AIR will, through its subsidiaries, provide Aimco and its subsidiaries with certain property management and related services at a majority of the properties owned or leased by Aimco and its subsidiaries. Pursuant to the Property Management Agreements, Aimco will be obligated to pay to AIR a property management fee based on an agreed percentage of revenue collected and such other fees as may be mutually agreed for various other services. The initial term of each Property Management Agreement will be one (1) year, with automatic one (1) year renewal periods, unless either party elects to terminate (for any reason or no reason whatsoever) at any time upon delivery of 60 days’ prior written notice to the other party. Neither party will be obligated to pay to the other party a termination fee or other penalty upon such termination.

Master Services Agreement

Pursuant to the Master Services Agreement, AIR and its subsidiaries will provide Aimco and its subsidiaries with customary administrative and support services that are material to Aimco and its subsidiaries’ business and that AIR and its subsidiaries are in a position to continue to provide following the Separation. AIR and its subsidiaries will not unreasonably withhold, delay, or condition their consent to providing additional services to the extent (i) such services are provided as of immediately prior to the distribution of New OP Units and (ii) AIR is able to cause such services to be provided without unreasonable difficulty and without violation of law or contract, in each case, other than certain excluded services (e.g., legal, financial, accounting, insurance, regulatory and tax advice, and services provided under the Property Management Agreements). AIR and its subsidiaries will endeavor to provide the services at a relative level of service (in terms of quantity and quality, subject to increases consistent with the reasonably foreseeable natural growth of the business of Aimco and its

 

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subsidiaries) substantially similar to the services provided during the 12 months prior to the distribution of New OP Units. Aimco and its subsidiaries will pay AIR’s and its subsidiaries’ fully-burdened costs (including internal allocated costs) in performing the services. Services will be provided until termination of the Master Services Agreement. AIR may terminate any or all services on 60 days’ prior written notice, and Aimco may terminate individual services, at any time after December 31, 2023.

Master Leasing Agreement

In connection with the Separation Agreement, New OP and AIR OP (or their applicable subsidiaries) will enter into a Master Leasing Agreement that will govern the leasing arrangement between the parties; the initial term of the Master Leasing Agreement will be 18 months, with automatic annual extensions (subject to each party’s right to terminate upon notice prior to the end of any such extension term). The Master Leasing Agreement will provide that each time the parties thereto wish to execute a lease for a particular property, such parties will cause their applicable affiliates to execute a stand-alone lease, in the lease form attached as an exhibit to the Master Leasing Agreement (each, a “Lease”).

Immediately upon the completion of the Separation, a Lease will be executed for each of the Initial Leased Properties. Additional properties that are in need of redevelopment or lease-up may be added to the Master Leasing Agreement and become subject to a Lease, upon agreement of the parties to the Master Leasing Agreement, in accordance with the terms thereof. The initial annual rent for a property will be based on the then-current fair market value of the subject property and market NOI cap rates, subject to certain adjustments, and will be further subject to periodic escalation as set forth in the applicable Lease, and the other terms thereof, including the initial term and extensions, will be on an arm’s-length basis. Aimco or its applicable subsidiary will have the right to terminate any such Lease prior to the end of its term once the leased property is stabilized. In connection with such an early termination, AIR or its applicable subsidiary will generally have an option (and not an obligation) to pay Aimco and its subsidiaries an amount equal to the difference between the then-current fair market value of such property and the initial fair market value of such property at the time of Lease inception, at a small discount thereto; if AIR or its applicable subsidiary does not exercise such option, Aimco or its applicable subsidiary will have the right to cause such property to be sold to a third party (by AIR and Aimco), with AIR guaranteed to receive an amount equal to the fair market value of the property at the time of the Lease inception and Aimco retaining any excess proceeds. In the event of such sale of the property, Aimco may also elect to purchase the property at a purchase price equal to the fair market value thereof at the time of Lease inception (and may subsequently sell the property to a third party, subject to AIR’s right of first refusal during the first year following Aimco’s acquisition). If AIR elects not to pay the fee for the redevelopment or development-related improvements, and Aimco declines to so purchase the property or cause its sale to a third party, Aimco may elect to rescind its termination of the applicable lease and instead continue such lease in effect in accordance with its terms.

Right of First Offer/Purchase Option

During the term of the Master Leasing Agreement, and in accordance with the terms thereof, AIR OP will have (a) a purchase option (an “Option”) with respect to any real property owned or, subject to the consent of the landlord, leased by Aimco or its subsidiaries for which redevelopment has been substantially completed by Aimco (if applicable) and that has reached a specified occupancy level for a minimum time period, and (b) a right of first offer (a “ROFO”) on stabilized properties that Aimco is under contract to purchase from third parties; provided that, no ROFO or Option will apply to any such transfers in respect of the Excluded Seed Properties, the Additional Excluded Properties, the Separate Portfolio Assets, or properties leased from AIR pursuant to the Master Leasing Agreement. Additionally, neither the ROFO nor the Option will apply to transfers of shares of stock in Aimco, certain customary exceptions for transfers to controlled affiliates, and distributions in kind to the stockholders of Aimco. The ROFO and Option rights shall each terminate concurrently with the termination of the Master Leasing Agreement.

In the event AIR OP exercises either its Option or its ROFO with respect to a property and the parties proceed to a sale of such property, then, (a) in the event of an Option property, AIR OP will pay an amount equal

 

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to the then-current fair market value and, (b) in the case of a ROFO for a stabilized property that Aimco is under contract to purchase, AIR OP will acquire such property for an amount equal to 101% of the sum of the agreed-upon purchase price plus out of pocket costs. If AIR OP declines to exercise its ROFO or its Option, as applicable, Aimco may offer the property to a third party on the same terms as those offered to AIR OP (or, in the case of a stabilized property that Aimco is under contract to purchase, Aimco may proceed with the acquisition of such property at the agreed-upon purchase price). Any purchase of an Aimco asset by AIR OP pursuant to a ROFO or an Option will be accompanied by a pre-closing tax liability indemnity by Aimco in favor of AIR OP.

Notes Receivable from Aimco

After the distribution of New OP Units but prior to the distribution of AIR Common Stock, AIR OP and its subsidiaries will sell their interests in James-Oxford LP (other than a less than 5% common interest) to New OP’s subsidiary, Aimco JO, in exchange for notes receivable from Aimco JO (the “Notes”), with an aggregate principal amount equal to approximately $534 million. After the completion of the Separation, the Notes will be obligations of Aimco JO payable to subsidiaries of AIR.

The Notes will mature on January 31, 2024, and will be secured by Aimco JO’s equity interests in James-Oxford LP, the partnership that directly or indirectly holds the Separate Portfolio Assets. The Notes will bear interest at a rate of 5.2% per annum, payable quarterly on January 1, April 1, July 1, and October 1, commencing on April 1, 2021. Upon a merger or consolidation, asset sale, casualty event or other disposition, Aimco JO will be obligated to prepay the Notes in an amount equal to the net cash proceeds received in connection with such casualty event or transaction. Any such prepayment shall be accompanied by accrued and unpaid interest and a make-whole amount. However, if after giving effect to such casualty event or transaction the fair market value of all real property held by James-Oxford LP and its subsidiaries (less senior secured indebtedness) exceeds the then-outstanding principal balance of the Notes, Aimco JO will have the option to reinvest such net cash proceeds within 180 days of such casualty event or transaction by acquiring, leasing, constructing, or improving real property useful in its business that it in good faith believes will enhance value. Aimco OP is not otherwise permitted to prepay the Notes prior to the maturity date. The Notes are senior secured obligations of Aimco JO and will rank senior to all other senior obligations of Aimco JO to the extent of the value of the collateral under the Notes and will rank pari passu with all other senior unsubordinated obligations of Aimco JO to the extent the amount of such obligations exceed the value of the collateral under the Notes. The Notes are not guaranteed and as a result, recourse is limited to Aimco JO and its assets (including the collateral). The Notes will contain certain representations, warranties, covenants, and events of default.

 

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DESCRIPTION OF AIR’S CAPITAL STOCK

AIR’s charter and bylaws will be amended and restated in connection with the Separation. The following is a summary description of the material terms of AIR’s capital stock as will be set forth in AIR’s charter and bylaws, as amended and restated, together with Maryland law, that will govern the rights of holders of AIR Common Stock upon the consummation of the Separation.

While the following attempts to describe the material terms of our capital stock, the description may not contain all of the information that is important to you and is subject to, and is qualified in its entirety by reference to, our charter and bylaws, the applicable provisions of the Maryland General Corporation Law (“MGCL”), and other applicable Maryland law. You are encouraged to read the full text of our charter and bylaws, the forms of which will be included as exhibits to the registration statement on Form 10, of which this information statement is a part, as well as the provisions of the MGCL and other applicable Maryland law.

Certain Differences between the Rights of Aimco Stockholders and AIR Stockholders

AIR, a Maryland corporation, will elect and intends to qualify to be subject to tax as a REIT commencing with its initial taxable year ending December 31, 2020. Maryland was chosen as our domicile due to Maryland being the leading jurisdiction for the incorporation or formation of REITs, with a vast majority of all publicly traded REITs having been formed under Maryland law. Certain provisions of Maryland law that may be deemed more favorable to REITs than other jurisdictions for incorporation, such as Delaware, include (i) the absence of a franchise tax and (ii) the ability of the board of directors to increase authorized capital stock and effect certain reverse stock split transactions without approval by stockholders. Maryland law also permits directors of a Maryland corporation to be indemnified in circumstances where directors of a Delaware corporation could not be indemnified, which we believe may be helpful in attracting and retaining qualified independent directors.

Aimco is also incorporated under and governed by Maryland law. AIR will have generally modeled its corporate governance after that of Aimco. The chart below provides a summary comparison of certain of the corporate governance features applicable to each of Aimco and AIR.

 

    

Aimco

  

AIR

Election of Directors    Annual (but we expect that, prior to the Separation, the Aimco board of directors will take action such that this would, if in effect on the date hereof, be annual for 1/3 of the Board until 2024, then annually for the entire Board)    Annual (for 1/3 of the Board) until 2022, then annually for the entire Board
Size of the Board of Directors    No less than 3    No less than 3
General Voting Standard    Majority    Majority
Voting Standard for Election of Directors in Uncontested Elections    Majority of the votes cast standard with director resignation policy    Majority of the votes cast standard with director resignation policy
Voting Standard to Amend Bylaws    Board of directors (by a majority of the entire board) or stockholders (by holders of two-thirds of outstanding shares)    Board of directors (by a majority of the entire board) or stockholders (by holders of two-thirds of outstanding shares)
Voting Standard to Amend Key Provisions of Bylaws    Stockholder (2/3)    Stockholder (2/3)
Voting Standard to Amend Certain Key Provisions of Charter    Stockholder (2/3)    Stockholder (2/3)

 

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Aimco

  

AIR

Blank Check Preferred Stock    Yes    Yes
Separate Chairman and Chief Executive Officer    No (but we expect that, in connection with the Separation, this will be “Yes”)    Yes
All Directors other than Chief Executive Officer are Independent    Yes (but we expect that, in connection with the Separation, this will be “No” as Mr. Considine will continue as a director but will no longer serve as CEO)    Yes
Stockholders Authorized to Call a Special Meeting of Stockholders    Yes
(upon written request by holders of not less than 25% of the outstanding shares entitled to vote on the business proposed to be transacted thereat (but we expect that, prior to the Separation, the Aimco board of directors will take action such that reference to “25%” above would be replaced with “a majority”, if in effect on the date hereof)) 		   Yes
(upon written request by holders of not less than a majority of the outstanding shares entitled to vote on the business proposed to be transacted thereat)
Stockholder Action Via Written Consent Without a Meeting    Must be unanimous    Must be unanimous
Restrictions on Ownership of Common Stock    Yes
(related to REIT qualification) 		   Yes
(related to REIT qualification)
Anti-Takeover Statutes (Control Share Acquisition Statute; Freeze-Out with Fair Price Provision Statute)    Aimco has not opted out of the control share acquisition statute; Aimco has not opted out of the freeze-out out with fair price provision statute    AIR has not opted out of the control share acquisition statute; AIR has not opted out of the freeze-out out with fair price provision statute
Unsolicited Takeovers Statute
(e.g., self-classification of board of directors) 		   No (but it is expected that, prior to the Separation, Aimco’s board of directors will (1) opt into the Unsolicited Takeovers Statute (self-classifying the board) and (2) opt out of the Unsolicited Takeovers statute effective as of the 2024 annual meeting of stockholders)    AIR has opted out of the Unsolicited Takeovers Statute, effective as of the 2022 annual meeting of stockholders, and may not opt back into such statute without stockholder approval
Voting Standard for Certain Business Combinations with Interested Stockholders (Beneficial Holders of more than 10% of Outstanding Voting Stock) Set Forth in Charter    80% of the voting stock and 2/3 of the voting stock excluding the interested stockholder. Supermajority vote does not apply if combination meets fair price requirement.    80% of the voting stock and 2/3 of the voting stock excluding the interested stockholder. Supermajority vote does not apply if combination meets fair price requirement.
Board Authorized to Increase the Authorized Capital Stock without Stockholder Approval    No    Yes

 

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General

Following the Separation, our authorized stock will consist of 1,021,175,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share.

Immediately following the Separation, based on the number of shares of Aimco Common Stock issued and outstanding on as of November 17, 2020, AIR expects to have approximately 148,865,947 shares of AIR Common Stock issued and outstanding and 20 shares of Class A Preferred Stock issued and outstanding. The actual number of shares of AIR Common Stock to be distributed will be determined on the record date and will reflect any changes in the number of shares of Aimco Common Stock between November 17, 2020, and the record date.

Power to Reclassify Our Unissued Shares

Our board of directors will have the power, without stockholder approval, to amend our charter to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to authorize us to issue additional authorized but unissued shares of common stock or preferred stock and to classify and reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock, including one or more classes or series of common stock or preferred stock that have priority with respect to voting rights, dividends, or upon liquidation over shares of our common stock. Prior to the issuance of shares of each new class or series, our board of directors will be required by the MGCL and our charter to set, subject to the provisions of our charter regarding restrictions on transfer and ownership of stock, the terms, preferences, conversion, or other rights, voting powers, restrictions, limitations as to dividends, or other distributions, qualifications, or terms or conditions of redemption for each class or series of stock.

Common Stock

Holders of shares of AIR Common Stock are entitled to receive dividends, if, when, and as declared by the board of directors of AIR, out of funds legally available therefor. The holders of shares of AIR Common Stock, upon any voluntary or involuntary liquidation, dissolution or winding up of or any distribution of the assets of AIR, are entitled to receive ratably any assets remaining after payment in full of all liabilities of AIR and any liquidation preferences of preferred stock. The shares of AIR Common Stock possess voting rights for the election of directors of AIR and in respect of other corporate matters, each share entitling the holder thereof to one vote. Holders of shares of AIR Common Stock do not have cumulative voting rights in the election of directors, which means that holders of more than 50% of the shares of AIR Common Stock voting for the election of directors can elect all of the directors if they choose to do so and the holders of the remaining shares cannot elect any directors. Holders of shares of AIR Common Stock do not have preemptive rights, which means that they have no right to acquire any additional shares of AIR Common Stock that may be issued by AIR at a subsequent date.

Computershare Trust Company, N.A. will serve as transfer agent and registrar of the common stock.

Preferred Stock

Under our charter, our board of directors may from time to time establish and cause us to issue one or more classes or series of preferred stock and set the terms, preferences, conversion, or other rights, voting powers, restrictions, limitations as to dividends, or other distributions, qualifications, or terms or conditions of redemption of such classes or series. Accordingly, our board of directors, without stockholder approval, may issue preferred stock with voting, conversion, or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could be issued quickly with terms calculated to delay or prevent a change of control or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock, may adversely affect the voting and other rights of the holders of our common stock, and could have the effect of delaying, deferring, or preventing a change of control of our company or other corporate action.

 

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Our charter authorizes the issuance of up to 1,000,000 shares of our Class A Preferred Stock, par value $0.01 per share. At the closing of the Separation and related transactions, we will have issued 20 shares of Class A Preferred Stock with an aggregate liquidation preference of $2 million. The Class A Preferred Stock ranks senior to the AIR Common Stock with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up. The Class A Preferred Stock will entitle the holders thereof to cumulative cash dividends payable quarterly in an amount of 8.5% per annum for 4 years, which rate will increase by 50 bps per annum in each of years 5, 6, and 7 after the issuance, and by 25 bps per annum in each of years 8 through 27, after which time the annual dividend rate will remain 15%. We may, at our option at any time on or after the fifth anniversary of the issue date, redeem the Class A Preferred Stock at any time in whole, or from time to time in part, at a price per share (the “Preferred Stock Redemption Price”) equal to the liquidation preference, plus any accrued but unpaid dividends to, but excluding, the date of redemption. Substantially concurrently with the occurrence of a Change of Control (as defined in our charter), we must redeem all of the outstanding shares of Class A Preferred Stock for cash at a price per share equal to the Preferred Stock Redemption Price. Except as described above, the shares of Class A Preferred Stock have no stated maturity, are not subject to any sinking fund and will remain outstanding indefinitely. Holders of shares of Class A Preferred Stock generally do not have any voting rights. However, certain material adverse changes to the terms of the Class A Preferred Stock cannot be made without the affirmative vote of at least 66 2/3% of the outstanding shares of Class A Preferred Stock.

Restrictions on Transfer and Ownership of AIR Stock

For AIR to qualify as a REIT, not more than 50% in value of its outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year, and the shares of capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Because the board of directors of AIR believes that it is essential for AIR to continue to qualify as a REIT and to provide additional protection for AIR’s stockholders in the event of certain transactions, the board of directors of AIR will have adopted provisions of the charter restricting the acquisition of shares of AIR’s capital stock.

The relevant sections of AIR’s charter will provide that, subject to the exceptions and the constructive ownership rules described below, no “person” (as defined in our articles of incorporation) may beneficially or constructively own, or be deemed to beneficially or constructively own by virtue of the attribution rules in the Code and Rule 13d-3 under the Exchange Act, more than 8.7%, by value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock (which restriction we refer to as the “common stock ownership limit”), or 8.7% in aggregate value of the outstanding shares of all classes and series of our capital stock, including our common stock and preferred stock (which restriction we refer to as the “aggregate stock ownership limit”).

For purposes of calculating the amount of stock owned by a given individual, the individual’s AIR Common Stock and limited partnership interests in AIR OP will be aggregated. Under certain conditions, the board of directors of AIR may waive the ownership limits.

In addition to the ownership limits described above, AIR’s charter will prohibit any person from (i) beneficially or constructively owning shares of AIR capital stock that would result in our being “closely held” under section 856(h) of the Code (ii) transferring shares of AIR capital stock if such transfer would result in shares of our capital stock being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution) our capital stock being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution); (iii) beneficially or constructively owning shares of AIR stock to the extent such beneficial or constructive ownership in a tenant of AIR’s real property that is described in Section 856(d)(2)(B) of the Code if the income derived by AIR from such tenant would cause AIR to fail to satisfy any of the gross income requirements of Section 856(c) of the Code; (iv) beneficially or constructively owning shares of AIR capital stock if such ownership would result in AIR’s failing to qualify as a REIT; and (v) beneficially or

 

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constructively owning shares of stock to the extent such beneficial ownership of stock would result in AIR failing to qualify as a “domestically controlled qualified investment entity” within the meaning of section 897(h) of the Code. We refer to these restrictions together as the “ownership limits.”

Our board of directors may, in its sole discretion, exempt a person from the ownership limits and certain other limits on the ownership of our capital stock described above, and may establish a different limit on ownership for any such person. However, in no event may the 15% ownership limitation applicable to Mr. Considine be waived In order to be considered by the board of directors for exemption or a different limit on ownership, a person must make such representations and undertakings as are reasonably necessary to ascertain that such person’s beneficial or constructive ownership of our capital stock will not jeopardize our ability to qualify as a REIT under the Code and must agree that any violation or attempted violation of such representations or undertakings (or other action that is contrary to the ownership limits or the other limits on ownership of our capital stock described above) will result in the shares of capital stock being automatically transferred to a trust as described below. As a condition of its waiver, the board of directors may require an opinion of counsel or IRS ruling satisfactory to the board of directors with respect to our qualification as a REIT and may impose such other conditions as it deems appropriate in connection with the granting of the exemption or a different limit on ownership.

In connection with the waiver of the ownership limits or at any other time, our board of directors may, in its sole discretion, from time to time increase the ownership limits for one or more persons and decrease the ownership limits for all other person. Reduced ownership limits will not apply to any person whose percentage ownership of the total outstanding shares of our common stock or of the total outstanding shares of all classes and series of our capital stock, as applicable, is in excess of such decreased ownership limits until such time as such person’s percentage of total outstanding shares of our common stock or of the total outstanding shares of all classes and series of our capital stock, as applicable, equals or falls below the decreased ownership limits. However, any further acquisition of shares of our common stock or capital stock, as applicable, in excess of such percentage ownership of the total outstanding shares of our common stock or of the total outstanding shares of all classes and series of our capital stock would be in violation of the ownership limits.

As a condition of such waiver, the AIR board of directors may require opinions of counsel satisfactory to it or an undertaking from the applicant with respect to preserving the REIT status of AIR. If shares of capital stock in excess of the ownership limits, or shares of common stock that would cause the REIT to be beneficially owned by fewer than 100 persons, or that would result in AIR being “closely held” within the meaning of Section 856(h) of the Code, or that would otherwise result in AIR failing to qualify as a REIT or failing to qualify as a “domestically controlled qualified investment entity” within the meaning of section 897(h) of the Code are issued or transferred to any person, such issuance or transfer shall be null and void to the intended transferee, and the intended transferee would acquire no rights to the stock.

Shares of capital stock transferred in excess of the ownership limits or other applicable limitations will automatically be transferred to a trust for the exclusive benefit of one or more qualifying charitable organizations to be designated by AIR. Shares transferred to such trust will remain outstanding, and the trustee of the trust will have all voting and dividend rights pertaining to such shares. The trustee of such trust may transfer such shares to a person whose ownership of such shares does not violate the ownership limits or other applicable limitation. Upon a sale of such shares by the trustee, the interest of the charitable beneficiary will terminate, and the sales proceeds would be paid, first, to the original intended transferee, to the extent of the lesser of (1) such transferee’s original purchase price (or the market value of such shares on the date of the violative transfer if purportedly acquired by gift or devise) and (2) the price received by the trustee, and, second, any remainder to the charitable beneficiary. In addition, shares of stock held in such trust are purchasable by AIR for a 90-day period at a price equal to the lesser of the price paid for the stock by the original intended transferee (or the original market value of such shares if purportedly acquired by gift or devise) and the market price for the stock on the date that AIR determines to purchase the stock. The 90-day period commences on the date of the violative transfer or the date that the board of directors of AIR determines in good faith that a violative transfer has

 

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occurred, whichever is later. All certificates representing shares of capital stock bear a legend referring to the restrictions described above.

Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our capital stock that will or may violate the foregoing restrictions on transferability and ownership will be required to give notice to us immediately and provide us with such other information as AIR may request to determine the effect, if any, of such transfer on AIR’s qualification as a REIT and to ensure compliance with the ownership limits.

In addition to the foregoing, if AIR’s board of directors determines that a proposed or purported transfer would violate the restrictions on ownership and transfer of our capital stock set forth in AIR’s charter, the board of directors may take such action as it deems advisable to refuse to give effect to or to prevent such violation, including but not limited to, causing AIR to repurchase shares of our capital stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.

All persons who own, directly or by virtue of the attribution provisions of the Code and Rule 13d-3 under the Exchange Act, more than a specified percentage of the outstanding shares of capital stock must file a written statement or an affidavit with AIR containing the information specified in the AIR charter within 30 days after January 1 of each year. In addition, each stockholder shall upon demand be required to disclose to AIR in writing such information with respect to the direct, indirect, and constructive ownership of shares as the board of directors of AIR deems appropriate or necessary to comply with the provisions of the Code applicable to a REIT or to comply with the requirements of any taxing authority or governmental agency.

The restrictions on ownership and transfer of capital stock described above could delay, defer or prevent a transaction or a change in control that might involve a premium price for AIR Common Stock or otherwise be in the best interests of AIR’s stockholders.

The restrictions on transfer and ownership described above and the other provisions described below, along with other provisions of the MGCL, alone or in combination, could have the effect of delaying, deferring or preventing a proxy contest, tender offer, merger, or other change in control of us that might involve a premium price for shares of AIR Common Stock or otherwise be in the best interest of our stockholders, and could increase the difficulty of consummating any offer.

Amendments to Our Charter and Bylaws and Approval of Extraordinary Actions

Under Maryland law, a Maryland corporation generally cannot amend its charter, merge, consolidate, sell all or substantially all of its assets, engage in a statutory share exchange or dissolve unless the action is advised by the board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter unless a lesser percentage (but not less than a majority of the votes entitled to be cast on the matter) is set forth in the corporation’s charter. Our charter provides for approval of these matters by the affirmative vote of stockholders entitled to cast a majority of the votes entitled to be cast on such matter, except that the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on such matter is required to amend the provisions of our charter relating to the removal of directors, which also requires two-thirds of all votes entitled to be cast on the matter, and to amend the provisions of our charter relating to the vote required to amend the removal provisions. Our board of directors will have the exclusive power to adopt, alter or repeal any provision of our bylaws or to make new bylaws.

Maryland law permits a Maryland corporation to transfer all or substantially all of its assets without the approval of the stockholders of the corporation to one or more persons if all of the equity interests of the person or persons are owned, directly or indirectly, by the corporation.

 

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Classified Board

Our charter will provide that our Board will be initially divided into three classes. The three classes will be denominated as Class I, Class II, and Class III. Class I will serve until the 2021 annual meeting of our stockholders, at which annual meeting such Class will be elected to a term expiring at the 2022 annual meeting of our stockholders. Class II and Class III will serve until the 2022 annual meeting of our stockholders. Commencing with the 2022 annual meeting of our stockholders, our board of directors will no longer be classified, and each director shall be elected annually for a term of one year expiring at the next succeeding annual meeting. Under the classified board provisions, it would take at least two elections of directors for any individual or group to gain control of our board of directors. Accordingly, these provisions could discourage a third party from initiating a proxy contest, making a tender offer, or otherwise attempting to gain control of us.

Removal of Directors

Our charter provides that our directors may be removed only for cause, as defined in our charter, and then only by at least two-thirds of the votes entitled to be cast generally in the election of directors.

Size of Board and Vacancies

Our amended and restated bylaws will provide that the board of directors will consist of not less than three nor greater than nine directors, the exact number of which will be fixed exclusively by the board of directors. Any vacancies created in the board of directors resulting from any increase in the authorized number of directors or the death, resignation, retirement, disqualification, removal from office, or other cause will be filled by a majority of the directors then in office, even if the remaining directors do not constitute a quorum. Any director elected by the board of directors to fill a vacancy will hold office for the remainder of the full term of the class of directors in which the vacancy has occurred and until his or her successor is elected and qualifies.

Business Combinations

Under Maryland law, certain “business combinations” (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or transfer or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns, directly or indirectly, (1) 10% or more of the voting power of the corporation’s shares or (2) is an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock of the corporation (an “Interested Stockholder”), or an affiliate or associate thereof, are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding voting shares of the corporation, voting together as a single voting group, and (b) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Stockholder or an affiliate or associate of the Interested Stockholder with whom the business combination is to be effected, unless, among other conditions, the corporation’s stockholders receive a specified minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. For purposes of determining whether a person is an Interested Stockholder of AIR, interests in AIR OP that are held by limited partners other than AIR or “LP Units” will be treated as beneficial ownership of the shares of common stock that may be issued in exchange for the LP Units when such LP Units are tendered for redemption. The Maryland business combination statute could have the effect of discouraging offers to acquire AIR and of increasing the difficulty of consummating any such offer. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. The AIR board of directors does not immediately intend to pass such a resolution.

 

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Control Share Acquisitions

Maryland law provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by an officer of the corporation or by directors who are employees of the corporation. “Control shares” are voting shares of stock that, if aggregated with all other shares of stock previously acquired by that person, would entitle the acquiror to exercise voting power, except solely by virtue of a revocable proxy, in electing directors within one of the following ranges of voting power:

 

  •  

one-tenth or more but less than one-third;

 

  •  

one-third or more but less than a majority; or

 

  •  

a majority or more of all voting power.

Control shares do not generally include shares the acquiring person is then entitled to vote that were acquired in good faith and as a result of having previously obtained stockholder approval. For purposes of determining whether a person or entity is an Interested Stockholder of AIR, ownership of LP Units will be treated as beneficial ownership of the shares of common stock that may be issued in exchange for the LP Units when such LP Units are tendered for redemption.

A “control share acquisition” means the acquisition, directly or indirectly, of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon the satisfaction of certain conditions (including delivery of an “acquiring person statement” and a written undertaking to pay certain of the corporation’s expenses of a special meeting), may compel the corporation’s board of directors to call a special meeting of stockholders, to be held within 50 days of demand, to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself, at its option, present the question at any stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then, subject to certain conditions and limitations, the corporation may, at its option, redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value, determined without regard to the absence of voting rights, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights of such shares were considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of the appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters’ rights do not apply in the context of a control share acquisition.

The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation’s charter or bylaws prior to the control share acquisition. No such exemption appears in AIR’s charter or bylaws. The control share acquisition statute could have the effect of discouraging offers to acquire AIR and of increasing the difficulty of consummating any such offer.

Unsolicited Takeovers

Under Maryland law, a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors may elect to be subject to certain statutory provisions relating to unsolicited takeovers that, among other things, would automatically classify the board into three classes with staggered terms of three years each and vest in the board the exclusive right to determine the number of directors

 

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and the exclusive right, by the affirmative vote of a majority, of the remaining directors to fill vacancies on the board, even if the remaining directors do not constitute a quorum. These statutory provisions relating to unsolicited takeovers also provide that any director elected to fill a vacancy shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred, rather than the next annual meeting of directors as would otherwise be the case, and until his successor is elected and qualified.

Neither our charter nor our bylaws provides that we are subject to any of the foregoing statutory provisions, although our charter and bylaws will contain provisions that have similar effects as the foregoing statutory provisions. For example, our charter will provide that our board of directors will initially be divided into three classes, denominated as Class I, Class II and Class III, with Class I serving until the 2021 annual meeting of our stockholders (at which meeting it will be elected for a term expiring at the next annual meeting of our stockholders) and Class II and Class III serving until the 2022 annual meeting of our stockholders; commencing with the 2022 annual meeting of our stockholders, our board of directors will no longer be classified, and each director shall be elected annually for a term of one year expiring at the next succeeding annual meeting. The classification and staggered terms of office of our directors would make it more difficult for a third party to gain control of our board prior to the 2022 annual meeting of our stockholders. However, our board of directors will resolve substantially concurrent with the Separation that, following the 2022 annual meeting of our stockholders, we will be prohibited from electing to be subject to the foregoing statutory provisions. Accordingly, our board of directors will be prohibited from, following the 2022 annual meeting of our stockholders, electing to classify into three classes without first obtaining stockholder approval.

Dissolution of AIR

Our dissolution must be approved by our board by a majority vote of the entire board and by our stockholders by the affirmative vote of a majority of all the votes entitled to be cast by our stockholders on the matter.

Advance Notice of Director Nominations and New Business; Procedures of Special Meetings Requested by Stockholders

Our bylaws provide that nominations of persons for election to the board and the proposal of business to be considered by stockholders at the annual or special meeting of stockholders may be made only:

 

  •  

pursuant to our notice of the meeting;

 

  •  

by or at the direction of the board; or

 

  •  

by a stockholder who was a stockholder at the time the notice of meeting was given, and at the time of the meeting, and is entitled to vote at the meeting, and who has complied with the advance notice procedures, including the minimum time period, described in the bylaws.

Our bylaws also provide that only the business specified in our notice of meeting may be brought before a special meeting of stockholders. Our bylaws provide that our stockholders have the right to call a special meeting only upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast on the business proposed to be transacted at such meeting.

Proxy Access

Our bylaws permit any stockholder or group of up to 20 stockholders (counting as one stockholder, for this purpose, any two or more funds that are part of the same “qualifying fund group” (as defined in Aimco’s bylaws)) that (i) has owned continuously for at least three years a number of shares of Aimco Common Stock that represents at least 3% of outstanding Aimco Common Stock as of the date the notice of proxy access nomination is delivered to or mailed and received by the Secretary of Aimco in accordance with our bylaws (the

 

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“Required Shares”), (ii) continues to own the Required Shares through the date of the annual meeting, and (iii) satisfies all of the other requirements of, and complies with all applicable procedures set forth in our bylaws, to nominate up to a specified number of director nominees in our proxy materials for an annual meeting of stockholders. A nominating stockholder is considered to own only those outstanding shares of Aimco Common Stock as to which the stockholder possesses both (i) the full voting and investment rights pertaining to the shares and (ii) the full economic interest in (including the opportunity for profit from and risk of loss on) such shares. Under this provision, generally borrowed or hedged shares do not count as “owned” shares. Further, to the extent not otherwise excluded pursuant to this definition of ownership, a nominating stockholder’s “short position” as defined in Rule 14e-4 under the Exchange Act is deducted from the shares otherwise “owned.” If a group of stockholders is aggregating its stockholdings in order to meet the 3% ownership requirement, the ownership of the group will be determined by aggregating the lowest number of shares continuously owned by each member during the three-year holding period.

The maximum number of stockholder nominees permitted under the proxy access provisions of our bylaws shall not exceed the greater of two or 20% of the directors in office as of the last day a notice of nomination may be timely received. If the 20% calculation does not result in a whole number, the maximum number of stockholder nominees is the closest whole number below 20%. If one or more vacancies occurs for any reason after the nomination deadline and our board decides to reduce the size of our board in connection therewith, the 20% calculation will be calculated based on the number of directors in office as so reduced. Stockholder-nominated candidates whose nomination is withdrawn or whom the board determines to include in our proxy materials as board-nominated candidates will be counted against the 20% maximum. In addition, any director in office as of the nomination deadline who was included in our proxy materials as a stockholder nominee for either of the two preceding annual meetings and whom our board decides to renominate for election to the board also will be counted against the 20% maximum.

Notice of a nomination pursuant to the proxy access provisions of our bylaws must be received no earlier than 150 days and no later than 120 days before the anniversary of the date that we distributed our proxy statement for the previous year’s annual meeting of stockholders.

A stockholder nominee will not be eligible for inclusion in our proxy materials if any stockholder has nominated a person pursuant to the advance notice provision of our bylaws, if the nominee would not be independent, if the nominee’s election would cause us to violate our bylaws, our charter or any applicable listing standards, laws, rules or regulations, if the nominee is or has been an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, within the past three years, if the nominee is a named subject of a pending criminal proceeding or has been convicted in such a criminal proceeding within the past 10 years, if the nominee is subject to any order of the type specified in Rule 506(d) of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), or if the nominee or the stockholder who nominated him or her has provided false and misleading information to us or otherwise breached any of its or their obligations, representations or agreements under the proxy access provisions of our bylaws. Stockholder nominees who are included in our proxy materials but subsequently withdraw from or become ineligible for election at the meeting or do not receive at least 10% of the votes cast in the election will be ineligible for nomination under the proxy access provisions of our bylaws for the next two years. A nomination made under the proxy access provisions of our bylaws will be disregarded at the annual meeting under certain circumstances described in our bylaws.

Transfer Agent and Registrar

After the Separation, the registrar and transfer agent for AIR Common Stock will be Computershare Trust Company, N.A.

Listing

Shares of AIR Common Stock are expected to be traded on the NYSE under the ticker symbol “AIRC.”

 

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Limitation of Liability and Indemnification of Directors and Officers

Maryland law permits a Maryland corporation to include in its charter a provision that limits the liability of its directors and officers to the corporation and its stockholders for money damages, except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active or deliberate dishonesty that is established by a final judgment and that is material to the cause of action. Our charter contains a provision that limits, to the maximum extent permitted by Maryland law, the liability of our directors and officers to us and our stockholders for money damages. This provision does not limit our right or that of our stockholders to obtain equitable relief, such as injunction or rescission.

Our charter and bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, to pay or reimburse reasonable expenses before a final disposition of a proceeding to (1) any individual who is a present or former director or officer of ours and who is made, or threatened to be made, a party to, or witness in, the proceeding by reason of his or her service in that capacity; or (2) any individual who, while one or our directors or officers and at our request, serves or has served as a director, officer, partner, member, manager, trustee, employee or agent of another corporation, REIT, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity.

Our charter and bylaws authorize us, with the approval of our board, to provide indemnification and advancement of expenses to our agents and employees.

Maryland law requires a Maryland corporation (unless otherwise provided in its charter, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in that capacity unless it is established that:

 

  •  

the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty;

 

  •  

the director or officer actually received an improper personal benefit in money, property or services; or

 

  •  

in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

Under the MGCL, we may not indemnify a director or officer in a suit by us or in our right in which the director or officer was adjudged liable to us or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by the corporation or in its right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

In addition, Maryland law permits a Maryland corporation to advance reasonable expenses to a director or officer upon receipt of (1) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and (2) a written undertaking by him or her, or on his or her behalf, to repay the amount paid or reimbursed if it is ultimately determined that the standard of conduct was not met.

 

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We will enter into indemnification agreements with certain of our officers and directors. The indemnification agreements with our officers and directors generally offer substantially the same scope of coverage afforded by our charter and bylaws. In addition, as contracts, these indemnification agreements provide greater assurance to our officers and directors that indemnification will be available because they cannot be modified unilaterally in the future by the board of directors or the stockholders to eliminate the rights that they provide.

In respect to our obligations to provide indemnification to directors and officers for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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DESCRIPTION OF AIR OP PARTNERSHIP UNITS AND SUMMARY OF AIR OP PARTNERSHIP AGREEMENT

The following description sets forth some general terms and provisions of the AIR OP partnership agreement. The following description of the AIR OP partnership agreement is qualified in its entirety by the terms of the agreement.

General

AIR OP is a limited partnership organized under the provisions of the Delaware Revised Uniform Limited Partnership Act, as amended from time to time, or any successor to such statute (the “Delaware Act”), and upon the terms and subject to the conditions set forth in its agreement of limited partnership. AIR OP GP, a wholly owned subsidiary of AIR, is the sole general partner of AIR OP.

Purpose And Business

The purpose and nature of AIR OP is to conduct any business, enterprise or activity permitted by or under the Delaware Act, including, but not limited to, (i) conducting the business of ownership, construction, development, and operation of multifamily rental apartment communities, (ii) entering into any partnership, joint venture, business trust arrangement, limited liability company, or other similar arrangement to engage in any business permitted by or under the Delaware Act, or to own interests in any entity engaged in any business permitted by or under the Delaware Act, (iii) conducting the business of providing property and asset management and brokerage services, whether directly or through one or more partnerships, joint ventures, subsidiaries, business trusts, limited liability companies, or other similar arrangements, and (iv) doing anything necessary or incidental to the foregoing; provided, however, such business and arrangements and interests may be limited to and conducted in such a manner as to permit AIR, in the sole and absolute discretion of the general partner, at all times to be classified as a REIT.

Management By The General Partner

Except as otherwise expressly provided in the AIR OP partnership agreement, all management powers over the business and affairs of AIR OP are exclusively vested in the general partner. No limited partner of AIR OP or any other person to whom one or more AIR OP Common Units, LTIP Units, and partnership preferred units (“AIR OP Preferred Units,” and, collectively with AIR OP Common Units, and LTIP Units, “Units”) have been transferred (each, an “assignee”) may take part in the operations, management or control (within the meaning of the Delaware Act) of AIR OP’s business, transact any business in AIR OP’s name or have the power to sign documents for or otherwise bind AIR OP. The general partner may not be removed by the limited partners with or without cause, except with the consent of the general partner. In addition to the powers granted to a general partner of a limited partnership under applicable law or that are granted to the general partner under any other provision of the AIR OP partnership agreement, the general partner, subject to the other provisions of the AIR OP partnership agreement, has full power and authority to do all things deemed necessary or desirable by it to conduct the business of AIR OP, to exercise all powers of AIR OP and to effectuate the purposes of AIR OP. AIR OP may incur debt or enter into other similar credit, guarantee, financing or refinancing arrangements for any purpose (including, without limitation, in connection with any acquisition of properties) upon such terms as the general partner determines to be appropriate. The general partner is authorized to execute, deliver, and perform specific agreements and transactions on behalf of AIR OP without any further act, approval or vote of the limited partners.

Restrictions on General Partner’s Authority

The general partner may not take any action in contravention of the AIR OP partnership agreement. The general partner may not, without the prior consent of the limited partners, undertake, on behalf of AIR OP, any of

 

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the following actions or enter into any transaction that would have the effect of such transactions: (i) except as provided in the partnership agreement, amend, modify or terminate the partnership agreement other than to reflect the admission, substitution, termination or withdrawal of partners; (ii) make a general assignment for the benefit of creditors or appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of AIR OP; (iii) institute any proceeding for bankruptcy on behalf of AIR OP; or (iv) subject to specific exceptions, approve or acquiesce to the transfer of the AIR OP general partner interest, or admit into AIR OP any additional or successor general partners.

Additional Limited Partners

The general partner is authorized to admit additional limited partners to AIR OP from time to time, on terms and conditions and for such capital contributions as may be established by the general partner in its reasonable discretion. The net capital contribution need not be equal for all partners. No action or consent by the limited partners is required in connection with the admission of any additional limited partner. The general partner is expressly authorized to cause AIR OP to issue additional interests (i) upon the conversion, redemption, or exchange of any debt, Units, or other securities issued by AIR OP, (ii) for less than fair market value, so long as the general partner concludes in good faith that such issuance is in the best interests of the general partner and AIR OP, and (iii) in connection with any merger of any other entity into AIR OP if the applicable merger agreement provides that persons are to receive interests in AIR OP in exchange for their interests in the entity merging into AIR OP. Subject to Delaware law, any additional partnership interests may be issued in one or more classes, or one or more series of any of such classes, with such designations, preferences, and relative, participating, optional, or other special rights, powers, and duties as shall be determined by the general partner, in its sole and absolute discretion without the approval of any limited partner, and set forth in a written document thereafter attached to and made an exhibit to the partnership agreement. Without limiting the generality of the foregoing, the general partner has authority to specify (a) the allocations of items of partnership income, gain, loss, deduction, and credit to each such class or series of partnership interests; (b) the right of each such class or series of partnership interests to share in distributions; (c) the rights of each such class or series of partnership interests upon dissolution and liquidation of AIR OP; (d) the voting rights, if any, of each such class or series of partnership interests; and (e) the conversion, redemption, or exchange rights applicable to each such class or series of partnership interests. No person may be admitted as an additional limited partner without the consent of the general partner, which consent may be given or withheld in the general partner’s sole and absolute discretion.

Indemnification

To the fullest extent permitted by applicable law, AIR OP shall indemnify each Indemnitee (as defined in the AIR OP partnership agreement) from and against any and all losses, claims, damages, liabilities (joint or several), expenses (including, without limitation, attorney’s fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, that relate to the operations of AIR OP as set forth in the AIR OP partnership agreement in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise; provided, however, that AIR OP shall not indemnify an Indemnitee (i) for willful misconduct or a knowing violation of the law or (ii) for any transaction for which such Indemnitee received an improper personal benefit in violation or breach of any provision of the AIR OP partnership agreement.

 

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Outstanding Classes Of Units

As of November 17, 2020, AIR OP had issued and outstanding the following partnership interests:

 

Class

   Units
Outstanding 		     Quarterly
Distribution
per Unit 		     Liquidation
Preference
per Unit 		 

Common partnership common units held by Aimco

     148,865,947.00      $ 0.41        N/A  

Common partnership common units held by third party

     6,463,183.44      $ 0.41        N/A  

Class I High Performance partnership units

     1,998,230.00      $ 0.41        N/A  

Class One partnership preferred units

     90,000.00      $ 2.00      $ 91.43  

Class Two partnership preferred units

     11,121.78      $ 0.12      $ 25.00  

Class Three partnership preferred units

     1,313,927.18      $ 0.492      $ 25.00  

Class Four partnership preferred units

     644,954.00      $ 0.500      $ 25.00  

Class Six partnership preferred units

     773,693.00      $ 0.531      $ 25.00  

Class Seven partnership preferred units

     26,150.00      $ 0.492      $ 25.00  

Class Nine partnership preferred units

     78,956.00      $ 0.375      $ 25.00  

LTIP I units

     135,650.00      $ 0.041        N/A  

LTIP II units

     2,224,684.00      $ .0082        N/A  

Immediately prior to the Separation, AIR OP will issue $2 million in a new series of preferred limited partnership units of AIR OP to AIR with terms substantially the same as the terms of the Class A Preferred Stock, and will issue another new series of preferred limited partnership units of AIR OP to each of Sub REIT 1 and Sub REIT 2 with terms substantially the same as the non-participating non-voting preferred stock that each of Sub REIT 1 and Sub REIT 2 is expected to issue in connection with the Separation as described above.

Distributions

Subject to the rights of holders of any outstanding AIR OP Preferred Units, the AIR OP partnership agreement requires the general partner to cause AIR OP to distribute quarterly all, or such portion as the general partner may in its sole and absolute discretion determine (provided such amount may not be less than the aggregate Preferred Return Shortfall (as defined in the AIR OP partnership agreement) of all AIR OP Common Units held by all non-AIR holders), of Available Cash (as defined in the AIR OP partnership agreement) generated by AIR OP during such quarter to the general partner, the special limited partner, and the other holders of AIR OP Common Units on the record date established by the general partner with respect to such quarter, as follows:

 

  •  

First, to the non-AIR holders of Partnership Common Units (as defined in the AIR OP partnership agreement) as of the record date for such distribution, in accordance with the Preferred Return Shortfalls of their Partnership Common Units, until the aggregate Preferred Return Shortfall applicable to all Partnership Common Units held by the non-AIR holders is zero;

 

  •  

Second, to AIR and its subsidiaries other than AIR OP (the “AIR Partners”) and its subsidiaries in accordance with the Preferred Return Shortfalls of their Partnership Common Units, until the aggregate Preferred Return Shortfall applicable to all Partnership Common Units held by the AIR Partners is zero; and

 

  •  

Third, (i) the non-AIR holders Sharing Percentage (as defined in the AIR OP partnership agreement) to the non-AIR holders, and (ii) the AIR Partners Sharing Percentage to the AIR Partners, in each case, allocated among them based on their ownership of Partnership Common Units.

Holders of any AIR OP Preferred Units issued in the future may have priority over the general partner, the special limited partner, and holders of Units with respect to distributions of Available Cash, distributions upon liquidation, or other distributions.

 

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The general partner in its sole and absolute discretion may distribute to the limited partners Available Cash on a more frequent basis and provide for an appropriate record date. The partnership agreement requires the general partner to take such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with AIR’s requirements for qualification as a REIT, to cause AIR OP to distribute amounts sufficient to enable the AIR Partners to transfer funds to AIR that, together with amounts received by AIR from sources other than AIR OP, will allow AIR to pay stockholder dividends that will (i) satisfy the requirements, or the REIT requirements, for qualifying as a REIT under the Code and the applicable regulations promulgated by the U.S. Treasury Department, or the Treasury Regulations, and (ii) avoid any U.S. federal income or excise tax liability of AIR.

While some of the debt instruments to which AIR OP will be a party, including its credit facilities, may contain restrictions on the payment of distributions to the holders of the Units (collectively, the “AIR OP Unitholders”), the debt instruments will allow AIR OP to distribute sufficient amounts to enable the general partner and special limited partner to transfer funds to AIR that are then used to pay stockholder dividends thereby allowing AIR to meet the requirements for qualifications as a REIT under the Code.

Distributions in Kind

No right is given to any non-AIR holder to demand and receive property other than cash as provided in the AIR OP partnership agreement. The general partner may determine, in its sole and absolute discretion, to make a distribution in kind of AIR OP assets (a) to all AIR OP Unitholders, in which case such assets shall be distributed in such a fashion as to ensure that the fair market value is distributed and allocated in accordance with the AIR OP partnership agreement, or (b) only to AIR Partners and not to any non-AIR holders if, after giving effect to such distribution to AIR Partners, the net asset value of AIR OP, as reasonably determined by the general partner in good faith, would exceed 200% of the sum of (i) the product of (x) the number of AIR OP Common Units then held by non-AIR holders, (y) the value of a share of AIR Common Stock, and (z) the Adjustment Factor (as defined in the AIR OP partnership agreement), and (ii) the aggregate liquidation preference of all outstanding AIR OP Preferred Units (all calculated as of the date of such distribution).

Distributions Upon Liquidation

Subject to the rights of holders of any outstanding AIR OP Preferred Units, net proceeds from the sale or other disposition of all or substantially all of its assets in a transaction that will lead to a liquidation of AIR OP or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of AIR OP, or a Terminating Capital Transaction (as defined in the AIR OP partnership agreement), and any other cash received or reductions in reserves made after commencement of the liquidation of AIR OP, will be distributed to the AIR OP Unitholders in accordance with the AIR OP partnership agreement.

Restricted Distributions

The AIR OP partnership agreement prohibits AIR OP and the general partner, on behalf of AIR OP, from making a distribution to any AIR OP Unitholder on account of its interest in Units if such distribution would violate Section 17-607 of the Delaware Act or other applicable law.

Allocations Of Net Income And Net Loss

AIR OP Common Units

Net Income (as defined in the AIR OP partnership agreement) and Net Loss (as defined in the AIR OP partnership agreement) of AIR OP will be determined and allocated with respect to each fiscal year of AIR OP as of the end of each such year. Except as otherwise provided in the AIR OP partnership agreement, an allocation to an AIR OP Unitholder of a share of Net Income or Net Loss will be treated as an allocation of the same share of each item of income, gain, loss, or deduction that is taken into account in computing Net Income or Net Loss. Except as otherwise provided in the AIR OP partnership agreement, all Net Income and Net Loss for any relevant fiscal year (or other taxable year or taxable period) will be allocated in the manner and order of priority specified

 

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in the AIR OP partnership agreement. The AIR OP partnership agreement contains provisions for special allocations intended to comply with certain regulatory requirements, including the requirements of Treasury Regulations Sections 1.704-1(b) and 1.704-2. Except as otherwise provided in the AIR OP partnership agreement and subject to the terms of any outstanding AIR OP Preferred Units, for U.S. federal income tax purposes under the Code and the Treasury Regulations, each partnership item of income, gain, loss, and deduction will be allocated among the AIR OP Unitholders in the same manner as its correlative item of “book” income, gain, loss, or deduction is allocated under the AIR OP partnership agreement.

AIR OP Preferred Units

Net income will be allocated to the holders of AIR OP Preferred Units for any fiscal year (and, if necessary, subsequent fiscal years) to the extent that the holders of AIR OP Preferred Units receive a distribution on any AIR OP Preferred Units (other than an amount included in any redemption of AIR OP Preferred Units). If any AIR OP Preferred Units are redeemed, for the fiscal year that includes such redemption (and, if necessary, for subsequent fiscal years) (i) gross income and gain (in such relative proportions as the general partner in its discretion will determine) will be allocated to the holders of AIR OP Preferred Units to the extent that the redemption amounts paid or payable with respect to the AIR OP Preferred Units so redeemed exceeds the aggregate capital contributions (net of liabilities assumed or taken subject to by AIR OP) per AIR OP Preferred Units allocable to the AIR OP Preferred Units so redeemed and (ii) deductions and losses (in such relative proportions as the general partner in its discretion will determine) will be allocated to the holders of AIR OP Preferred Units to the extent that the aggregate capital contributions (net of liabilities assumed or taken subject to by AIR OP) per AIR OP Preferred Units allocable to the AIR OP Preferred Units so redeemed exceeds the redemption amount paid or payable with respect to the AIR OP Preferred Units so redeemed.

Withholding

AIR OP is authorized to withhold from or pay on behalf of or with respect to each limited partner any amount of Federal, state, local or foreign taxes that the general partner determines, in its sole discretion, that AIR OP is required to pay with respect to any amount distributable, allocable or payable to such limited partner under the AIR OP partnership agreement. The AIR OP partnership agreement also provides that any withholding tax amount paid on behalf of or with respect to a limited partner constitutes a loan by AIR OP to such limited partner. This loan is required to be repaid within 15 days after notice to the limited partner from the general partner, and each limited partner grants a security interest in its partnership interest to secure its obligation to pay any partnership withholding tax amounts paid on its behalf or with respect to such limited partner. In addition, under the AIR OP partnership agreement, the partnership may redeem the partnership interest of any limited partner who fails to pay partnership withholding tax amounts paid on behalf of or with respect to such limited partner. Also, the general partner has authority to withhold, from any amounts otherwise distributable, allocable, or payable to a limited partner, the general partner’s estimate of further taxes required to be paid by such limited partner.

Return Of Capital

No partner is entitled to interest on its capital contribution or on such partner’s capital account. Except (i) under the rights of redemption set forth in the AIR OP partnership agreement, (ii) as provided by law, or (iii) under the terms of any outstanding AIR OP Preferred Units, no partner has any right to demand or receive the withdrawal or return of its capital contribution from AIR OP, except to the extent of distributions made under the AIR OP partnership agreement or upon termination of AIR OP. Except to the extent otherwise expressly provided in the AIR OP partnership agreement and subject to the terms of any outstanding AIR OP Preferred Units, no limited partner or assignee will have priority over any other limited partner or assignee either as to the return of capital contributions or as to profits, losses or distributions.

Redemption Rights Of Qualifying Parties

After the first anniversary of becoming a holder of AIR OP Common Units, holders of AIR OP Common Units and some assignees have the right, subject to the terms and conditions set forth in the AIR OP partnership agreement, to require AIR OP to redeem all or a portion of the AIR OP Common Units held by such party in

 

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exchange for shares of Aimco Common Stock or a cash amount equal to the value of such shares, as AIR OP may determine. On or before the close of business on the fifth business day after a holder of AIR OP Common Units gives the general partner a notice of redemption, AIR OP may, in its sole and absolute discretion but subject to the restrictions on the ownership of Aimco Common Stock imposed under AIR’s charter and the transfer restrictions and other limitations thereof, elect to cause AIR to acquire some or all of the tendered AIR OP Common Units from the tendering party in exchange for Aimco Common Stock, based on an exchange ratio of one share of Aimco Common Stock for each one AIR OP Common Unit, subject to adjustment as provided in the AIR OP partnership agreement. The AIR OP partnership agreement does not obligate AIR or the general partner to register, qualify, or list any Aimco Common Stock issued in exchange for AIR OP Common Units with the SEC, with any state securities commissioner, department or agency, or with any stock exchange. Aimco Common Stock issued in exchange for AIR OP Common Units under the AIR OP partnership agreement will contain legends regarding restrictions under the Securities Act and applicable state securities laws as Aimco in good faith determines to be necessary or advisable in order to ensure compliance with securities laws. Notwithstanding the foregoing, however, holders of AIR OP Class I High Performance partnership units have the right, subject to the terms and conditions of the AIR OP partnership agreement, to require AIR OP to redeem all or a portion of such units in exchange for an amount of cash per such redeemed unit equal to the lesser of (x) the amount that would be received in respect of such unit if AIR OP sold all of its properties at their fair market value (which may be determined by reference to the value of a share of Aimco Common Stock), paid all of its debts, and distributed the remaining proceeds to the partners as provided in the AIR OP partnership agreement in the event of a winding up of AIR OP, and (y) in certain circumstances, the amount received in a public offering of shares of Aimco Common Stock. Upon receipt of a notice of redemption, AIR OP may, in its sole and absolute discretion but subject to the restrictions on the ownership of common stock imposed under the Aimco charter and the transfer restrictions and other limitations thereof, elect to cause Aimco to acquire some or all of the tendered AIR OP Class I High Performance partnership units in exchange for Aimco Common Stock with a value equivalent to the cash amount described in the preceding sentence.

Notwithstanding the foregoing, it is expected that the AIR OP partnership agreement will be amended prior to the consummation of the Separation to replace each reference to Aimco Common Stock with a reference to AIR Common Stock and each reference to obligations of Aimco in respect thereof with a reference to obligations of AIR. Assuming such amendment is adopted, each reference in this section entitled “Redemption Rights Of Qualifying Parties” to “Aimco” and “Aimco Common Stock” shall be deemed to be replaced with “AIR” and “AIR Common Stock,” respectively.

Partnership Right To Call Limited Partner Interests

Notwithstanding any other provision of the AIR OP partnership agreement, on and after the date on which the aggregate percentage interests of the limited partners, other than the special limited partner, are less than one percent (1%), AIR OP will have the right, but not the obligation, from time to time and at any time to redeem any and all outstanding limited partner interests (other than the special limited partner’s interest) by treating any limited partner as if such limited partner had tendered for redemption under the AIR OP partnership agreement the amount of AIR OP Common Units specified by the general partner, in its sole and absolute discretion, by notice to the limited partner.

Transfers And Withdrawals

Restrictions On Transfer

The AIR OP partnership agreement restricts the transferability of Units. Any transfer or purported transfer of a Unit not made in accordance with the AIR OP partnership agreement will be null and void ab initio. Until the expiration of one year from the date on which an AIR OP Unitholder acquired Units, subject to some exceptions, such AIR OP Unitholder may not transfer all or any portion of its Units to any transferee without the consent of the general partner, which consent may be withheld in its sole and absolute discretion. After the

 

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expiration of one year from the date on which an AIR OP Unitholder acquired Units, such AIR OP Unitholder has the right to transfer all or any portion of its Units to any person, subject to the satisfaction of specific conditions specified in the AIR OP partnership agreement, including the general partner’s right of first refusal.

It is a condition to any transfer (whether or not such transfer is effected before or after the one year holding period) that the transferee assumes by operation of law or express agreement all of the obligations of the transferor limited partner under the AIR OP partnership agreement with respect to such Units, and no such transfer (other than under a statutory merger or consolidation wherein all obligations and liabilities of the transferor partner are assumed by a successor corporation by operation of law) will relieve the transferor partner of its obligations under the AIR OP partnership agreement without the approval of the general partner, in its sole and absolute discretion.

In connection with any transfer of Units, the general partner will have the right to receive an opinion of counsel reasonably satisfactory to it to the effect that the proposed transfer may be effected without registration under the Securities Act, and will not otherwise violate any federal or state securities laws or regulations applicable to AIR OP or the Units transferred.

No transfer by a limited partner of its Units (including any redemption or any acquisition of AIR OP Common Units by the general partner or by AIR OP) may be made to any person if (i) in the opinion of legal counsel for AIR OP, it would result in AIR OP being treated as an association taxable as a corporation, or (ii) such transfer is effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code.

AIR OP Class I High Performance Partnership Units

AIR OP Class I High Performance partnership units are subject to different restrictions on transfer. Individuals may not transfer such units except to a family member (or a family-owned entity) or in the event of their death.

Substituted Limited Partners

No limited partner will have the right to substitute a transferee as a limited partner in its place. A transferee of the interest of a limited partner may be admitted as a substituted limited partner only with the consent of the general partner, which consent may be given or withheld by the general partner in its sole and absolute discretion. If the general partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee as a substituted limited partner, such transferee will be considered an assignee for purposes of the AIR OP partnership agreement. An assignee will be entitled to all the rights of an assignee of a limited partnership interest under the Delaware Act, including the right to receive distributions from AIR OP and the share of Net Income, Net Losses, and other items of income, gain, loss, deduction, and credit of AIR OP attributable to the Units assigned to such transferee, and the rights to transfer the Units provided in the AIR OP partnership agreement, but will not be deemed to be a holder of Units for any other purpose under the AIR OP partnership agreement, and will not be entitled to effect a consent or vote with respect to such Units on any matter presented to the limited partners for approval (such right to consent or vote, to the extent provided in the AIR OP partnership agreement or under the Delaware Act, fully remaining with the transferor limited partner).

Withdrawals

No limited partner may withdraw from AIR OP other than as a result of a permitted transfer of all of such limited partner’s Units in accordance with the AIR OP partnership agreement, with respect to which the transferee becomes a substituted limited partner, or under a redemption (or acquisition by Aimco) of all of such limited partner’s Units.

 

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Restrictions On the General Partner

The general partner may not transfer any of its general partner interest or withdraw from AIR OP unless (i) the limited partners consent or (ii) immediately after a merger of the general partner into another entity, substantially all of the assets of the surviving entity, other than the general partnership interest in AIR OP held by the general partner, are contributed to AIR OP as a capital contribution in exchange for Units.

Amendment of the Partnership Agreement

By the General Partner Without the Consent of the Limited Partners

The general partner has the power, without the consent of the limited partners, to amend the AIR OP partnership agreement as may be required to facilitate or implement any of the following purposes: (i) to add to the obligations of the general partner or surrender any right or power granted to the general partner or any affiliate of the general partner for the benefit of the limited partners; (ii) to reflect the admission, substitution or withdrawal of partners or the termination of AIR OP in accordance with the partnership agreement; (iii) to reflect a change that is of an inconsequential nature and does not adversely affect the limited partners in any material respect, or to cure any ambiguity, correct or supplement any provision in the partnership agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under the partnership agreement that will not be inconsistent with law or with the provisions of the partnership agreement; (iv) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling, or regulation of a federal or state agency or contained in federal or state law; (v) to reflect such changes as are reasonably necessary for AIR to maintain its status as a REIT; and (vi) to modify the manner in which capital accounts are computed (but only to the extent set forth in the definition of “Capital Account” in the AIR OP partnership agreement or contemplated by the Code or The Treasury Regulations).

With the Consent of the Limited Partners

Amendments to the AIR OP partnership agreement may be proposed by the general partner or by holders of a majority of the outstanding Units and other classes of units that have the same voting rights as holders of Units, excluding the special limited partner. Following such proposal, the general partner will submit any proposed amendment to the limited partners. The general partner will seek the written consent of a majority in interest of the limited partners on the proposed amendment or will call a meeting to vote thereon and to transact any other business that the general partner may deem appropriate.

Procedures for Actions and Consents of Partners

Meetings of the partners may be called by the general partner and will be called upon the receipt by the general partner of a written request by a majority in interest of the limited partners. Notice of any such meeting will be given to all partners not less than seven days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Each meeting of partners will be conducted by the general partner or such other person as the general partner may appoint under such rules for the conduct of the meeting as the general partner or such other person deems appropriate in its sole and absolute discretion. Whenever the vote or consent of partners is permitted or required under the partnership agreement, such vote or consent may be given at a meeting of partners or may be given by written consent. Any action required or permitted to be taken at a meeting of the partners may be taken without a meeting if a written consent setting forth the action so taken is signed by partners holding a majority of outstanding Units (or such other percentage as is expressly required by the AIR OP partnership agreement for the action in question).

Records and Accounting; Fiscal Year

The AIR OP partnership agreement requires the general partner to keep or cause to be kept at the principal office of AIR OP those records and documents required to be maintained by the Delaware Act and other books

 

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and records deemed by the general partner to be appropriate with respect to AIR OP’s business. The books of AIR OP will be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or on such other basis as the general partner determines to be necessary or appropriate. To the extent permitted by sound accounting practices and principles, AIR OP, the general partner, and AIR may operate with integrated or consolidated accounting records, operations, and principles. The fiscal year of AIR OP is the calendar year.

Reports

As soon as practicable, but in no event later than 105 days after the close of each calendar quarter and each fiscal year, the general partner will make available to limited partners (which may be done by filing a report with the SEC) a report containing financial statements of AIR OP, or of AIR if such statements are prepared solely on a consolidated basis with AIR, for such calendar quarter or fiscal year, as the case may be, presented in accordance with generally accepted accounting principles, and such other information as may be required by applicable law or regulation or as the general partner determines to be appropriate. Statements included in quarterly reports are not audited. Statements included in annual reports are audited by a nationally recognized firm of independent public accountants selected by the general partner.

Tax Matters Partner and Partnership Representative

The general partner is the “tax matters partner” and “partnership representative” of AIR OP. In such capacity, the general partner is authorized, but not required, to take certain actions on behalf of AIR OP with respect to tax matters and has the sole authority to act on behalf of AIR OP in connection with and make all relevant decisions regarding application of AIR OP audit rules under the Code. In addition, the general partner will arrange for the preparation and timely filing of all returns with respect to partnership income, gains, deductions, losses, and other items required of AIR OP for U.S. federal and state income tax purposes, and will use all reasonable effort to furnish, within 90 days of the close of each taxable year, the tax information reasonably required by limited partners for U.S. federal and state income tax reporting purposes. The limited partners will promptly provide the general partner with such information as may be reasonably requested by the general partner from time to time.

Dissolution and Winding Up

Dissolution

AIR OP will dissolve, and its affairs will be wound up, upon the first to occur of any of the following (each a “liquidating event”): (i) an event of withdrawal, as defined in the Delaware Act (including, without limitation, bankruptcy), of the sole general partner unless, within 90 days after the withdrawal, a “majority in interest” (as such phrase is used in Section 17-801(3) of the Delaware Act) of the remaining partners agree in writing, in their sole and absolute discretion, to continue the business of AIR OP and to the appointment, effective as of the date of withdrawal, of a successor general partner; (ii) an election to dissolve AIR OP made by the general partner in its sole and absolute discretion, with or without the consent of the limited partners; (iii) entry of a decree of judicial dissolution of AIR OP under the provisions of the Delaware Act; (iv) the occurrence of a Terminating Capital Transaction; or (v) the redemption (or acquisition by Aimco, the general partner, or the special limited partner) of all Units other than Units held by the general partner or the special limited partner.

Winding Up

Upon the occurrence of a liquidating event, AIR OP will continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and partners. The general partner (or, in the event that there is no remaining general partner or the general partner has dissolved, become bankrupt within the meaning of the Delaware Act, or ceased to operate, any person elected by a majority

 

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in interest of the limited partners) will be responsible for overseeing the winding up and dissolution of AIR OP and will take full account of AIR OP’s liabilities and property, and AIR OP property will be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the general partner, include AIR’s stock) will be applied and distributed in the following order: (i) first, to the satisfaction of all of AIR OP’s debts and liabilities to creditors other than the partners and their assignees (whether by payment or the making of reasonable provision for payment thereof); (ii) second, to the satisfaction of all AIR OP’s debts and liabilities to the general partner (whether by payment or the making of reasonable provision for payment thereof), including, but not limited to, amounts due as reimbursements under the partnership agreement; (iii) third, to the satisfaction of all of AIR OP’s debts and liabilities to the other partners and any assignees (whether by payment or the making of reasonable provision for payment thereof); (iv) fourth, to the satisfaction of all liquidation preferences of outstanding AIR OP Preferred Units, if any; and (v) fifth, the balance, if any, to the general partner, the limited partners, and any assignees in accordance with and in proportion to their positive capital account balances, after giving effect to all contributions, distributions, and allocations for all periods. In the event of a liquidation, holders of AIR OP Class I High Performance partnership units will be specially allocated items of income and gain in an amount sufficient to cause the capital account of such holder to be equal to that of a holder of an equal number of AIR OP Common Units.

 

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U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a summary of the U.S. federal income tax consequences generally applicable to an investment in AIR Common Stock. This summary does not discuss the consequences of an investment in Class A Preferred Stock, AIR OP Common Units, debt securities, or warrants. This summary is based upon the Code, Treasury Regulations, rulings, and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. This summary is also based on the assumptions that the operation of AIR, AIR OP, and the limited liability companies and limited partnerships in which they own controlling interests (collectively, the “Subsidiary Partnerships”), subsidiary REITs, and any affiliated entities will be in accordance with their respective organizational documents and partnership agreements. As used in this section, (i) references to “AIR,” “we,” “our,” and “us” mean only AIR and not its subsidiaries or other lower-tier entities, except as otherwise indicated; and (ii) references to Aimco refer to Aimco, New OP, and their consolidated subsidiaries (other than AIR and AIR OP and their consolidated subsidiaries after the completion of the Separation).

This summary is for general information only and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor, or to certain types of investors subject to special tax rules (including financial institutions; insurance companies; broker-dealers; regulated investment companies; partnerships and trusts; persons who hold AIR Common Stock on behalf of other persons as nominees; holders that receive AIR Common Stock through the exercise of stock options or otherwise as compensation; persons holding AIR Common Stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security,” or other integrated investment; and, except to the extent discussed below, tax-exempt organizations, and foreign investors, as determined for U.S. federal income tax purposes). If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds AIR Common Stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the acquisition, ownership, or disposition of AIR Common Stock.

This summary assumes that investors will hold AIR Common Stock as a capital asset (generally, property held for investment). No advance ruling from the IRS has been or will be sought regarding any matter discussed in this information statement. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below.

The U.S. federal income tax treatment of a particular holder depends upon determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences to any holder of AIR Common Stock will depend on the holder’s particular tax circumstances. Accordingly, each holder is urged to consult its tax advisor regarding the federal, state, local, and foreign tax consequences of acquiring, holding, exchanging, or otherwise disposing of AIR Common Stock and of AIR’s election to be subject to tax as a real estate investment trust for U.S. federal income tax purposes.

Taxation of AIR

AIR will elect to be taxed as a REIT under the Code commencing with its taxable year ending December 31, 2020, and AIR intends to continue to operate in such a manner as to qualify for taxation as a REIT. We believe that we will be organized, and expect to operate in such a manner as to qualify for taxation, as a REIT. However, qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code, including through actual annual operating results, asset composition, distribution levels, and diversity of stock ownership. Accordingly, no assurance can be given that we will be organized and operate in a manner so as to qualify or remain qualified as a REIT. See “U.S. Federal Income Tax Considerations—Taxation of AIR—Failure to Qualify.”

 

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In connection with the Separation, we expect to receive an opinion of Skadden, Arps to the effect that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable, us to meet the requirements for qualification and taxation as a REIT. It must be emphasized that the opinion of Skadden, Arps will be based on various assumptions relating to our organization and operation, and will be conditioned upon fact-based representations and covenants made by our management regarding our organization, assets, income, and the past, present, and future conduct of our business operations. While we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given by Skadden, Arps or by us that we will qualify as a REIT for any particular year. See “U.S. Federal Income Tax Considerations—Taxation of AIR—Failure to Qualify.” The opinion will be expressed as of the date issued and will not cover subsequent periods. Skadden, Arps will have no obligation to advise us or our stockholders of any subsequent change in the matters stated, represented, or assumed, or of any subsequent change in the applicable law. You should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions. In addition, the opinion of Skadden, Arps will rely on a separate opinion of Skadden, Arps regarding Aimco’s organization and operation as a REIT, which separate opinion will be subject to the same limitations and qualifications described above with respect to the opinion on our REIT status.

The REIT provisions of the Code are highly technical and complex. The following summary sets forth certain aspects of the provisions of the Code that govern the U.S. federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, Treasury Regulations, and administrative and judicial interpretations thereof, all of which are subject to change, possibly with retroactive effect.

Taxation of REITs in General

Provided AIR qualifies as a REIT, it will generally be entitled to a deduction for dividends that it pays and therefore will not be subject to U.S. federal corporate income tax on its net income that is currently distributed to its stockholders. This deduction for dividends paid substantially eliminates the “double taxation” of corporate income (i.e., taxation at both the corporate and stockholder levels) that generally results from investment in a corporation. Rather, income generated by a REIT is generally taxed only at the stockholder level upon a distribution of dividends by the REIT.

Currently, most U.S. stockholders that are individuals, trusts, or estates are taxed on corporate dividends at a reduced maximum U.S. federal income tax rate. With limited exceptions, however, dividends received by stockholders from AIR or from other entities that are taxed as REITs will generally not be eligible for this rate and will be taxed at rates applicable to ordinary income. See “—Taxation of Stockholders—Taxation of Taxable U.S. Holders—Distributions.”

Any net operating losses, foreign tax credits, and other tax attributes of a REIT generally do not pass through to the stockholders of the REIT, subject to special rules for certain items such as capital gains recognized by REITs. See “—Taxation of Stockholders—Taxation of Taxable U.S. Holders—Distributions.”

If AIR qualifies as a REIT, it will nonetheless be subject to U.S. federal income tax in the following circumstances:

 

  1.

AIR will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including undistributed net capital gains.

 

  2.

A 100% excise tax may be imposed on some items of income and expense that are directly or constructively paid between AIR and its TRSs (as described below) if and to the extent that the IRS successfully asserts that the economic arrangements between AIR and its TRSs are not comparable to similar arrangements between unrelated third parties.

 

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  3.

If AIR has net income from prohibited transactions, which are, in general, sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax.

 

  4.

If AIR elects to treat property that it acquires in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” AIR may thereby avoid the 100% prohibited transactions tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate. AIR does not anticipate receiving any income from foreclosure property.

 

  5.

If AIR should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but nonetheless maintains its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on an amount based on the magnitude of the failure, adjusted to reflect the profit margin associated with AIR’s gross income.

 

  6.

If AIR should fail to satisfy the asset tests (other than certain de minimis violations) or other requirements applicable to REITs, as described below, and yet nonetheless maintains its qualification as a REIT because there is reasonable cause for the failure, and other applicable requirements are met, it may be subject to an excise tax. In that case, the amount of the tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the non-qualifying assets in question multiplied by the highest corporate tax rate if that amount exceeds $50,000 per failure.

 

  7.

If AIR should fail to distribute during each calendar year at least the sum of: (i) 85% of its REIT ordinary income for such year; (ii) 95% of its REIT capital gain net income for such year; and (iii) any undistributed net taxable income from prior periods, AIR will be required to pay a 4% excise tax on the excess of the required distribution over the sum of: (a) the amounts actually distributed; plus (b) retained amounts on which income tax was paid at the corporate level.

 

  8.

AIR may be required to pay monetary penalties to the IRS in certain circumstances, including if it fails to meet the record-keeping requirements intended to monitor its compliance with rules relating to the composition of a REIT’s stockholders, as described below in “—Requirements for Qualification—General.”

 

  9.

If AIR acquires appreciated assets from a corporation that is not a REIT (i.e., a subchapter C corporation) in a transaction in which the adjusted tax basis of the assets in the hands of AIR is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, AIR may be subject to tax on such appreciation at the highest U.S. federal corporate income tax rate then applicable if AIR subsequently recognizes gain on the disposition of any such assets during the five-year period following the acquisition of such assets from the subchapter C corporation.

 

  10.

The earnings of any AIR subsidiary that is taxed as a C corporation (including any TRS) will generally be subject to U.S. federal corporate income tax.

AIR and its subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, and foreign income taxes, property taxes, and other taxes on their assets and operations. AIR could also be subject to tax in situations and on transactions not presently contemplated.

Requirements for Qualification—General

The Code defines a REIT as a corporation, trust, or association:

 

  1.

that is managed by one or more trustees or directors;

 

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  2.

the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

 

  3.

that would be taxable as a domestic corporation but for its election to be subject to tax as a REIT;

 

  4.

that is neither a financial institution nor an insurance company subject to certain provisions of the Code;

 

  5.

the beneficial ownership of which is held by 100 or more persons;

 

  6.

in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include specified tax-exempt entities);

 

  7.

that meets other tests described below (including with respect to the nature of its income and assets); and

 

  8.

that makes an election to be taxed as a REIT for the current taxable year or has made such an election for a previous taxable year that has not been terminated or revoked.

The Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. AIR’s articles of incorporation will provide certain restrictions regarding transfers of its shares, which are intended to assist AIR in satisfying the share ownership requirements described in conditions (5) and (6) above. These restrictions, however, may not ensure that AIR will, in all cases, be able to satisfy the share ownership requirements described in (5) and (6) above.

To monitor AIR’s compliance with the share ownership requirements, AIR will generally be required to maintain records regarding the actual ownership of its shares. To do so, AIR must demand written statements each year from the record holders of certain percentages of its stock in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the dividends paid by AIR). A list of those persons failing or refusing to comply with this demand must be maintained as part of AIR’s records. Failure by AIR to comply with these record keeping requirements could subject it to monetary penalties. A stockholder who fails or refuses to comply with the demand is required by Treasury Regulations to submit a statement with its tax return disclosing the actual ownership of the shares and certain other information.

In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. AIR will satisfy this requirement.

Effect of Subsidiary Entities

Ownership of Partnership Interests. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT is deemed to own its proportionate share of the partnership’s assets and to earn its proportionate share of the partnership’s income for purposes of the asset and gross income tests applicable to REITs as described below, regardless of whether the REIT receives a distribution from the partnership. A REIT’s proportionate share of a partnership’s assets and income is based on its capital interest in the partnership (except that for purposes of the 10% value test, described below, a REIT’s proportionate share of the partnership’s assets is based on its proportionate interest in the equity and certain debt securities issued by the partnership). Similarly, the assets and gross income of the partnership are deemed to retain the same character in the hands of the REIT. Thus, AIR’s proportionate share of the assets and items of income of the Subsidiary Partnerships will be treated as assets and items of income of AIR for purposes of applying the REIT requirements described below.

Substantially all of AIR’s investments will be held indirectly through AIR OP. AIR will include in its income its proportionate share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of its “real estate investment trust taxable income.” Moreover, for purposes of the REIT asset tests, AIR will include its proportionate share of assets held by the Subsidiary Partnerships.

 

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AIR’s direct and indirect investment in partnerships will involve special tax considerations, including the possibility of a challenge by the IRS of the tax status of any of the Subsidiary Partnerships as a partnership for U.S. federal income tax purposes. If any of these entities were treated as an association for U.S. federal income tax purposes, it would be taxable as a corporation and therefore subject to an entity-level tax on its income. In such a situation, the character of AIR’s assets and items of gross income would change and could preclude AIR from satisfying the REIT asset tests and gross income tests (see “—Asset Tests” and “—Income Tests”) and in turn could prevent AIR from qualifying as a REIT unless AIR is eligible for relief from the violation pursuant to relief provisions described below (see “—Failure to Qualify”). In addition, any change in the status of any of the Subsidiary Partnerships for U.S. federal income tax purposes might be treated as a taxable event, in which case AIR might incur a tax liability without any related cash distributions.

If AIR were to be a limited partner or nonmanaging member in any partnership or limited liability company and such entity takes or expects to take actions that could jeopardize AIR’s status as a REIT or require AIR to pay tax, AIR may be forced to dispose of its interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action that could cause AIR to fail a gross income or asset test, and that AIR would not become aware of such action in time to dispose of its interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, AIR could fail to qualify as a REIT unless it were entitled to relief, as described below.

In addition, under the Code and the Treasury Regulations, income, gain, loss, and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for tax purposes in a manner such that the contributing partner is charged with, or benefits from the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of the unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a “Book-Tax Difference”). Such allocations are solely for U.S. federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. Where a partner contributes cash to a partnership at a time that the partnership holds appreciated (or depreciated) property, the Treasury Regulations provide for a similar allocation of these items to the other (i.e., noncontributing) partners. AIR OP has acquired properties in connection with its formation and subsequent thereto by way of contributions of appreciated property. Consequently, the partnership agreement requires allocations to be made in a manner consistent with these requirements. These rules apply to the contribution by AIR to AIR OP of the cash proceeds received in any offerings of its stock.

In general, a unitholder who has contributed appreciated property to AIR OP will be allocated reduced amounts of depreciation deductions for tax purposes and increased taxable income and gain on the sale by AIR OP or other Subsidiary Partnerships of the contributed properties. This will tend to eliminate the Book-Tax Difference over the depreciable life of the contributed property. However, these special allocations do not always entirely rectify the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. This could cause AIR (a) to be allocated lower depreciation deductions for tax purposes than would be allocated to it if all properties were to have a tax basis equal to their fair market value at the time of contribution and (b) to be allocated lower amounts of taxable loss in the event of a sale of interests in such contributed properties at a book loss, than the economic or book loss allocated to AIR as a result of such sale, with a corresponding benefit to the other partners in AIR OP. These allocations might adversely affect AIR’s ability to comply with the REIT distribution requirements, although AIR does not anticipate that this will occur. These allocations may also affect AIR’s earnings and profits for purposes of determining the portion of distributions taxable as dividend income. The application of these rules over time may result in a higher portion of distributions being taxed as dividends than would have occurred had AIR purchased interests in the properties at their agreed values.

With respect to any property purchased or to be purchased by any of the Subsidiary Partnerships (other than through the issuance of units) subsequent to the formation of AIR, such property initially will have a tax basis equal to its fair market value and the special allocation provisions described above will not apply.

 

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Finally, the rules applicable to U.S. federal income tax audits of partnerships (such as AIR OP) provide that, subject to certain exceptions, any audit adjustment to items of income, gain, loss, deduction, or credit of a partnership (and any partner’s distributive share thereof) is determined, and taxes, interest, or penalties attributable thereto are assessed and collected, at the partnership level. It is possible that these rules could result in AIR OP or other Subsidiary Partnerships in which AIR directly or indirect invests being required to pay additional taxes, interest, and penalties as a result of an audit adjustment, and AIR, as a direct or indirect partner of these partnerships, could be required to bear the economic burden of those taxes, interest, and penalties even though AIR, as a REIT, may not otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment.

Disregarded Subsidiaries. Most entities that will be wholly owned by AIR, including single member limited liability companies, will generally be disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT income and asset tests. In addition, AIR’s indirect interests in certain Subsidiary Partnerships will be held through wholly owned corporate subsidiaries that are organized and operated as “qualified REIT subsidiaries” within the meaning of the Code. A qualified REIT subsidiary is any corporation, other than a TRS as described below, that is wholly owned by a REIT, or by other disregarded subsidiaries, or by a combination of the two. If a REIT owns a qualified REIT subsidiary, that subsidiary is disregarded for U.S. federal income tax purposes, and all assets, liabilities, and items of income, deduction, and credit of the subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the REIT itself, including for purposes of the gross income and asset tests applicable to REITs as summarized below. Each qualified REIT subsidiary, therefore, will not be subject to U.S. federal corporate income taxation, although it may be subject to state or local taxation. Disregarded subsidiaries, along with partnerships in which AIR holds an equity interest, are sometimes referred to herein as “pass-through subsidiaries.”

In the event that a disregarded subsidiary of AIR ceases to be wholly owned—for example, if any equity interest in the subsidiary is acquired by a person other than AIR or another disregarded subsidiary of AIR—the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, it would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect AIR’s ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation. See “—Asset Tests” and “—Income Tests.”

Subsidiary REITs. AIR will own interests in one or more corporations that have elected to be taxed as REITs. Provided that each such entity qualifies as a REIT, AIR’s interest in the entity will be treated as a qualifying real estate asset for purposes of the REIT asset tests and any dividend income or gains derived by AIR from such entity will generally be treated as income that qualifies for purposes of the REIT gross income tests. To qualify as a REIT, each such entity will need to independently satisfy the various REIT qualification requirements described in this summary. If such an entity were to fail to qualify as a REIT, and certain relief provisions do not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax. In addition, a failure of the entity to qualify as a REIT would have an adverse effect on AIR’s ability to comply with the REIT income and asset tests, and thus its ability to qualify as a REIT.

Taxable REIT Subsidiaries. A REIT, in general, may jointly elect with a subsidiary corporation, whether or not wholly owned (including a corporation owned by AIR OP), to treat such subsidiary corporation as a TRS. A TRS also includes any corporation, other than a REIT, with respect to which a TRS owns securities possessing 35% of the total voting power or total value of the outstanding securities of such corporation. The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for U.S. federal income tax purposes. As a result, a parent REIT is not treated as holding the assets of a TRS or as receiving any income that the TRS earns. Rather, the stock issued by the TRS is an asset in the hands of the parent REIT, and the REIT recognizes as income the dividends, if any, that it receives from the subsidiary. This treatment can affect the income and asset test calculations that apply to the REIT, as described below. Because a parent REIT does not include the assets and income of such subsidiary corporations in determining the

 

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parent’s compliance with the REIT requirements, such entities may be used by the parent REIT to indirectly undertake activities that the REIT rules might otherwise preclude it from doing directly or through pass-through subsidiaries (for example, activities that give rise to certain categories of income such as management fees or foreign currency gains).

Certain of AIR’s operations (including certain of its property management, asset management, and risk management activities) will be conducted through its TRSs. Because AIR will not be required to include the assets and income of such TRSs in determining AIR’s compliance with the REIT requirements, AIR will use its TRSs to facilitate its ability to offer services and activities to its tenants that are not generally considered as qualifying REIT services and activities. If AIR fails to properly structure and provide such nonqualifying services and activities through its TRSs, its ability to satisfy the REIT gross income requirement, and also its REIT status, may be jeopardized.

A TRS may generally engage in any business except the operation or management of a lodging or health care facility. If any of AIR’s TRSs were deemed to operate or manage a health care or lodging facility, they would fail to qualify as TRSs, and AIR would fail to qualify as a REIT. AIR believes that none of its TRSs will operate or manage any health care or lodging facilities. However, there can be no assurance that the IRS will not contend that any of AIR’s TRSs operate or manage a health care or lodging facility, disqualifying it from treatment as a TRS, and thereby resulting in the disqualification of AIR as a REIT.

Several provisions of the Code regarding arrangements between a REIT and a TRS seek to ensure that a TRS will be subject to an appropriate level of U.S. federal income taxation. For example, a TRS is limited in its ability to deduct interest payments made to its REIT owner. In addition, AIR would be obligated to pay a 100% penalty tax on certain payments that it receives from, or on certain expenses deducted by, a TRS if the IRS were to successfully assert that the economic arrangements between AIR and the TRS were not comparable to similar arrangements among unrelated third parties.

A portion of the amounts to be used to fund distributions to stockholders may come from distributions made by AIR’s TRSs to AIR OP and interest paid by the TRSs on certain notes held by AIR OP. In general, TRSs pay U.S. federal, state, and local income taxes on their taxable income at normal corporate rates. Any U.S. federal, state, or local income taxes that AIR’s TRSs are required to pay will reduce AIR’s cash flow from operating activities and its ability to make payments to holders of its securities.

Income Tests

To maintain qualification as a REIT, AIR must annually satisfy two gross income requirements:

 

  •  

First, at least 75% of AIR’s gross income for each taxable year, excluding gross income from sales of inventory or dealer property in “prohibited transactions,” discharge of indebtedness, and certain hedging transactions, generally must be derived from “rents from real property,” dividends received from other REITs, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as specified income from temporary investments.

 

  •  

Second, at least 95% of AIR’s gross income for each taxable year, excluding gross income from prohibited transactions, discharge of indebtedness, and certain hedging transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gains from the sale or disposition of stock or securities, which need not have any relation to real property. Income and gain from certain hedging transactions will be excluded from both the numerator and the denominator for purposes of both the 75% and 95% gross income tests.

Rents received by AIR directly or through the Subsidiary Partnerships will qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met. If rent

 

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is partly attributable to personal property leased in connection with a lease of real property, the portion of the total rent attributable to the personal property will not qualify as “rents from real property” unless it constitutes 15% or less of the total rent received under the lease. In addition, the amount of rent must not be based in whole or in part on the income or profits of any person. Amounts received or accrued as rent, however, generally will not be excluded from rents from real property solely by reason of being based on fixed percentages of gross receipts or sales. Also, neither AIR nor an actual or constructive owner of 10% or more of AIR’s stock may actually or constructively own 10% or more of the interests in the assets or net profits of a non-corporate tenant, or, if the tenant is a corporation, 10% or more of the total combined voting power of all classes of stock entitled to vote, or 10% or more of the total value of all classes of stock of the tenant. Rents AIR receives from such a tenant that is a TRS of AIR’s, however, will not be excluded from the definition of “rents from real property” as a result of this condition if at least 90% of the leased space at the property to which the rents relate is leased to third parties, and the rents paid by the TRS are substantially comparable to rents paid by AIR’s other tenants for comparable space. Whether rents paid by a TRS are substantially comparable to rents paid by other tenants is determined at the time the lease with the TRS is entered into, extended, and modified, if such modification increases the rents due under such lease. Notwithstanding the foregoing, however, if a lease with a “controlled TRS” is modified and such modification results in an increase in the rents payable by such TRS, any such increase will not qualify as “rents from real property.” For purposes of this rule, a “controlled TRS” is a TRS in which the parent REIT owns stock possessing more than 50% of the voting power or more than 50% of the total value of the outstanding stock of such TRS.

Moreover, AIR generally must not operate or manage a property (subject to certain exceptions) or furnish or render services to the tenants of such property, other than through an “independent contractor” from which AIR derives no revenue. AIR and its affiliates will be permitted, however, to directly perform services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, AIR and its affiliates may directly or indirectly provide non-customary services to tenants of its properties without disqualifying all of the rent from the property if the payments for such services do not exceed 1% of the total gross income from the property. For purposes of this test, the income received from such non-customary services will be deemed to be at least 150% of the direct cost of providing the services. Moreover, AIR will generally be permitted to provide services to tenants or others through a TRS without disqualifying the rental income received from tenants for purposes of the REIT income requirements. AIR believes that substantially all of the services it will render at its properties will be of the type that are usually or customarily performed in connection with the rental of space and will not be primarily for the benefit or convenience of its tenants. Therefore, AIR believes that its provision of these services will not cause rents received with respect to its properties to fail to qualify as “rents from real property.” Subject to AIR’s ability to provide a de minimis amount of non-customary services to tenants, AIR intends to cause services that are not “usually or customarily rendered,” or that are for the benefit of a particular tenant in connection with the rental of real property, to be provided through a TRS or through an “independent contractor.” However, no assurance can be given that the IRS will concur with AIR’s determination as to whether a particular service is usual or customary, or otherwise in this regard.

Any income or gain derived by AIR directly or through its Subsidiary Partnerships from instruments that hedge certain risks, such as the risk of changes in interest rates, will be excluded from gross income for purposes of both the 75% and 95% gross income tests; provided that specified requirements are met, including the requirement that the instrument is entered into during the ordinary course of AIR’s business and that the instrument is properly identified as a hedge along with the risk that it hedges within prescribed time periods. Income and gain from all other hedging transactions will not be qualifying income for either the 95% or 75% gross income test. See “—Derivatives and Hedging Transactions.”

If AIR fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for the year if it is entitled to relief under certain provisions of the Code. These relief provisions will generally be available if AIR’s failure to meet these tests was due to reasonable cause and not due to willful neglect, and AIR attaches a schedule of the sources of its income to its tax return. It is not

 

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possible to state whether AIR would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving AIR, AIR will not qualify as a REIT. Even where these relief provisions apply, the Code imposes a tax based upon the amount by which AIR fails to satisfy the particular gross income test.

Asset Tests

AIR, at the close of each calendar quarter of its taxable year, must also satisfy five tests relating to the nature of its assets.

 

  (1)

First, at least 75% of the value of the total assets of AIR must be represented by some combination of “real estate assets,” cash, cash items, U.S. government securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, “real estate assets” include interests in real property, such as land, buildings, leasehold interests in real property, stock of other corporations that qualify as REITs, some kinds of mortgage backed securities, and mortgage loans and debt instruments (whether or not secured by real property) that are issued by a “publicly offered REIT” (i.e., a REIT that is required to file annual and periodic reports with the SEC under the Exchange Act). Assets that do not qualify for purposes of the 75% asset test are subject to the additional asset tests described below.

 

  (2)

Second, the value of any one issuer’s securities owned by AIR may not exceed 5% of the value of AIR’s total assets.

 

  (3)

Third, AIR may not own more than 10% of any one issuer’s outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to securities of TRSs or qualified REIT subsidiaries, and the value prong of the 10% asset test does not apply to “straight debt” having specified characteristics and to certain other securities described below. Solely for purposes of the 10% value test, the determination of its interest in the assets of a partnership in which AIR owns an interest will be based on its proportionate interest in the equity and certain debt securities issued by the partnership.

 

  (4)

Fourth, the aggregate value of all securities of TRSs held by AIR may not exceed 20% of the value of AIR’s total assets.

 

  (5)

Fifth, no more than 25% of the value of AIR’s total assets may be represented by “nonqualified publicly offered REIT debt instruments” (i.e., real estate assets that would cease to be real estate assets if debt instruments issued by publicly offered REITs were not included in the definition of real estate assets).

Notwithstanding the general rule, as noted above, that for purposes of the REIT income and asset tests, AIR will be treated as owning its proportionate share of the underlying assets of a subsidiary partnership, if it holds indebtedness issued by a partnership, the indebtedness will be subject to, and may cause a violation of, the asset tests unless the indebtedness is a qualifying mortgage asset, or other conditions, described below, are met. Similarly, although stock of another REIT is a qualifying asset for purposes of the REIT asset tests, any non-mortgage debt that is issued by a non-publicly offered REIT may not so qualify (such debt, however, will not be treated as a “security” for purposes of the 10% value test, as explained below).

Certain securities will not cause a violation of the 10% value test described above. Such securities include instruments that constitute “straight debt,” which term generally excludes, among other things, securities having contingency features. A security does not qualify as “straight debt” where a REIT (or a controlled TRS of the REIT) owns other securities of the same issuer that do not qualify as straight debt, unless the value of those other securities constitute, in the aggregate, 1% or less of the total value of that issuer’s outstanding securities. In addition to straight debt, the Code provides that certain other securities will not violate the 10% asset value test. Such securities include: (i) any loan made to an individual or an estate; (ii) certain rental agreements pursuant to

 

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which one or more payments are to be made in subsequent years (other than agreements between a REIT and certain persons related to the REIT under attribution rules); (iii) any obligation to pay rents from real property; (iv) securities issued by governmental entities that are not dependent in whole or in part on the profits of (or payments made by) a non-governmental entity; (v) any security (including debt securities) issued by another REIT; and (vi) any debt instrument issued by a partnership if the partnership’s income is of a nature that it would satisfy the 75% gross income test described above under “—Income Tests.” In applying the 10% value test, a debt security issued by a partnership is not taken into account to the extent, if any, of the REIT’s proportionate interest in that partnership.

AIR believes that its holdings of securities and other assets will comply with the foregoing REIT asset requirements, and it intends to monitor compliance on an ongoing basis. Generally, independent appraisals have not been obtained to support AIR’s conclusions as to the value of its assets, including AIR OP’s total assets and the value of AIR OP’s interest in the TRSs. Moreover, values of some assets may not be susceptible to a precise determination, and values are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements. Accordingly, there can be no assurance that the IRS will not contend that AIR’s interests in its subsidiaries or in the securities of other issuers will cause a violation of the REIT asset requirements and loss of REIT status.

Certain relief provisions are available to allow REITs to satisfy the asset requirements or to maintain REIT qualification notwithstanding certain violations of the asset tests and other requirements. One such provision allows a REIT that fails one or more of the asset tests to nevertheless maintain its REIT qualification if: (a) it provides the IRS with a description of each asset causing the failure; (b) the failure is due to reasonable cause and not willful neglect; (c) the REIT pays a tax equal to the greater of (i) $50,000 per failure and (ii) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate; and (d) the REIT either disposes of the assets causing the failure within six months after the last day of the quarter in which it identifies the failure or otherwise satisfies the relevant asset tests within that time frame.

A second relief provision contained in the Code applies to de minimis violations of the 10% and 5% asset tests. A REIT may maintain its qualification despite a violation of such requirements if (a) the value of the assets causing the violation do not exceed the lesser of 1% of the REIT’s total assets and $10,000,000, and (b) either (i) the REIT disposes of the assets causing the failure within six months after the last day of the quarter in which it identifies the failure or (ii) the relevant tests are otherwise satisfied within that time frame.

If AIR should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause AIR to lose its REIT status if (1) AIR satisfied the asset tests at the close of the preceding calendar quarter and (2) the discrepancy between the value of its assets and the asset test requirements was not wholly or partly caused by an acquisition of non-qualifying assets but instead arose from changes in the market value of its assets. If the condition described in (2) were not satisfied, AIR still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which the discrepancy arose. No assurance can be given that AIR would qualify for relief under these provisions.

Annual Distribution Requirements

For AIR to qualify as a REIT, AIR will be required to distribute dividends, other than capital gain dividends, to its stockholders in an amount at least equal to:

 

  •  

the sum of:

 

  •  

90% of AIR’s “real estate investment trust taxable income,” computed without regard to the deduction for dividends paid and net capital gain of AIR, and

 

  •  

90% of AIR’s net income, if any, (after tax) from foreclosure property (as described below); minus

 

  •  

the sum of specified items of non-cash income.

 

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These distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before AIR timely files its tax return for the year and if paid with or before the first regular dividend payment after such declaration. In addition, any dividend declared in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month will be treated as both paid by AIR and received by the stockholder on December 31 of such year, so long as the dividend is actually paid by AIR before the end of January of the next calendar year. If AIR ceases to be a “publicly offered REIT,” then in order for distributions to be counted as satisfying the annual distribution requirement, and to give rise to a tax deduction by AIR, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if it is pro rata among all outstanding shares of stock within a particular class and is in accordance with the preferences among different classes of stock as will be set forth in AIR’s organizational documents.

To the extent that AIR distributes at least 90%, but less than 100%, of its “real estate investment trust taxable income,” as adjusted, it will be subject to tax thereon at ordinary corporate tax rates. In any year, AIR may elect to retain, rather than distribute, its net long-term capital gain and pay tax on such gain. In such a case, AIR’s stockholders would include their proportionate share of such undistributed long-term capital gain in income and receive a corresponding credit for their share of the tax paid by AIR. AIR’s stockholders would then increase the adjusted basis of their AIR shares by the difference between the designated amounts included in their income as long-term capital gains and the tax deemed paid with respect to their shares.

To the extent that a REIT has available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that it must make in order to comply with the REIT distribution requirements. Such losses, however, will generally not affect the character, in the hands of stockholders, of any distributions that are actually made by the REIT, which are generally taxable to stockholders to the extent that the REIT has current or accumulated earnings and profits. See “—Taxation of Stockholders—Taxation of Taxable U.S. Holders—Distributions.”

If AIR should fail to distribute during each calendar year at least the sum of:

 

  •  

85% of its REIT ordinary income for such year;

 

  •  

95% of its REIT capital gain net income for such year (excluding retained net capital gain); and

 

  •  

any undistributed taxable income from prior periods.

AIR would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed plus (y) the amounts of income retained on which AIR has paid U.S. federal corporate income tax.

It is possible that AIR, from time to time, may not have sufficient cash to meet the distribution requirements due to timing differences between (i) the actual receipt of cash (including receipt of distributions from AIR OP) and (ii) the inclusion of certain items in income by AIR for U.S. federal income tax purposes. In the event that such timing differences occur, in order to meet the distribution requirements AIR may find it necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable in-kind distributions of property. Alternatively, AIR can declare a taxable dividend payable in cash or stock at the election of each stockholder, where the aggregate amount of cash and/or stock to be distributed in such dividend may be subject to limitation. In such case, for U.S. federal income tax purposes, taxable stockholders receiving such dividends will be required to include the full amount of the dividend in income to the extent of AIR’s current and accumulated earnings and profits.

Under certain circumstances, AIR may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in AIR’s deduction for dividends paid for the earlier year. In this case, AIR may be able to avoid losing its REIT status or being taxed on amounts distributed as deficiency dividends; however, AIR will be required to pay interest based on the amount of any deduction taken for deficiency dividends.

 

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Prohibited Transactions

Net income derived by a REIT from a prohibited transaction is subject to a 100% excise tax. The term “prohibited transaction” generally includes a sale or other disposition of property (other than foreclosure property) that is held as inventory or primarily for sale to customers in the ordinary course of a trade or business. AIR intends to conduct its operations so that no asset owned by AIR or its pass-through subsidiaries will be treated as, or as having been, held as inventory or for sale to customers, and that a sale of any such asset will not be in the ordinary course of AIR’s business. Whether property is held as inventory or “primarily for sale to customers in the ordinary course of a trade or business” depends, however, on the particular facts and circumstances. No assurance can be given that no property sold by AIR will be treated as inventory or as property held for sale to customers or that AIR can comply with certain safe-harbor provisions of the Code that would prevent the imposition of the 100% excise tax. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates.

Foreclosure Property

Foreclosure property is real property and any personal property incident to such real property (i) that AIR acquires as the result of having bid in the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after a default (or upon imminent default) on a lease of the property or a mortgage loan held by AIR and secured by the property; (ii) for which AIR acquired the related loan or lease at a time when default was not imminent or anticipated; and (iii) with respect to which AIR made a proper election to treat the property as foreclosure property. AIR generally will be subject to tax at the maximum corporate rate on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property.

Derivatives and Hedging Transactions

AIR may enter into hedging transactions with respect to interest rate exposure on one or more of its assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. Except to the extent provided by Treasury Regulations, any income from a hedging transaction (including gain from the sale, disposition, or termination of a position in such a transaction) will not constitute gross income for purposes of the 75% or 95% gross income test if AIR properly identifies the transaction as specified in applicable Treasury Regulations and AIR enters into such transaction (i) in the normal course of AIR’s business primarily to manage risk of interest rate changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets; (ii) primarily to manage risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests; or (iii) in connection with the extinguishment of indebtedness with respect to which AIR has entered into a qualified hedging position described in the foregoing clause (i) or the disposition of property with respect to which AIR entered into a qualified hedging position described in the foregoing clause (ii), primarily to manage the risks of such hedging positions. To the extent that AIR enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the 75% and 95% gross income tests. AIR intends to structure any hedging transactions in a manner that will not jeopardize its qualification as a REIT. AIR may conduct some or all of its hedging activities (including hedging activities relating to currency risk) through a TRS or other corporate entity, the income from which may be subject to U.S. federal income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries. No assurance can be given, however, that AIR’s hedging activities will not give rise to income that does not qualify for purposes of either or both of the REIT

 

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gross income tests, or that AIR’s hedging activities will not adversely affect its ability to satisfy the REIT qualification requirements.

Penalty Tax

Any redetermined rents, redetermined deductions, excess interest, or redetermined TRS service income that AIR or its TRSs generate will be subject to a 100% penalty tax. In general, redetermined rents are rents from real property that are overstated as a result of any services furnished to any of AIR’s tenants by a TRS, redetermined deductions and excess interest represent any amounts that are deducted by a TRS for amounts paid to AIR that are in excess of the amounts that would have been deducted based on arm’s-length negotiations, and redetermined TRS service income is income of a TRS attributable to services provided to, or on behalf of, AIR (other than services furnished or rendered to a customer of AIR’s) to the extent such income is lower than the income the TRS would have earned based on arm’s-length negotiations. Rents that AIR receives will not constitute redetermined rents if they qualify for certain safe harbor provisions contained in the Code.

AIR believes that the fees paid to its TRSs for tenant services will be comparable to the fees that would be paid to an unrelated third party negotiating at arm’s-length. This determination, however, is inherently factual, and the IRS may assert that the fees paid by AIR do not represent arm’s-length amounts. If the IRS successfully made such an assertion, AIR would be required to pay a 100% penalty tax on the excess of an arm’s-length fee for tenant services over the amount actually paid.

Failure to Qualify

If AIR fails to satisfy one or more requirements for REIT qualification other than the income or asset tests, AIR could avoid disqualification if the failure is due to reasonable cause and not to willful neglect, and AIR pays a penalty of $50,000 for each such failure. Relief provisions are available for failures of the income tests and asset tests, as described above in “—Income Tests” and “—Asset Tests.”

If AIR fails to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, AIR will be subject to tax on its taxable income at regular corporate rates. Distributions to stockholders in any year in which AIR fails to qualify will not be deductible by AIR nor will they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders that are individuals will generally be taxable at the preferential income tax rates for qualified dividends. In addition, subject to the limitations of the Code, corporate distributees may be eligible for the dividends received deduction.

Unless AIR is entitled to relief under specific statutory provisions, AIR would also be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether, in all circumstances, AIR would be entitled to this statutory relief. The rule against re-electing REIT status following a loss of such status could also apply to us or a REIT subsidiary of ours if it were determined that Aimco failed to qualify as a REIT for certain taxable years and we or our REIT subsidiaries were treated as a successor to any such entity for U.S. federal income tax purposes. Although Aimco, in the Separation Agreement, will covenant to use its reasonable best efforts to maintain the REIT status of Aimco and its REIT subsidiaries for each taxable year ending on or before December 31, 2021 (unless Aimco obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that such failure to maintain REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above), no assurance can be given that such covenant would prevent us from failing to qualify as a REIT. Although, in the event of a breach, we may be able to seek damages from Aimco, there can be no assurance that such damages, if any, would appropriately compensate us. In addition, if Aimco or any of the relevant subsidiaries were to fail to qualify as a REIT despite its reasonable best efforts, we would have no claim against Aimco. If we fail to qualify as a REIT due to a predecessor’s failure to qualify as a REIT, we would be subject to corporate income tax as described in the preceding paragraph.

 

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Taxation of Stockholders

Taxation of Taxable U.S. Holders

As used herein, the term “U.S. Holder” means a holder of AIR’s stock who for U.S. federal income tax purposes is:

 

  1.

an individual who is a citizen or resident of the United States;

 

  2.

a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, or of any state thereof, or the District of Columbia;

 

  3.

an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or

 

  4.

a trust if (i) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust, or (ii) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

Distributions. Provided that AIR qualifies as a REIT, distributions made to AIR’s U.S. Holders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will generally be taken into account by stockholders as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, dividends received from REITs are not eligible for taxation at the preferential income tax rates for qualified dividends received by U.S. Holders that are individuals, trusts, and estates from taxable C corporations. Such U.S. Holders, however, are taxed at the preferential rates on dividends designated by and received from REITs to the extent that the dividends are attributable to: (i) income retained by the REIT in the prior taxable year on which the REIT was subject to corporate level income tax (less the amount of tax); (ii) dividends received by the REIT from TRSs or other taxable C corporations; or (iii) income in the prior taxable year from the sales of “built-in gain” property acquired by the REIT from C corporations in carryover basis transactions (less the amount of corporate tax on such income).

In addition, for taxable years that begin after December 31, 2017, and before January 1, 2026, stockholders that are individuals, trusts, or estates are generally entitled to a deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT (not including capital gain dividends, as described below, or dividends eligible for reduced rates applicable to qualified dividend income, as described above), subject to certain limitations.

Distributions that are designated as capital gain dividends will generally be taxed to U.S. Holders as long-term capital gains, to the extent that such distributions do not exceed AIR’s actual net capital gain for the taxable year, without regard to the period for which the U.S. Holder that receives such distribution has held its stock. However, corporate U.S. Holders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Long-term capital gains are generally taxable at reduced maximum U.S. federal rates in the case of stockholders that are individuals, trusts, or estates, and ordinary income rates in the case of stockholders that are corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for taxpayers who are taxed as individuals, to the extent of previously claimed depreciation deductions. AIR may elect to retain, rather than distribute, some or all of its net long-term capital gains and pay taxes on such gains. In this case, AIR could elect for its stockholders to include their proportionate shares of such undistributed long-term capital gains in income, and to receive a corresponding credit for their share of the tax that AIR pays. AIR’s stockholders would increase the adjusted basis of their stock by the difference between (i) the amounts of capital gain dividends that AIR designated and that they include in their taxable income, minus (ii) the tax that AIR paid on their behalf with respect to that income. See “—Taxation of AIR—Annual Distribution Requirements.”

 

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Distributions in excess of current and accumulated earnings and profits will not be taxable to a U.S. Holder to the extent that they do not exceed the adjusted basis of the U.S. Holder’s shares in respect of which the distributions were made, but rather will reduce the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a U.S. Holder’s shares, they will be included in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. In addition, any dividend declared by AIR in October, November, or December of any year, and payable to a U.S. Holder of record on a specified date in any such month, will be treated as both paid by AIR and received by the U.S. Holder on December 31 of such year; provided that the dividend is actually paid by AIR before the end of January of the following calendar year.

To the extent that a REIT has available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that must be made in order to comply with the REIT distribution requirements. See “—Taxation of AIR—Annual Distribution Requirements.” Such losses, however, are not passed through to stockholders and do not offset income of stockholders from other sources, nor would they affect the character of any distributions that are actually made by a REIT, which are generally subject to tax in the hands of stockholders to the extent that the REIT has current or accumulated earnings and profits.

Dispositions of AIR Common Stock. A U.S. Holder will realize gain or loss upon the sale, redemption, or other taxable disposition of AIR Common Stock in an amount equal to the difference between the sum of the fair market value of any property and cash received in such disposition and the U.S. Holder’s adjusted tax basis in the stock at the time of the disposition. In general, capital gains recognized by individuals upon the sale or disposition of shares of AIR Common Stock will be subject to a taxation at long-term capital gains rates if the AIR Common Stock is held for more than 12 months and will be taxed at ordinary income rates if the AIR Common Stock is held for 12 months or less. Gains recognized by U.S. Holders that are corporations are currently subject to U.S. federal income tax at ordinary income rates, whether or not classified as long-term capital gains. Capital losses recognized by a U.S. Holder upon the disposition of AIR Common Stock held for more than one year at the time of disposition will be considered long-term capital losses and are generally available only to offset capital gain income of the U.S. Holder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of AIR Common Stock by a U.S. Holder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from AIR that are required to be treated by the U.S. Holder as long-term capital gain.

If an investor recognizes a loss upon a subsequent disposition of stock or other securities of AIR in an amount that exceeds a prescribed threshold, it is possible that the provisions of the Treasury Regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss generating transaction to the IRS. While these Treasury Regulations are directed towards “tax shelters,” they are written quite broadly and apply to transactions that would not typically be considered tax shelters. In addition, the Code imposes penalties for failure to comply with these requirements. Prospective investors should consult their tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of stock or securities of AIR or transactions that might be undertaken directly or indirectly by AIR. Moreover, prospective investors should be aware that AIR and other participants in the transactions involving AIR (including their advisors) might be subject to disclosure or other requirements pursuant to these Treasury Regulations.

Taxation of Non-U.S. Holders

The following is a summary of certain anticipated U.S. federal income and estate tax considerations for the ownership and disposition of AIR Common Stock applicable to Non-U.S. stockholders. The discussion is based on current law, is for general information only and addresses only selected, and not all, aspects of U.S. federal income and estate taxation relevant to Non-U.S. Holders.

Ordinary Dividends. The portion of distributions received by Non-U.S. Holders that is: (i) payable out of AIR’s earnings and profits; (ii) not attributable to capital gains of AIR; and (iii) not effectively connected with a

 

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U.S. trade or business of the Non-U.S. Holder, will be subject to U.S. withholding tax at the rate of 30% (unless reduced by an applicable tax treaty and the Non-U.S. Holder provides appropriate documentation regarding its eligibility for treaty benefits). In general, Non-U.S. Holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of AIR Common Stock. In cases where the dividend income from a Non-U.S. Holder’s investment in AIR Common Stock is, or is treated as, effectively connected with the Non-U.S. Holder’s conduct of a U.S. trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at graduated rates, in the same manner as domestic stockholders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the Non-U.S. Holder. The income may also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder that is a corporation.

Non-Dividend Distributions. Unless AIR Common Stock constitutes a USRPI within the meaning of FIRPTA, distributions by AIR that are not payable out of AIR’s earnings and profits will not be subject to U.S. income tax. If it cannot be determined at the time at which a distribution is made whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the Non-U.S. Holder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of current and accumulated earnings and profits of AIR. If AIR Common Stock constitutes a USRPI, distributions by AIR in excess of the sum of its earnings and profits plus the stockholder’s basis in its AIR Common Stock will be taxed under FIRPTA at the rate of tax, including any applicable capital gains rates, that would apply to a domestic stockholder of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax will be enforced by withholding at a rate of 15% of the amount by which the distribution exceeds the stockholder’s share of AIR’s earnings and profits.

Capital Gain Dividends. Under FIRPTA, a distribution made by AIR to a Non-U.S. Holder, to the extent attributable to USRPI Capital Gains, will, except as described below, be considered effectively connected with a U.S. trade or business of the Non-U.S. Holder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations, without regard to whether the distribution is designated as a capital gain dividend. In addition, AIR will be required to withhold tax equal to 21% of the maximum amount that could have been designated as a USRPI Capital Gains dividend. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a Non-U.S. Holder that is a corporation. A distribution is not a USRPI Capital Gain dividend if AIR held an interest in the underlying asset solely as a creditor. Capital gain dividends received by a Non-U.S. Holder that are attributable to dispositions by AIR of assets other than USRPIs will generally not be subject to U.S. federal income or withholding tax, unless: (i) the gain is effectively connected with the Non-U.S. Holder’s U.S. trade or business, in which case the Non-U.S. Holder would be subject to the same treatment as U.S. Holders with respect to such gain; or (ii) the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the Non-U.S. Holder will incur a 30% tax on his capital gains.

A capital gain dividend by AIR that would otherwise have been treated as a USRPI Capital Gain will not be so treated or be subject to FIRPTA, will generally not be treated as income that is effectively connected with a U.S. trade or business, and will instead be treated in the same manner as an ordinary dividend from AIR (see “—Taxation of Non-U.S. Holders—Ordinary Dividends”); provided that: (1) the capital gain dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the United States, and (2) the recipient Non-U.S. Holder does not own more than 10% of that class of stock at any time during the one-year period ending on the date on which the capital gain dividend is received. AIR anticipates that its stock will be “regularly traded” on an established securities market.

Dispositions of AIR Common Stock. Unless AIR Common Stock constitutes a USRPI, a sale of AIR Common Stock by a Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The stock will be treated as a USRPI if 50% or more of AIR’s assets throughout a prescribed testing period consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. Even if the foregoing test is met, AIR Common Stock nonetheless will not

 

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constitute a USRPI if AIR is a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT, less than 50% of the value of which is held directly or indirectly by Non-U.S. Holders at all times during a specified testing period (after applying certain presumptions regarding the ownership of AIR Common Stock, as described in the Code). AIR believes that it will be a domestically controlled qualified investment entity. If AIR is and continues to be a domestically controlled qualified investment entity, the sale of AIR Common Stock should not be subject to taxation under FIRPTA. No assurance can be given that AIR will be a domestically controlled qualified investment entity.

In the event that AIR does not constitute a domestically controlled qualified investment entity, but AIR’s stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, a Non-U.S. Holder’s sale of AIR Common Stock nonetheless would not be subject to tax under FIRPTA as a sale of a USRPI; provided that the selling Non-U.S. Holder held 10% or less of such class of AIR’s outstanding stock at all times during a prescribed statutory testing period.

If gain on the sale of stock of AIR were subject to taxation under FIRPTA, the Non-U.S. Holder would be required to file a U.S. federal income tax return and would be subject to the same treatment as a U.S. stockholder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals, and the purchaser of the stock could be required to withhold 15% of the purchase price and remit such amount to the IRS.

Gain from the sale of AIR Common Stock that would not otherwise be subject to taxation under FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder’s investment in the AIR Common Stock is effectively connected with a U.S. trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the same treatment as a domestic stockholder with respect to such gain, and a Non-U.S. Holder that is a corporation may also be subject to a 30% branch profits tax (unless reduced or eliminated by treaty); or (ii) if the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

In addition, even if AIR is and continues to be a domestically controlled qualified investment entity, upon disposition of AIR Common Stock, a Non-U.S. Holder may be treated as having capital gain from the sale or exchange of a USRPI if the Non-U.S. Holder: (i) disposes of its AIR Common Stock within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been treated as gain from the sale or exchange of a USRPI; and (ii) acquires, or enters into a contract or option to acquire, other shares of AIR Common Stock within 61 days of the first day of the 30-day period described in (i) above, unless such Non-U.S. Holder held 5% or less of our stock at all times during the one-year period ending on the distribution date.

Special FIRPTA Rules. There are certain exemptions from FIRPTA for particular types of foreign investors, including “qualified foreign pension funds” and their wholly owned foreign subsidiaries, and certain widely held, publicly traded “qualified collective investment vehicles.”

Estate Tax. AIR Common Stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the United States at the time of such individual’s death will be includable in the individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and may therefore be subject to U.S. federal estate tax.

Taxation of Tax-Exempt Stockholders

Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. However, they are subject to taxation on their UBTI. While many investments in real estate may generate UBTI, the IRS has ruled that

 

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dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt stockholder has not held its AIR Common Stock as “debt financed property” within the meaning of the Code (i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt stockholder), and (2) the AIR Common Stock is not otherwise used in an unrelated trade or business, AIR believes that distributions from AIR and income from the sale of the AIR Common Stock generally should not give rise to UBTI to a tax-exempt stockholder.

Tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under sections 501(c)(7), (c)(9), (c)(17), and (c)(20) of the Code are subject to different UBTI rules, which will generally require such stockholders to characterize distributions from AIR as UBTI.

In certain circumstances, a pension trust that owns more than 10% of AIR’s stock could be required to treat a percentage of the dividends as UBTI if AIR is a “pension-held REIT.” AIR will not be a pension-held REIT unless: (1) it is required to “look through” one or more of its pension trust stockholders in order to satisfy the REIT “closely-held” test; and (2) either (i) one pension trust owns more than 25% of the value of AIR’s stock, or (ii) one or more pension trusts, each individually holding more than 10% of the value of AIR’s stock, collectively owns more than 50% of the value of AIR’s stock. Certain restrictions on ownership and transfer of AIR’s stock generally should prevent a tax-exempt entity from owning more than 10% of the value of AIR’s stock and generally should prevent AIR from becoming a pension-held REIT.

Other Tax Considerations

Legislative or Other Actions Affecting REITs

The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time. The REIT rules are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, which may result in statutory changes as well as revisions to regulations and interpretations. Holders are urged to consult with their tax advisors with respect to the status of legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in AIR Common Stock.

Medicare 3.8% Tax on Investment Income

Certain U.S. Holders who are individuals, estates, or trusts, and whose income exceeds certain thresholds, are required to pay a 3.8% Medicare tax on their “net investment income,” which will include dividends received from AIR and capital gains from the sale or other disposition of AIR Common Stock.

Foreign Account Tax Compliance Act

Withholding at a rate of 30% generally will be required on dividends made in respect of AIR Common Stock held by or through certain foreign financial institutions (including investment funds), unless such institution (i) enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, and the accounts maintained by, the institution held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons, and to withhold on certain payments, or (ii) complies with the terms of an intergovernmental agreement between the United States and an applicable foreign country. Accordingly, the entity through which AIR Common Stock is held will affect the determination of whether such withholding is required. Similarly, dividends made in respect of AIR Common Stock held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which the

 

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applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury Regulations or other guidance, may modify these requirements. AIR will not pay any additional amounts to stockholders in respect of any amounts withheld. Non-U.S. Holders are encouraged to consult their tax advisors regarding the possible implications of these withholding taxes on their investment in AIR Common Stock.

State, Local and Foreign Taxes

AIR, AIR OP, and AIR Common Stock holders may be subject to state, local, or foreign taxation in various jurisdictions, including those in which it or they transact business, own property, or reside. It should be noted that AIR OP owns properties located in a number of states and local jurisdictions and may be required to file income tax returns in some or all of those jurisdictions. The state, local, or foreign tax treatment of AIR OP, AIR, and AIR Common Stock holders may not conform to the U.S. federal income tax consequences discussed above. Consequently, prospective investors are urged to consult their tax advisors regarding the application and effect of state, local, or foreign tax laws on an investment in AIR.

 

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WHERE YOU CAN FIND MORE INFORMATION

AIR has filed a registration statement on Form 10 with the SEC, of which this information statement forms a part, with respect to the shares of AIR Common Stock being distributed as contemplated by this information statement. This information statement is a part of, and does not contain all of the information set forth in, the registration statement on Form 10 and the exhibits and schedules to the registration statement. In addition, New OP has filed a registration statement on Form 10 with the SEC. For further information with respect to us, AIR Common Stock, and New OP Units, see the registration statements, including their exhibits and schedules. Statements made in this information statement relating to any contract or other document are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement, including its exhibits and schedules, over the Internet at the SEC’s website at www.sec.gov and on our corporate website at aircommunities.com.

Information contained on or connected to, or that can be accessed from, our website does not and will not constitute part of this information statement or the registration statement on Form 10, of which this information statement is a part.

As a result of the Separation, AIR will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file periodic reports, proxy statements, and other information with the SEC, which will be available on the SEC’s website at www.sec.gov.

We intend to furnish holders of AIR Common Stock with annual reports containing combined financial statements prepared in accordance with GAAP, and audited and reported on, with an opinion expressed, by an independent registered public accounting firm.

You should rely only on the information contained in this information statement or to which we have referred you. We have not authorized any person to provide you with different information or to make any representation not contained in this information statement.

Aimco is a publicly traded company and is subject to the reporting requirements of the SEC and is required to file with the SEC annual, quarterly, and special reports, proxy statements, and other information. Aimco’s publicly available filings can be found on the SEC’s website at www.sec.gov. Aimco’s filings and additional information that Aimco has made public to investors may also be found on its website at www.aimco.com. Neither Aimco’s filings nor the information contained on or connected to, or that can be accessed from, its website, will constitute part of this information statement or the registration statement on Form 10, of which this information statement is a part.

 

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INDEX TO FINANCIAL STATEMENTS

 

Consolidated Financial Statements of Apartment Investment and Management Company (AIR Predecessor)

  

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Balance Sheets as of December 31, 2019, and 2018

     F-4  

Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017

     F-5  

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017

     F-6  

Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017

     F-7  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

     F-8  

Notes to the Consolidated Financial Statements

     F-10  

Schedule III—Real Estate and Accumulated Depreciation

     F-38  

Unaudited Condensed Consolidated Financial Statements of Apartment Investment and Management Company (AIR Predecessor)

  

Condensed Consolidated Balance Sheets as of September  30, 2020 and December 31, 2019

     F-44  

Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2020 and 2019

     F-45  

Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2020 and 2019

     F-46  

Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2020 and 2019

     F-47  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019

     F-48  

Notes to the Condensed Consolidated Financial Statements

     F-49  

 

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Apartment Investment and Management Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Apartment Investment and Management Company (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the accompanying Index to Financial Statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

Adoption of New Accounting Standard

As discussed in Note 10 to the consolidated financial statements, the Company changed its accounting for the income tax consequences of intercompany transfers of assets effective January 1, 2017.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by

 

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communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

  

Accounting for Acquisitions of Real Estate

Description of the Matter   

During 2019 the Company acquired real estate for total consideration of $242 million, (including assumption of liabilities). As more fully described in Note 2 and summarized in Note 3 to the consolidated financial statements, the total consideration for these asset acquisitions was allocated to land, buildings and improvements, intangible assets, and intangible liabilities, based upon their relative fair values.

 

Auditing management’s accounting for acquisitions involves a higher degree of judgment due to the subjective nature of the assumptions that are inherent in the determination of the relative fair values of the assets acquired and liabilities assumed. The significant assumptions used to estimate the fair value of these acquired tangible and intangible assets includes market comparable prices for similar land parcels, estimated replacement costs for buildings and improvements, market rental rates, and assumptions regarding the time it would take to lease commercial space assuming it were vacant at acquisition.

How We Addressed the Matter in Our Audit   

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for acquisitions of real estate and the allocation of consideration on a relative fair value basis. This included testing controls over management’s identification of the assets acquired and liabilities assumed and evaluating the methods and significant assumptions used by the Company and its valuation specialists, where applicable, to develop such estimates.

 

To test the significant assumptions discussed above, our audit procedures included, among others, comparing the significant assumptions to observable market data and published industry resources. For example, we compared management’s land value assumptions and estimated building replacement costs to observable market transactions for similar properties. For lease intangibles we compared management’s assumptions regarding market rental rates and the amount of time if would take to lease a commercial space if the building were vacant at acquisition to published market data for comparable leases. Our internal valuation specialists assisted with the identification of observable market data used in evaluating the aforementioned assumptions.

/s/ ERNST & YOUNG LLP

We have served as the Company’s auditor since 1994.

Denver, Colorado

February 24, 2020

 

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Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED BALANCE SHEETS

As of December 31, 2019 and 2018

(In thousands, except share data)

 

     2019     2018  

ASSETS

    

Buildings and improvements

   $ 6,868,543     $ 6,552,065  

Land

     1,869,048       1,756,525  
  

 

 

   

 

 

 

Total real estate

     8,737,591       8,308,590  

Accumulated depreciation

     (2,718,284 )      (2,585,115 ) 
  

 

 

   

 

 

 

Net real estate

     6,019,307       5,723,475  

Cash and cash equivalents

     142,902       36,858  

Restricted cash

     34,800       35,737  

Mezzanine investment

     280,258       —    

Other assets

     351,472       351,541  

Assets held for sale

     —         42,393  
  

 

 

   

 

 

 

Total assets

   $ 6,828,739     $ 6,190,004  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Non-recourse property debt, net

   $ 4,230,590     $ 3,915,305  

Revolving credit facility borrowings

     275,000       160,360  
  

 

 

   

 

 

 

Total indebtedness

     4,505,590       4,075,665  
  

 

 

   

 

 

 

Accrued liabilities and other

     360,574       226,230  

Liabilities related to assets held for sale

     —       23,177  
  

 

 

   

 

 

 

Total liabilities

     4,866,164       4,325,072  
  

 

 

   

 

 

 

Preferred noncontrolling interests in Aimco Operating Partnership (Note 8)

     97,064       101,291  

Redeemable noncontrolling interests in consolidated real estate partnership

     4,716       —    

Commitments and contingencies (Note 6) Equity:

    

Perpetual preferred stock (Note 7)

     —         125,000  

Common Stock, $0.01 par value, 500,787,260 shares authorized, 148,885,197 and 144,623,034 shares issued/outstanding at December 31, 2019 and 2018, respectively

     1,489       1,446  

Additional paid-in capital

     3,497,367       3,515,686  

Accumulated other comprehensive income

     4,195       4,794  

Distributions in excess of earnings

     (1,722,402 )      (1,947,507 ) 
  

 

 

   

 

 

 

Total Aimco equity

     1,780,649       1,699,419  
  

 

 

   

 

 

 

Noncontrolling interests in consolidated real estate partnerships

     (3,296 )      (2,967 ) 

Common noncontrolling interests in Aimco Operating Partnership

     83,442       67,189  
  

 

 

   

 

 

 

Total equity

     1,860,795       1,763,641  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,828,739     $ 6,190,004  
  

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands, except per share data)

 

     2019     2018     2017  

REVENUES:

      

Rental and other property revenues attributable to real estate

   $ 914,294     $ 922,593     $ 918,148  

Asset Management business rental and tax credit revenues

     —         49,817       87,289  
  

 

 

   

 

 

   

 

 

 

Total revenues

     914,294       972,410       1,005,437  
  

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

      

Property operating expenses attributable to real estate

     311,221       307,901       319,126  

Property operating expenses of partnerships served by Asset

Management business

     —         20,921       35,458  

Depreciation and amortization

     380,171       377,786       366,184  

General and administrative expenses

     47,037       46,268       43,657  

Other expenses, net

     19,092       3,778       11,148  

Provision for real estate impairment loss

     —         —         35,881  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     757,521       756,654       811,454  
  

 

 

   

 

 

   

 

 

 

Interest income

     11,424       10,914       8,332  

Interest expense

     (168,807 )      (200,634 )      (194,615 ) 

Gain on dispositions of real estate and the Asset Management business

     503,168       677,463       300,849  

Mezzanine investment income, net

     1,531       —         —    

Income from unconsolidated real estate partnerships

     803       77       7,694  
  

 

 

   

 

 

   

 

 

 

Income before income tax benefit

     504,892       703,576       316,243  

Income tax benefit (Note 10)

     3,135       13,027       30,836  
  

 

 

   

 

 

   

 

 

 

Net income

     508,027       716,603       347,079  

Noncontrolling interests:

      

Net income attributable to noncontrolling interests in consolidated real estate partnerships

     (187 )      (8,220 )      (9,084 ) 

Net income attributable to preferred noncontrolling interests in Aimco Operating Partnership

     (7,708 )      (7,739 )      (7,764 ) 

Net income attributable to common noncontrolling interests in Aimco Operating Partnership

     (26,049 )      (34,417 )      (14,457 ) 
  

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interests

     (33,944 )      (50,376 )      (31,305 ) 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Aimco

     474,083       666,227       315,774  

Net income attributable to Aimco preferred stockholders

     (7,335 )      (8,593 )      (8,594 ) 

Net income attributable to participating securities

     (604 )      (1,037 )      (319 ) 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Aimco common stockholders

   $ 466,144     $ 656,597     $ 306,861  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Aimco per common share—basic

   $ 3.16     $ 4.34     $ 2.02  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Aimco per common share—diluted

   $ 3.15     $ 4.34     $ 2.02  
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—basic

     147,718       151,152       151,595  
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—diluted

     147,944       151,334       152,060  
  

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

     2019     2018     2017  

Net income

   $ 508,027     $ 716,603     $ 347,079  

Other comprehensive (loss) gain:

      

Unrealized (losses) gains on available for sale debt securities

     (637 )      (131 )      1,507  

Realized and unrealized losses on interest rate swaps

     —         —         (173 ) 

Losses on interest rate swaps reclassified into earnings from accumulated other comprehensive loss

     —         1,391       1,480  
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) gain

     (637 )      1,260       2,814  
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     507,390       717,863       349,893  
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to noncontrolling interests

     (33,906 )      (50,445 )      (31,527 ) 
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Aimco

   $ 473,484     $ 667,418     $ 318,366  
  

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

    Preferred Stock     Common Stock     Additional
Paid-
in Capital 		    Accumulated
Other
Comprehensive
Income (Loss) 		    Distributions
in Excess
of Earnings 		    Total Aimco
Equity 		    Noncontrolling
Interests in
Consolidated
Real Estate
Partnerships 		    Common
Noncontrolling
Interests in
Aimco
Operating
Partnerships 		    Total
Equity 		 
    Shares
Issued 		    Amount     Shares
Issued 		    Amount  

Balances at December 31, 2016

    5,000     $ 125,000       152,143     $ 1,521     $ 4,051,770     $ 1,011     $ (2,385,399 )    $ 1,793,903     $ 151,121     $ (58 )    $ 1,944,966  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redemption of Aimco Operating Partnership units

    —         —         —         —         —         —         —         —         —         (11,882 )      (11,882 ) 

Amortization of share-based compensation cost

    —         —         17       —         8,638       —         —         8,638       —         613       9,251  

Contributions from noncontrolling interests

    —         —         —         —         —         —         —         —         3,401       —         3,401  

Effect of changes in ownership for consolidated entities

    —         —         —         —         (160,586 )      —         —         (160,586 )      (157,056 )      4,867       (312,775 ) 

Cumulative effect of a change in accounting principle

    —         —         —         —         —         —         (62,682 )      (62,682 )      —         (3,028 )      (65,710 ) 

Change in accumulated other comprehensive income

    —         —         —         —         —         2,592       —         2,592       101       121       2,814  

Net income

    —         —         —         —         —         —         315,774       315,774       9,084       14,457       339,315  

Distributions to noncontrolling interests

    —         —         —         —         —         —         —         —         (8,367 )      (10,765 )      (19,132 ) 

Common Stock dividends

    —         —         —         —         —         —         (226,172 )      (226,172 )      —         —         (226,172 ) 

Preferred Stock dividends

    —         —         —         —         —         —         (8,594 )      (8,594 )      —         —         (8,594 ) 

Other, net

    —         —         275       3       268       —         —         271       —         —         271  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2017

    5,000       125,000       152,435       1,524       3,900,090       3,603       (2,367,073 )      1,663,144       (1,716 )      (5,675 )      1,655,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repurchases of Common Stock

    —         —         (7,970 )      (80 )      (373,513 )      —         —         (373,593 )      —         —         (373,593 ) 

Issuance of Aimco Operating Partnership units

    —         —         —         —         —         —         —         —         —         50,151       50,151  

Redemption of Aimco Operating Partnership units

    —         —         —         —         —         —         —         —         —         (9,639 )      (9,639 ) 

Amortization of share-based compensation cost

    —         —         21       —         8,074       —         —         8,074       —         1,691       9,765  

Effect of changes in ownership for consolidated entities

    —         —         —         —         (19,115 )      —         —         (19,115 )      —         9,014       (10,101 ) 

Change in accumulated other comprehensive income

    —         —         —         —         —         1,191       —         1,191       —         69       1,260  

Net income

    —         —         —         —         —         —         666,227       666,227       8,220       34,417       708,864  

Distributions to noncontrolling interests

    —         —         —         —         —         —         —         —         (9,471 )      (12,839 )      (22,310 ) 

Common Stock dividends

    —         —         —         —         —         —         (238,067 )      (238,067 )      —         —         (238,067 ) 

Preferred Stock dividends

    —         —         —         —         —         —         (8,594 )      (8,594 )      —         —         (8,594 ) 

Other, net

    —         —         137       2       150       —         —         152       —         —         152  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2018

    5,000       125,000       144,623       1,446       3,515,686       4,794       (1,947,507 )      1,699,419       (2,967 )      67,189       1,763,641  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repurchases of Common Stock

    —         —         (461 )      (5 )      (20,677 )      —         —         (20,682 )      —         —         (20,682 ) 

Redemption of Preferred Stock

    (5,000 )      (125,000 )      —         —         4,089       —         (4,089 )      (125,000 )      —         —         (125,000 ) 

Issuance of Aimco Operating Partnership units

    —         —         —         —         —         —         —         —         —         3,034       3,034  

Redemption of Aimco Operating Partnership units

    —         —         127       2       6,242       —         —         6,244       —         (12,710 )      (6,466 ) 

Amortization of share-based compensation cost

    —         —         22       —         5,924       —         —         5,924       —         3,184       9,108  

Effect of changes in ownership of consolidated entities

    —         —         —         —         (13,243 )      —         —         (13,243 )      3,422       9,821       —    

Purchase of noncontrolling interest in consolidated real estate partnerships

    —         —         —         —         —         —         —         —         (3,844 )      —         (3,844 ) 

Change in accumulated other comprehensive income

    —         —         —         —         —         (599 )      —         (599 )      —         (38 )      (637 ) 

Net income

    —         —         —         —         —         —         474,083       474,083       382       26,049       500,514  

Common Stock dividends

    —         —         —         —         —         —         (241,643 )      (241,643 )      —         —         (241,643 ) 

Common Stock issued to Common Stockholders in special dividend

    —         —         4,492       45       (786 )      —         —         (741 )      —         —         (741 ) 

Preferred Stock dividends

    —         —         —         —         —         —         (3,246 )      (3,246 )      —         —         (3,246 ) 

Distributions to noncontrolling interests

    —         —         —         —         —         —         —         —         (308 )      (13,087 )      (13,395 ) 

Other, net

    —         —         82       1       132       —         —         133       19       —         152  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2019

    —       $ —         148,885     $ 1,489     $ 3,497,367     $ 4,195     $ (1,722,402 )    $ 1,780,649     $ (3,296 )    $ 83,442     $ 1,860,795  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

F-7

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

    2019     2018     2017  

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

  $ 508,027     $ 716,603     $ 347,079  

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation and amortization

    380,171       377,786       366,184  

Provision for real estate impairment loss

    —         —         35,881  

Gain on dispositions of real estate and the Asset Management business

    (503,168 )      (677,463 )      (300,849 ) 

Income tax benefit

    (3,135 )      (13,027 )      (30,836 ) 

Share-based compensation expense

    8,146       8,550       7,877  

Amortization of debt issuance costs and other

    7,629       9,023       5,666  

Other, net

    25       1,065       (7,694 ) 

Changes in operating assets and operating liabilities:

     

Accounts receivable and other assets

    (26,021 )      (27,830 )      (15,841 ) 

Accounts payable, accrued liabilities and other

    2,798       1,681       (15,395 ) 
 

 

 

   

 

 

   

 

 

 

Total adjustments

    (133,555 )      (320,215 )      44,993  
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    374,472       396,388       392,072  

CASH FLOWS FROM INVESTING ACTIVITIES:

     

Purchases of real estate and deposits related to purchases of real estate

    (138,311 )      (242,297 )      (20,372 ) 

Capital expenditures

    (393,461 )      (340,489 )      (358,104 ) 

Proceeds from dispositions of real estate and the Asset Management Business

    628,771       708,848       401,983  

Payment for mezzanine investment and related transaction costs

    (277,627 )      —         —    

Purchases of corporate assets

    (17,584 )      (7,718 )      (8,899 ) 

Proceeds from repayments on notes receivable

    147       5,010       430  

Other investing activities

    (7,348 )      (1,508 )      (2,019 ) 
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (205,413 )      121,846       13,019  

CASH FLOWS FROM FINANCING ACTIVITIES:

     

Proceeds from non-recourse property debt

    774,623       1,228,027       312,434  

Principal repayments on non-recourse property debt

    (520,027 )      (976,087 )      (409,167 ) 

(Repayment of) proceeds from term loan

    —         (250,000 )      250,000  

Net borrowings on revolving credit facility

    114,640       93,200       49,230  

Payment of debt issuance costs

    (4,861 )      (11,961 )      (4,751 ) 

Payment of debt extinguishment costs

    (4,491 )      (14,241 )      (399 ) 

Repurchases of Common Stock

    (20,682 )      (373,593 )      —    

Repurchases of Preferred Stock

    (125,000 )      —         —    

Payment of dividends to holders of Preferred Stock

    (3,246 )      (8,594 )      (8,594 ) 

Payment of dividends to holders of Common Stock

    (241,288 )      (237,504 )      (225,377 ) 

Payment of distributions to noncontrolling interests

    (21,620 )      (29,196 )      (26,799 ) 

Redemptions of noncontrolling interests in the Aimco Operating Partnership

    (10,694 )      (9,885 )      (13,546 ) 

Contribution from noncontrolling interests in consolidated real estate partnerships

    4,911       —         —    

Purchases of noncontrolling interests in consolidated real estate partnerships

    (3,780 )      (3,579 )      (314,269 ) 

Other financing activities

    (2,437 )      5,233       (2,462 ) 
 

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

    (63,952 )      (588,180 )      (393,700 ) 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

    105,107       (69,946 )      11,391  

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

    72,595       142,541       131,150  
 

 

 

   

 

 

   

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

  $ 177,702     $ 72,595     $ 142,541  
 

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

     2019      2018      2017  

SUPPLEMENTAL CASH FLOW INFORMATION:

        

Interest paid

   $ 160,961      $ 199,996      $ 196,438  

Cash paid for income taxes

     12,238        11,522        7,401  

Non-cash transactions associated with the acquisition or disposition of

real estate:

        

Non-recourse property debt assumed in connection with the acquisition of real estate

     97,565        208,885        —    

Deferred tax liability assumed in connection with the acquisition of real estate

     148,809        —          —    

Issuance of common OP Units in connection with acquisition of real estate

     3,034        50,151        —    

Non-recourse property debt assumed by buyer in connection with the disposition of the Asset Management business

     —          227,708        —    

Other non-cash transactions:

        

Recognition of right of use lease assets

     54,626        —          —    

Recognition of lease liabilities

     59,251        —          —    

Accrued capital expenditures (at end of period)

     54,358        40,185        31,719  

Accrued dividends on TSR restricted stock and LTIP awards (at end of period) (Note 9)

     1,420        1,266        1,720  

See notes to the consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

Note 1—Organization

Apartment Investment and Management Company, or Aimco, is a Maryland corporation incorporated on January 10, 1994. Aimco is a self-administered and self-managed real estate investment trust, or REIT. AIMCO Properties, L.P., or the Aimco Operating Partnership, is a Delaware limited partnership formed on May 16, 1994, to conduct our business, which is focused on the ownership, management, redevelopment and some development of quality apartment communities located in several of the largest markets in the United States.

Aimco, through its wholly-owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, holds a majority of the ownership interests in the Aimco Operating Partnership. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership. Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are referred to as OP Units. OP Units include common partnership units, which we refer to as common OP Units, as well as preferred partnership units, which we refer to as preferred OP Units. As of December 31, 2019, after elimination of units held by consolidated subsidiaries, the Aimco Operating Partnership had 158,419,051 common OP Units outstanding. As of December 31, 2019, Aimco owned 148,885,197, or 94.0%, of the common OP Units of the Aimco Operating Partnership and Aimco had an equal number of shares of its Class A Common Stock outstanding, which we refer to as Common Stock.

Except as the context otherwise requires, “we,” “our” and “us” refer to Aimco, the Aimco Operating Partnership and their consolidated subsidiaries, collectively.

We own and operate a portfolio of apartment communities, diversified by both geography and price point, in 17 states and the District of Columbia. As of December 31, 2019, our portfolio included 124 apartment communities with 32,839 apartment homes in which we held an average ownership of approximately 99%. We consolidated 120 of these apartment communities with 32,697 apartment homes.

Note 2—Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

Aimco’s accompanying consolidated financial statements include the accounts of Aimco. All significant intercompany balances have been eliminated in consolidation.

We consolidate a variable interest entity, or VIE, in which we are considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. As of December 31, 2019 and 2018, Aimco consolidated six and nine VIEs, respectively, including the Aimco Operating Partnership.

As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a partner in a limited partnership or a member of a limited liability company.

Noncontrolling Interests in the Aimco Operating Partnership

Noncontrolling interests in Aimco Operating Partnership consist of common OP Units and preferred OP Units and are reflected in Aimco’s accompanying consolidated balance sheets as noncontrolling interests in

 

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Aimco Operating Partnership. Holders of preferred OP Units participate in the Aimco Operating Partnership’s income or loss only to the extent of their preferred distributions. Within Aimco’s consolidated financial statements, after provision for preferred OP Unit distributions, the Aimco Operating Partnership’s income or loss is allocated to the holders of common OP Units based on the weighted-average number of common OP Units (including those held by Aimco) outstanding during the period. During the years ended December 31, 2019, 2018, and 2017, the holders of common OP Units had a weighted-average ownership interest in the Aimco Operating Partnership of 6.0%, 4.9%, and 4.5%, respectively. Please refer to Note 8 for further information regarding the items comprising noncontrolling interests in the Aimco Operating Partnership. Substantially all of the assets and liabilities of Aimco are those of the Aimco Operating Partnership.

Noncontrolling Interests in Consolidated Real Estate Partnerships

We generally report the unaffiliated partners’ interests in the net assets of our consolidated real estate partnerships as noncontrolling interests in consolidated real estate partnerships within consolidated equity and partners’ capital. If a real estate partnership includes redemption rights that are not within Aimco’s control, the noncontrolling interest is included as temporary equity or temporary capital. If the redemption right is not currently redeemable but probable of being redeemable in the future, changes in redemption value are recognized each quarter with the change in value being reflected in additional paid-in-capital.

The assets of real estate partnerships consolidated by Aimco must first be used to settle the liabilities of such consolidated real estate partnerships. These consolidated real estate partnerships’ creditors do not have recourse to the general credit of Aimco.

Noncontrolling interests in consolidated real estate partnerships consist primarily of equity interests held by limited partners in consolidated real estate partnerships that have finite lives. We generally attribute to noncontrolling interests their share of income or loss of consolidated partnerships based on their proportionate interest in the results of operations of the partnerships, including their share of losses even if such attribution results in a deficit noncontrolling interest balance within our equity accounts.

The terms of the related partnership agreements generally require the partnerships to be liquidated following the sale of the underlying real estate. As the general partner in these partnerships, we ordinarily control the execution of real estate sales and other events that could lead to the liquidation, redemption or other settlement of noncontrolling interests.

Changes in our ownership interest in consolidated real estate partnerships generally consist of our purchase of an additional interest in or the sale of our entire interest in a consolidated real estate partnership. The effect on our equity of our purchase of additional interests in consolidated real estate partnerships during the years ended December 31, 2019, 2018, and 2017, is shown in our consolidated statements of equity. The effect on our equity of sales of consolidated real estate or sales of our entire interest in consolidated real estate partnerships is reflected in our consolidated financial statements as gains or losses on dispositions of real estate and accordingly the effect on our equity is reflected within the amount of net income allocated to us and to noncontrolling interests. Upon our deconsolidation of a real estate partnership following the sale of our partnership interests or liquidation of the partnership following sale of the related apartment community, we derecognize any remaining noncontrolling interest of the associated partnership previously recorded in our consolidated balance sheets.

Investments in Unconsolidated Real Estate Partnerships

We own general and limited partner interests in partnerships that either directly, or through interests in other real estate partnerships, own apartment communities. We generally account for investments in real estate partnerships that we do not consolidate under the equity method. Under the equity method, we recognize our share of the earnings or losses of the entity for the periods presented, inclusive of our share of any impairments

 

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and disposition gains or losses recognized by and related to such entities, and we present such amounts within income from unconsolidated real estate partnerships in our consolidated statements of operations.

The excess of our cost of the acquired partnership interests over our share of the partners’ equity or deficit is generally ascribed to the fair values of land and buildings owned by the partnerships. We amortize the excess cost ascribed to the buildings over the related estimated useful lives. Such amortization is recorded as an adjustment of the amounts of earnings or losses we recognize from such unconsolidated real estate partnerships.

We may also originate loans for real estate acquisitions or developments where we either expect, or have the opportunity, to participate in the residual profits from such projects. When the risks and rewards of these arrangements are similar to an equity investor or joint venture partner, we account for these arrangements as real estate investments using the equity method of accounting. We recognize as income changes in our share of net assets, adjusted for any basis differential, in mezzanine investment income, net, in our consolidated statements of operations.

Real Estate

Acquisitions

Upon the acquisition of real estate, we determine whether the purchase qualifies as an asset acquisition or, less frequently, meets the definition of an acquisition of a business. We generally recognize the acquisition of apartment communities or interests in partnerships that own communities at our cost, including the related transaction costs, as asset acquisitions.

We allocate the cost of apartment communities acquired based on the relative fair value of the assets acquired and liabilities assumed. The fair value of these assets and liabilities is determined using valuation techniques that rely on Level 2 and Level 3 inputs within the fair value framework. We determine the fair value of tangible assets, such as land, buildings, furniture, fixtures and equipment using valuation techniques that consider comparable market transactions, replacement costs and other available information. We determine the fair value of identified intangible assets or liabilities, which typically relate to in-place leases, using valuation techniques that consider the terms of the in-place leases, current market data for comparable leases and our experience in leasing similar communities.

The intangible assets or liabilities related to in-place leases are comprised of: (a) the value of the above- and below-market leases in-place, measured over the period, including probable lease renewals for below-market leases, that the leases are expected to remain in effect; (b) the estimated unamortized portion of avoided leasing commissions and other costs that ordinarily would be incurred to originate the in-place leases; and (c) the value associated with leased apartment homes during an estimated absorption period, which estimates rental revenue that would not have been earned had leased apartment homes been vacant at the time of acquisition, assuming lease-up periods based on market demand and stabilized occupancy levels. The above- and below-market lease intangibles are amortized to rental revenue over the expected remaining terms of the associated leases, which include reasonably assured renewal periods. Other intangible assets related to in-place leases are amortized to depreciation and amortization over the expected remaining terms of the associated leases.

Capital Additions

We capitalize costs, including certain indirect costs, incurred in connection with our capital additions activities, including redevelopments, developments, other tangible apartment community improvements, and replacements of existing apartment community components. Included in these capitalized costs are payroll costs associated with time spent by employees in connection with capital additions activities at the apartment community level. We characterize as “indirect costs” an allocation of certain department costs, including payroll, at the area operations and corporate levels that clearly relate to capital additions activities. We also capitalize

 

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interest, property taxes, and insurance during periods in which construction projects are in progress. We begin capitalization of costs, including certain indirect costs, incurred in connection with our capital addition activities, upon commencement of activities necessary to ready apartment communities for their intended use. These activities include when apartment communities or apartment homes are undergoing physical construction, as well as when homes are held vacant in advance of planned construction, provided that other activities such as permitting, planning and design are in progress. We cease the capitalization of costs when the apartment communities are substantially complete and ready for their intended use, which is typically when construction has been substantially completed and apartment homes are available for occupancy. Costs, including ordinary repairs, maintenance, and resident turnover costs, are charged to property operating expense as incurred.

For the years ended December 31, 2019, 2018, and 2017, we capitalized to buildings and improvements $11.8 million, $7.6 million, and $7.6 million of interest costs, respectively, and $37.8 million, $36.8 million, and $36.0 million of other direct and indirect costs, respectively.

Gain or Loss on Dispositions

Gain or loss on real estate dispositions are recognized when we no longer hold a controlling financial interest in the real estate and sufficient consideration has been received. Upon disposition, the related assets and liabilities are derecognized, and the gain or loss on disposition is recognized as the difference between the carrying amount of those assets and liabilities and the value of consideration received.

Impairment

Real estate and other long-lived assets to be held and used are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of an apartment community may not be recoverable, we assess its recoverability by comparing the carrying amount to our estimate of the undiscounted future cash flows, excluding interest charges, of the community. If the carrying amount exceeds the aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the community. As a result of our analysis, we did not recognize an impairment of our real estate and other long-lived assets to be held and used during the year ended December 31, 2019 and December 31, 2018. During the year ended December 31, 2017 we recognized an impairment related to our La Jolla Cove property, which we sold in 2018.

Cash Equivalents

We classify highly liquid investments with an original maturity of three months or less as cash equivalents. We maintain cash equivalents in financial institutions in excess of insured limits. We have not experienced any losses in these accounts in the past and believe that we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.

Restricted Cash

Restricted cash includes capital replacement reserves, completion repair reserves, bond sinking fund amounts, real estate tax and insurance escrow accounts held by lenders and resident security deposits.

 

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Other Assets

As of December 31, 2019 and 2018, other assets was comprised of the following amounts (in thousands):

 

     2019      2018  

Investments in securitization trust that holds Aimco property debt

   $ 94,251      $ 83,587  

Right of use lease assets

     61,911        —    

Goodwill and other intangible assets, net

     56,905        43,424  

Notes receivable, net

     41,300        39,254  

Software, equipment and leasehold improvements

     25,750        18,309  

Accounts receivable, net

     20,949        16,376  

Prepaid expenses, real estate taxes and insurance

     12,767        25,657  

Investments in unconsolidated real estate partnerships

     12,759        12,650  

Deferred tax asset, net (Note 10)

     —          67,060  

Deferred costs, deposits and other

     24,880        45,224  
  

 

 

    

 

 

 

Total other assets

   $ 351,472      $ 351,541  
  

 

 

    

 

 

 

Investments in Securitization Trust that holds Aimco Property Debt

We hold investments in a securitization trust that primarily holds certain of our property debt. These investments were initially recognized at their purchase price and the discount to the face value is being accreted into interest income over the expected term of the securities. We have designated these investments as available for sale, or AFS, debt securities and we measure these investments at fair value with changes in their fair value, other than the changes attributed to the accretion described above, recognized as an adjustment of accumulated other comprehensive income or loss within equity. Please refer to Note 12 for further information regarding these debt securities.

Goodwill and Other Intangible Assets, net

As of December 31, 2019 and 2018, other assets included goodwill associated with our reportable segments of $37.8 million. We perform an annual impairment test of goodwill by evaluating qualitative factors to determine the likelihood that goodwill may be impaired. As a result of the qualitative analysis, we do not believe our goodwill is impaired as of the date of our annual test.

Deferred Costs

We defer, as debt issuance costs, lender fees and other direct costs incurred in obtaining new financing and amortize the amounts over the terms of the related loan agreements. In connection with the modification of existing financing arrangements, we defer lender fees and amortize these costs and any unamortized debt issuance costs over the term of the modified loan agreement. Debt issuance costs associated with our revolving credit facility are included in other assets in our consolidated balance sheets. Debt issuance costs associated with non-recourse property debt are presented as a direct deduction from the related liabilities in our consolidated balance sheets. When financing arrangements are repaid or otherwise extinguished prior to maturity, unamortized debt issuance costs are written off, additionally, any lender fees or other costs incurred in connection with the extinguishment are recognized as expense. Amortization and write-off of debt issuance costs and other extinguishment costs are included in interest expense in our consolidated statements of operations.

We defer leasing costs incremental to a lease that we would not have incurred if the contract had not been obtained. Amortization of these costs is included in depreciation and amortization.

 

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Revenue from Leases

We are a lessor primarily for residential leases. We also own approximately 1.1 million square feet of commercial space across our portfolio.

In 2019 we adopted ASC 842, Leases. The adoption of the standard did not affect the accounting for leases in our position as lessor, except for how we recognize costs incurred to obtain residential leases. Please refer to the Accounting Pronouncements Adopted in the Current Year heading below for further information about this standard.

Our operating leases with residents may also provide that the resident reimburse us for certain costs, primarily the resident’s share of utilities expenses, incurred by the apartment community. These reimbursements represent revenue attributable to nonlease components for which the timing and pattern of recognition is the same as the revenue for the lease components. We adopted the practical expedient that allows us to account for the lease and nonlease components as a single component. Reimbursement and related expense are presented on a gross basis in our consolidated statements of operations, with the reimbursement included in rental and other property revenues attributable to real estate in our consolidated statements of operations. We recognize rental revenue attributed to lease components, net of any concessions, on a straight-line basis over the term of the lease.

Asset Management Business

Prior to the July 2018 sale of our Asset Management business, we provided asset management and other services to certain consolidated partnerships owning apartment communities that qualify for low-income housing tax credits and are structured to provide for the pass-through of tax credits and tax deductions to their partners. We consolidated those low-income housing tax credit partnerships in which we were the sole general partner and decision maker of the partnerships. We recognized income from asset management and other services when the related fees were earned and realized or realizable.

Depreciation and Amortization

Depreciation for all tangible assets is calculated using the straight-line method over their estimated useful lives. Acquired buildings and improvements are depreciated over a useful life based on the age, condition, and other physical characteristics of the asset. Furniture, fixtures, and equipment are generally depreciated over five years.

We depreciate capitalized costs using the straight-line method over the estimated useful life of the related improvement, which is generally 5, 15, or 30 years. We also capitalize payroll and other indirect costs incurred in connection with preparing an asset for its intended used. These costs include corporate-level costs that clearly relate to the capital addition activities, which we allocate to the applicable assets. All capitalized payroll costs and indirect costs are allocated to capital additions proportionately based on direct costs and depreciated over the estimated useful lives of such capital additions.

Purchased software and other costs related to software purchased or developed for internal use are capitalized during the application development stage and are amortized using the straight-line method over the estimated useful life of the software, generally three to five years. Purchased equipment is recognized at cost and depreciated using the straight-line method over the estimated useful life of the asset, which is generally five years. Leasehold improvements are also recorded at cost and depreciated on a straight-line basis over the shorter of the asset’s estimated useful life or the term of the related lease.

Certain homogeneous items that are purchased in bulk on a recurring basis, such as appliances, are depreciated using group methods that reflect the average estimated useful life of the items in each group. Except in the case of apartment community casualties, where the net book value of the lost asset is written off in the determination of casualty gains or losses, we generally do not recognize any loss in connection with the replacement of an existing apartment community component because normal replacements are considered in determining the estimated useful lives used in connection with our composite and group depreciation methods.

 

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Insurance

We believe our insurance coverages insure our apartment communities adequately against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood, and other perils. In addition, we have third-party insurance coverage (after self-insured retentions) that defray the costs of large workers’ compensation, health, and general liability exposures. We accrue losses based upon our estimates of the aggregate liability for uninsured losses incurred using certain actuarial assumptions followed in the insurance industry and based on our experience.

Share-Based Compensation

We issue various forms of share-based compensation, including stock options and restricted stock awards with service conditions and/or market conditions. We recognize share-based employee compensation based on the fair value on the grant date and recognize compensation cost over the awards’ requisite service periods. We reduce compensation cost related to forfeited awards in the period of forfeiture. Please refer to Note 9 for further discussion of our share-based compensation.

Income Taxes

Aimco has elected to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ended December 31, 1994, and it intends to continue to operate in such a manner. Aimco’s current and continuing qualification as a REIT depends on its ability to meet the various requirements imposed by the Internal Revenue Code, which are related to organizational structure, distribution levels, diversity of stock ownership and certain restrictions with regard to owned assets and categories of income. If Aimco qualifies for taxation as a REIT, it will generally not be subject to United States federal corporate income tax on its taxable income that is currently distributed to stockholders. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that generally results from an investment in a corporation.

Even if Aimco qualifies as a REIT, it may be subject to United States federal income and excise taxes in various situations, such as on undistributed income. Aimco also will be required to pay a 100% tax on any net income on non-arm’s length transactions between it and a TRS (described below) and on any net income from sales of apartment communities that were held for sale in the ordinary course. The state and local tax laws may not conform to the United States federal income tax treatment, and Aimco may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business. Any taxes imposed on us reduce our operating cash flow and net income.

Certain of our operations or a portion thereof, including property management and risk management, are conducted through taxable REIT subsidiaries, which are subsidiaries of the Aimco Operating Partnership, and each of which we refer to as a TRS. A TRS is a subsidiary C-corporation that has not elected REIT status and, as such, is subject to United States federal corporate income tax. We use TRS entities to facilitate our ability to offer certain services and activities to our residents and investment partners that cannot be offered directly by a REIT. We also use TRS entities to hold investments in certain apartment communities.

For our TRS entities, deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for United States federal income tax purposes, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We reduce deferred tax assets by recording a valuation allowance when we determine, based on available evidence, that it is more likely than not that the assets will not be realized. We recognize the tax consequences associated with intercompany transfers between Aimco and TRS entities when such transactions occur. Please refer to Note 10 for further information about our income taxes.

 

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Earnings per Share

Aimco calculates earnings per share based on the weighted-average number of shares of Common Stock, participating securities, common stock equivalents and dilutive convertible securities outstanding during the period. Please refer to Note 11 for further information regarding earnings per share computations.

Use of Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes thereto. Actual results could differ from those estimates.

Reclassifications and Revisions

On February 20, 2019, Aimco effected a reverse split of Common Stock at a ratio of one share for every 1.03119 shares outstanding on the date of effectiveness. The accounting guidance for recapitalization events requires that we revise Aimco’s equity as if the reverse split had occurred at the beginning of the earliest period presented. As such, we have revised the outstanding share counts, presentation of share activity, and earnings per share, as if the reverse split had occurred on December 31, 2016.

Accounting Pronouncements Adopted in the Current Year

Effective January 1, 2019, we adopted ASC 842 issued by the Financial Accounting Standards Board, or FASB. We elected to adopt the new standard using practical expedients that do not require a look back to expired or existing contracts for embedded leases, allow us to retain the classification of existing leases, and allow us to retain the previous accounting for the initial direct costs of existing leases. As both a lessee and a lessor, we also elected to use the practical expedient that allows us to combine revenue attributable to nonlease components with associated lease components where the timing and pattern of transfer of the components are the same. Under the new standard, a contract is or contains a lease when it provides the right to control the use of an asset for a period of time in exchange for consideration.

Lessor accounting remains largely unchanged other than how we recognize costs incurred to obtain leases. Under ASC 842, we defer leasing costs incremental to a lease that we would not have incurred if the contract had not been obtained. As a result of the practical expedient related to the combination of revenue from nonlease and lease components described above, we will combine rent payments with payments for other services we provide to our residents, including residents’ reimbursement of utility expenses. We have adopted the standard using the optional transition method that allows for prior reporting periods to remain as originally presented. Please refer to Note 4.

In 2018, the Securities Exchange Commission, or SEC, amended its rules to eliminate, modify, or integrate into other SEC requirements certain disclosure rules. The amendments are intended to simplify compliance without significantly changing the total mix of information provided to investors. The amendments created a requirement to report dividends per share or unit and changes in equity in interim periods on a comparative basis for both quarter-to-date and year-to-date periods presented.

Recent Accounting Pronouncements

In 2016, the FASB issued ASC 326, Financial Instruments-Credit Losses, which changes the method and timing of the recognition of credit losses on financial assets. The standard will require us to estimate and record credit losses over the life of a financial instrument, including receivables, at its inception. Our notes receivable and AFS debt securities are subject to the new standard. For AFS debt securities, the new standard would require us to estimate a credit loss if the fair value of the instruments are less than their carrying value of the instruments.

 

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This credit loss standard is required to be applied using a modified-retrospective approach and requires a cumulative-effect adjustment to retained earnings be recorded as of the date of adoption. We adopted the new standard on January 1, 2020. The adoption of the standard is not expected to have a material impact on our financial position or results of operations.

Note 3—Significant Transactions

Parkmerced Mezzanine Investment

On November 26, 2019, we loaned $275 million to the partnership that owns Parkmerced Apartments. The loan accrues interest at 10% per annum with a five-year term and the right to extend for a second five-year term. Along with our mezzanine loan, we received a ten-year option to acquire a 30% interest in the partnership at a $1.0 million exercise price, increased by 30% of future capital spending to progress development and redevelopment of the partnership’s apartment homes. The existence of the option provides us with the opportunity to participate in residual profits of the partnership and in accordance with the acquisition, development, and construction guidance within ASC 310, Receivables, we account for this transaction under the equity method. Our investment balance, which represents our maximum exposure, is reflected in mezzanine investment in our consolidated balance sheets. Parkmerced Apartments is a 152-acre site in southwest San Francisco, currently improved with 3,221 rent-control apartment homes and the vested right to develop 4,093 new market-rate homes.

Acquisitions

During the year ended December 31, 2019, we acquired a 95% interest in 1001 Brickell Bay Drive, a 1.8-acre waterfront parcel in Miami, Florida, currently improved with an office building. The remaining 5% is held by an outside partner and is redeemable at the holder’s option for cash during a three-month exercise period, which begins on July 2, 2022. As the redemption of this put is not within Aimco’s control, the noncontrolling interest is reflected in temporary equity in Aimco’s consolidated balance sheets.

We also acquired One Ardmore, an apartment community located in Ardmore, Pennsylvania, a suburb of Philadelphia, and Prism, an apartment community under development in Cambridge, Massachusetts. Summarized information regarding these acquisitions is set forth in the table below (in thousands):

 

Purchase price

   $ 229,711  

Capitalized transaction costs

     4,057  

Noncontrolling interests in consolidated real estate partnership

     8,250  
  

 

 

 

Total consideration(1)

   $ 242,018  
  

 

 

 

Consideration allocated to building and improvements

     218,752  

Consideration allocated to land

     162,094  

Consideration allocated to intangible assets

     16,500  

Consideration allocated to intangible liabilities

     (6,519 ) 

Deferred tax liability assumed(2)

     (148,809 ) 
  

 

 

 

Total consideration

   $ 242,018  
  

 

 

 

 

(1)

Total consideration includes $97.6 million of debt assumed and issuance of 59,761 common OP Units. In accordance with GAAP, the common OP Units were valued at $50.77 per unit, the Aimco Common Stock closing price on the purchase date.

 

(2)

The deferred tax liability of $148.8 million resulted from the corporate structure used to complete the acquisition of 1001 Brickell Bay Drive and is due to the difference between the purchase price determined in accordance with GAAP and the tax basis of the property.

 

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Dispositions of Apartment Communities

During the years ended December 31, 2019, 2018, and 2017, we sold apartment communities as summarized below (dollars in thousands):

 

     2019      2018      2017  

Number of apartment communities sold

     12        4        5  

Number of apartment homes sold

     3,596        1,334        2,291  

Gain on dispositions of real estate(1)

   $ 503,168      $ 175,213      $ 297,730  

 

(1)

During the year ended December 31, 2019, gain on dispositions of real estate includes the expiration of indemnification liabilities related to the sale of our Asset Management business.

The apartment communities sold were predominantly located outside of our primary markets or in lower-rated locations within our primary markets and had average revenues per apartment home significantly below those of our retained portfolio.

During the year ended December 31, 2018, we also sold for $590.0 million our Asset Management business and our four affordable apartment communities located in the Hunters Point area of San Francisco. The sale resulted in a gain of $500.3 million and net cash proceeds of $512.2 million, after payment of transaction costs and repayment of property-level debt. Additionally, we sold our interest in the entities owning the La Jolla Cove property. We provided seller financing with a stated value of $48.6 million and received net cash proceeds of approximately $5.0 million.

In addition to the apartment communities we sold during the current period, from time to time we may be marketing for sale certain communities that are inconsistent with our long-term investment strategy. At the end of each reporting period we evaluate whether such communities meet the criteria to be classified as held for sale. As of December 31, 2019, no communities were classified as held for sale.

Note 4—Leases

Lessor Arrangements

The majority of payments we receive for our residential and commercial leases are fixed. We receive variable payments from our residents and commercial tenants primarily for utility reimbursements. Our total lease income was comprised of the following amounts for all operating leases for the year ended December 31, 2019 (in thousands):

 

Fixed lease income

   $ 855,326  

Variable lease income

     56,424  
  

 

 

 

Total lease income

   $ 911,750  
  

 

 

 

In general, our commercial leases have options to extend for a certain period of time at the tenant’s option. Future minimum annual rental payments we will receive under commercial leases, excluding such extension options, are as follows as of December 31, 2019 (in thousands):

 

2020

   $ 26,770  

2021

     23,277  

2022

     19,766  

2023

     15,853  

2024

     13,512  

Thereafter

     52,040  
  

 

 

 

Total

   $ 151,218  
  

 

 

 

 

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Generally, our residential leases do not provide extension options and, as of December 31, 2019, have an average remaining term of 8.8 months.

Lessee Arrangements

Beginning in 2019, we recognize right of use assets and related lease liabilities, which are included in other assets and accrued liabilities and other, respectively, in our consolidated balance sheets. We estimated the value of the lease liabilities using a discount rate equivalent to the rate we would pay on a secured borrowing with similar terms to the lease. On October 1, 2019, we revised our estimate of the incremental borrowing rate, which resulted in a reduction of our right of use assets and related lease liabilities for ground leases. The adjustment recorded to our right of use assets and lease liabilities did not impact our consolidated statements of operations.

Substantially all of the payments under our ground and office leases are fixed. We exclude options to extend the lease in our minimum lease terms unless the option is reasonably certain to be exercised. Our total lease cost for ground and office leases for the years ended December 31, 2019, 2018, and 2017 was $10.7 million, $5.1 million, and $4.8 million, respectively.

As of December 31, 2019, the ground and office leases have weighted-average remaining terms of 74.0 years and 8.4 years, respectively, and weighted-average discount rates of 6.55% and 3.22%, respectively. Minimum annual rental payments under these operating leases, reconciled to the lease liability included in accrued liabilities and other in our consolidated balance sheets, are as follows (in thousands):

 

     Operating Lease
Future Minimum
Rent 		 

2020

   $ 5,156  

2021

     5,143  

2022

     5,053  

2023

     4,363  

2024

     4,392  

Thereafter

     427,935  
  

 

 

 

Total

   $ 452,042  

Less: Discount

     (394,735 ) 
  

 

 

 

Total lease liability

   $ 57,307  
  

 

 

 

Of the total lease liability as of December 31, 2019, $43.7 million of the balance relates to our ground leases, with the remainder relating to our office leases.

Note 5—Non-Recourse Property Debt and Credit Agreement

Non-Recourse Property Debt

We finance apartment communities in our portfolio primarily using property-level, non-recourse, long-dated, fixed-rate, amortizing debt. The following table summarizes non-recourse property debt related to assets classified as held for use as of December 31, 2019 and 2018 (dollars in thousands):

 

    Latest Maturity
Date 		    Interest Rate
Range 		    Weighted-Average
Interest Rate 		    2019     2018  

Fixed-rate property debt

    January 1, 2055       2.73% to 6.79%       3.93 %    $ 4,081,221     $ 3,676,882  

Variable-rate property debt

    July 13, 2033       2.51% to 3.00%       2.88 %      170,118       260,118  

Debt issuance costs, net of accumulated amortization

          (20,749 )      (21,695 ) 
       

 

 

   

 

 

 

Non-recourse property debt, net

        $ 4,230,590     $ 3,915,305  
       

 

 

   

 

 

 

 

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Principal and interest on fixed-rate debt are generally payable monthly or in monthly interest-only payments with balloon payments due at maturity. As of December 31, 2019, our fixed-rate property debt was secured by 78 apartment communities that had an aggregate net book value of $4.3 billion.

Principal and interest on variable-rate debt are generally payable in semi-annual installments with balloon payments due at maturity. As of December 31, 2019, our variable-rate property debt was secured by seven apartment communities that had an aggregate net book value of $105.7 million.

These non-recourse property debt instruments contain covenants common to the type of borrowing, and as of December 31, 2019, we were in compliance with all such covenants.

As of December 31, 2019, the scheduled principal amortization and maturity payments for the non-recourse property debt were as follows (in thousands):

 

     Amortization      Maturities      Total  

2020

   $ 92,177      $ 78,930      $ 171,107  

2021(1)

     83,427        598,263        681,690  

2022

     78,909        260,671        339,580  

2023

     71,332        249,251        320,583  

2024

     67,561        285,517        353,078  

Thereafter

     391,512        1,993,789        2,385,301  
  

 

 

    

 

 

    

 

 

 

Total

   $ 784,918      $ 3,466,421      $ 4,251,339  
  

 

 

    

 

 

    

 

 

 

 

(1)

Pursuant to the terms of our loan agreements, we may prepay in 2020 $246.5 million of loans maturing in 2021, without penalty.

Revolving Credit Facility

We have a revolving credit facility with a syndicate of financial institutions. Our revolving credit facility provides for $800.0 million of revolving loan commitments. As of December 31, 2019 and 2018, we had $275.0 million and $160.4 million, respectively, of outstanding borrowings under our revolving credit facility. The interest rate on our outstanding borrowings was 3.00% and 3.93% as of December 31, 2019 and 2018, respectively. As of December 31, 2019, after outstanding borrowings and $7.2 million of undrawn letters of credit backed by the Credit Agreement, our available borrowing capacity was $517.8 million.

Borrowings against the revolving loan commitments bear interest at a rate set forth on a pricing grid, which rate varies based on our credit rating as assigned by specified rating agencies (LIBOR plus 1.20%, or, at our option, a base rate plus 0.20% as of December 31, 2019). The revolving credit facility matures on January 22, 2022. The revolving credit facility provides that we may make distributions to our investors during any four consecutive quarters in an aggregate amount that does not exceed the greater of 95% of our funds from operations, as defined by Nareit, for such period, subject to certain non-cash adjustments, or such amount as may be necessary to maintain Aimco’s REIT status.

Note 6—Commitments and Contingencies

Commitments

In connection with our redevelopment, development, and other capital improvement activities, we have entered into various construction-related contracts and we have made commitments to complete redevelopment and development of certain apartment communities, pursuant to financing or other arrangements. As of December 31, 2019, our commitments related to active redevelopments and developments totaled approximately $254.5 million, most of which we expect to incur during the next 12 months.

 

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We enter into certain commitments for future purchases of goods and services in connection with the operations of our apartment communities. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to our historical expenditures.

Legal Matters

In addition to the matters described below, we are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by our general liability insurance program, and none of which we expect to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Environmental

Various federal, state and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or for personal injury, disease, disability or other infirmities related to the alleged presence of hazardous materials. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate.

We are engaged in discussions with the Environmental Protection Agency, or EPA, regarding contaminated groundwater near an Indiana apartment community that has not been owned by us since 2008. The contamination allegedly derives from a dry cleaner that operated on our former property, prior to our ownership. We undertook a voluntary remediation of the dry cleaner contamination under state oversight. In 2016, EPA listed our former community and a number of residential communities in the vicinity on the National Priorities List, or NPL (i.e., as a Superfund site). In May 2018, we prevailed on our federal judicial appeal vacating the Superfund listing. We continue to work with EPA to identify options for clean-up of the site outside the Superfund program. Although the outcome of these processes are uncertain, we do not expect their resolution to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

We also have a contingent liability related to a property in Lake Tahoe, California, regarding environmental contamination from the historic operation of a dry cleaner. An entity owned by us was the former general partner of a now-dissolved partnership that previously owned a site that was a laundromat with a self-service dry-cleaning machine. That entity and the current property owner have been remediating the site since 2009, under the oversight of the Lahontan Regional Water Quality Control Board, or Lahontan. In May 2017, Lahontan issued a final cleanup and abatement order that names four potentially-responsible parties, acknowledges that there may be additional responsible parties, and requires the named parties to perform additional groundwater investigation and corrective actions with respect to onsite and offsite contamination. We are appealing the final order while simultaneously complying with it. Although the outcome of this process is uncertain, we do not expect its resolution to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

We have determined that our legal obligations to remove or remediate certain potentially hazardous materials may be conditional asset retirement obligations, as defined by GAAP. Except in limited circumstances where the asset retirement activities are expected to be performed in connection with a planned construction project or apartment community casualty, we believe that the fair value of our asset retirement obligations cannot

 

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be reasonably estimated due to significant uncertainties in the timing and manner of settlement of those obligations. Asset retirement obligations that are reasonably estimable as of December 31, 2019, are immaterial to our consolidated financial condition, results of operations and cash flows.

Note 7—Aimco Equity

Preferred Stock

During the year ended December 31, 2019, Aimco redeemed all of the outstanding shares of its 6.88% Class A Cumulative Preferred Stock. Aimco’s Class A Preferred Stock had a $0.01 per share par value, was senior to Aimco’s Common Stock, had a liquidation preference per share of $25.00.

In connection with the redemption of Aimco preferred stock, the Aimco Operating Partnership redeemed from Aimco a number of Preferred Partnership Units equal to the number of shares redeemed by Aimco.

Common Stock

During the years ended December 31, 2019, 2018, and 2017, Aimco declared dividends per common share of $1.56, $1.52 and $1.44, respectively.

On February 3, 2019, Aimco’s Board of Directors authorized a reverse stock split, in which every 1.03119 Aimco common share was combined into one Aimco common share, effective at the close of business on February 20, 2019. On the same date, the Board of Directors also declared a special dividend on the Aimco Common Stock that consisted of $67.1 million in cash, 4.5 million shares of Aimco Common Stock, and $0.4 million of cash paid in lieu of issuing fractional units. We paid the special dividend on March 22, 2019, to stockholders of record as of February 22, 2019. The special dividend amount included the regular quarterly cash dividend of $0.39 per share.

Stockholders had the opportunity to elect to receive the special dividend in the form of all cash or all stock, subject to proration if either option was oversubscribed. Aimco’s Board of Directors also authorized a reverse stock split intended to neutralize the dilutive impact of the stock issued in the special dividend. As a result, the total number of shares outstanding after the stock dividend and reverse split was unchanged from the number of shares outstanding immediately prior to the two actions. All equity and earnings per share data, including the number of shares outstanding, have been retroactively adjusted to reflect the reverse stock split for all periods presented in this Annual Report on Form 10-K.

Change to our charter

On February 24, 2020, pursuant to Maryland law and our charter, our Board of Directors reclassified into Common Stock, all of the authorized and unissued shares of each of the following classes of preferred stock: Class Z Cumulative Preferred Stock, Class A Cumulative Preferred Stock, and Series A Community Reinvestment Act Preferred Stock. The reclassification increases the number of authorized shares classified as Common Stock by 9,800,240 shares, from 500,787,260 shares immediately prior to the reclassification to 510,587,500 shares immediately after the reclassification. The reclassification does not impact any of our issued and outstanding shares of preferred stock.

Registration Statements

Aimco has a shelf registration statement that provides for the issuance of equity and debt securities by Aimco.

 

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Note 8 —Partners’ Capital

Redeemable Preferred OP Units

The Aimco Operating Partnership has outstanding various classes of redeemable preferred OP Units. As of December 31, 2019 and 2018, the Aimco Operating Partnership had the following classes of preferred OP Units (stated at their redemption values, in thousands, except unit and per unit data):

 

     Distributions per Annum      Units Issued and Outstanding      Redemption Values  

Class of Preferred Units

   Percent     Per Unit      2019      2018      2019      2018  

Class One

     8.75 %    $ 8.00        90,000        90,000      $ 8,229      $ 8,229  

Class Two

     1.92 %    $ 0.48        11,122        14,240        278        356  

Class Three

     7.88 %    $ 1.97        1,338,524        1,338,524        33,463        33,463  

Class Four

     8.00 %    $ 2.00        644,954        644,954        16,124        16,124  

Class Six

     8.50 %    $ 2.13        773,693        773,693        19,342        19,342  

Class Seven

     7.87 %    $ 1.97        26,150        27,960        654        699  

Class Nine

     6.00 %    $ 1.50        78,956        243,112        1,974        6,078  

Class Ten

     6.00 %    $ 1.50        680,000        680,000        17,000        17,000  
       

 

 

    

 

 

    

 

 

    

 

 

 

Total

          3,643,399        3,812,483      $ 97,064      $ 101,291  
       

 

 

    

 

 

    

 

 

    

 

 

 

Each class of preferred OP Units is currently redeemable at the holders’ option. The Aimco Operating Partnership, at its sole discretion, may settle such redemption requests in cash or cause Aimco to issue shares of its Common Stock with a value equal to the redemption price. In the event the Aimco Operating Partnership requires Aimco to issue shares of Common Stock to settle a redemption request, the Aimco Operating Partnership would issue to Aimco a corresponding number of common OP Units. The Aimco Operating Partnership has a redemption policy that requires cash settlement of redemption requests for the preferred OP Units, subject to limited exceptions. Subject to certain conditions, the Class Four and Class Six preferred OP Units may be converted into common OP Units.

These redeemable units are classified within temporary equity in Aimco’s consolidated balance sheets.

During the years ended December 31, 2019, 2018, and 2017, approximately 169,000, 10,000 and 67,000 preferred OP Units, respectively, were redeemed in exchange for cash, and no preferred OP Units were redeemed in exchange for shares of Aimco Common Stock or common OP Units.

The following table presents a reconciliation of the Aimco Operating Partnership’s preferred OP Units during the year ended December 31, 2019 (in thousands):

 

     2019  

Balance at January 1

   $ 101,291  

Preferred distributions

     (7,708 ) 

Redemption of preferred units

     (4,227 ) 

Net income

     7,708  
  

 

 

 

Balance at December 31

   $ 97,064  
  

 

 

 

Aimco Operating Partnership Partners’ Capital

Common Partnership Units

In Aimco’s consolidated balance sheets, the common OP Units are classified within permanent equity as common noncontrolling interests in the Aimco Operating Partnership.

Common partnership units held by Aimco are not redeemable whereas common OP Units are redeemable at the holders’ option, subject to certain restrictions, on the basis of one common OP Unit for either one share of

 

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Common Stock or cash equal to the fair value of a share of Common Stock at the time of redemption. Aimco has the option to deliver shares of Common Stock in exchange for all or any portion of the common OP Units tendered for redemption. When a limited partner redeems a common OP Unit for Common Stock, Limited Partners’ capital is reduced and the General Partner and Special Limited Partners’ capital is increased.

During the years ended December 31, 2019, 2018, and 2017, approximately 129,000, 224,000 and 268,000 common OP Units, respectively, were redeemed in exchange for cash. During the year ended December 31, 2019, 127,000 common OP Units were redeemed in exchange for shares of Common Stock. No common OP Units were redeemed in exchange for Aimco Common Stock during the years ended December 31, 2018 and 2017.

The holders of the common OP Units receive distributions, prorated from the date of issuance, in an amount equivalent to the dividends paid to holders of Common Stock. During the years ended December 31, 2019, 2018, and 2017, the Aimco Operating Partnership declared distributions per common unit of $1.56, $1.52 and $1.44, respectively.

On February 3, 2019, the Board of Directors of the Aimco Operating Partnership’s general partner authorized a reverse unit split and special distribution in the same form and with the same timing as the reverse stock split and special dividend discussed in Note 7 above. The special distribution to the holders of Aimco Operating Partnership common partnership units that consisted of $72.7 million in cash, 4.8 million common partnership units and $0.4 million of cash paid in lieu of issuing fractional units. Total common partnership units outstanding prior to and following both transactions was unchanged.

Note 9—Share-Based Compensation

We have a stock award and incentive program to attract and retain officers and independent directors. As of December 31, 2019, approximately 3.9 million shares were available for issuance under our Amended and Restated 2015 Stock Award and Incentive Plan, or the 2015 Plan. The total number of shares available for issuance under this plan may increase due to any forfeiture, cancellation, exchange, surrender, termination or expiration of an award outstanding under our 2007 Stock Award and Incentive Plan. Awards under the 2015 Plan may be in the form of incentive stock options, non-qualified stock options and restricted stock, or other types of awards as authorized under the plan.

Our plans are administered by the Compensation and Human Resources Committee of Aimco’s Board of Directors. In the case of stock options, the exercise price of the options granted may not be less than the fair market value of a share of Common Stock at the date of grant.

Total compensation cost recognized for share-based awards was as follows for the years ended December 31, 2019, 2018, and 2017 (in thousands):

 

     2019      2018      2017  

Share-based compensation expense(1)

   $ 8,146      $ 8,550      $ 7,877  

Capitalized share-based compensation(2)

     962        1,215        1,374  
  

 

 

    

 

 

    

 

 

 

Total share-based compensation(3)

   $ 9,108      $ 9,765      $ 9,251  
  

 

 

    

 

 

    

 

 

 

 

(1)

Amounts are recorded in general and administrative expenses on the consolidated statements of operations.

(2)

Amounts are recorded in building and improvements on the consolidated balance sheets.

(3)

Amounts are recorded in additional paid-in capital and common noncontrolling interests in the Aimco Operating Partnership on the Aimco consolidated balance sheets.

As of December 31, 2019, total unvested compensation cost not yet recognized was $10.3 million. We expect to recognize this compensation over a weighted-average period of approximately 1.6 years.

 

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We grant stock options and restricted stock awards that are subject to time-based vesting and require continuous employment, typically over a period of four years from the grant date, and we refer to these awards as Time-Based Stock Options and Time-Based Restricted Stock, respectively. We also grant stock options, restricted stock awards, and two forms of long-term incentive partnership units, or LTIP units, that vest conditioned on Aimco’s total shareholder return, or TSR, relative to the NAREIT Equity Apartment Index (60% weighting) and the MSCI US REIT Index (40% weighting) over a forward-looking performance period of three years. We refer to these awards as TSR Stock Options, TSR Restricted Stock, TSR LTIP I units, and TSR LTIP II units. Vested LTIP II units may be converted at the holders’ option to LTIP Units for a strike price over a term of 10 years. Earned TSR-based awards, if any, will vest 50% on each of the third anniversary and fourth anniversary of the grant date, based on continued employment. Our Time-Based Stock Options and TSR Stock Options expire generally 10 years from the date of grant.

We recognize compensation cost associated with Time-Based awards ratably over the requisite service periods, which are typically four years. We recognize compensation cost related to the TSR-based awards, which have graded vesting periods, over the requisite service period for each separate vesting tranche of the award, commencing on the grant date. The value of the TSR-based awards take into consideration the probability that the market condition will be achieved; therefore previously recorded compensation cost is not adjusted in the event that the market condition is not achieved and awards do not vest.

We had Time-Based Stock Options, Time-Based Restricted Stock, TSR Stock Options, TSR Restricted Stock, TSR LTIP I units and TSR LTIP II units outstanding as of December 31, 2019.

Stock Options

The following table summarizes activity for our outstanding stock options, for the years ended December 31, 2019, 2018, and 2017 (options in thousands):

 

     2019      2018      2017  
     Number of
Options 		    Weighted-
Average
Exercise
Price 		     Number of
Options 		    Weighted-
Average
Exercise
Price 		     Number of
Options 		    Weighted-
Average
Exercise
Price 		 

Outstanding at beginning of year

     646     $ 40.12        648     $ 40.08        675     $ 29.55  

Granted

     —         —          —         —          184       44.07  

Exercised

     (5 )      8.92        (2 )      28.33        (211 )      9.90  

Forfeited

     —         —          —         —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at end of year

     641     $ 40.30        646     $ 40.12        648     $ 40.08  

Exercisable at end of year

     458     $ 38.78        186     $ 38.18        128     $ 37.59  

The intrinsic value of a stock option represents the amount by which the current price of the underlying stock exceeds the exercise price of the option. As of December 31, 2019, stock options outstanding had an aggregate intrinsic value of $7.3 million and a weighted-average remaining contractual term of 6 years. Stock options exercisable as of December 31, 2019, had an aggregate intrinsic value of $5.9 million and a weighted-average remaining contractual term of 5.5 years. The intrinsic value of stock options exercised during the years ended December 31, 2019, 2018, and 2017, was $0.1 million, $0.0 million and $7.1 million, respectively.

During 2017, we granted TSR Stock Options. The weighted-average grant date fair value of stock options granted during the year ended 2017 was $11.39 per option.

 

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Time-Based Restricted Stock Awards

The following table summarizes activity for Time-Based Restricted Stock awards for the years ended December 31, 2019, 2018, and 2017 (shares in thousands):

 

     2019      2018      2017  
     Number of
Shares 		    Weighted-
Average
Grant-Date
Fair Value 		     Number of
Shares 		    Weighted-
Average
Grant-Date
Fair Value 		     Number of
Shares 		    Weighted-
Average
Grant-Date
Fair Value 		 

Unvested at beginning of year

     121     $ 40.82        155     $ 37.63        241     $ 33.61  

Granted

     48       47.71        49       40.01        44       44.07  

Vested

     (75 )      42.76        (83 )      34.42        (130 )      32.35  

Forfeited

     (2 )      38.80        —         —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Unvested at end of year

     92     $ 42.86        121     $ 40.82        155     $ 37.63  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The aggregate fair value of Time-Based Restricted Stock awards and TSR Restricted Stock awards that vested during the years ended December 31, 2019, 2018, and 2017 was $13.7 million, $8.4 million and $6.0 million, respectively.

TSR Restricted Stock Awards

The following table summarizes activity for TSR Restricted Stock awards for the years ended December 31, 2019, 2018, and 2017 (shares in thousands):

 

     2019      2018      2017  
     Number of
Shares 		    Weighted-
Average
Grant-Date
Fair Value 		     Number of
Shares 		    Weighted-
Average
Grant-Date
Fair Value 		     Number of
Shares 		     Weighted-
Average
Grant-Date
Fair Value 		 

Unvested at beginning of year

     171     $ 41.65        246     $ 40.70        208      $ 39.66  

Granted(1)

     39       54.73        44       41.71        38        46.39  

Change in awards(2)

     216       39.67        —       —        —        —  

Vested

     (213 )      39.67        (119 )      39.72        —        —  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Unvested at end of year

     213     $ 43.99        171     $ 41.65        246      $ 40.70  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)

Based on target performance payout.

(2)

Represents the change in the number of restricted stock awards earned at the end of the measurement period.

TSR LTIP I Units

The following table summarizes activity for TSR LTIP I units for the years ended December 31, 2019, 2018, and 2017 (units in thousands):

 

     2019      2018      2017  
     Number
of
Units 		     Weighted-
Average
Grant-Date
Fair Value 		     Number
of
Units 		     Weighted-
Average
Grant-Date
Fair Value 		     Number of
Units 		     Weighted-
Average
Grant-Date
Fair Value 		 

Unvested at beginning of year

     93      $ 43.78        45      $ 46.21        —      $ —    

Granted

     6        55.17        48        41.48        45        46.21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unvested at end of year

     99      $ 44.38        93      $ 43.78        45      $ 46.21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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TSR LTIP II Units

The following table summarizes activity for TSR LTIP II units for the years ended December 31, 2019 and 2018 (units in thousands):

 

     2019      2018  
     Number
of
Units 		     Weighted-
Average
Grant-Date
Fair Value 		     Number of
Units 		     Weighted-
Average
Grant-Date
Fair Value 		 

Unvested at beginning of year

     243      $ 8.29        —      $ —    

Granted

     356        12.03        243        8.29  
  

 

 

    

 

 

    

 

 

    

 

 

 

Unvested at end of year

     599      $ 10.51        243      $ 8.29  
  

 

 

    

 

 

    

 

 

    

 

 

 

Determination of Grant-Date Fair Value of Awards

We estimated the fair value of TSR-based awards granted in 2019, 2018, and 2017 using a Monte Carlo model with the assumptions set forth in the table below.

The risk-free interest rate reflects the annualized yield of a zero coupon United States Treasury security with a term equal to the expected term of the awards. The expected dividend yield reflects expectations regarding cash dividend amounts per share paid on Aimco’s Common Stock during the expected term of the awards. Expected volatility reflects an average of the historical volatility of Aimco’s Common Stock during the historical period commensurate with the expected term of the award that ended on the date of grant, and the implied volatility is calculated from observed call option contracts closest to the expected term. The derived vesting period of TSR Restricted Stock and TSR LTIP I units was determined based on the graded vesting terms. The expected term of the TSR-options and TSR LTIP II units was based on historical exercises and post-vesting terminations. The valuation assumptions for the 2019, 2018, and 2017 grants were as follows:

 

     2019      2018      2017  

Grant date market value of a common share

     $49.24        $40.95        $44.07  

Risk-free interest rate

     2.59% - 2.66 %       2.32% - 2.68 %       1.57% - 2.22 % 

Dividend yield

     3.09 %       3.52 %       3.27 % 

Expected volatility

     19.08% - 19.24 %       17.64% - 18.02 %       21.33% - 23.00 % 

Derived vesting period of TSR Restricted Stock and TSR LTIP I units

     3.4 years        3.4 years        3.4 years  

Weighted average expected term of TSR Stock Options and LTIP II units

     5.8 years        5.6 years        5.8 years  

The grant date fair value for the Time-Based Restricted Stock awards reflects the closing price of a share of Aimco Common Stock on the grant date.

 

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Note 10—Income Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities of the TRS entities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows (in thousands):

 

     December 31,  
     2019      2018  

Deferred tax liabilities:

     

Real estate and real estate partnership basis differences

   $ 126,269      $ 12,058  

Deferred tax assets:

     

Tax credit carryforwards

   $ 53,776      $ 67,530  

Net operating, capital and other loss carryforwards

     6,147        7,022  

Accruals and expenses

     6,138        7,432  

Management contracts and other

     1,379        2,064  
  

 

 

    

 

 

 

Total deferred tax assets

     67,440        84,048  
  

 

 

    

 

 

 

Valuation allowance

     (4,766 )       (4,930 ) 
  

 

 

    

 

 

 

Net deferred tax (liabilities) assets

   $ (63,595 )     $ 67,060  
  

 

 

    

 

 

 

As of December 31, 2019, deferred tax liabilities, net, were presented in accrued liabilities and other in our consolidated balance sheets. As of December 31, 2018, deferred tax assets, net, were presented in other assets in our consolidated balance sheets.

During the year ended December 31, 2019, we recognized a $148.8 million deferred tax liability in connection with the acquisition of 1001 Brickell Bay Drive, as discussed in Note 3.

As of December 31, 2019, we had federal and state net operating loss carryforwards, or NOLs, for which the deferred tax asset was approximately $6.1 million, before a valuation allowance of $4.8 million. The NOLs expire in years 2020 to 2038. Subject to certain separate return limitations, we may use these NOLs to offset a portion of state taxable income generated by our TRS entities. As of December 31, 2019, we also had low-income housing and rehabilitation tax credit carryforwards and corresponding deferred tax assets of approximately $53.8 million for income tax purposes that expire in years 2035 to 2039.

A reconciliation of the beginning and ending balance of our unrecognized tax benefits is presented below (in thousands):

 

     2019      2018      2017  

Balance at January 1

   $ 2,618      $ 2,476      $ 2,286  

Additions based on tax position taken in current year

     2,758        —        —  

Additions based on tax positions related to prior years

     226        142        190  

Reductions as a result of a lapse of the applicable statutes

     (522 )       —        —  
  

 

 

    

 

 

    

 

 

 

Balance at December 31

   $ 5,080      $ 2,618      $ 2,476  
  

 

 

    

 

 

    

 

 

 

Because the statute of limitations has not yet elapsed, our United States federal income tax returns for the year ended December 31, 2014, and subsequent years and certain of our State income tax returns for the year ended December 31, 2014, and subsequent years are currently subject to examination by the IRS or other taxing authorities. If recognized, the unrecognized benefit would affect the effective rate.

 

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Table of Contents

In 2014, the IRS initiated an audit of the Aimco Operating Partnership’s 2011 and 2012 tax years. This audit was concluded during the year ended December 31, 2019, with no material effect on our tax benefits, financial condition or results of operations.

Our policy is to include any interest and penalties related to income taxes within the income tax line item in our consolidated statements of operations.

In accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the exercise of stock options by employees of our TRS entities and the vesting of restricted stock awards. We recognize the tax effects related to stock-based compensation through earnings in the period the compensation was recognized.

Significant components of the income tax benefit or expense are as follows and are classified within income tax benefit in our consolidated statements of operations for the years ended December 31, 2019, 2018, and 2017 (in thousands):

 

     2019      2018      2017  

Current:

        

Federal

   $ 6,115      $ 11,269      $ (938 ) 

State

     8,982        10,537        525  
  

 

 

    

 

 

    

 

 

 

Total current

     15,097        21,806        (413 ) 
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     (12,891 )       (29,243 )       (10,908 ) 

State

     (5,341 )       (5,590 )       (3,621 ) 

Revaluation of deferred taxes due to change in tax rate

     —        —        (15,894 ) 
  

 

 

    

 

 

    

 

 

 

Total deferred

     (18,232 )       (34,833 )       (30,423 ) 
  

 

 

    

 

 

    

 

 

 

Total benefit

   $ (3,135 )     $ (13,027 )     $ (30,836 ) 
  

 

 

    

 

 

    

 

 

 

Consolidated income or loss subject to tax consists of pretax income or loss of our TRS entities and income and gains retained by the REIT. For the years ended December 31, 2019, 2018, and 2017, we had consolidated net loss subject to tax of $21.2 million, net income subject to tax of $158.6 million, and net loss subject to tax of $55.6 million, respectively. Net loss subject to tax for the year ended December 31, 2019 included a $7.7 million net loss of a foreign subsidiary.

 

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Table of Contents

The reconciliation of income tax attributable to operations computed at the United States statutory rate to income tax benefit is shown below (dollars in thousands):

 

     2019     2018     2017  
     Amount     Percent     Amount     Percent     Amount     Percent  

Tax (benefit) provision at United States statutory rates on consolidated income or loss subject to tax

   $ (4,442 )      21.0 %    $ 33,296       21.0 %    $ (19,459 )      35.0 % 

United States branch profits tax on losses of a foreign subsidiary

     (1,813 )      8.6 %      —       — %      —       — % 

State income tax expense, net of federal tax (benefit) expense

     3,935       (18.6 %)      12,252       7.7 %      (1,769 )      3.2 % 

Establishment of deferred tax asset related to partnership basis difference(1)

     —       — %      —       — %      (3,501 )      6.3 % 

Effect of permanent differences

     (138 )      0.7 %      302       0.2 %      (1,629 )      2.9 % 

Tax effect of intercompany transactions(2)

     —       — %      (33,250 )      (21.0 %)      —       — % 

Tax credits

     (667 )      3.2 %      (6,897 )      (4.4 %)      (9,607 )      17.3 % 

Tax reform revaluation(3)

     —       — %      288       0.2 %      (15,894 )      28.6 % 

(Decrease) increase in valuation allowance(4)

     (164 )      0.8 %      (20,434 )      (12.9 %)      21,023       (37.8 %) 

Other

     154       (0.7 %)      1,416       0.9 %      —       — % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax benefit

   $ (3,135 )      15.0 %    $ (13,027 )      (8.3 %)    $ (30,836 )      55.5 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

2017 includes the establishment of a deferred tax asset related to partnership basis difference when it became apparent that it would reverse in the foreseeable future. This deferred tax asset was fully reserved in the valuation allowance described below as of December 31, 2017.

(2)

Effective January 1, 2017, we adopted a new accounting standard applicable to intercompany asset transfers. As a result, the accumulated unrecognized deferred tax expense associated with historical intercompany transfers was recognized as a cumulative effect adjustment through retained earnings at that time. 2018 includes the tax benefit to establish the initial deferred tax asset from the intercompany transfer of a portion of the Asset Management business between the Aimco Operating Partnership and TRS entities.

(3)

Reflects revaluation of deferred tax assets and liabilities using the TRS entities’ lower effective tax rates resulting from the 2017 Act. Accounting for the tax effects of enactment of the 2017 Act was finalized during the year ended December 31, 2018.

(4)

2019 includes a $0.2 million release of a valuation allowance for expired state NOL carryforwards. 2017 includes a $15.4 million valuation allowance against the deferred tax assets associated with rehabilitation tax credits due to the lower federal tax rate under the 2017 Act. This valuation allowance was reversed in 2018 as a result of the sale of our Asset Management business.

Income taxes paid totaled approximately $12.2 million, $11.5 million and $7.4 million in the years ended December 31, 2019, 2018, and 2017, respectively.

 

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Table of Contents

For income tax purposes, dividends paid to holders of Common Stock primarily consist of ordinary income, capital gains, qualified dividends and unrecaptured Section 1250 gains, or a combination thereof. For the years ended December 31, 2019, 2018, and 2017, dividends per share held for the entire year were estimated to be taxable as follows:

 

     2019     2018     2017  
     Amount      Percentage     Amount      Percentage     Amount      Percentage  

Ordinary income

   $ 0.66        20.7 %    $ 0.51        33.4 %    $ 0.75        51.5 % 

Capital gains

     1.29        40.4 %      0.93        61.2 %      0.51        35.7 % 

Qualified dividends

     0.66        20.7 %      —        — %      0.02        1.6 % 

Unrecaptured Section 1250 gain

     0.58        18.2 %      0.08        5.4 %      0.16        11.2 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3.19        100.0 %    $ 1.52        100.0 %    $ 1.44        100.0 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Note 11—Earnings per Share

Aimco calculates basic earnings per common share based on the weighted-average number of shares of Common Stock outstanding. We calculate diluted earnings per share taking into consideration dilutive common stock equivalents and dilutive convertible securities outstanding during the period.

Our common stock equivalents include options to purchase shares of Common Stock, which, if exercised, would result in Aimco’s issuance of additional shares and the Aimco Operating Partnership’s issuance to Aimco of additional common partnership units equal to the number of shares purchased under the options. These equivalents also include unvested TSR Restricted Stock awards that do not meet the definition of participating securities, which would result in an increase in the number of shares of Common Stock outstanding equal to the number of the shares that vest. We include in the denominator securities with dilutive effect in calculating diluted earnings per share during these periods.

Our Time-Based Restricted Stock awards receive non-forfeitable dividends similar to shares of Common Stock prior to vesting, and our TSR LTIP I units and TSR LTIP II units receive non-forfeitable distributions based on specified percentages of the distributions paid to common partnership units prior to vesting and conversion. The unvested restricted shares and units related to these awards are participating securities. We include the effect of participating securities in basic and diluted earnings per share computations using the two-class method of allocating distributed and undistributed earnings when the two-class method is more dilutive than the treasury stock method.

Reconciliations of the numerator and denominator in the calculations of basic and diluted earnings per share and per unit for the years ended December 31, 2019, 2018, and 2017 are as follows (in thousands, except per share and per unit data):

 

     2019      2018      2017  

Earnings per share

        

Numerator:

        

Basic and dilutive net income attributable to Aimco common stockholders

   $ 466,144      $ 656,597      $ 306,861  

Denominator—shares:

        

Basic weighted-average Common Stock outstanding

     147,718        151,152        151,595  

Dilutive share equivalents outstanding

     226        182        465  
  

 

 

    

 

 

    

 

 

 

Dilutive weighted-average Common Stock outstanding

     147,944        151,334        152,060  
  

 

 

    

 

 

    

 

 

 

Earnings per share—basic

   $ 3.16      $ 4.34      $ 2.02  
  

 

 

    

 

 

    

 

 

 

Earnings per share—dilutive

   $ 3.15      $ 4.34      $ 2.02  
  

 

 

    

 

 

    

 

 

 

Non-dilutive share equivalents outstanding

     —        269        184  

 

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Table of Contents

As discussed in Note 7, the Aimco Operating Partnership has various classes of preferred OP Units, which may be redeemed at the holders’ option. The Aimco Operating Partnership may redeem these units for cash, or at its option, shares of Common Stock. As of December 31, 2019, these preferred OP Units were potentially redeemable for approximately 1.9 million shares of Common Stock (based on the period end market price), or cash. The Aimco Operating Partnership has a redemption policy that requires cash settlement of redemption requests for the preferred OP Units, subject to limited exceptions. Accordingly, we have excluded these securities from earnings per share computations for the periods presented above, and we expect to exclude them in future periods.

Note 12—Fair Value Measurements

Recurring Fair Value Measurements

We measure at fair value on a recurring basis our investment in the securitization trust that holds certain of our property debt, which we classify as AFS debt securities. These investments are presented within other assets in the consolidated balance sheets. We hold several positions in the securitization trust that pay interest currently and we also hold the first loss position in the securitization trust, which accrues interest over the term of the investment. These investments were acquired at a discount to face value and we are accreting the discount to the $100.9 million face value of the investments through interest income using the effective interest method over the remaining expected term of the investments, which as of December 31, 2019, was approximately 1.6 years. Our amortized cost basis for these investments, which represents the original cost adjusted for interest accretion less interest payments received, was $90.0 million and $83.6 million at December 31, 2019 and 2018, respectively.

Our investments in AFS debt securities are classified within Level 2 of the GAAP fair value hierarchy. We estimate the fair value of these investments using an income and market approach with primarily observable inputs, including yields and other information regarding similar types of investments, and adjusted for certain unobservable inputs specific to these investments. The fair value of the positions that pay interest currently typically moves in an inverse relationship with movements in interest rates. The fair value of the first loss position is primarily correlated to collateral quality and demand for similar subordinate commercial mortgage-backed securities.

The following table summarizes fair value for our AFS debt securities as of December 31, 2019 and 2018 (in thousands):

 

     As of December 31,  
     2019      2018  
     Total Fair
Value 		     Level 1      Level 2      Level 3      Total Fair
Value 		     Level 1      Level 2      Level 3  

AFS debt securities

   $ 94,251      $ —        $ 94,251      $ —        $ 88,457      $ —        $ 88,457      $ —    

Non-Recurring Fair Value Measurements

We believe that the carrying value of the consolidated amounts of cash and cash equivalents, accounts receivables and payables approximated their fair value as of December 31, 2019 and 2018, due to their relatively short-term nature and high probability of realization. The carrying amounts of notes receivable and the revolving credit facility approximated their estimated fair value as of December 31, 2019. We estimate the fair value of our non-recourse property debt using an income and market approach, including comparison of the contractual terms to observable and unobservable inputs such as market interest rate risk spreads, contractual interest rates, remaining periods to maturity, collateral quality and loan to value ratios on similarly encumbered apartment communities within our portfolio. We classify the fair value of our non-recourse property debt within Level 2 of the GAAP valuation hierarchy based on the significance of certain of the unobservable inputs used to estimate its fair value.

 

F-33

Table of Contents

The following table summarizes carrying value and fair value of our non-recourse property debt as of December 31, 2019 and 2018 (in thousands):

 

     As of December 31,  
     2019      2018  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Non-recourse property debt

   $ 4,251,339      $ 4,298,630      $ 3,937,000      $ 3,893,171  

Note 13—Business Segments

In 2019, as a result of the 2018 sale of the Asset Management business, we revised the information regularly reviewed by our chief executive officer, who is our chief operating decision maker, to assess our operating performance. We have determined we have four segments: Same Store, Redevelopment and Development, Acquisition, and Other Real Estate.

Our Same Store segment includes communities that have reached a stabilized level of operations as of the beginning of a two-year comparable period and maintained it throughout the current and comparable prior year, and are not expected to be sold within 12 months. Our Redevelopment and Development segment includes apartment communities that are currently under construction that have not achieved a stabilized level of operations, and those that have been completed in recent years that have not achieved and maintained stabilized operations for both the current and comparable prior year. Our Acquisition segment includes communities that we have acquired since the beginning of a two-year comparable period. Our Other Real Estate segment primarily includes communities that are subject to limitations on rent increases, communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale, certain retail spaces and 1001 Brickell Bay Drive.

Our chief operating decision maker uses proportionate property net operating income to assess the operating performance of our apartment communities. Proportionate property net operating income is defined as our share of rental and other property revenues, excluding utility costs reimbursed by residents, less our share of property operating expenses, net of utility reimbursements, for consolidated communities. In our consolidated statements of operations, utility reimbursements are included in rental and other property revenues attributable to real estate, in accordance with GAAP.

As of December 31, 2019, our Same Store segment included 91 consolidated apartment communities with 26,649 apartment homes; our Redevelopment and Development segment included seven consolidated communities with 3,143 homes; our Acquisition segment included seven consolidated communities with 1,590 homes; and our Other Real Estate segment included 15 consolidated communities with 1,315 homes and one office building.

 

F-34

Table of Contents

The following tables present the revenues, proportionate property net operating income and income before income tax benefit of our segments on a proportionate basis and excluding our proportionate share of four apartment communities with 142 apartment homes that we neither manage nor consolidate, and amounts related to communities sold as of December 31, 2019 for the years ended December 31, 2019, 2018, and 2017 (in thousands):

 

    Same
Store 		    Redevelopment
and
Development 		    Acquisition     Other
Real
Estate 		    Proportionate
and Other
Adjustments(1) 		    Corporate and
Amounts Not
Allocated to
Segments(2) 		    Consolidated  

Year ended December 31, 2019:

             

Total revenues

  $ 691,379     $ 75,522     $ 42,038     $ 45,105     $ 33,450     $ 26,800     $ 914,294  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses attributable to real estate

    181,802       27,919       11,715       17,717       31,140       40,928       311,221  

Other operating expenses not allocated to segments(3)

    —         —         —         —       —         446,300       446,300  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    181,802       27,919       11,715       17,717       31,140       487,228       757,521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proportionate property net operating income

    509,577       47,603       30,323       27,388       2,310       (460,428 )      156,773  

Other items included in income before income tax benefit(4)

    —         —         —         —         —         348,119       348,119  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax benefit

  $ 509,577     $ 47,603     $ 30,323     $ 27,388     $ 2,310     $ (112,309 )    $ 504,892  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Same
Store 		    Redevelopment
and
Development 		    Acquisition     Other
Real
Estate 		    Proportionate
and Other
Adjustments(1) 		    Corporate and
Amounts Not
Allocated to
Segments(2) 		    Consolidated  

Year ended December 31, 2018:

             

Total revenues

  $ 665,835     $ 76,687     $ 27,923     $ 37,647     $ 31,442     $ 132,876     $ 972,410  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses attributable to real estate

    177,466       27,836       7,689       14,910       29,323       50,677       307,901  

Other operating expenses not allocated to segments(3)

    —         —         —         —         —         448,753       448,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    177,466       27,836       7,689       14,910       29,323       499,430       756,654  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proportionate property net operating income

    488,369       48,851       20,234       22,737       2,119       (366,554 )      215,756  

Other items included in income before income tax benefit(4)

    —         —         —         —         —         487,820       487,820  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax benefit

  $ 488,369     $ 48,851     $ 20,234     $ 22,737     $ 2,119     $ 121,266     $ 703,576  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-35

Table of Contents
     Same
Store 		     Redevelopment
and
Development 		    Acquisition     Other
Real
Estate 		    Proportionate
and Other
Adjustments(1) 		    Corporate and
Amounts Not
Allocated to
Segments(2) 		    Consolidated  

Year ended December 31, 2017:

               

Total revenues

   $ 626,311      $ 72,995     $ —       $ 36,869     $ 39,776     $ 229,486     $ 1,005,437  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses attributable to real estate

     171,167        26,471       —         14,121       29,782       77,585       319,126  

Other operating expenses not allocated to segments(3)

     —          —         —       —         —         492,328       492,328  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     171,167        26,471       —       14,121       29,782       569,913       811,454  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proportionate property net operating income

     455,144        46,524       —         22,748       9,994       (340,427 )      193,983  

Other items included in income before income tax benefit(4)

     —          —         —         —         —         122,260       122,260  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax benefit

   $ 455,144      $ 46,524     $ —       $ 22,748     $ 9,994     $ (218,167 )    $ 316,243  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents adjustments for the noncontrolling interests in consolidated real estate partnerships’ share of the results of consolidated apartment communities in our segments, which are included in the related consolidated amounts, but excluded from proportionate property net operating income for our segment evaluation. Also includes the reclassification of utility reimbursements from revenues to property operating expenses for the purpose of evaluating segment results. Utility reimbursements are included in rental and other property revenues attributable to real estate in our consolidated statements of operations prepared in accordance with GAAP.

(2)

Includes the operating results of apartment communities sold during the periods shown or held for sale at the end of the period, if any, and the operating results of communities owned by consolidated partnerships served by our Asset Management business prior to its sale in July 2018. Corporate and Amounts Not Allocated to Segments also includes property management expenses and casualty gains and losses, which are included in consolidated property operating expenses and are not part of our segment performance measure.

(3)

Other operating expenses not allocated to segments consists of property operating expenses of partnerships served by our Asset Management business prior to its sale in July 2018, depreciation and amortization, general and administrative expenses and other operating expenses including provision for real estate impairment loss, which are not included in our measure of segment performance.

(4)

Other items included in income before income tax benefit primarily consists of gain on dispositions of real estate and the Asset Management business and interest expense.

The assets of our segments and the consolidated assets not allocated to our segments were as follows (in thousands):

 

     December 31,
2019 		     December 31,
2018 		 

Same Store

   $ 3,982,586      $ 4,068,880  

Redevelopment and Development

     946,390        792,126  

Acquisition

     623,037        507,190  

Other Real Estate

     647,725        327,092  

Corporate and other assets(1)

     629,001        494,716  
  

 

 

    

 

 

 

Total consolidated assets

   $ 6,828,739      $ 6,190,004  
  

 

 

    

 

 

 

 

(1)

Includes the assets not allocated to our segments, primarily corporate assets, assets of apartment communities which were sold or classified as held for sale as of December 31, 2019, and the Asset Management business.

 

F-36

Table of Contents

For the years ended December 31, 2019, 2018, and 2017, capital additions related to our segments were as follows (in thousands):

 

     2019      2018      2017  

Same Store

   $ 153,944      $ 171,869      $ 215,130  

Redevelopment and Development

     194,498        138,103        84,712  

Acquisition

     33,122        14,228        —  

Other Real Estate

     20,011        6,314        12,044  
  

 

 

    

 

 

    

 

 

 

Total capital additions

   $ 401,575      $ 330,514      $ 311,886  
  

 

 

    

 

 

    

 

 

 

Note 14—Unaudited Summarized Consolidated Quarterly Information

Aimco’s summarized unaudited consolidated quarterly information for the years ended December 31, 2019 and 2018, is provided below (in thousands, except per share amounts):

 

     Quarter  

2019

   First      Second      Third      Fourth  

Total revenues

   $ 230,235      $ 224,200      $ 229,827      $ 230,032  

Net income

     291,295        69,996        3,970        142,766  

Net income attributable to Aimco common stockholders

     271,568        59,234        2,003        133,339  

Net income attributable to Aimco common stockholders per common share—basic

   $ 1.88      $ 0.40      $ 0.01      $ 0.90  

Net income attributable to Aimco common stockholders per common share—diluted

   $ 1.88      $ 0.40      $ 0.01      $ 0.90  

 

     Quarter  

2018

   First      Second      Third      Fourth  

Total revenues

   $ 247,720      $ 250,187      $ 242,481      $ 232,022  

Net income

     95,690        7,156        603,917        9,840  

Net income attributable to Aimco common stockholders

     81,525        2,817        567,029        5,226  

Net income attributable to Aimco common stockholders per common share—basic

   $ 0.54      $ 0.02      $ 3.73      $ 0.04  

Net income attributable to Aimco common stockholders per common share—diluted

   $ 0.54      $ 0.02      $ 3.73      $ 0.04  

 

F-37

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

SCHEDULE III: REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2019

(In Thousands Except Apartment Home Data)

 

       

(1)

Date
Consolidated

                  Initial Cost     (2)
Cost Capitalized
Subsequent to
Consolidation 		    As of December 31, 2019  

Apartment Community
Name

 

Apartment
Type

 

Location

  Year
Built 		    Apartment
Homes 		    Land     Buildings and
Improvements 		    Land     Buildings and
Improvements 		    (3)
Total 		    (4)
Accumulated
Depreciation (AD) 		    Total Cost
Net of AD 		    (5)
Encumbrances 		 

Same Store Sales:

                           

100 Forest Place

  High Rise   Dec 1997   Oak Park, IL     1987       234     $ 2,664     $ 18,815     $ 11,145     $ 2,664     $ 29,960     $ 32,624     $ (16,676 )    $ 15,948     $ 34,453  

118-122 West 23rd Street

  High Rise   Jun 2012   New York, NY     1987       42       14,985       23,459       6,914       14,985       30,373       45,358       (10,461 )      34,897       16,999  

1045 on the Park Apartment Homes

  Mid Rise   Jul 2013   Atlanta, GA     2012       30       2,793       6,662       819       2,793       7,481       10,274       (1,739 )      8,535       —    

1582 First Avenue

  High Rise   Mar 2005   New York, NY     1900       17       4,281       752       518       4,281       1,270       5,551       (650 )      4,901       2,226  

21 Fitzsimons

  Mid Rise   Aug 2014   Aurora, CO     2008       600       12,864       104,720       27,677       12,864       132,397       145,261       (26,098 )      119,163       89,413  

2200 Grace

  Mid Rise   Dec 1999   Lombard, IL     1971       72       642       7,788       294       642       8,082       8,724       (4,549 )      4,175       7,448  

2900 on First Apartments

  Mid Rise   Oct 2008   Seattle, WA     1989       135       19,070       17,518       34,356       19,070       51,874       70,944       (29,578 )      41,366       13,594  

306 East 89th Street

  High Rise   Jul 2004   New York, NY     1930       20       2,680       1,006       1,099       2,680       2,105       4,785       (1,046 )      3,739       1,816  

322-324 East 61st Street

  High Rise   Mar 2005   New York, NY     1900       40       6,372       2,224       1,598       6,372       3,822       10,194       (2,009 )      8,185       3,339  

3400 Avenue of the Arts

  Mid Rise   Mar 2002   Costa Mesa, CA     1987       770       57,241       65,506       88,112       57,241       153,618       210,859       (92,205 )      118,654       142,476  

452 East 78th Street

  High Rise   Jan 2004   New York, NY     1900       12       1,982       608       600       1,982       1,208       3,190       (548 )      2,642       —    

510 East 88th Street

  High Rise   Jan 2004   New York, NY     1900       20       3,163       1,002       653       3,163       1,655       4,818       (726 )      4,092       —    

514-516 East 88th Street

  High Rise   Mar 2005   New York, NY     1900       36       6,282       2,168       1,617       6,282       3,785       10,067       (1,868 )      8,199       3,620  

Axiom

  Mid Rise   Apr 2015   Cambridge, MA     2015       115       —         63,612       2,665       —         66,277       66,277       (11,504 )      54,773       32,253  

Bank Lofts

  High Rise   Apr 2001   Denver, CO     1920       125       3,525       9,045       5,797       3,525       14,842       18,367       (8,109 )      10,258       10,218  

Bay Ridge at Nashua

  Garden   Jan 2003   Nashua, NH     1984       412       3,262       40,713       17,995       3,262       58,708       61,970       (26,731 )      35,239       50,638  

Bayberry Hill Estates

  Garden   Aug 2002   Framingham, MA     1971       424       19,944       35,945       25,151       19,944       61,096       81,040       (30,503 )      50,537       44,197  

Bluffs at Pacifica, The

  Garden   Oct 2006   Pacifica, CA     1963       64       8,108       4,132       17,349       8,108       21,481       29,589       (11,400 )      18,189       —    

Boston Lofts

  High Rise   Apr 2001   Denver, CO     1890       158       3,446       20,589       6,715       3,446       27,304       30,750       (14,706 )      16,044       14,927  

Boulder Creek

  Garden   Jul 1994   Boulder, CO     1973       221       754       7,730       20,791       754       28,521       29,275       (20,708 )      8,567       37,861  

Broadcast Center

  Garden   Mar 2002   Los Angeles, CA     1990       279       29,407       41,244       31,856       29,407       73,100       102,507       (32,455 )      70,052       96,880  

Broadway Lofts

  High Rise   Sep 2012   San Diego, CA     1909       84       5,367       14,442       7,647       5,367       22,089       27,456       (6,031 )      21,425       11,298  

Burke Shire Commons

  Garden   Mar 2001   Burke, VA     1986       360       4,867       23,617       19,855       4,867       43,472       48,339       (27,328 )      21,011       56,855  

 

F-38

Table of Contents
       

(1)

Date
Consolidated

                  Initial Cost     (2)
Cost Capitalized
Subsequent to
Consolidation 		    As of December 31, 2019  

Apartment Community
Name

 

Apartment
Type

 

Location

  Year
Built 		    Apartment
Homes 		    Land     Buildings and
Improvements 		    Land     Buildings and
Improvements 		    (3)
Total 		    (4)
Accumulated
Depreciation (AD) 		    Total Cost
Net of AD 		    (5)
Encumbrances 		 

Calhoun Beach Club

  High Rise   Dec 1998   Minneapolis, MN     1928       332     $ 11,708     $ 73,334     $ 65,713     $ 11,708     $ 139,047     $ 150,755     $ (85,259 )    $ 65,496     $ —    

Canyon Terrace

  Garden   Mar 2002   Saugus, CA     1984       130       7,508       6,601       7,008       7,508       13,609       21,117       (7,711 )      13,406       —    

Cedar Rim

  Garden   Apr 2000   Newcastle, WA     1980       104       761       5,218       13,873       761       19,091       19,852       (14,179 )      5,673       —    

Charlesbank Apartment Homes

  Mid Rise   Sep 2013   Watertown, MA     2012       44       3,399       11,726       1,018       3,399       12,744       16,143       (2,931 )      13,212       —    

Chestnut Hall

  High Rise   Oct 2006   Philadelphia, PA     1923       315       12,338       14,299       13,223       12,338       27,522       39,860       (13,266 )      26,594       35,834  

Creekside

  Garden   Jan 2000   Denver, CO     1974       328       3,189       12,698       7,404       3,189       20,102       23,291       (13,579 )      9,712       11,066  

Crescent at West Hollywood, The

  Mid Rise   Mar 2002   West Hollywood, CA     1985       130       15,765       10,215       8,281       15,765       18,496       34,261       (12,337 )      21,924       39,336  

Elm Creek

  Mid Rise   Dec 1997   Elmhurst, IL     1987       400       5,910       30,830       32,788       5,910       63,618       69,528       (35,969 )      33,559       50,296  

Evanston Place

  High Rise   Dec 1997   Evanston, IL     1990       190       3,232       25,546       16,703       3,232       42,249       45,481       (20,982 )      24,499       —    

Four Quarters Habitat

  Garden   Jan 2006   Miami, FL     1976       336       2,379       17,199       32,991       2,379       50,190       52,569       (30,456 )      22,113       50,716  

Foxchase

  Garden   Dec 1997   Alexandria, VA     1940       2,113       15,496       96,062       64,213       15,496       160,275       175,771       (92,368 )      83,403       218,337  

Georgetown

  Garden   Aug 2002   Framingham, MA     1964       207       12,351       13,168       4,896       12,351       18,064       30,415       (9,068 )      21,347       14,355  

Georgetown II

  Mid Rise   Aug 2002   Framingham, MA     1958       72       4,577       4,057       2,316       4,577       6,373       10,950       (3,871 )      7,079       —    

Hidden Cove

  Garden   Jul 1998   Escondido, CA     1983       334       3,043       17,616       11,447       3,043       29,063       32,106       (17,321 )      14,785       51,840  

Hidden Cove II

  Garden   Jul 2007   Escondido, CA     1986       118       12,849       6,530       5,439       12,849       11,969       24,818       (5,881 )      18,937       20,160  

Hillcreste

  Garden   Mar 2002   Century City, CA     1989       315       35,862       47,216       15,706       35,862       62,922       98,784       (29,709 )      69,075       61,930  

Hillmeade

  Garden   Nov 1994   Nashville, TN     1986       288       2,872       16,070       22,103       2,872       38,173       41,045       (22,434 )      18,611       26,756  

Horizons West Apartments

  Mid Rise   Dec 2006   Pacifica, CA     1970       78       8,887       6,377       2,808       8,887       9,185       18,072       (4,155 )      13,917       —    

Hunt Club

  Garden   Sep 2000   Gaithersburg, MD     1986       336       17,859       13,149       14,807       17,859       27,956       45,815       (17,241 )      28,574       —    

Hyde Park Tower

  High Rise   Oct 2004   Chicago, IL     1990       155       4,731       14,927       16,765       4,731       31,692       36,423       (11,613 )      24,810       12,301  

Indian Oaks

  Garden   Mar 2002   Simi Valley, CA     1986       254       24,523       15,801       12,124       24,523       27,925       52,448       (14,829 )      37,619       26,944  

Indigo

  High Rise   Aug 2016   Redwood City, CA     2016       463       26,932       296,116       3,561       26,932       299,677       326,609       (35,408 )      291,201       135,348  

Island Club

  Garden   Oct 2000   Oceanside, CA     1986       592       18,027       28,654       21,829       18,027       50,483       68,510       (32,842 )      35,668       93,333  

Latrobe

  High Rise   Jan 2003   Washington, D.C.     1980       175       3,459       9,103       13,380       3,459       22,483       25,942       (13,313 )      12,629       26,128  

Laurel Crossing

  Garden   Jan 2006   San Mateo, CA     1971       418       49,474       17,756       15,017       49,474       32,773       82,247       (17,078 )      65,169       104,658  

Lincoln Place(6)

  Garden   Oct 2004   Venice, CA     1951       795       128,332       10,439       340,136       44,197       350,575       394,772       (143,166 )      251,606       184,330  

Malibu Canyon

  Garden   Mar 2002   Calabasas, CA     1986       698       69,834       53,438       41,577       69,834       95,015       164,849       (51,078 )      113,771       102,968  

Mariners Cove

  Garden   Mar 2002   San Diego, CA     1984       500       —         66,861       14,977       —         81,838       81,838       (42,171 )      39,667       —    

Meadow Creek

  Garden   Jul 1994   Boulder, CO     1968       332       1,435       24,533       10,058       1,435       34,591       36,026       (21,082 )      14,944       —    

Merrill House

  High Rise   Jan 2000   Falls Church, VA     1964       159       1,836       10,831       7,588       1,836       18,419       20,255       (10,923 )      9,332       —    

Monterey Grove

  Garden   Jun 2008   San Jose, CA     1999       224       34,325       21,939       16,051       34,325       37,990       72,315       (13,236 )      59,079       49,680  

Ocean House on Prospect

  Mid Rise   Apr 2013   La Jolla, CA     1970       53       12,528       18,805       15,336       12,528       34,141       46,669       (8,635 )      38,034       12,281  

One Canal

  High Rise   Sep 2013   Boston, MA     2016       310       —         15,873       178,772       —         194,645       194,645       (29,058 )      165,587       108,491  

Pacific Bay
Vistas(6)

  Garden   Mar 2001   San Bruno, CA     1987       308       28,694       62,460       40,698       23,354       103,158       126,512       (39,188 )      87,324       104,664  

Pacifica Park

  Garden   Jul 2006   Pacifica, CA     1977       104       12,970       6,579       8,815       12,970       15,394       28,364       (7,517 )      20,847       28,613  

Palazzo at Park La Brea, The

  Mid Rise   Feb 2004   Los Angeles, CA     2002       521       48,362       125,464       48,103       48,362       173,567       221,929       (87,785 )      134,144       165,344  

 

F-39

Table of Contents
       

(1)

Date
Consolidated

                  Initial Cost     (2)
Cost Capitalized
Subsequent to
Consolidation 		    As of December 31, 2019  

Apartment Community
Name

 

Apartment
Type

 

Location

  Year
Built 		    Apartment
Homes 		    Land     Buildings and
Improvements 		    Land     Buildings and
Improvements 		    (3)
Total 		    (4)
Accumulated
Depreciation (AD) 		    Total Cost
Net of AD 		    (5)
Encumbrances 		 

Palazzo East at Park La Brea, The

  Mid Rise   Mar 2005   Los Angeles, CA     2005       611     $ 72,578     $ 136,503     $ 28,065     $ 72,578     $ 164,568     $ 237,146     $ (79,668 )    $ 157,478     $ 192,083  

Pathfinder Village

  Garden   Jan 2006   Fremont, CA     1973       246       19,595       14,838       20,707       19,595       35,545       55,140       (17,480 )      37,660       55,000  

Peachtree Park

  Garden   Jan 1996   Atlanta, GA     1969       303       4,684       11,713       14,244       4,684       25,957       30,641       (17,244 )      13,397       27,316  

Plantation Gardens

  Garden   Oct 1999   Plantation, FL     1971       372       3,773       19,443       25,547       3,773       44,990       48,763       (28,766 )      19,997       —    

Preserve at Marin

  Mid Rise   Aug 2011   Corte Madera, CA     1964       126       13,516       30,132       82,512       13,516       112,644       126,160       (32,015 )      94,145       35,451  

Ravensworth Towers

  High Rise   Jun 2004   Annandale, VA     1974       219       3,455       17,157       4,575       3,455       21,732       25,187       (15,171 )      10,016       19,870  

River Club, The

  Garden   Apr 2005   Edgewater, NJ     1998       266       30,579       30,638       8,468       30,579       39,106       69,685       (19,159 )      50,526       59,070  

Riverloft

  High Rise   Oct 1999   Philadelphia, PA     1910       184       2,120       11,286       38,090       2,120       49,376       51,496       (25,765 )      25,731       5,881  

Rosewood

  Garden   Mar 2002   Camarillo, CA     1976       152       12,430       8,060       6,983       12,430       15,043       27,473       (7,950 )      19,523       —    

Royal Crest Estates

  Garden   Aug 2002   Warwick, RI     1972       492       22,433       24,095       6,736       22,433       30,831       53,264       (21,454 )      31,810       —    

Royal Crest Estates

  Garden   Aug 2002   Nashua, NH     1970       902       68,230       45,562       16,865       68,230       62,427       130,657       (44,966 )      85,691       70,299  

Royal Crest Estates

  Garden   Aug 2002   Marlborough, MA     1970       473       25,178       28,786       15,100       25,178       43,886       69,064       (29,314 )      39,750       62,074  

Royal Crest Estates

  Garden   Aug 2002   North Andover, MA     1970       588       51,292       36,808       30,314       51,292       67,122       118,414       (39,455 )      78,959       81,363  

Saybrook Pointe

  Garden   Dec 2014   San Jose, CA     1995       324       32,842       84,457       25,960       32,842       110,417       143,259       (19,010 )      124,249       61,073  

Shenandoah Crossing

  Garden   Sep 2000   Fairfax, VA     1984       640       18,200       57,198       26,395       18,200       83,593       101,793       (62,964 )      38,829       57,204  

Springwoods at Lake Ridge

  Garden   Jul 2002   Woodbridge, VA     1984       180       5,587       7,284       3,790       5,587       11,074       16,661       (5,064 )      11,597       —    

Sterling Apartment Homes, The

  Garden   Oct 1999   Philadelphia, PA     1961       534       8,871       55,365       118,250       8,871       173,615       182,486       (91,452 )      91,034       141,077  

Stonecreek Club

  Garden   Sep 2000   Germantown, MD     1984       240       13,593       9,347       8,450       13,593       17,797       31,390       (13,092 )      18,298       —    

Township At Highlands

  Town Home   Nov 1996   Centennial, CO     1985       161       1,536       9,773       10,121       1,536       19,894       21,430       (13,167 )      8,263       13,120  

Vantage Pointe

  Mid Rise   Aug 2002   Swampscott, MA     1987       96       4,748       10,089       2,661       4,748       12,750       17,498       (5,806 )      11,692       —    

Villa Del Sol

  Garden   Mar 2002   Norwalk, CA     1972       120       7,476       4,861       5,050       7,476       9,911       17,387       (6,000 )      11,387       10,338  

Villas of Pasadena

  Mid Rise   Jan 2006   Pasadena, CA     1973       92       9,693       6,818       4,696       9,693       11,514       21,207       (5,230 )      15,977       —    

Vivo

  High Rise   Jun 2016   Cambridge, MA     2015       91       6,450       35,974       5,851       6,450       41,825       48,275       (11,588 )      36,687       19,810  

Waterford Village

  Garden   Aug 2002   Bridgewater, MA     1971       588       29,110       28,101       11,636       29,110       39,737       68,847       (29,186 )      39,661       34,464  

Waterways Village

  Garden   Jun 1997   Aventura, FL     1994       180       4,504       11,064       16,910       4,504       27,974       32,478       (13,996 )      18,482       12,865  

Waverly Apartments

  Garden   Aug 2008   Brighton, MA     1970       103       7,920       11,347       6,844       7,920       18,191       26,111       (7,441 )      18,670       11,245  

Wexford Village

  Garden   Aug 2002   Worcester, MA     1974       264       6,349       17,939       5,183       6,349       23,122       29,471       (14,281 )      15,190       —    

Willow Bend

  Garden   May 1998   Rolling Meadows, IL     1969       328       2,717       15,437       20,130       2,717       35,567       38,284       (24,855 )      13,429       32,489  

Windrift

  Garden   Mar 2001   Oceanside, CA     1987       404       24,960       17,590       22,254       24,960       39,844       64,804       (26,130 )      38,674       72,646  

Windsor Park

  Garden   Mar 2001   Woodbridge, VA     1987       220       4,279       15,970       6,366       4,279       22,336       26,615       (14,287 )      12,328       —    

Yacht Club at Brickell

  High Rise   Dec 2003   Miami, FL     1998       357       31,362       32,214       18,825       31,362       51,039       82,401       (19,678 )      62,723       68,351  

Yorktown Apartments

  High Rise   Dec 1999   Lombard, IL     1971       292       2,413       10,374       53,236       2,413       63,610       66,023       (31,274 )      34,749       30,167  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Same Store Sales

        26,649     $ 1,411,619     $ 2,597,010     $ 2,149,561     $ 1,322,144     $ 4,746,571     $ 6,068,715     $ (2,188,175 )    $ 3,880,540     $ 3,579,476  

 

F-40

Table of Contents
       

(1)

Date
Consolidated

                  Initial Cost     (2)
Cost Capitalized
Subsequent to
Consolidation 		    As of December 31, 2019  

Apartment Community
Name

 

Apartment
Type

 

Location

  Year
Built 		    Apartment
Homes 		    Land     Buildings and
Improvements 		    Land     Buildings and
Improvements 		    (3)
Total 		    (4)
Accumulated
Depreciation (AD) 		    Total Cost
Net of AD 		    (5)
Encumbrances 		 

Redevelopment and Development:

                     

236-238 East 88th Street

  High Rise   Jan 2004   New York, NY     1900       42     $ 8,820     $ 2,914     $ 8,734     $ 8,820     $ 11,648     $ 20,468     $ (2,088 )    $ 18,380     $ —    

707 Leahy

  Garden   Apr 2007   Redwood City, CA     1973       110       15,444       7,909       16,619       15,444       24,528       39,972       (6,731 )      33,241       8,534  

Bay Parc Plaza

  High Rise   Sep 2004   Miami, FL     2000       474       22,680       41,847       38,851       22,680       80,698       103,378       (26,606 )      76,772       76,631  

Flamingo Point

  High Rise   Sep 1997   Miami Beach, FL     1960       1,101       32,427       48,808       400,164       32,427       448,972       481,399       (188,572 )      292,827       —    

Parc Mosaic

  Garden   Dec 2014   Boulder, CO     1970       226       15,300       —         107,179       15,300       107,179       122,479       (461 )      122,018       —    

Park Towne Place

  High Rise   Apr 2000   Philadelphia, PA     1959       940       10,472       47,301       353,053       10,472       400,354       410,826       (152,223 )      258,603       196,655  

Villas at Park La Brea, The

  Garden   Mar 2002   Los Angeles, CA     2002       250       8,630       48,871       19,251       8,630       68,122       76,752       (33,834 )      42,918       51,097  

Other(7)

            —         9,598       —         82,830       9,598       82,830       92,428       (2 )      92,426       —    
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Redevelopment and Development

      3,143     $ 123,371     $ 197,650     $ 1,026,681     $ 123,371     $ 1,224,331     $ 1,347,702     $ (410,517 )    $ 937,185     $ 332,917  

Acquisition:

                           

777 South Broad Street

  Mid Rise   May 2018   Philadelphia, PA     2010       146     $ 6,986     $ 67,512     $ 2,596     $ 6,986     $ 70,108     $ 77,094     $ (4,115 )    $ 72,979     $ 56,581  

Avery Row

  Mid Rise   Dec 2018   Arlington, VA     2013       67       8,165       21,348       1,812       8,165       23,160       31,325       (913 )      30,412       —    

Bent Tree Apartments

  Garden   Feb 2018   Centreville, VA     1986       748       46,975       113,695       20,823       46,975       134,518       181,493       (9,679 )      171,814       —    

Locust on the Park

  High Rise   May 2018   Philadelphia, PA     1911       152       5,292       53,823       4,228       5,292       58,051       63,343       (3,510 )      59,833       34,891  

One Ardmore

  Mid Rise   Apr 2019   Ardmore, PA     2019       110       4,929       61,631       1,387       4,929       63,018       67,947       (1,560 )      66,387       31,052  

Southstar Lofts

  High Rise   May 2018   Philadelphia, PA     2014       85       1,780       37,428       683       1,780       38,111       39,891       (2,235 )      37,656       29,624  

The Left Bank

  Mid Rise   May 2018   Philadelphia, PA     1929       282       —         130,893       13,352       —         144,245       144,245       (8,092 )      136,153       80,679  

Other(7)

            —         7,890       —         14,634       7,890       14,634       22,524       —         22,524       —    
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Acquisition

          1,590     $ 82,017     $ 486,330     $ 59,515     $ 82,017     $ 545,845     $ 627,862     $ (30,104 )    $ 597,758     $ 232,827  

Other Real Estate:

                         

1001 Brickell

  High Rise   Jul 2019   Miami, FL     1985       —       $ 149,519     $ 152,892     $ 5,228     $ 149,519     $ 158,120     $ 307,639     $ (8,053 )    $ 299,586     $ —    

173 E. 90th Street

  High Rise   May 2004   New York, NY     1910       72       12,066       4,535       8,827       12,066       13,362       25,428       (4,667 )      20,761       —    

182-188 Columbus Avenue

  Mid Rise   Feb 2007   New York, NY     1910       32       19,123       3,300       5,769       19,123       9,069       28,192       (4,603 )      23,589       13,635  

234 East 88th Street

  Mid Rise   Jan 2014   New York, NY     1900       20       2,448       4,449       828       2,448       5,277       7,725       (1,418 )      6,307       —    

237-239 Ninth Avenue

  High Rise   Mar 2005   New York, NY     1900       36       8,495       1,866       3,132       8,495       4,998       13,493       (3,166 )      10,327       5,438  

240 West 73rd Street

  High Rise   Sep 2004   New York, NY     1900       200       68,109       12,140       14,048       68,109       26,188       94,297       (10,715 )      83,582       —    

311 & 313 East 73rd Street

  Mid Rise   Mar 2003   New York, NY     1904       34       5,678       1,609       598       5,678       2,207       7,885       (1,625 )      6,260       —    

464-466 Amsterdam & 200-210 W. 83rd Street

  Mid Rise   Feb 2007   New York, NY     1910       71       25,553       7,101       9,153       25,553       16,254       41,807       (6,396 )      35,411       20,094  

518 East 88th Street

  Mid Rise   Jan 2014   New York, NY     1900       20       2,233       4,315       625       2,233       4,940       7,173       (1,388 )      5,785       —    

 

F-41

Table of Contents
       

(1)

Date
Consolidated

                  Initial Cost     (2)
Cost Capitalized
Subsequent to
Consolidation 		    As of December 31, 2019  

Apartment Community
Name

 

Apartment
Type

 

Location

  Year
Built 		    Apartment
Homes 		    Land     Buildings and
Improvements 		    Land     Buildings and
Improvements 		    (3)
Total 		    (4)
Accumulated
Depreciation (AD) 		    Total Cost
Net of AD 		    (5)
Encumbrances 		 

Columbus Avenue

  Mid Rise   Sep 2003   New York, NY     1880       59     $ 35,527     $ 9,450     $ 9,327     $ 35,527     $ 18,777     $ 54,304     $ (12,118 )    $ 42,186     $ 24,608  

Heritage Park Escondido

  Garden   Oct 2000   Escondido, CA     1986       196       1,055       7,565       2,945       1,055       10,510       11,565       (7,188 )      4,377       5,867  

Heritage Park Livermore

  Garden   Oct 2000   Livermore, CA     1988       167       —         10,209       2,111       —         12,320       12,320       (8,576 )      3,744       6,090  

Heritage Village Anaheim

  Garden   Oct 2000   Anaheim, CA     1986       196       1,832       8,541       2,332       1,832       10,873       12,705       (7,339 )      5,366       7,124  

Mezzo

  High Rise   Mar 2015   Atlanta, GA     2008       94       4,292       34,178       1,817       4,292       35,995       40,287       (6,918 )      33,369       22,970  

St. George Villas

  Garden   Jan 2006   St. George, SC     1984       40       107       1,025       419       107       1,444       1,551       (1,290 )      261       293  

Tremont

  Mid Rise   Dec 2014   Atlanta, GA     2009       78       5,274       18,011       3,069       5,274       21,080       26,354       (4,028 )      22,326       —    

Other(7)

            —         205       —         382       205       382       587       —         587       —    
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Real Estate

        1,315     $ 341,516     $ 281,186     $ 70,610     $ 341,516     $ 351,796     $ 693,312     $ (89,488 )    $ 603,824     $ 106,119  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Portfolio

          32,697     $ 1,958,523     $ 3,562,176     $ 3,306,367     $ 1,869,048     $ 6,868,543     $ 8,737,591     $ (2,718,284 )    $ 6,019,307     $ 4,251,339  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Date we acquired the apartment community or first consolidated the partnership that owns the community.

(2)

Includes costs capitalized since acquisition or date of initial consolidation of the community.

(3)

The aggregate cost of land and depreciable property for federal income tax purposes was approximately $3.8 billion as of December 31, 2019.

(4)

Depreciable life for buildings and improvements ranges from 5 to 30 years and is calculated on a straight-line basis.

(5)

Encumbrances are presented before reduction for debt issuance costs.

(6)

The current carrying value of the apartment community reflects an impairment loss recognized during prior periods.

(7)

Other includes apartment communities under development, land parcels, and certain non-residential properties held for future development.

 

F-42

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

SCHEDULE III: REAL ESTATE AND ACCUMULATED DEPRECIATION

For the Years Ended December 31, 2019, 2018, and 2017

(In Thousands)

 

     2019     2018     2017  

Total real estate balance at beginning of year

   $ 8,308,590     $ 8,478,877     $ 8,486,166  

Additions during the year:

      

Acquisitions

     383,557       501,009       16,687  

Capital additions

     404,896       348,727       354,229  

Dispositions and other

     (359,452 )      (1,020,023 )      (378,205 ) 
  

 

 

   

 

 

   

 

 

 

Total real estate balance at end of year

   $ 8,737,591     $ 8,308,590     $ 8,478,877  
  

 

 

   

 

 

   

 

 

 

Accumulated depreciation balance at beginning of year

   $ 2,585,115     $ 2,848,609     $ 2,730,758  

Depreciation

     358,661       354,208       344,960  

Dispositions and other

     (225,492 )      (617,702 )      (227,109 ) 
  

 

 

   

 

 

   

 

 

 

Accumulated depreciation balance at end of year

   $ 2,718,284     $ 2,585,115     $ 2,848,609  
  

 

 

   

 

 

   

 

 

 

 

F-43

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2020 and December 31, 2019

(In thousands, except share data)

(Unaudited)

 

     September 30,
2020 		    December 31,
2019 		 

ASSETS

    

Buildings and improvements

   $ 7,006,395     $ 6,868,543  

Land

     1,891,763       1,869,048  
  

 

 

   

 

 

 

Total real estate

     8,898,158       8,737,591  

Accumulated depreciation

     (2,858,174 )      (2,718,284 ) 
  

 

 

   

 

 

 

Net real estate

     6,039,984       6,019,307  

Cash and cash equivalents

     228,368       142,902  

Restricted cash

     40,123       34,800  

Mezzanine investment

     300,326       280,258  

Other assets

     383,298       351,472  

Assets held for sale

     50,030       —    
  

 

 

   

 

 

 

Total assets

   $ 7,042,129     $ 6,828,739  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Non-recourse property debt, net

   $ 4,058,295     $ 4,230,590  

Term loan, net

     348,502       —    

Revolving credit facility borrowings

     —         275,000  
  

 

 

   

 

 

 

Total indebtedness

     4,406,797       4,505,590  

Accrued liabilities and other

     356,538       360,574  

Liabilities related to assets held for sale

     58,177       —    
  

 

 

   

 

 

 

Total liabilities

     4,821,512       4,866,164  

Redeemable preferred OP Units

     79,449       97,064  

Redeemable noncontrolling interests in consolidated real estate partnership

     4,371       4,716  

Commitments and contingencies (Note 4)

    

Equity:

    

Common Stock, $0.01 par value, 510,587,500 shares authorized, 148,865,947 and 148,885,197 shares issued/outstanding at September 30, 2020 and December 31, 2019, respectively

     1,489       1,489  

Additional paid-in capital

     4,000,925       3,497,367  

Accumulated other comprehensive income

     3,579       4,195  

Distributions in excess of earnings

     (1,884,602 )      (1,722,402 ) 
  

 

 

   

 

 

 

Total Aimco equity

     2,121,391       1,780,649  

Noncontrolling interests in consolidated real estate partnerships

     (60,212 )      (3,296 ) 

Common noncontrolling interests in Aimco Operating Partnership

     75,618       83,442  
  

 

 

   

 

 

 

Total equity

     2,136,797       1,860,795  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,042,129     $ 6,828,739  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

F-44

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Nine Months Ended September 30, 2020 and 2019

(In thousands, except per share data)

(Unaudited)

 

     Nine Months Ended
September 30, 		 
     2020     2019  

REVENUES

    

Rental and other property revenues

   $ 658,815     $ 684,262  

OPERATING EXPENSES

    

Property operating expenses

     224,532       232,090  

Depreciation and amortization

     296,414       283,027  

General and administrative expenses

     27,922       31,922  

Investment management expenses

     5,124       4,319  

Other expenses, net

     23,452       12,759  
  

 

 

   

 

 

 

Total operating expenses

     577,444       564,117  
  

 

 

   

 

 

 

Interest income

     10,407       8,615  

Interest expense

     (140,657 )      (122,961 ) 

Gain on dispositions of real estate

     47,204       356,929  

Mezzanine investment income, net

     20,553       —    

Income from unconsolidated real estate partnerships

     629       591  
  

 

 

   

 

 

 

Income before income tax benefit

     19,507       363,319  

Income tax benefit

     7,859       1,942  
  

 

 

   

 

 

 

Net income

     27,366       365,261  

Noncontrolling interests:

    

Net loss (income) attributable to noncontrolling interests in consolidated real estate partnerships

     153       (103 ) 

Net income attributable to preferred noncontrolling interests in Aimco Operating Partnership

     (5,415 )      (5,800 ) 

Net income attributable to common noncontrolling interests in Aimco Operating Partnership

     (1,134 )      (18,787 ) 
  

 

 

   

 

 

 

Net income attributable to noncontrolling interests

     (6,396 )      (24,690 ) 
  

 

 

   

 

 

 

Net income attributable to Aimco

     20,970       340,571  

Net income attributable to Aimco preferred stockholders

     —         (7,335 ) 

Net (income) attributable to participating securities

     (125 )      (431 ) 
  

 

 

   

 

 

 

Net income attributable to Aimco common Stockholders

   $ 20,845     $ 332,805  
  

 

 

   

 

 

 

Net income attributable to Aimco per common share—basic and diluted

   $ 0.14     $ 2.26  
  

 

 

   

 

 

 

Weighted average common shares outstanding—basic

     148,532       147,474  
  

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     148,628       147,692  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30, 		 
     2020     2019  

Net income

   $ 27,366     $ 365,261  

Unrealized losses on available for sale debt securities

     (658 )      (325 ) 
  

 

 

   

 

 

 

Comprehensive income

     26,708       364,936  
  

 

 

   

 

 

 

Comprehensive income attributable to noncontrolling interests

     (6,354 )      (24,671 ) 
  

 

 

   

 

 

 

Comprehensive income attributable to Aimco

   $ 20,354     $ 340,265  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

    Preferred Stock     Common Stock     Additional
Paid-
in Capital 		    Accumulated
Other
Comprehensive
Income (Loss) 		    Distributions
in Excess
of Earnings 		    Total Aimco
Equity 		    Noncontrolling
Interests in
Consolidated
Real Estate
Partnerships 		    Common
Noncontrolling
Interests in
Aimco
Operating
Partnership 		    Total
Equity 		 
    Shares
Issued 		    Amount     Shares
Issued 		    Amount  

Balances at December 31, 2018

    5,000     $ 125,000       144,623     $ 1,446     $ 3,515,686     $ 4,794     $ (1,947,507 )    $ 1,699,419     $ (2,967 )    $ 67,189     $ 1,763,641  

Repurchases of Common Stock

    —         —         (461 )      (5 )      (20,677 )      —         —         (20,682 )      —         —         (20,682 ) 

Redemption of Preferred Stock

    (5,000 )      (125,000 )      —         —         4,089       —         (4,089 )      (125,000 )      —         —         (125,000 ) 

Issuance of Aimco Operating Partnership units

    —         —         —         —         —         —         —         —         —         3,034       3,034  

Redemption of Aimco Operating Partnership units

    —         —         127       2       6,242       —         —         6,244       —         (11,202 )      (4,958 ) 

Amortization of share-based compensation cost

    —         —         22       —         4,795       —         —         4,795       —         2,387       7,182  

Effect of changes in ownership for consolidated entities

    —         —         —         —         (12,123 )      —         —         (12,123 )      3,357       8,766       —    

Contribution from noncontrolling interest in consolidated real estate partnerships

    —         —         —         —         —         —         —         —         4,911       —         4,911  

Purchase of noncontrolling interest in consolidated real estate partnerships

    —         —         —         —         —         —         —         —         (3,780 )      —         (3,780 ) 

Change in accumulated other comprehensive income

    —         —         —         —         —         (306 )      —         (306 )      —         (19 )      (325 ) 

Net income

    —         —         —         —         —         —         340,571       340,571       103       18,787       359,461  

Common Stock dividends

    —         —         —         —         —         —         (183,579 )      (183,579 )      —         —         (183,579 ) 

Common Stock issued to Common Stockholders in special dividend

    —         —         4,492       45       (561 )      —         —         (516 )      —         —         (516 ) 

Preferred Stock dividends

    —         —         —         —         —         —         (3,247 )      (3,247 )      —         —         (3,247 ) 

Distributions to noncontrolling interests

    —         —         —         —         —         —         —         —         (143 )      (9,827 )      (9,970 ) 

Other, net

    —         —         82       1       (118 )      —         —         (117 )      19       —         (98 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2019

    —       $ —         148,885     $ 1,489     $ 3,497,333     $ 4,488     $ (1,797,851 )    $ 1,705,459     $ 1,500     $ 79,115     $ 1,786,074  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2019

    —       $ —         148,885     $ 1,489     $ 3,497,367     $ 4,195     $ (1,722,402 )    $ 1,780,649     $ (3,296 )    $ 83,442     $ 1,860,795  

Repurchases of Common Stock

    —         —         (234 )      (2 )      (10,002 )      —         —         (10,004 )      —         —         (10,004 ) 

Redemption of Aimco Operating Partnership units

    —         —         159       2       5,135       —         —         5,137       —         (6,876 )      (1,739 ) 

Amortization of share-based compensation cost

    —         —         25       —         3,911       —         —         3,911       —         3,154       7,065  

Effect of changes in ownership of consolidated entities

    —         —         —         —         504,361       —         —         504,361       (61,320 )      4,647       447,688  

Contribution from noncontrolling interest in consolidated real estate partnerships

    —         —         —         —         —         —         —         —         4,701       —         4,701  

Cumulative effect of a change in accounting principle

    —         —         —         —         —         —         (277 )      (277 )      —         —         (277 ) 

Change in accumulated other comprehensive income

    —         —         —         —         —         (616 )      —         (616 )      —         (42 )      (658 ) 

Net income

    —         —         —         —         —         —         20,970       20,970       194       1,134       22,298  

Common Stock dividends

    —         —         —         —         —         —         (182,893 )      (182,893 )      —         —         (182,893 ) 

Distributions to noncontrolling interests

    —         —         —         —         —         —         —         —         (178 )      (9,841 )      (10,019 ) 

Other, net

    —         —         31       —         153       —         —         153       (313 )      —         (160 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2020

    —       $ —         148,866     $ 1,489     $ 4,000,925     $ 3,579     $ (1,884,602 )    $ 2,121,391     $ (60,212 )    $ 75,618     $ 2,136,797  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30, 		 
     2020     2019  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 27,366     $ 365,261  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     296,414       283,027  

Gain on dispositions of real estate

     (47,204 )      (356,929 ) 

Income tax benefit

     (7,859 )      (1,942 ) 

Other adjustments

     11,617       10,429  

Net changes in operating assets and operating liabilities

     (14,458 )      (21,098 ) 
  

 

 

   

 

 

 

Net cash provided by operating activities

     265,876       278,748  

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of real estate and deposits related to purchases of real estate

     (98,573 )      (131,613 ) 

Capital expenditures

     (272,269 )      (292,749 ) 

Proceeds from dispositions of real estate

     36,869       422,463  

Purchases of corporate assets

     (13,539 )      (14,825 ) 

Other investing activities

     (8,457 )      719  
  

 

 

   

 

 

 

Net cash used in investing activities

     (355,969 )      (16,005 ) 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from non-recourse property debt

     608,756       667,965  

Principal repayments on non-recourse property debt

     (702,354 )      (390,346 ) 

Proceeds from term loan

     350,000       —    

Net repayments of revolving credit facility

     (275,000 )      (160,360 ) 

Payment of debt issuance costs

     (7,663 )      (3,625 ) 

Payment of debt extinguishment costs

     (13,175 )      (840 ) 

Repurchases of Common Stock

     (10,004 )      (20,682 ) 

Repurchases of Preferred Stock

     —         (125,000 ) 

Payment of dividends to holders of Common Stock

     (183,003 )      (183,319 ) 

Payment of dividends to holders of Preferred Stock

     —         (3,247 ) 

Payment of distributions to noncontrolling interests

     (15,863 )      (16,320 ) 

Redemptions of noncontrolling interests in the Aimco Operating Partnership

     (19,355 )      (5,071 ) 

Contribution from noncontrolling interests in consolidated real estate partnerships

     463,523       4,911  

Purchases of noncontrolling interests in consolidated real estate partnerships

     —         (3,780 ) 

Other financing activities

     (14,980 )      (2,399 ) 
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     180,882       (242,113 ) 

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

     90,789       20,630  

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD

     177,702       72,595  
  

 

 

   

 

 

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD

   $ 268,491     $ 93,225  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 1—Organization

Apartment Investment and Management Company, or Aimco, is a Maryland corporation incorporated on January 10, 1994. Aimco is a self-administered and self-managed real estate investment trust, or REIT. AIMCO Properties, L.P., or the Aimco Operating Partnership, is a Delaware limited partnership formed on May 16, 1994, to conduct our business, which is focused on the ownership, management, redevelopment, and some development of quality apartment communities located in several of the largest markets in the United States.

Aimco, through its wholly-owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, holds a majority of the ownership interests in the Aimco Operating Partnership. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership. Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are referred to as OP Units. OP Units include common partnership units, which we refer to as common OP Units, as well as preferred partnership units, which we refer to as preferred OP Units. As of September 30, 2020, after elimination of units held by consolidated subsidiaries, the Aimco Operating Partnership had 159,182,513 common OP Units outstanding. As of September 30, 2020, Aimco owned 148,865,947 of the common OP Units of the Aimco Operating Partnership and Aimco had an equal number of shares of its Class A Common Stock outstanding, which we refer to as Common Stock. Aimco’s ownership of the total common OP units outstanding represents a 93.5% legal interest in the Aimco Operating Partnership and a 94.9% economic interest.

Except as the context otherwise requires, “we,” “our,” and “us” refer to Aimco, the Aimco Operating Partnership, and their consolidated subsidiaries, collectively.

We own and operate a portfolio of apartment communities, diversified by both geography and price point, in 17 states and the District of Columbia. As of September 30, 2020, our portfolio included 126 apartment communities with 33,209 apartment homes in which we held an average ownership of approximately 95%. We consolidated 122 of these apartment communities with 33,067 apartment homes.

On September 14, 2020, we announced a Board-led plan, informed by active and regular engagement with shareholders, to reduce financial risk and execution risk, and to increase shareholder value by division of our business between two public entities. The first, with approximately 90% of our estimated fair value, will be known as Apartment Income REIT, or AIR. The second entity, with 10% of our estimated fair value, will be known as Aimco, or sometimes for clarity, as “new” Aimco, and is expected to hold the non-traditional assets, specified below. Separation costs for the nine months ended September 30, 2020, totaled $ $12.6 million, are reflected in other expenses, net on our condensed consolidated statement of operations.

Following the completion of the Separation, we expect to retain the redevelopment and development business, 25 consolidated communities including 16 multi-family communities securing $534 million of notes payable due to AIR, and four non-100% owned communities that we do not consolidate. In addition, we expect to hold non-traditional assets such as other investments including 1001 Brickell Bay Drive and our loan to, and equity option in, the partnership that owns Parkmerced Apartments.

Note 2—Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and

 

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footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The condensed consolidated balance sheets of Aimco as of December 31, 2019, have been derived from their respective audited financial statements at that date, but do not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in Aimco’s Annual Report on Form 10-K for the year ended December 31, 2019.

Principles of Consolidation

Aimco’s accompanying condensed consolidated financial statements include the accounts of Aimco and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

We consolidate a variable interest entity, or VIE, in which we are considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.

As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a partner in a limited partnership or a member of a limited liability company. Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are reflected in Aimco’s accompanying condensed consolidated balance sheets as noncontrolling interests in the Aimco Operating Partnership. Interests in partnerships consolidated by the Aimco Operating Partnership that are held by third parties are reflected in our accompanying condensed consolidated balance sheets as noncontrolling interests in consolidated real estate partnerships.

Redeemable Preferred OP Units

As described in Note 5, the preferred OP Units may be redeemed at the holder’s option and are therefore presented within temporary equity in Aimco’s condensed consolidated balance sheets and within temporary capital in the Aimco Operating Partnership’s condensed consolidated balance sheets. The following table presents a reconciliation of the Aimco Operating Partnership’s preferred OP Units from December 31, 2019, to September 30, 2020 (in thousands):

 

Balance at December 31, 2019

   $ 97,064  

Preferred distributions

     (5,415 ) 

Redemption of preferred units

     (17,615 ) 

Net income

     5,415  
  

 

 

 

Balance at September 30, 2020

   $ 79,449  
  

 

 

 

The Aimco Operating Partnership has outstanding various classes of redeemable preferred OP Units. As of September 30, 2020 and December 31, 2019, the Aimco Operating Partnership had 2,938,802 and 3,643,399 redeemable preferred OP Units, respectively, issued and outstanding. Distributions per annum range from 1.92% to 8.75% per class and $0.48 to $8.00 per unit.

 

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Revenue from Leases

The majority of lease payments we receive from our residents and tenants are fixed. We receive variable payments from our residents and commercial tenants primarily for utility reimbursements. For the nine months ended September 30, 2020 and 2019, our total lease income was comprised of the following amounts for all operating leases (in thousands):

 

     Nine Months Ended
September 30, 		 
     2020      2019  

Fixed lease income

   $ 619,447      $ 639,359  

Variable lease income

     40,842        42,814  

Straight-line rent write-off(1)

     (2,927 )       —    
  

 

 

    

 

 

 

Total lease income

   $ 657,362      $ 682,173  
  

 

 

    

 

 

 

 

(1)

We monitor the collectability of all unpaid rent amounts. The onset of COVID-19 and the anticipated economic slowdown resulted in a $2.9 million write-off of accrued straight-line rent during the nine months ended September 30, 2020. Additionally, we wrote-off the related deferred leasing costs of $2.4 million during the nine months ended September 30, 2020. The write-offs of deferred leasing costs are recorded in depreciation and amortization in our condensed consolidated statements of operations.

In response to the economic effects of the COVID-19 pandemic and governmental lockdown, many jurisdictions where our communities are located have enacted protections for residents and commercial tenants, including government-mandated rent deferrals, rent freezes, repayment extensions, fee abatement measures or concessions, and prohibitions on lease terminations or evictions for tenants. Some states and municipalities are also implementing rental assistance programs and encouraging landlord-tenant negotiations.

On April 10, 2020, the Financial Accounting Standards Board, or FASB, issued a Staff Q&A to respond to some frequently asked questions about accounting for lease concessions, including deferrals or reductions of future lease payments. Consequently, in accordance with the Staff Q&A issued by the FASB, we may elect to record rent relief when granted rather than over the remaining term of the lease. Our residential tenants represent approximately 97% of revenue and our commercial tenants represent approximately 3% of revenue for the three months ended September 30, 2020. For the nine months ended September 30, 2020, we granted to commercial tenants $1.0 million in rent relief, and elected to record these as a reduction of variable lease income in the table above.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes thereto. Actual results could differ from those estimates.

Reclassifications and Revisions

For the 2020 presentation of our condensed consolidated statements of operations, we have added a caption for investment management expenses. We have reclassified certain items from property operating expenses, general and administrative expenses, and other expenses, net, in our 2019 presentation to conform to the current presentation.

Accounting Pronouncements Adopted in the Current Year

On January 1, 2020, we adopted ASC 326, Financial Instruments – Credit Losses, issued by the FASB which changes the method and timing of the recognition of credit losses on financial assets. The standard

 

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requires us to estimate and record credit losses over the life of a financial instrument, including receivables, at its inception. Our notes receivable and investments in available for sale, or AFS, debt securities are subject to the new standard. For AFS debt securities, the new standard requires us to estimate a credit loss if the fair value of the instruments is less than the carrying value of the instruments.

We adopted the credit loss standard using the modified-retrospective approach. We recorded a cumulative-effect adjustment for the estimated credit loss associated with our notes receivable of $0.3 million in distributions in excess of earnings in our condensed consolidated balance sheets as of January 1, 2020. As of the date of adoption, the fair value of our AFS debt securities exceeded their carrying value and no estimate of credit loss was required for these instruments.

Note 3—Significant Transactions

Joint Venture Transaction

On September 8, 2020, we formed a joint venture with a passive institutional investor, to own a portfolio of 12 multi-family apartment communities with 4,051 homes located in California. The communities included in the joint venture were valued at $2.4 billion, or approximately $592,000 per apartment home. The joint venture has existing property debt of $1.22 billion and an implied equity value of $1.18 billion. In exchange for a 39% interest subject to $475 million of property debt, we received $461 million. We retain ownership of 61% of the joint venture and will control and operate the communities in exchange for property and asset management fees.

We evaluated the joint venture and concluded that we will continue to consolidate these communities. The difference between the consideration received and the carrying value of the interest sold was recognized in additional paid-in capital.

Acquisition of Hamilton on the Bay

On August 25, 2020, we acquired Hamilton on the Bay, an apartment community and an adjacent land parcel located in Miami, Florida. Summarized information regarding this acquisition is set forth in the table below (dollars in thousands):

 

Number of apartment homes

     271  

Purchase price

   $ 89,600  

Capitalized transaction costs

     2,506  
  

 

 

 

Total consideration

   $ 92,106  
  

 

 

 

Consideration allocated to land

   $ 56,251  

Consideration allocated to building and improvements

     34,645  

Consideration allocated to intangible assets(1)

     1,506  

Consideration allocated to below-market lease liabilities(2)

     (296 ) 
  

 

 

 

Total consideration

   $ 92,106  
  

 

 

 

 

(1)

Intangible assets include in-place leases and leasing costs with a weighted-average term of 0.5 years.

(2)

Below-market leases have a weighted-average term of 0.8 years.

Dispositions of Apartment Communities

During the nine months ended September 30, 2020 and 2019, we sold one apartment community with 219 apartment homes for a gain on disposition of $47.2 million and sold eight apartment communities with 2,605 apartment homes for a gain on dispositions of $356.9 million, respectively. The apartment communities sold were in lower-rated locations within our primary markets and had average revenues per apartment home significantly below those of our retained portfolio.

 

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From time to time we may be marketing for sale certain apartment communities that are inconsistent with our long-term investment strategy. At the end of each reporting period we evaluate whether such communities meet the criteria to be classified as held for sale. As of September 30, 2020, we classified a 266-apartment home community as held for sale that was sold for gross proceeds of approximately $126 million later on November 3, 2020.

Term Loan

On April 20, 2020, we secured a $350.0 million term loan. The loan matures on April 20, 2021, includes a one-year extension option, and currently bears interest at a 30-day LIBOR plus 1.85%, with a 50-basis point LIBOR floor. Proceeds from the loan were used primarily to repay borrowings on our revolving credit facility.

Life Science Developer Investment

During the nine months ended September 30, 2020, we made a $50 million commitment to IQHQ, a privately-held life-sciences real estate development company. In addition, we gained the right to collaborate with IQHQ on any multifamily component at its future development sites.

Note 4—Commitments and Contingencies

Commitments

In connection with our redevelopment, development, and other capital additions activities, we have entered into various construction-related contracts and we have made commitments to complete redevelopment and development of certain apartment communities, pursuant to financing or other arrangements. As of September 30, 2020, our commitments related to these capital activities totaled approximately $184 million, most of which we expect to incur during the next 12 months.

We enter into certain commitments for future purchases of goods and services in connection with the operations of our apartment communities. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to our historical expenditures.

Legal Matters

In addition to the matters described below, we are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by our general liability insurance program, and none of which we expect to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

Environmental

Various federal, state, and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or for personal injury, disease, disability, or other infirmities related to the alleged presence of hazardous materials. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate.

 

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We are engaged in discussions with the Environmental Protection Agency, or EPA, regarding contaminated groundwater near an Indiana apartment community that has not been owned by us since 2008. The contamination allegedly derives from a dry cleaner that operated on our former property, prior to our ownership. We undertook a voluntary remediation of the dry cleaner contamination under state oversight. In 2016, EPA listed our former community and a number of residential communities in the vicinity on the National Priorities List, or NPL (i.e., as a Superfund site). In May 2018, we prevailed on our federal judicial appeal vacating the Superfund listing. We continue to work with EPA to formulate an agreed order to reimburse EPA costs and finish clean up of the site outside the Superfund program. Although the outcome of this process is uncertain, we do not expect the resolution to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

We also have a contingent environmental liability related to a property in Lake Tahoe, California. An entity owned by us was the former general partner of a now-dissolved partnership that previously owned a site where a laundromat, with a self-service dry-cleaning machine, operated. That entity and the current property owner have been remediating the site since 2009, under the oversight of the Lahontan Regional Water Quality Control Board, or Lahontan. In May 2017, Lahontan issued a final cleanup and abatement order that names four potentially-responsible parties, acknowledges that there may be additional responsible parties, and requires the named parties to perform additional groundwater investigation and corrective actions with respect to onsite and offsite contamination. We appealed the final order, and on June 1, 2020, the court vacated the Order against us. However, there are still civil suits pending related to this contingent liability. Although the outcome of this process is uncertain, we do not expect the resolution to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

We have determined that our legal obligations to remove or remediate certain potentially hazardous materials may be conditional asset retirement obligations, as defined by GAAP. Except in limited circumstances where the asset retirement activities are expected to be performed in connection with a planned construction project or apartment community casualty, we believe that the fair value of our asset retirement obligations cannot be reasonably estimated due to significant uncertainties in the timing and manner of settlement of those obligations. Asset retirement obligations that are reasonably estimable as of September 30, 2020, are immaterial to our consolidated financial condition, results of operations, and cash flows.

Note 5—Earnings and Dividends per Share

Aimco calculates basic earnings per common share based on the weighted-average number of shares of Common Stock. We calculate diluted earnings per share taking into consideration dilutive common stock equivalents and dilutive convertible securities outstanding during the period.

Our common stock equivalents include options to purchase shares of Common Stock, which, if exercised, would result in Aimco’s issuance of additional shares and the Aimco Operating Partnership’s issuance to Aimco of additional common partnership units equal to the number of shares purchased under the options. These equivalents also include unvested total shareholder return, or TSR, restricted stock awards that do not meet the definition of participating securities, which would result in an increase in the number of shares of Common Stock outstanding equal to the number of shares that vest. We include in the denominator securities with dilutive effect in calculating diluted earnings per share during these periods.

Our restricted stock awards that are subject to time-based vesting receive non-forfeitable dividends similar to shares of Common Stock prior to vesting, and our TSR long-term incentive partnership units receive non-forfeitable distributions based on specified percentages of the distributions paid to common partnership units prior to vesting and conversion. The unvested restricted shares and units related to these awards are participating securities. We include the effect of participating securities in basic and diluted earnings per share computations using the two-class method of allocating distributed and undistributed earnings when the two-class method is more dilutive than the treasury stock method.

 

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Reconciliations of the numerator and denominator in the calculations of basic and diluted earnings per share for the nine months ended September 30, 2020 and 2019, are as follows (in thousands, except per share):

 

     Nine Months Ended
September 30, 		 
     2020      2019  

Earnings per share

     

Numerator:

     

Basic and dilutive net income attributable to Aimco common stockholders

   $ 20,845      $ 332,805  

Denominator—shares:

     

Basic weighted-average Common Stock outstanding

     148,532        147,474  

Dilutive share equivalents outstanding

     96        218  
  

 

 

    

 

 

 

Dilutive weighted-average Common Stock outstanding

     148,628        147,692  
  

 

 

    

 

 

 

Earnings per share—basic and diluted

   $ 0.14      $ 2.26  
  

 

 

    

 

 

 

Non-dilutive share equivalents outstanding

     8,337        —    

The Aimco Operating Partnership has various classes of preferred OP Units, which may be redeemed at the holders’ option. The Aimco Operating Partnership may redeem these units for cash, or at its option, shares of Common Stock. As of September 30, 2020, these preferred OP Units were potentially redeemable for approximately 2.4 million shares of Common Stock (based on the period end market price), or cash. The Aimco Operating Partnership has a redemption policy that requires cash settlement of redemption requests for the preferred OP Units, subject to limited exceptions. Accordingly, we have excluded these securities from earnings per share computations for the periods presented above, and we expect to exclude them in future periods.

Dividends and distributions paid during the nine months ended September 30, 2020 and 2019, were as follows:

 

     Nine Months Ended
September 30, 		 
       2020          2019    

Dividends and distributions paid

   $ 1.23      $ 2.80  

In the first quarter of 2019, the Board of Directors authorized a special dividend and special distribution of $2.02, which is included in the $2.80 in the table above. The special dividend and distribution in the first quarter of 2019 consisted of the below (in millions):

 

Aimco Special Dividend:

  

Cash

   $ 67.1  

Shares of Common Stock

     4.5  

Cash paid in lieu of issuing fractional shares

   $ 0.4  

Aimco Operating Partnership Special Distribution:

  

Cash

   $ 72.7  

Common partnership units

     4.8  

Cash paid in lieu of issuing fractional units

   $ 0.4  

In connection with the 2019 special dividend and distribution, the Board of Directors authorized a reverse stock split during the three months ended March 31, 2019. The reverse split combined every 1.03119 common shares and common partnership units into one common share or common partnership unit and was intended to neutralize the dilutive impact of the shares and units issued in the special dividend and distribution. As a result, the number of shares and units outstanding after the dividend/distribution and reverse split was unchanged from the number outstanding immediately prior to the two actions.

 

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Note 6—Fair Value Measurements

Recurring Fair Value Measurements

We measure at fair value on a recurring basis our investments in the securitization trust that holds certain of our property debt, which we classify as AFS debt securities. These investments are presented within other assets in the condensed consolidated balance sheets. We hold several positions in the securitization trust that pay interest currently and we also hold the first loss position in the securitization trust, which accrues interest over the term of the investment. These investments were acquired at a discount to face value and we are accreting the discount to the $100.9 million face value of the investments through interest income using the effective interest method over the remaining expected term of the investments, which as of September 30, 2020, was approximately 0.8 years. Our amortized cost basis for these investments, which represents the original cost adjusted for interest accretion less interest payments received, was $95.3 million and $90.0 million as of September 30, 2020, and December 31, 2019, respectively.

Our investments in AFS debt securities are classified within Level 2 of the GAAP fair value hierarchy. We estimate the fair value of these investments using an income and market approach with primarily observable inputs, including yields and other information regarding similar types of investments, and adjusted for certain unobservable inputs specific to these investments. The fair value of the positions that pay interest currently typically moves in an inverse relationship with movements in interest rates. The fair value of the first loss position is primarily correlated to collateral quality and demand for similar subordinate commercial mortgage-backed securities.

During the nine months ended September 30, 2020, we paid an upfront premium of $12.1 million for the option to enter into an interest rate swap at a future date. This interest rate option, or swaption, provides partial protection against our refinancing interest rate risk and is intended to mitigate interest rate increases between now and 2024. We receive a cash settlement in the future if the prevailing interest rate is higher than the 1.68% strike price. The amount of future cash settlement is limited if the prevailing interest rate exceeds 2.78%. Alternatively, if interest rates were to decrease below the specified strike price, we would not receive a cash settlement.

We measure at fair value on a recurring basis our interest rate option, which is presented in other assets in our condensed consolidated balance sheets. Our interest rate option is classified within Level 2 of the GAAP fair value hierarchy, and we estimate its fair value using pricing models that rely on observable market information, including contractual terms, market prices, and interest rate yield curves. The fair value adjustment is included in earnings in other expense, net, in our condensed consolidated statements of operations. Changes in fair value are reflected as a non-cash transaction in adjustments to arrive at cash flows from operations, and the upfront premium is reflected in other financing in our condensed consolidated statements of cash flows.

The following table summarizes fair value for our AFS debt securities and our interest rate option (in thousands):

 

     As of September 30, 2020      As of December 31, 2019  
     Total      Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3  

AFS debt securities

   $ 98,874      $ —        $ 98,874      $ —        $ 94,251      $ —        $ 94,251      $ —    

Interest rate option

     10,026        —          10,026        —          —          —          —          —    

Fair Value Disclosures

We believe that the carrying value of the consolidated amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximated their fair value as of September 30, 2020, and December 31, 2019, due to their relatively short-term nature and high probability of realization. The carrying amounts of notes receivable, the term loan, and the revolving credit facility also approximated their estimated fair value as of September 30, 2020, and December 31, 2019. We estimate the fair value of our non-recourse property

 

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debt using an income and market approach, including comparison of the contractual terms to observable and unobservable inputs such as market interest rate risk spreads, contractual interest rates, remaining periods to maturity, collateral quality, and loan to value ratios on similarly encumbered apartment communities within our portfolio. We classify the fair value of our non-recourse property debt within Level 2 of the GAAP fair value hierarchy based on the significance of certain of the unobservable inputs used to estimate its fair value.

The following table summarizes carrying value and fair value for our non-recourse property debt (in thousands):

 

     As of September 30, 2020      As of December 31, 2019  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Non-recourse property debt

   $ 4,079,251      $ 4,206,702      $ 4,251,339      $ 4,298,630  

Note 7—Variable Interest Entities

Consolidated Entities

Aimco consolidates the Aimco Operating Partnership, a VIE of which Aimco is the primary beneficiary. Aimco, through the Aimco Operating Partnership, consolidates all VIEs for which it is the primary beneficiary. Substantially all of the assets and liabilities of Aimco are that of the Aimco Operating Partnership.

All of the VIEs the Aimco Operating Partnership consolidates own interests in one or more apartment communities and are typically structured to generate a return for their partners through the operation and ultimate sale of the communities. The Aimco Operating Partnership is the primary beneficiary in the limited partnerships in which it is the sole decision maker and has a substantial economic interest. The table below summarizes apartment community information regarding VIEs consolidated by the Aimco Operating Partnership, excluding 1001 Brickell Bay Drive as it is not an apartment community:

 

     September 30,
2020 		     December 31,
2019 		 

VIEs with interests in apartment communities

     6        6  

Apartment communities owned by VIEs

     17        6  

Apartment homes in communities owned by VIEs

     5,409        2,056  

Assets of the Aimco Operating Partnership’s consolidated VIEs must first be used to settle the liabilities of such consolidated VIEs. These consolidated VIEs’ creditors do not have recourse to the general credit of the Aimco Operating Partnership. Assets and liabilities of VIEs, excluding those of the Aimco Operating Partnership, are summarized in the table below (in thousands):

 

     September 30,
2020 		     December 31,
2019 		 

Assets(1)

     

Net real estate

   $ 1,424,820      $ 501,272  

Cash and cash equivalents

     15,908        11,600  

Restricted cash

     8,648        2,063  

Other assets

     38,815        40,459  

Liabilities(1)

     

Non-recourse property debt, net, secured by Aimco communities

     1,284,252        175,842  

Deferred tax liability

     136,968        147,722  

Accrued liabilities and other

     42,845        36,107  

 

(1)

VIEs as of September 30, 2020 and December 31, 2019, include one VIE that owns an interest in 1001 Brickell Bay Drive. Assets and liabilities include those of the VIE, but it is not included in the apartment counts above as it is not an apartment community.

 

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Unconsolidated Entities

We have an interest in a partnership that owns Parkmerced Apartments, which meets the definition of a VIE. However, we are not the primary beneficiary and do not consolidate this partnership. We loaned $275.0 million to the partnership, which accrues interest at 10% per annum with a five-year term and the right to extend for a second five-year term. Our investment balance of $300.3 million, reflected in mezzanine investment in our condensed consolidated balance sheets, consists primarily of notes receivable and represents our maximum exposure to loss in this VIE.

Note 8—Business Segments

We have three segments: (i) Same Store, (ii) Redevelopment and Development, and (iii) Acquisition and Other Real Estate.

Our Same Store segment includes communities that have reached a stabilized level of operations as of the beginning of a two-year comparable period and maintained it throughout the current and comparable prior year and are not expected to be sold within 12 months. Our Redevelopment and Development segment includes apartment communities that are currently under construction, and those that have been completed in recent years that have not achieved and maintained stabilized operations for both the current and comparable prior year. Our Acquisition and Other Real Estate segment includes: (i) communities that we have acquired since the beginning of a two-year comparable period; (ii) communities that are subject to limitations on rent increases; (iii) communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale; (iv) communities that we expect to redevelop; and (v) certain commercial spaces.

Our chief operating decision maker uses proportionate property net operating income to assess the operating performance of our communities. Proportionate property net operating income reflects our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements, for consolidated communities. In our condensed consolidated statements of operations, utility reimbursements are included in rental and other property revenues, in accordance with GAAP.

As of September 30, 2020, our Same Store segment included 93 consolidated apartment communities with 27,610 apartment homes; our Redevelopment and Development segment included eight consolidated communities with 2,521 homes; and our Acquisition and Other Real Estate segment included 20 communities with 2,670 homes and one office building.

 

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The following tables present the rental and other property revenues, property operating expenses, proportionate property net operating income, and income before income tax benefit (expense) of our segments on a proportionate basis, excluding amounts related to communities sold or held for sale and our proportionate share of four apartment communities with 142 apartment homes that we neither manage nor consolidate, for the nine months ended September 30, 2020 and 2019 (in thousands):

 

    Same
Store 		    Redevelopment
and
Development 		    Acquisition
and Other
Real Estate 		    Proportionate
and Other
Adjustments(1) 		    Corporate and
Amounts Not
Allocated to
Segments(2) 		    Consolidated  

Nine months ended September 30, 2020:

           

Rental and other property revenues

  $ 534,395     $ 36,001     $ 53,485     $ 29,668     $ 5,266     $ 658,815  

Property operating expenses

    145,259       14,636       20,045       25,617       18,975       224,532  

Other operating expenses not allocated to segments(3)

    —         —         —         —         352,912       352,912  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    145,259       14,636       20,045       25,617       371,887       577,444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proportionate property net operating income (loss)

    389,136       21,365       33,440       4,051       (366,621 )      81,371  

Other items included in income before income tax benefit(4)

    —         —         —         —         (61,864 )      (61,864 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

  $ 389,136     $ 21,365     $ 33,440     $ 4,051     $ (428,485 )    $ 19,507  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Same
Store 		    Redevelopment
and
Development 		    Acquisition
and Other
Real Estate 		    Proportionate
and Other
Adjustments(1) 		    Corporate and
Amounts Not
Allocated to
Segments(2) 		    Consolidated  

Nine months ended September 30, 2019:

           

Rental and other property revenues

  $ 542,624     $ 37,839     $ 46,881     $ 24,389     $ 32,529     $ 684,262  

Property operating expenses

    146,895       14,736       17,403       22,704       30,352       232,090  

Other operating expenses not allocated to segments(3)

    —         —         —         —         332,027       332,027  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    146,895       14,736       17,403       22,704       362,379       564,117  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proportionate property net operating income (loss)

    395,729       23,103       29,478       1,685       (329,850 )      120,145  

Other items included in income before income tax benefit(4)

    —         —         —         —         243,174       243,174  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

  $ 395,729     $ 23,103     $ 29,478     $ 1,685     $ (86,676 )    $ 363,319  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents adjustments for the noncontrolling interests in consolidated real estate partnerships’ share of the results of consolidated communities in our segments, which are included in the related consolidated amounts, but excluded from proportionate property net operating income for our segment evaluation. Also includes the reclassification of utility reimbursements from revenues to property operating expenses for the purpose of evaluating segment results. Utility reimbursements are included in rental and other property revenues in our condensed consolidated statements of operations prepared in accordance with GAAP.

(2)

Includes the operating results of apartment communities sold during the periods shown or held for sale at the end of the period, if any. Also includes property management expenses and casualty gains and losses, which are included in consolidated property operating expenses and are not part of our segment performance measure. The write-off of straight-line rent receivables, recognized due to the impact of COVID-19 and the resulting economic impact on our

 

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  commercial tenants, are included in consolidated rental and property revenues and are not included in our measurement of segment performance for the nine months ended September 30, 2020.
(3)

Includes depreciation and amortization, general and administrative expenses, and other operating expenses, which may include provision for real estate impairment loss and write-offs of deferred leasing commissions, which are not included in our measure of segment performance.

(4)

Includes gain on dispositions of real estate, mezzanine investment income, income from unconsolidated communities, interest income, and interest expense.

The assets of our segments and the consolidated assets not allocated to our segments were as follows (in thousands):

 

     September 30,
2020 		     December 31,
2019 		 

Same Store

   $ 4,491,989      $ 4,618,108  

Redevelopment and Development

     859,214        716,750  

Acquisition and Other Real Estate

     881,824        803,777  

Corporate and other assets(1)

     809,102        690,104  
  

 

 

    

 

 

 

Total consolidated assets

   $ 7,042,129      $ 6,828,739  
  

 

 

    

 

 

 

 

(1)

Includes the assets not allocated to our segments, primarily corporate assets, our mezzanine investment, and assets of communities sold or held for sale as of September 30, 2020.

For the nine months ended September 30, 2020 and 2019, capital additions related to our segments were as follows (in thousands):

 

     2020      2019  

Same Store

   $ 73,681      $ 130,967  

Redevelopment and Development

     168,247        144,210  

Acquisition and Other Real Estate

     18,796        25,160  
  

 

 

    

 

 

 

Total capital additions

   $ 260,724      $ 300,337  
  

 

 

    

 

 

 

Note 9—Subsequent Events

On October 21, 2020, our Board of Directors declared a $8.20 special dividend in the form of cash and stock. The special dividend includes the next two quarterly cash dividends, or $0.82 per share in the aggregate, accelerating the payment of the regular dividend expected in February of 2021. Additionally, shareholders in the aggregate will receive $7.38 per share in stock. The dividend will be payable to shareholders of record on the close of business on November 4, 2020, with shareholders having the opportunity to elect to receive the special dividend in the form of all stock or prorated cash and stock, and will be paid on November 30, 2020, after trading hours. The number of shares distributed in the special dividend will be determined by the volume weighted average price (“VWAP”) of our shares during the 10-trading day period ending on November 24, 2020.

In order to neutralize the dilutive impact of the stock issued in the special dividend, our Board also authorized a reverse stock split, effective on November 30, 2020, immediately following the special dividend. As a result, total shares outstanding following completion of both the special dividend and the reverse stock split are expected to be unchanged from the total shares outstanding immediately prior to the dividend. Some stockholders may have more shares and some may have fewer based on their individual elections. The reverse split will ensure comparability of per share results before and after these transactions.

 

F-60

Exhibit 99.2

 

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Computershare

PO Box 505000

Louisville, KY 40233-5000

Telephone 800 730 6001

www.computershare.com/investor

  
    
    
    
    
    
    
    
    

Important Notice Regarding the Availability of Materials

THIS NOTICE WILL ENABLE YOU TO ACCESS MATERIALS FOR INFORMATIONAL PURPOSES ONLY

You are receiving this notice because you held shares of Apartment Investment and Management Company (“Aimco”) common stock as of the close of business on [●], 2020 (“Record Date”). On [●], 2020, Aimco will distribute all of the outstanding shares of Apartment Income REIT Corp. (“AIR”) on a pro rata basis to holders of Aimco common stock. Each Aimco stockholder will receive one share of AIR common stock for each share of Aimco common stock held as of the close of business on the Record Date.

An information statement describing the distribution has been filed as an exhibit to AIR’s registration statement on Form 10.

This notice provides instructions on how to access the information statement for informational purposes only and is not a form for voting. No vote of Aimco’s stockholders is required or is being sought. Therefore, you are not being asked for a proxy, and you are requested not to send a proxy. The information statement contains important information and is available, free of charge, on the Internet or by mail by following the instructions below. We encourage you to access and review the information statement closely.

How to Access the Information Statement

How to View Online:

Visit: www.aimco.com/scc_infostmt

How to Request and Receive a PAPER Copy:

If you want to receive a paper copy of these documents, you must request one. There is NO charge for requesting a copy. Please choose one of the following methods to make your request:

By Telephone - Call our Transfer Agent, Computershare, free of charge at 1-800-730-6001

By Email - Send an email to our Transfer Agent, Computershare, at web.queries@computershare.com with “Request for Materials Aimco (AIR)” in the subject line. Include in the message the full registration on your Computershare account and mailing address. State in the email that you want a paper copy of the AIR information statement.

 

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