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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

Commission File Number 0-24497

AIMCO Properties, L.P.

(303) 757-8101
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

The number of Partnership Common Units outstanding as of October 31, 2002: 103,254,553

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AIMCO PROPERTIES, L.P.

FORM 10-Q

INDEX

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AIMCO PROPERTIES, L.P.

CONSOLIDATED BALANCE SHEETS
(In Thousands)

See notes to consolidated financial statements.

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AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Unit Data)
(Unaudited)

See notes to consolidated financial statements.

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AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

See notes to consolidated financial statements.

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AIMCO PROPERTIES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)

NOTE 1 — Organization

     AIMCO Properties, L.P., a Delaware limited partnership (the “Partnership” and together with its consolidated subsidiaries and other controlled entities, the “Company”), was formed on May 16, 1994 to conduct the business of acquiring, developing, leasing, and managing multifamily apartment communities. The Partnership’s securities include Partnership Common Units (“common OP Units”), Partnership Preferred Units (“preferred OP Units”), and High Performance Partnership Units (“High Performance Units”), which are collectively referred to as “OP Units.” Apartment Investment and Management Company (“AIMCO”) is the owner of the General Partner — AIMCO-GP, Inc. — and Special Limited Partner — AIMCO-LP, Inc., as defined in the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P. as amended (the “Partnership Agreement”). The General Partner and Special Limited Partner hold common OP Units of the Partnership. In addition, AIMCO (through the General Partner and Special Limited Partner) is the primary holder of outstanding preferred OP Units. The Limited Partners (as defined in the Partnership Agreement) of the Partnership are individuals or entities that own common OP Units or preferred OP Units other than AIMCO, the General Partner or the Special Limited Partner. After holding the common OP Units for one year, the Limited Partners have the right to redeem their common OP Units for cash, subject to the prior right of the Partnership to elect to acquire some or all of the common OP Units tendered for redemption for cash or in exchange for shares of AIMCO Class A Common Stock. Common OP Units redeemed for AIMCO Class A Common Stock are generally on a one-for-one basis (subject to antidilution adjustments). Preferred OP Units may or may not be redeemable based on their respective terms, as provided for in the Partnership Agreement.

     The Partnership, through its operating divisions and subsidiaries, holds substantially all of AIMCO’s assets and manages the daily operations of AIMCO’s business and assets. All employees of the Company are employees of the Partnership; AIMCO has no employees.

     AIMCO is required to contribute to the Partnership all proceeds from offerings of its securities. In addition, substantially all of AIMCO’s assets must be owned through the Partnership; therefore, AIMCO is generally required to contribute to the Partnership all assets acquired. In exchange for the contribution of offering proceeds or assets, AIMCO receives additional interests in the Partnership with similar terms (i.e., if AIMCO contributes proceeds of a preferred stock offering, AIMCO (through the General Partner and Special Limited Partner) receives preferred OP Units).

     AIMCO frequently consummates transactions for the benefit of the Partnership. For legal, tax or other business reasons, AIMCO may hold title or ownership of certain assets until they can be transferred to the Partnership. However, the Partnership has a controlling financial interest in substantially all of AIMCO’s assets in the process of transfer to the Partnership.

     As of September 30, 2002, the Company:

	•		owned a controlling equity interest in 179,663 units in 694 apartment properties (which the Company refers to as “consolidated”);
	•		owned a non-controlling equity interest in 122,149 units in 933 apartment properties (which the Company refers to as “unconsolidated”), of which 78,413 units were also managed by the Company; and
	•		provided services or managed, for third party owners, 25,058 units in 203 apartment properties, primarily pursuant to long term, non-cancelable agreements.

     At September 30, 2002, the Partnership had 103,262,862 common OP Units, 40,316,801 preferred OP Units and 2,379,084 High Performance Units (includes only those units that have met the required measurement benchmarks and are dilutive — see Note 8) outstanding.

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NOTE 2 — Basis of Presentation

     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

     The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     For further information, refer to the statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2001. Certain 2001 financial statement amounts have been reclassified to conform to the 2002 presentation, including certain eliminations of self-charged income, as well as the treatment of discontinued operations.

     The accompanying consolidated financial statements include the accounts of the Partnership and majority owned corporate subsidiaries and consolidated real estate partnerships. As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or limited liability company and “partner” refers to a limited partner in a limited partnership or a member in a limited liability company. Pursuant to a Management and Contribution Agreement between the Partnership and AIMCO, the Partnership has acquired, in exchange for interests in the Partnership, the economic benefits of subsidiaries of AIMCO in which the Partnership does not have an interest, and AIMCO has granted the Partnership a right of first refusal to acquire such subsidiaries’ assets for no additional consideration. Pursuant to that agreement, AIMCO has also granted the Partnership certain rights with respect to assets of such subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The assets of consolidated real estate partnerships owned or controlled by AIMCO or the Partnership generally are not available to pay creditors of AIMCO or the Partnership.

     Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income, even though the Company does not suffer any economic effect, cost or risk. This charge is classified in the consolidated statements of income as distributions to minority partners in excess of income. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case, the Company recognizes 100% of the losses in operating earnings, even though the Company does not suffer any economic effect, cost or risk. With regard to such consolidated real estate partnerships, approximately $0.8 million in non-cash depreciation losses related to the minority interest ownership were charged to operations for the three and nine months ended September 30, 2002, respectively, and no losses were charged to operations for the three and nine months ended September 30, 2001, respectively.

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NOTE 3 — Notes Receivable from Unconsolidated Real Estate Partnerships

     The following table summarizes the Company’s notes receivable from unconsolidated real estate partnerships at September 30, 2002 and 2001 (in thousands):

     The Company recognizes interest income earned from its investments in notes receivable when the collectibility of such amounts is both probable and estimable. The notes receivable were either extended by the Company and are carried at the face amount plus accrued interest (“par value notes”) or were made by predecessors whose positions have been acquired at a discount (“discounted notes”).

     As of September 30, 2002 and 2001, the Company held, primarily through its consolidated corporate subsidiaries, $115.3 million and $128.9 million, respectively, of par value notes receivable from unconsolidated real estate partnerships, including accrued interest, for which the Company believes the collectibility of such amounts is both probable and estimable. As such, interest income from the par value notes is generally recognized as it is earned. Interest income from such notes for the three and nine months ended September 30, 2002 totaled $7.3 million and $24.2 million, respectively, and for the three and nine months ended September 30, 2001 totaled $8.1 million and $22.8 million, respectively.

     As of September 30, 2002 and 2001, the Company held discounted notes, including accrued interest, with a carrying value of $132.2 million and $128.5 million, respectively. The total face value plus accrued interest of these notes was $221.7 million and $289.3 million at September 30, 2002 and 2001, respectively.

     Under the cost recovery method, the discounted notes are carried at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. Based upon closed or pending transactions (which include sales, refinancing, foreclosures and rights offering activities), the Company has determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, the Company is amortizing, as interest income, on a prospective basis over the estimated remaining life of the loans, the difference between the carrying value of the discounted notes and the estimated collectible value. For the three and nine months ended September 30, 2002, the Company recognized deferred interest income and discounts of approximately $3.8 million ($0.04 per basic and diluted unit) and $19.3 million ($0.20 per basic and diluted unit), respectively, and for the three and nine months ended September 30, 2001, the Company recognized deferred interest income and discounts of approximately $3.1 million ($0.04 per basic and diluted unit) and $5.7 million ($0.07 per basic and diluted unit), respectively. These amounts are net of allocated expenses of $0.2 million and $0.8 million for the three and nine months ended September 30, 2002, respectively, and none and $2.2 million for the three and nine months ended September 30, 2001, respectively. The notes receivable generally are realizable through collection of cash or obtaining ownership of the property.

     The Company continues to assess the collectibility or impairment of each note on a periodic basis. During the three and nine months ended September 30, 2002, the Company identified and recorded provisions for losses on notes receivable of $1.7 million and $4.8 million, respectively. The Company will continue to monitor and assess these notes, and expects to identify both recoveries and impairments, but does not expect any net impairments to have a material adverse affect on its consolidated financial condition or results of operations taken as a whole.

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NOTE 4 — Commitments and Contingencies

  Legal

     The Company is a party to various legal actions resulting from its operating activities. These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.

  Limited Partnerships

     In connection with the Company’s acquisitions of interests in real estate partnerships, it is sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such real estate partnerships or violations of the relevant partnership agreements.

     The Company may incur costs in connection with the defense or settlement of such litigation. The Company believes it complies with its fiduciary obligations and relevant partnership agreements. Although the outcome of any litigation is uncertain, the Company does not expect any such legal actions to have a material adverse affect on the Company’s consolidated financial condition or results of operations taken as a whole.

  Environmental

     Various federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to properly remedy, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of properties, the Company could potentially be liable for environmental liabilities or costs associated with its properties or properties it acquires or manages in the future.

     There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. Prior to March 31, 2002, the Company generally was insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, certain of the Company’s insurance carriers have excluded from insurance coverage property damage loss claims arising from the presence of mold, although the Company does retain some limited coverage for catastrophic property damage due to mold. In addition, certain of the Company’s insurance carriers do provide some coverage for personal injury claims, which coverage generally expires on December 31, 2002.

     The Company has implemented protocols and procedures to prevent or eliminate mold from its properties and believes that its measures will eliminate, or at least minimize, the effects that mold could have on its residents. To date, the Company has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change, however, the Company can make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.

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  Other Legal Matters

     In December 2001, AIMCO and certain of its affiliated partnerships that own properties voluntarily entered into an agreement with the U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Housing and Urban Development (“HUD”) pursuant to which AIMCO agreed to pay a fine of $130,000, conduct lead-based paint inspections and other testing, if necessary, on properties initially built prior to 1978, and re-issue lead-based paint disclosures to residents of such properties that have not been certified as lead-base paint free. In return, neither AIMCO nor its properties will be subject to any additional fines for inadequate disclosures prior to the execution of the agreement. The cost of the settlement, inspections and remediations incurred to date had been reserved for at the time the Company acquired the NHP Incorporated and Insignia Financial Group, Inc. portfolios. Any remaining costs are not expected to be material.

     On January 30, 2002, AIMCO and four of its affiliated partnerships were named as defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco in the Superior Court, County of San Francisco. The City Attorney asserts that the defendants have violated certain state and local residential housing codes, and engaged in unlawful business practices and unfair competition, in connection with four properties owned and operated by the affiliated partnerships. The City Attorney asserts civil penalties from $500 to $1,000 per day for each affected unit, as well as other statutory and equitable relief. AIMCO has engaged in preliminary discussions with the City Attorney to resolve the lawsuit. In the event it is unable to resolve the lawsuit, AIMCO believes it has meritorious defenses to assert and it will vigorously defend itself. The matter has been set for trial on July 7, 2003. Although the outcome of any litigation is uncertain, AIMCO does not believe that the ultimate outcome will have a material adverse effect on AIMCO’s consolidated financial condition or results of operations taken as a whole.

     National Program Services, Inc. and Vito Gruppuso (collectively “NPS”) are insurance agents who in 2000 sold to AIMCO property insurance issued by National Union Fire Insurance Company of Pittsburgh, PA (“National Union”). The financial failure of NPS resulted in defaults in June 2002 under two agreements by which NPS indemnified AIMCO from losses relating to the matters described below. As a result of such defaults, AIMCO faces the risk of impairment of a $16.7 million insurance-related receivable as well as a contingent liability of $5.7 million. AIMCO’s receivable arose from the improper and premature cancellation by National Union of its property insurance coverage in April 2001. AIMCO had paid to National Union amounts in excess of $10 million in prepaid premiums for property insurance coverage that was to continue through at least April 2002. In addition, AIMCO has a $6.7 million receivable from NPS to reimburse it for payments on a premium finance agreement, proceeds of which were to pay premiums to National Union. AIMCO holds two $5 million surety bonds issued by Lumberman’s Mutual Insurance Company to secure the NPS indemnities. In addition, AIMCO has pending litigation in the U.S. District Court for the District of Colorado against National Union, First Capital Group, a New York based insurance wholesaler, NPS and other agents of National Union, for a refund of at least $10 million of the prepaid premium plus other damages resulting from the cancellation of the coverage. The cancellation of the property insurance coverage in 2001 has no effect on AIMCO’s or the Company’s present property insurance coverage or on coverage that existed through April 2001.

     With respect to the contingent liability arising from the NPS defaults, in July 2002 AIMCO received a demand for payment of $5.7 million from Cananwill, Inc., a premium funding company, allegedly due for premium payments made to National Union. AIMCO believes it has meritorious defenses to assert, and it will vigorously defend itself in the event Cananwill commences any litigation. In the event of litigation and an adverse determination, AIMCO will seek reimbursement of any loss from the bonds securing the NPS indemnification agreements as well as from all third parties responsible for the misapplication of its payments.

     Although the outcome of any claim or matter in litigation is uncertain, AIMCO does not believe that it will incur any material loss in connection with the receivable or that the ultimate outcome of these separate but related matters will have a material adverse effect on AIMCO’s consolidated financial condition or results of operations taken as a whole.

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NOTE 5 — Partners’ Capital

  Preferred OP Units

     All outstanding classes of preferred OP Units are on equal parity with each other and are senior to the common OP Units. Generally, holders of classes of preferred OP Units do not have any voting rights, except the right to approve certain changes to the Partnership Agreement that would adversely affect holders of such class of units.

     On March 11, 2002, the Partnership paid the proceeds from the Casden Term Loan to AIMCO in exchange for a note receivable of $198.3 million (the “Note”). Upon completion of the merger of Casden Properties, Inc., (“Casden”) in March of 2002 into AIMCO (the “Casden Merger”), AIMCO contributed the substantial majority of the assets and liabilities of Casden to the Partnership in exchange for approximately 7,934,920 Class Ten Partnership Preferred Units (the “Class Ten Preferred Units”). The Note bears interest at 8% per annum. The Class Ten Preferred Units pay distributions of $2.00 per unit. When AIMCO issues stock for cash, the net proceeds are used to repay the Note. Concurrently, a portion of the Class Ten Preferred Units is converted into the same class of units issued by AIMCO. In June 2002, AIMCO fully repaid the note and all Class Ten Preferred Units were converted.

     On March 19, 2002, AIMCO announced that on April 18, 2002 it would redeem for AIMCO Class A Common Stock all outstanding shares of its Class K Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class K Preferred Stock”) at a redemption price of $27.2125 per share of Class K Preferred Stock. The redemption price was payable in shares of AIMCO Class A Common Stock at a price of $45.7835 per share, or the issuance of 0.5944 shares of AIMCO Class A Common Stock for each share of Class K Preferred Stock redeemed. Concurrently, the Partnership announced that it would redeem each of the Class K Partnership Preferred Units (the “Class K Preferred Units”) for 0.5944 common OP Units. Subsequent to the Partnership’s announcement all 5,000,000 Class K Preferred Units were converted into approximately 2,972,000 common OP Units.

     On March 25, 2002, AIMCO sold 1,000,000 shares of Class R Cumulative Preferred Stock, par value $0.01 per share (the “Class R Preferred Stock”) in a registered public offering, and on April 11, 2002, AIMCO sold an additional 1,000,000 shares of Class R Preferred Stock in a registered public offering. The total proceeds from both of these offerings of approximately $51 million were paid by AIMCO to the Partnership to reduce the Note. Concurrently 2,044,400 Class Ten Preferred Units were converted into 2,000,000 Class R Partnership Preferred Units (the “Class R Preferred Units”). The net proceeds were used by the Partnership to repay short-term indebtedness. The Class R Preferred Units have substantially the same terms as the shares of Class R Preferred Stock. Holders of the Class R Preferred Stock are entitled to receive dividends in an annual amount of $2.50, or 10% of the $25 per share liquidation preference. These dividends are cumulative from the date of original issuance and are payable quarterly each year. Distributions are made on the Class R Preferred Units at the same time and in the same amount as dividends paid on the Class R Preferred Stock. The Class R Preferred Units are senior to common OP Units as to distributions and liquidation. Upon any liquidation, dissolution or winding up of the Partnership, before payments of distributions by the Partnership are made to any holders of common OP Units, the holders of Class R Preferred Units are entitled to receive a liquidation preference of $25 per unit, plus accumulated, accrued and unpaid dividends/distributions. Each Class R Preferred Unit is redeemable beginning July 20, 2006 at the option of the Partnership, at a price equal to the liquidation preference of $25 per unit, plus all accumulated, accrued and unpaid distributions, if any, to the date fixed for redemption.

     On May 6, 2002, the holder of 2,500,000 shares of AIMCO Class L Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class L Preferred Stock”) with a face value of $62.5 million, converted such shares into 1,344,664 shares of AIMCO Class A Common Stock. Concurrently, the Partnership converted 2,500,000 Class L Partnership Preferred Units (the “Class L Preferred Units”) into 1,344,664 common OP Units. Following this conversion, as of September 30, 2002, 2,500,000 Class L Preferred Units remained outstanding.

     On July 29, 2002, AIMCO announced that on August 28, 2002, it would redeem all outstanding shares of its Class B Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class B Preferred Stock”) for cash equal to the liquidation preference of $100 per share, plus accrued and unpaid dividends through the redemption date of $1.73545 per share. On August 20, 2002, the holder of all 419,471 shares of Class B Preferred Stock converted such shares into 1,377,573 shares of AIMCO Class A Common Stock. Concurrently, the Partnership converted all Class B Partnership Preferred Units into 1,377,573 common OP Units.

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  Common OP Units

     On June 5, 2002, AIMCO completed the sale of 8,000,000 shares of AIMCO Class A Common Stock in an underwritten public offering at a net price of $46.17 per share. Proceeds of approximately $147 million were paid by AIMCO to the Partnership to fully repay the Note, and concurrently the remaining 5,890,520 Class Ten Preferred Units were converted into 3,189,582 common OP Units. The remaining proceeds of $222 million were contributed by AIMCO to the Partnership in exchange for 4,810,418 common OP Units. The total net proceeds of $369 million were used by the Partnership to repay outstanding short-term indebtedness under the credit facility and the term loan that was used to finance the Company’s acquisition of Casden, which included the Casden Merger.

     In August and September of 2002, the holders of mandatorily redeemable convertible preferred securities (“TOPRS”) converted approximately $5.3 million of TOPRS into approximately 107,000 shares of AIMCO Class A Common Stock. The TOPRS were assumed by the Company in October 1998 in connection with its merger with Insignia Financial Group, Inc. The TOPRS have a conversion price of $49.61 per share, which, based on a liquidation amount of $50 per security, results in the issuance of 1.0079 shares of AIMCO Class A Common Stock for each TOPRS converted. Concurrently, the Partnership converted approximately $5.3 million of TOPRS into approximately 107,000 common OP Units.

     During the three and nine months ended September 30, 2002, the Company completed tender offers for limited partnership interests resulting in the issuance of approximately 125,000 and 201,000 common OP Units, respectively.

     During the three and nine months ended September 30, 2002, approximately 182,000 and 464,000 common OP Units, respectively, and approximately 77,000 and 77,000 preferred OP Units, respectively, were tendered for redemption in exchange for cash or shares of AIMCO Class A Common Stock.

  High Performance Units

     On April 26, 2002, AIMCO stockholders approved the sale by the Partnership of 5,000 of its Class V High Performance Units (the “Class V Units”) (see Note 8). In July 2002, the Partnership issued 4,245 of its Class V Units to a limited liability company owned by a limited number of employees for an offering price of approximately $0.9 million. Subsequent to September 30, 2002, the Partnership issued an additional 755 Class V Units to the same limited liability company for an offering price of approximately $0.2 million.

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NOTE 6 — Earnings Per Unit

     Earnings per unit is calculated based on the weighted average number of common OP Units, common OP Unit equivalents and dilutive convertible securities outstanding during the period. The following table illustrates the calculation of basic and diluted earnings per unit for the three and nine months ended September 30, 2002 and 2001 (in thousands, except per unit data):

     Convertible preferred OP Units that could be converted into 10,814 and 17,352 weighted average common OP Units for the three months ended September 30, 2002 and 2001, respectively, and 13,147 and 16,538 weighted average common OP Units for the nine months ended September 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per unit because the effects would be anti-dilutive.

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NOTE 7 — Industry Segments

     The Company has two reportable segments: real estate (owning and operating apartments); and investment management business (providing, to third parties and affiliates, services relating to the apartment business). The Company owns and operates multifamily apartment communities throughout the United States and Puerto Rico that generate rental and other property related income through the leasing of apartment units to a diverse base of tenants. The Company separately evaluates the performance of each of its apartment communities. However, because each of its apartment communities has similar economic characteristics, the apartment communities have been aggregated into a single apartment communities, or real estate, segment. The Company considers disclosure of different components of the multifamily housing business to be useful. All real estate revenues are from external customers and no revenues are generated from transactions with other segments. A significant portion of the revenues earned in the investment management business are from transactions with affiliates in the real estate segment.

     No single tenant or related group of tenants contributed 10% or more of total revenues during the three and nine months ended September 30, 2002 or 2001. The Company also manages apartment properties and provides other services for third parties and affiliates through its investment management business segment. As disclosed, a significant portion of the revenues of the investment management business is from affiliates.

     A performance measure the Company uses for each segment is its contribution to free cash flow (“Free Cash Flow” or “FCF”). The Company defines Free Cash Flow as net operating income less the capital spending required to maintain and improve the related assets. Free Cash Flow measures profitability prior to the cost of capital. Other performance measures the Company uses include funds from operations, adjusted funds from operations and earnings before structural depreciation. The Company deducts Capital Replacement spending to arrive at Free Cash Flow and adjusted funds from operations. In addition, beginning in the second quarter of 2002, the Company began deducting Capital Enhancement spending as well as Capital Replacement spending. This additional deduction is reflected on a prospective basis.

     The following tables present the contribution (separated between consolidated and unconsolidated activity) to the Company’s Free Cash Flow for the three and nine months ended September 30, 2002 and 2001, from these segments, and a reconciliation of Free Cash Flow to funds from operations, funds from operations less actual spending for Capital Replacements and Capital Enhancements, and net income (in thousands, except equivalent units (ownership effected) and monthly rents):

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FREE CASH FLOW FROM BUSINESS COMPONENTS
For the Three Months Ended September 30, 2002 and 2001
(in thousands, except unit data)