The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold.  For the three months ended JuneSeptember 30, 2012 and 2011, the proceeds from sales of available for salesCompany did not sell any securities totaled $5.1 million which resulted in a $0.5 million gain.the periods.  For the sixnine months ended JuneSeptember 30, 2012 and 2011, the proceeds from sales of available for sale securities totaled $5.1$6.3 million and $28.0 million, respectively, which resulted in gains of $0.5 million and $4.5 million, respectively.

The Company evaluates its investments in entities to determine whether such entities may be a variable interest entity or VIE,("VIE"), and, if a VIE, whether it is the primary beneficiary and therefore should consolidate the VIE. Generally, an entity is determined to be a VIE when either: (1) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support, (2) the equity holders, as a group, lack any of the following three characteristics: (i) the power, through voting rights or similar rights, to direct the activities of the entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected losses of the entity, (iii) the right to receive the expected residual returns of the entity, or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities (“VIEs”).  Total DownREIT units outstanding were 1,061,8481,057,848 and 1,063,848 as of JuneSeptember 30, 2012 and December 31, 2011, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $163.4$156.8 million and $149.5 million, as of JuneSeptember 30, 2012 and December 31, 2011, respectively.  The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $201.4$202.7 million and $174.0$176.7 million, respectively, as of JuneSeptember 30, 2012 and $199.8 million and $171.5 million, respectively, as of December 31, 2011.  Interest holders in VIEs consolidated by the Company are allocated income equal to the cash payments made to those interest holders.  The remaining results of operations are generally allocated to the Company.  As of JuneSeptember 30, 2012 and December 31, 2011, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

Stock-based compensation expense for options and restricted stock totaled $0.4 million and $0.3 million for the three months ended JuneSeptember 30, 2012 and 2011, respectively and $0.8$1.2 million and $0.7$1.0 million for the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.  The intrinsic value of the stock options exercised during the three months ended JuneSeptember 30, 2012 and 2011 totaled $0.7$0.5 million and $2.0$0.6 million, respectively and $1.8$2.4 million and $3.0$3.6 million for the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.  As of JuneSeptember 30, 2012, the intrinsic value of the stock options outstanding totaled $16.3$13.6 million.  As of JuneSeptember 30, 2012, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $4.9$4.3 million.  The cost is expected to be recognized over a weighted-average period of 1 to 6 years for the stock option plans and is expected to be recognized straight-line over 7 years for the restricted stock awards.

The Company has adopted an incentive program involving the issuance of Series Z-1 Incentive Units of limited partnership interest in the Operating Partnership.  Stock-based compensation expense for Z-1 Units totaled $0.5 million and $0.3$0.2 million for the three months ended JuneSeptember 30, 2012 and 2011, respectively and $1.1$1.6 million and $0.5$0.7 million for the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.  Stock-based compensation for Z-1 units capitalized totaled $0.2 million and $0.1 million for the three months ended JuneSeptember 30, 2012, and 2011, respectivelyand $0.4 million and $0.3 million and $0.2 million for the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.  As of JuneSeptember 30, 2012, the intrinsic value of the Z-1 Units subject to future vesting totaled $22.8$22.0 million.  As of JuneSeptember 30, 2012, total unrecognized compensation cost related to Z-1 Units subject to future vesting totaled $9.2$7.9 million.  The unamortized cost is expected to be recognized over the next six to fourteen years subject to the achievement of the stated performance criteria.

Management believes that the carrying amounts of its amounts outstanding under lines of credit, notes receivable and notes and other receivables approximate fair value as of JuneSeptember 30, 2012 and December 31, 2011, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments.  Management has estimated that the fair value of the Company’s $1.79$2.13 billion of fixed rate debt, including unsecured bonds, at JuneSeptember 30, 2012 is approximately $1.90$2.26 billion and the fair value of the Company’s $439.0$402.1 million of variable rate debt, excluding borrowings under the lines of credit, at JuneSeptember 30, 2012 is $417.7$380.9 million based on the terms of existing mortgage notes payable, unsecured bonds and variable rate demand notes compared to those available in the marketplace.  Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of JuneSeptember 30, 2012 due to the short-term maturity of these instruments.  The fair values of the Company’s investments in mortgage backed securities are approximately equal to the amortized cost carrying value of these securities.  Marketable securities and both the note payable and the swap related to multifamily revenue refunding bonds for the 101 San Fernando apartment community, are carried at fair value as of JuneSeptember 30, 2012, as discussed above and in Note 8.2012.

The Company capitalizes all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use.  The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period.  Included in capitalized costs are management’s accounting estimates of the direct and incremental personnel costs and indirect project costs associated with the Company's development and redevelopment activities.  Indirect project costs consist primarily of personnel costs associated with construction administration and development, including accounting, legal fees, and various office costs that clearly relate to projects under development.  The Company’s capitalized internal costs related to development and redevelopment projects totaled $1.1$1.5 million and $1.3 million during each of the three months ended JuneSeptember 30, 2012 and 2011, respectively, and $2.2 million and $2.0$4.5 million for each of the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively, most of which relates to development projects.  These totals include capitalized salaries of $0.5 million and $0.6 million for both the three months ended JuneSeptember 30, 2012 and 2011, respectively, and $1.3$1.9 million and $1.1$1.7 million for sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.

The Company owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with the accounting standards.  Therefore, the Company accounts for these investments using the equity method of accounting.  Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company’s equity in earnings less distributions received and the Company’s share of losses.  The significant accounting policies of the Company’s co-investments entities are consistent with those of the Company in all material respects.  For preferred equity investments the Company recognizes its preferred interest as equity in earnings.

A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and may provide promote distributions if certain financial return benchmarks are achieved.  Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible.

The preparation of condensed consolidated financial statements, in accordance with U.S. generally accepted accounting principles, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate portfolio, its investments in and advances to joint ventures and affiliates, its notes receivables and its qualification as a Real Estate Investment Trust (“REIT”). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.

Reclassifications for discontinued operations and cost of management and other fees have been made to prior year statements of operations balances in order to conform to current year presentation.  Such reclassifications have no impact on reported earnings, cash flows, total assets or total liabilities.

In April,August, the Company purchasedacquired Riley Square (formerly Waterstone Santa Clara) for $38.3 million. Built in 1972, the joint venture partner’s membership interest in the co-investment Essex Skyline at MacArthur Place, a 349-unit premier high-rise apartment community containing luxury amenitiesproperty contains 156 units and is located in Santa Ana, California, for a total purchase priceClara, California. The community was purchased by the Wesco I, LLC (“Wesco I”) joint venture of $85.0 million.  During the second quarter,which the Company recorded promote income of $2.3 million included in interest and other income on the condensed consolidated statements of operations, earned ashas a result of achieving certain performance hurdles as defined in the joint venture agreement.  Upon the acquisition of partner’s membership interest, the property was consolidated and a gain on remeasurement of the Company’s co-investment interest of $21.9 million was recorded equal to the amount by which the fair value of the Company’s previously owned noncontrolling interest exceeded its carrying value.  The secured $80.0 million loan was repaid early as part of this transaction, and the property is now an unencumbered asset.

In September, the Company acquired Park West, a 126 unit apartment community located in San Francisco, California, for $31.6 million. The property was built in 1958 and contains six different buildings. The Company intends to renovate the exterior of the community for $8 million.  Also in September, the Company acquired Domaine, a 92 unit property built in 2009 located in Seattle, Washington. The property was purchased for $34.0 million.  In connection with the purchase, the Company assumed a $14.6 million loan at a fixed rate of 5.7% for seven years.an 8 year term. The interest rate on the loan was unfavorable compared to currently available market rates for mortgage loans, and thus in conjunction with the purchase price allocation, the Company recorded a $4.3 million loan premium to reflect the debt at fair value.  This resulted in an effective interest rate for this loan of 3.3%.

In April,October, Ascent, a 90 unit community located in Kirkland, Washington, was acquired by the Company for $15.9 million. Built in 1998, the property is located adjacent to the Montebello community acquired by the Company in July 2012.  Also in October, the Company acquired an entity that ownsWillow Lake Apartments, a land parcel508 unit property located in Emeryville, CaliforniaSan Jose, California.  The property was purchased for $148 million.  The Company intends to renovate the developmentexterior of a 190-unit apartment and total estimated costs of $58.2the community for $4.5 million.  Initial occupancy is expected in

During the third quarter, the Company sold 633,636 shares of 2014.common stock for $97.9 million, net of commissions, at an average per share price of $155.97.  Year to date through October, the Company has sold 1,775,748 shares of common stock for $269.0 million, net of commissions, at an average price of $152.97.

During the quarter, the Company repaid $86.9 million in a co-investment partnership with the Canada Pension Plan Investment Board (“CPPIB”), acquired two adjacent land parcels in San Francisco, California for the development of two nine story apartment communities containing a total of 463 units and approximately 9,300 square feet of retail space.secured debt related to six communities.  The Company expects initial occupancyincurred $1.2 million in the second quarterlosses from early retirement of 2014 for a total estimated cost of $250 million.  The Company holds a 55% noncontrolling interest in the venturedebt and will earn customary management fees and may earn a promoted interest if certain performance hurdles as defined in the joint venture agreementthese communities are achieved.now unencumbered assets.

During October, the Company drew an agreement to purchase a 121-unit community under construction in Valley Village a district of Los Angeles, California.  The Company made a $1.0additional $150 million deposit and will take ownership ofon the property upon receipt of a temporary certificate of occupancy for total estimated costs of $37.6 million,Company’s $350 unsecured term loan which is expected in the first quarter of 2014.

The following table details the Company's co-investments (dollars in thousands):

 

Management and other fees from affiliates include management, development and redevelopment fees from co-investments of $2.8$2.9 million and $1.4$1.8 million during the three months ended JuneSeptember 30, 2012 and 2011, respectively, and $5.2$7.9 million and $2.6$4.2 million for the sixnine months ended JuneSeptember 30, 2012 and 2011, respectively.  All of these fees are net of intercompany amounts eliminated by the Company.