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AIMCO PROPERTIES, L.P. FORM 10-Q INDEX

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 0-24497

AIMCO Properties, L.P.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The number of Partnership Common Units outstanding as of October 31, 2003: 103,592,513

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.

3

AIMCO PROPERTIES, L.P.

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

See notes to consolidated financial statements.

4

AIMCO PROPERTIES, L.P.

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

See notes to consolidated financial statements.

5

AIMCO PROPERTIES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(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, redeveloping, leasing, and managing multifamily apartment properties. 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 Partnership's general partner, AIMCO-GP, Inc. (the "General Partner"), and special limited partner, AIMCO-LP, Inc., (the "Special Limited Partner"). The General Partner and Special Limited Partner hold common OP Units and are the primary holders of outstanding preferred OP Units. "Limited Partners" refers to individuals or entities that are limited partners of the Partnership, other than Aimco, the General Partner or the Special Limited Partner, and own common OP Units or preferred OP Units. Generally, 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 acquire some or all of the common OP Units tendered for redemption 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 and High Performance Units may or may not be redeemable based on their respective terms, as provided for in the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P. as amended (the "Partnership Agreement").

        On July 24, 2003, the General Partner amended the Partnership Agreement to provide that the Partnership shall continue until it is dissolved pursuant to the provisions of the Partnership Agreement or as otherwise provided by law. Prior to such amendment, the Partnership Agreement provided for the termination of the Partnership in the year 2094.

        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. 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 (e.g., if Aimco contributes proceeds of a preferred stock offering, Aimco (through the General Partner and Special Limited Partner) receives preferred OP Units with terms substantially similar to the preferred securities issued by Aimco).

        As of September 30, 2003, the Company:

•

owned a controlling equity interest in 178,913 units in 697 properties (which the Company refers to as "consolidated");



•

owned a non-controlling equity interest in 67,157 units in 467 properties (which the Company refers to as "unconsolidated"), of which 58,634 units were also managed by the Company; and



•

provided services or managed, for third party owners, 51,847 units in 520 properties, primarily pursuant to long-term agreements (including 40,126 units in 418 properties that are asset managed only, and not property managed).

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        At September 30, 2003, the Partnership had outstanding 103,509,952 common OP Units, 39,467,057 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 10).

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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

        The balance sheet at December 31, 2002 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, 2002. Certain 2002 financial statement amounts have been reclassified to conform to the 2003 presentation, including the elimination of certain intercompany items and the treatment of discontinued operations.

        The accompanying consolidated financial statements include the accounts of the Partnership, majority owned corporate subsidiaries and consolidated real estate partnerships. 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 the 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' net assets for no additional consideration. Pursuant to that agreement, Aimco has also granted the Partnership certain rights with respect to assets of such subsidiaries. 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 limited partner in a limited partnership or a member in a limited liability company. 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, however, pursuant to the revolving credit facility and term loans, the Partnership has pledged as collateral, equity interests in certain consolidated real estate partnerships.

        Interests in consolidated real estate partnerships held by partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in consolidated 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. For the three and nine months ended September 30, 2003, such charges were $11.9 million and $21.5 million, respectively, compared to charges of $4.3 million and $15.3 million for the three and nine months ended September 30, 2002, respectively. Losses are allocated to minority partners until such time as such losses exceed the minority partners' basis, in which case, the Company recognizes 100% of the losses in operating

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earnings when the partnership is in a deficit equity position, even though the Company does not suffer any economic effect, cost or risk. With regard to such consolidated real estate partnerships, approximately $0.4 million in depreciation related net recoveries and $1.3 million in depreciation related net losses were charged to minority interest in consolidated real estate partnerships for the three and nine months ended September 30, 2003, respectively, and $0.8 million and $1.5 million in depreciation related net losses were charged to minority interest in consolidated real estate partnerships for the three and nine months ended September 30, 2002, respectively.

NOTE 3—Notes Receivable Primarily From Unconsolidated Real Estate Partnerships

        The following table summarizes the Company's notes receivable primarily from unconsolidated real estate partnerships at September 30, 2003 and 2002 (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, 2003 and 2002, the Company held, primarily through its consolidated corporate subsidiaries, $105.4 million and $115.7 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 par value notes for the three and nine months ended September 30, 2003 totaled $3.5 million and $11.0 million, respectively, and for the three and nine months ended September 30, 2002 totaled $7.3 million and $24.2 million, respectively.

        As of September 30, 2003 and 2002, the Company held discounted notes, including accrued interest, with a carrying value of $83.9 million and $133.4 million, respectively. The total face value plus accrued interest of these notes was $147.6 million and $221.7 million at September 30, 2003 and 2002, respectively.

        The discounted notes are accounted for under the cost recovery method, which results in the discounted notes being 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, refinancings, foreclosures and rights offerings), the Company has determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, the Company recognizes accretion income, on a prospective basis over the estimated remaining life of the loans, equal to the difference between the carrying value of the discounted notes and the estimated collectible value. For the three and nine months ended September 30, 2003, the Company recognized accretion income of approximately $0.05 million ($0.00 per basic and diluted unit) and $2.6 million ($0.02 per basic unit and diluted unit), respectively,

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and for the three and nine months ended September 30, 2002, the Company recognized accretion income of approximately $3.8 million ($0.04 per basic and diluted unit) and $19.3 million ($0.20 per basic and diluted unit), respectively. The Company generally realizes the notes receivable through collection of cash or increasing ownership of the property or of an additional equity interest in the partnership owning the property that serves as collateral for the loan.

        Included in the above total notes receivable balances, as of September 30, 2003 and 2002, are $57.2 million and $67.2 million, respectively, in notes that were secured by interests in real estate or interests in real estate partnerships. The Company earns interest on these notes receivable at various annual interest rates ranging between 5.5% and 12.0% and averaging 8.4%.

        The activity in the allowance for loan losses in total for both par value and discounted notes for the nine months ended September 30, 2003, is as follows (in thousands):

        The Company will continue to monitor the collectibility or impairment of each note on a periodic basis, and changes in the allowance may occur due to changes in the market environment that affect operating cash flows.

NOTE 4—Commitments and Contingencies

Commitments

        In connection with the March 2002 acquisition of Casden Properties Inc. ("Casden"), which included the merger of Casden into Aimco, and the merger of a subsidiary of Aimco into another real estate investment trust ("REIT") affiliated with Casden (collectively, the "Casden Merger"), Aimco and the Company have the following commitments to:

•

purchase two properties currently under development, upon satisfactory completion and attainment of 60% occupancy, as follows:



•

Park La Brea



•

Phase 2—comprised of a total of 521 units for a minimum consideration of approximately $163 million, expected to close in late 2003 or early 2004;



•

Phase 3—comprised of a total of 610 units for a minimum consideration of approximately $199 million, expected to close in late 2004 or early 2005; and



•

Westwood—comprised of a total of 350 units for a minimum consideration of approximately $201 million, for which construction has not yet commenced.



•

provide a stand-by facility of $70 million in debt financing associated with the development of Park La Brea and Westwood (as of September 30, 2003, no funds have been drawn on this stand-by facility);



•

invest up to $50 million for a 20% limited liability company interest in Casden Properties, LLC. As of September 30, 2003, the Company had invested $20.9 million. Casden Properties, LLC acts as general contractor for the entity that is developing Park La Brea and Westwood. In addition, Casden Properties, LLC intends to pursue new development opportunities in Southern California and other markets. Aimco will have an option, but not an obligation, to purchase at completion all multifamily rental projects developed by Casden Properties, LLC; and

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•

pay $2.5 million per quarter for five years (up to an aggregate amount of $50 million) to Casden Development Company, LLC as a retainer on account for redevelopment services on the Company's assets (as of September 30, 2003, $15.0 million has been paid).

Legal

        In addition to the matters described below, the Company is a party to various legal actions 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 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.

        As previously disclosed, Aimco has been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. In addition, the Company is aware of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold, some of which have resulted in substantial monetary judgments or settlements. The Company has only limited insurance coverage for property damage loss claims arising from the presence of mold and for personal injury claims related to mold exposure.

        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

        As previously disclosed, Aimco and four of its affiliated partnerships are defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco ("CCSF") alleging violations of residential housing codes, unlawful business practices and unfair competition. 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 filed a cross-complaint against CCSF, its Department of Building Inspections and certain of its employees, alleging constitutional violations arising out of its arbitrary and discriminatory application of its codes, and other tortious conduct. The matter is not presently set for trial. 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, will vigorously defend itself against CCSF's claims, and vigorously prosecute its own claims. Although the outcome of any litigation is uncertain, the Company does not believe that the ultimate outcome will have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.

        As previously disclosed, 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, Pennsylvania ("National Union"). The financial failure of NPS resulted in defaults in June 2002 under two agreements by which NPS indemnified the Company from losses relating to the matters described below. As a result of such defaults, the Company faced the risk of impairment of a $16.7 million insurance-related receivable as well as certain contingent liabilities as more fully described below. Aimco has settled its litigation with Lumbermens Mutual Casualty Company ("Lumbermens") and potential claims against an insurance agency with the result that it has received $10 million and reduced its insurance related receivable to $6.7 million. In addition, Aimco has pending litigation 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.

        As previously disclosed, with respect to the contingent liabilities arising from the NPS defaults, in November 2002, Cananwill, Inc., a premium funding company, commenced litigation against Aimco and others, alleging a balance due of $5.7 million, plus interest and attorney's fees, on a premium finance agreement that funded premium payments made to National Union. Aimco denies liability to Cananwill, believes it has meritorious defenses to assert, and it will vigorously defend itself. In the event of an adverse determination, Aimco will seek reimbursement of any loss from all third parties responsible for any such liability. In April 2003, Aimco filed suit against Cananwill and Combined Specialty Insurance Company, formerly known as Virginia Surety Company, Inc., in the United States District Court for the District of Colorado alleging Cananwill's conversion of $1.6 million of unearned premium belonging to Aimco and misapplication of such funds to the alleged debt asserted in the first Cananwill lawsuit. In addition, WestRM—West Risk Markets, Ltd. ("WestRM") has sued XL Reinsurance America, Inc. ("XL"), Greenwich Insurance Company ("Greenwich") and Lumbermens to collect on surety bonds issued by the three allegedly to secure payment obligations due on a premium funding made by WestRM. XL and Greenwich have made Aimco a third party defendant in this action, asserting that if they have any liability to WestRM, then Aimco is liable to XL and Greenwich pursuant to an alleged indemnification agreement. Finally, on July 11, 2003, Highlands Insurance Company ("Highlands") filed suit in a New Jersey state court against Cananwill, Aimco, XL and Greenwich asserting the liability of Aimco as a principal on surety bonds issued by Highlands in the event Highlands has any liability to Cananwill on the aforementioned Cananwill claim. Aimco believes it has meritorious defenses to assert, will vigorously defend itself against claims brought against it, and will vigorously prosecute its own claims. Although the outcome of any claim or matter in litigation is uncertain, the Company does not believe that it will incur any material loss in connection with the insurance-related receivable or that the ultimate outcome of these separate but related

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matters will have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.

        As previously disclosed, in 1998 and 1999, prior to the March 2002 Casden Merger in which Aimco acquired National Partnership Investments Corp. ("NAPICO"), investors holding limited partnership units in various limited partnerships of which NAPICO is the corporate general partner commenced an action against NAPICO and certain other defendants. The claims related to activities that pre-dated the Casden Merger and included, but were not limited to, claims for breaches of fiduciary duty to the limited partners of certain NAPICO-managed partnerships and violations of securities laws by making materially false and misleading statements in the consent solicitation statements sent to the limited partners of such partnerships. On April 29, 2003, the court entered judgment against NAPICO and certain other defendants in the amount of approximately $25.2 million for violations of securities laws and against NAPICO for approximately $67.3 million for breaches of fiduciary duty, both amounts plus interest of approximately $25.6 million, and for punitive damages against NAPICO in the amount of $2.6 million.

        On August 11, 2003, Aimco and NAPICO entered into a Stipulation of Settlement (the "Stipulation of Settlement") with the plaintiff class (the "Plaintiffs") and their counsel relating to the settlement of the litigation. On August 25, 2003, the court granted preliminary approval of the Stipulation of Settlement. The Stipulation of Settlement remains subject to the final approval of the court, as well as the approval of the Plaintiffs, which hearing is currently scheduled for November 24, 2003. The principal terms of the Stipulation of Settlement include, among other things (1) payments in both cash ($29 million) and Aimco Class A Common Stock ($19 million) by Alan I. Casden, on behalf of himself, NAPICO and other defendants, to the Plaintiffs, (2) guaranteed payments in an aggregate amount of $35 million ($7 million per year for 5 years), plus interest, by NAPICO to the Plaintiffs, (3) a release of claims of all parties associated with the litigation and (4) joint agreement by the parties to request that a new judgment be entered in the litigation to, among other things, expunge the judgment originally entered against NAPICO and the other defendants. On September 24, 2003, Battle Fowler, LLP filed a request to intervene to challenge the portion of the Stipulation of Settlement that would lead to expungement of the judgment originally entered on April 29, 2003 against NAPICO and the other defendants. All parties to the Stipulation of Settlement have opposed this request to intervene. A hearing regarding the request occurred November 10, 2003; however, the court has not yet ruled on the matter.

        On August 12, 2003, in connection with the Stipulation of Settlement, NAPICO and Aimco executed a Settlement Agreement (the "Settlement Agreement") with the prior shareholders of Casden Properties Inc. The principal terms of the Settlement Agreement include, among other things, that (1) NAPICO will voluntarily discontinue the action it commenced on May 13, 2003 against the former shareholders of Casden Properties Inc. and other indemnitors in the Casden Merger, (2) Alan I. Casden and certain related entities will resolve certain pending claims for indemnification made by NAPICO, Aimco and their affiliates, (3) Aimco or an affiliate will provide $25 million of the $29 million in cash that Alan I. Casden is obligated to provide under the Stipulation of Settlement in exchange for 531,915 shares of Aimco Class A Common Stock owned by The Casden Company, and (4) The Casden Company will promise to pay to NAPICO an aggregate amount of $35 million ($7 million per year for 5 years), plus interest, on a secured, nonrecourse basis. The Casden Company can prepay its obligations set forth in Item (4) in shares of Aimco Class A Common Stock having a value based on the greater of $47 per share or the market value of such shares at the time of payment.

        The Company does not believe that the ultimate outcome of the litigation involving NAPICO and certain other defendants will have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.

        On August 8, 2003 the Partnership was served with a complaint in the United States District Court, District of Columbia alleging that it willfully violated the Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime for all hours worked in excess of forty hours per week. The complaint attempts

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to bring a collective action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that the Partnership failed to compensate maintenance workers for time that they were required to be "on-call." Additionally, the complaint alleges that the Partnership failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call." The complaint also attempts to certify a subclass for salaried service directors who are challenging their classification as exempt from the overtime provisions of the FLSA. The Partnership has filed an answer to the complaint denying the substantive allegations. Although the outcome of any litigation is uncertain, the Company does not believe that the ultimate outcome will have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.

NOTE 5—Mandatorily Redeemable Preferred Securities

        Effective July 1, 2003, the Company, as a result of Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150") was required to reclassify the Class S Partnership Preferred Units (the "Class S Preferred Units") and Trust Based Convertible Preferred Securities ("TOPRS") from between the liabilities and partners' capital section of the consolidated balance sheet to liabilities (see Note 16 for further details on SFAS 150).

        On April 30, 2003, Aimco sold 4,000,000 shares ($100 million) of Class S Cumulative Redeemable Preferred Stock, par value $0.01 per share (the "Class S Preferred Stock") through a private placement to an institutional investor, resulting in approximately $97 million of net proceeds. Proceeds of $28.1 million were paid by Aimco to the Partnership to repay the note receivable established in the acquisition of the Villas at Park La Brea (see Note 17) and concurrently all 1,124,041 Class Eleven Partnership Preferred Units were converted into 1,124,041 Class S Preferred Units. The remaining net proceeds were contributed by Aimco to the Partnership in exchange for 2,875,959 Class S Preferred Units. The Partnership used the net proceeds to redeem $60 million of its Class C Partnership Preferred Units (the "Class C Preferred Units") (see Note 6) and to pay down borrowings on the Company's revolving credit facility. The Class S Preferred Units have substantially the same terms as the shares of Class S Preferred Stock. The initial dividend rate on the Class S Preferred Stock is based on three-month LIBOR plus 2.75%. These dividends are cumulative from the date of original issuance and are payable quarterly. From the first anniversary of the date of original issuance through October 31, 2004, the dividend rate on the Class S Preferred Stock increases to the three-month LIBOR plus 6.0% with additional increases thereafter. Distributions are made on the Class S Preferred Units at the same time and in the same amount as dividends paid on the Class S Preferred Stock. Under SFAS 150, the distributions paid on the Class S Preferred Units are recorded to interest expense in the amount of $1.0 million for the three months ended September 30, 2003. Class S Preferred Units are senior to common OP Units as to distributions and liquidation. Upon any liquidation, dissolution or winding up of Aimco, before payments of distributions by Aimco are made to any holders of Aimco Class A Common Stock or common OP Units, the holders of Class S Preferred Stock and Class S Preferred Units are entitled to receive a liquidation preference of $25 per share/unit, plus accumulated, accrued and unpaid dividends/distributions. Each share of Class S Preferred Stock is redeemable for a maximum amount of $25 per share, plus all accrued and unpaid dividends, if any, to the date fixed for redemption, as follows: (i) at the option of the holder, upon the occurrence of certain events or (ii) at the option of Aimco, at any time, with a mandatory redemption date of April 30, 2043. Depending on the date fixed for redemption, the Class S Preferred Stock is redeemable at varying per share amounts as follows: (i) on or before October 31, 2003, $24.50; (ii) on or before January 31, 2004, $24.63; (iii) on or before April 30, 2004, $24.75; or (iv) any time after April 30, 2004, $25.00. Aimco intends to redeem the Class S Preferred Stock within one year of its issuance with proceeds from property sales and at the same time that Aimco effects such redemption, the Partnership will concurrently redeem the Class S Preferred Units. The redemption value of the Class S Preferred Units at the date of adoption of SFAS 150 was $97.75 million. As a result, the Company reclassified this amount as a liability as of July 1, 2003. Based on the redemption terms of the Class S Preferred Stock, as described above, the redemption price of the Class S Preferred Units at September 30, 2003 was $98.0 million. Therefore, in accordance with SFAS 150, the Company recognized an additional liability and incurred interest expense in the amount of $0.25 million in the three months ended September 30, 2003.

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        The Company also includes TOPRS, which it assumed in connection with the Insignia merger in 1998, in mandatorily redeemable preferred securities. As of September 30, 2003, $15.2 million was outstanding of the $149.5 million that was originally assumed. The redemption value of the TOPRS at the date of adoption of SFAS 150 was $15.2 million and therefore the Company reclassified this amount as a liability as of July 1, 2003. As of September 30, 2003, the redemption value of the TOPRS remains $15.2 million.

NOTE 6—Partners' Capital

Preferred OP Units

        On June 30, 2003, using proceeds from the issuance of the Class S Preferred Stock, Aimco redeemed for cash all 2,400,000 outstanding shares of its Class C Preferred Stock at a redemption price per share of $25.00 plus an amount equal to accumulated and unpaid dividends through June 30, 2003, for a total of $25.475 per share. Concurrently, the Partnership redeemed each of the Class C Preferred Units.

        On July 31, 2003, Aimco sold 6,000,000 shares ($150 million) of Class T Cumulative Preferred Stock, par value $0.01 per share (the "Class T Preferred Stock") in a registered public offering. Proceeds of approximately $145 million were contributed by Aimco to the Partnership in exchange for Class T Partnership Preferred Units (the "Class T Preferred Units"). The Partnership used these proceeds to redeem other preferred securities as described below. The Class T Preferred Units have substantially the same terms as the shares of Class T Preferred Stock. Holders of the Class T Preferred Stock are entitled to receive quarterly dividend payments of $0.50 per share, equivalent to $2.00 per share on an annual basis, or 8% of the $25 per share liquidation preference, beginning on October 15, 2003. Class T Preferred Stock is senior to Aimco Class A Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of Aimco, before payments of distributions by Aimco are made to any holders of Aimco Class A Common Stock or common OP Units, the holders of Class T Preferred Stock and Class T Preferred Units are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Each share of Class T Preferred Stock is redeemable at Aimco's option beginning July 31, 2008 for cash in the amount of $25 per share, plus all accrued and unpaid dividends, if any, to the date fixed for redemption. Distributions will be made on the Class T Preferred Units at the same time and in the same amount as dividends on the Class T Preferred Stock.

        On August 18, 2003, Aimco redeemed 1,500,000 shares of its Class D Cumulative Preferred Stock, par value $0.01 per share at a redemption price of $25 per share plus an amount equal to accumulated and unpaid dividends through August 18, 2003, for a total of $25.2066 per share. Concurrently with this redemption, the Partnership redeemed for cash 1,500,000 of its Class D Partnership Preferred Units (the "Class D Preferred Units"). Following this redemption, 2,700,000 Class D Preferred Units remained outstanding.

        On August 18, 2003, Aimco redeemed all 2,000,000 outstanding shares of its Class H Cumulative Preferred Stock, par value $0.01 per share at a redemption price of $25 per share plus an amount equal to accumulated and unpaid dividends through August 18, 2003, for a total of $25.2243 per share. Concurrently with this redemption, the Partnership redeemed for cash all 2,000,000 Class H Partnership Preferred Units (the "Class H Preferred Units").

        On August 18, 2003, Aimco redeemed for cash all 2,500,000 outstanding shares of its Class L Convertible Cumulative Preferred Stock, par value $0.01 per share at a redemption price of $25 per share. Accumulated and unpaid dividends of $0.5625 per share were paid on August 28, 2003, the scheduled dividend payment date. Concurrently with this redemption, the Partnership redeemed for cash all 2,500,000 Class L Partnership Preferred Units (the "Class L Preferred Units").

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        On August 18, 2003, Aimco redeemed for cash all 1,200,000 outstanding shares of its Class M Convertible Cumulative Preferred Stock, par value $0.01 per share for a total redemption price of $25.7313 per share, which included $0.2313 of accumulated and unpaid dividends through August 18, 2003 and a 2%, or $0.50 per share, redemption premium. The redemption premium was included in preferred dividends/distributions for the three and nine months ended September 30, 2003. Concurrently with this redemption, the Partnership redeemed for cash all 1,200,000 Class M Partnership Preferred Units (the "Class M Preferred Units").

        On July 31, 2003, the Securities and Exchange Commission ("SEC") clarified Emerging Issues Task Force, Topic No. D-42, The Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock ("Topic D-42"). See Note 16 for further information on Topic D-42. The redemption of the Class C Preferred Units in second quarter 2003 resulted in $2.2 million of redemption related preferred unit issuance costs retroactively deducted from net income to arrive at net income attributable to common unitholders and thereby reduced by $0.02 the Company's previously reported earnings per basic and diluted common unit for the three months ended June 30, 2003. Additionally, the redemptions in the third quarter 2003 of the Class H Preferred Units, the Class L Preferred Units, and the Class M Preferred Units and the partial redemption in third quarter 2003 of the Class D Preferred Units resulted in $5.5 million of redemption related preferred unit issuance costs being deducted from net income to arrive at net income attributable to common unitholders and thereby reduced by $0.06 the Company's earnings per basic and diluted common unit for the three months ended September 30, 2003. All of these redemption related preferred unit issuance costs have thereby reduced by $0.08 earnings per basic and diluted common unit for the nine months ended September 30, 2003.

        During the three and nine months ended September 30, 2003, approximately 12,000 preferred OP Units were tendered for redemption in exchange for approximately 8,000 shares of Aimco Class A Common Stock. Additionally, during the three and nine months ended September 30, 2003, approximately none and 12,000 preferred OP Units, respectively, were tendered for redemption in exchange for cash.

        In July 2003, the Company repurchased all 1,077,485 outstanding Class Nine Partnership Preferred Units (the "Class Nine Preferred Units") for approximately $27 million (see Note 12 for further information).

Common OP Units

        During the three and nine months ended September 30, 2003, the Company completed tender offers for limited partnership interests resulting in the issuance of approximately none and 22,000 common OP Units, respectively.

        During the three and nine months ended September 30, 2003, approximately 2,000 and 26,000 common OP Units, respectively, were tendered for redemption in exchange for cash and approximately 35,000 and 119,000 common OP Units, respectively, were tendered for redemption in exchange for shares of Aimco Class A Common Stock. Concurrently with these redemptions for Aimco's Class A Common Stock, the Partnership issued to Aimco the same number of common OP Units.

High Performance Units

        On April 25, 2003, Aimco stockholders approved the sale by the Partnership of 5,000 of its Class VI High Performance Partnership Units (see Note 10). On May 9, 2003, the Partnership issued 5,000 of its Class VI High Performance Partnership Units to a limited liability company owned by a limited number of employees for an aggregate offering price of $985,000.

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NOTE 7—Stock-Based Compensation

        Aimco, from time to time, issues stock options. Upon exercise of the stock options, Aimco must contribute to the Partnership the proceeds received in exchange for the same number of common OP Units as shares of Aimco Class A Common Stock issued in connection with the exercised stock options. Therefore, the following disclosures are made pertaining to Aimco's stock options.

        Effective January 1, 2003, Aimco adopted the accounting provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123" ("SFAS 148"), and applied the prospective method set forth in SFAS 148 with respect to the transition. Under this method, Aimco now applies the fair value recognition provisions of SFAS 123 to all employee awards granted, modified, or settled on or after January 1, 2003, which has resulted in compensation expense being recorded based on the fair value of the stock options. For purposes of the pro forma disclosures below, the estimated fair values for all awards made prior to January 1, 2003 are amortized over the respective vesting period for each such option and are shown as expense as if SFAS 123 had been applied to all such awards.

        The following table illustrates the effect on net income and earnings per unit if the fair value based method had been applied to all outstanding and unvested awards in each period presented (in thousands, except per unit data):

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NOTE 8—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, 2003 and 2002 (in thousands, except per unit data):

        All of the Partnership's convertible preferred OP Units are anti-dilutive on an "as converted" basis, therefore, all of the distributions payable on the convertible preferred OP Units are deducted to arrive at the numerator and no additional units are included in the denominator. The common OP Unit equivalents related to approximately 5.6 million and 9.0 million of vested and unvested stock options, units issued for non-recourse notes receivable, and restricted stock awards for the three and nine months ended September 30, 2003, respectively, have been excluded from diluted earnings per unit as their effect would be anti-dilutive. Similarly, the common OP Unit equivalents related to approximately 3.5 million and 1.6 million of vested and unvested stock options, units issued for non-recourse notes receivable, and restricted stock awards have been excluded for the three and nine months ended September 30, 2002, respectively.

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NOTE 9—Business Segments

        The Company has two reportable segments: real estate (owning and operating apartments) and investment management business (providing property management and other services relating to the apartment business to third parties and affiliates). The Company owns and operates properties 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 residents. The Company separately evaluates the performance of each of its properties. However, because each of its properties has similar economic characteristics, the properties 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 resident or related group of residents contributed 10% or more of total revenues during the three and nine months ended September 30, 2003 or 2002.

        Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131") requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing such segments' performance. The Company's chief operating decision maker is comprised of several members of its executive management team who use several generally accepted industry financial measures to assess the performance of the business. Specifically, the Company's chief operating decision makers use free cash flow, funds from operations and adjusted funds from operations to assess the financial performance of its business. See note (3) below for an explanation of these measures.

        Certain reclassifications have been made to 2002 amounts to conform to the 2003 presentation. These reclassifications primarily represent presentation changes related to discontinued operations resulting from the requirements of Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144") and intercompany eliminations. In addition, on October 1, 2003, the National Association of Real Estate Investment Trusts ("NAREIT") clarified its definition of funds from operations to include impairment losses, which previously had been added back to calculate funds from operations. In the three months ended September 30, 2003, and effective for all prior periods presented, in accordance with this clarification, the Company no longer adds back impairment losses when computing funds from operations. As a result, funds from operations for the three months ended September 30, 2003 includes impairment losses of $0.6 million, and for the nine months ended September 30, 2003, includes an adjustment of $7.9 million to reflect this change. Funds from operations for the three and nine months ended September 30, 2002 includes an adjustment of $3.6 million and $4.0 million, respectively, to reflect this change. Finally, as a result of the SEC's interpretation of Topic D-42, the Company included in funds from operations redemption related preferred unit issuance costs in the three months ended September 30, 2003, and effective for all prior periods. Therefore, funds from operations for the three months ended September 30, 2003 includes issuance costs of $5.5 million and funds from operations for the nine months ended September 30, 2003 includes an adjustment of $2.2 million to reflect this change.

        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, 2003 and 2002, from these segments, and a reconciliation of free cash flow, funds from operations, and adjusted funds from operations, to net income (in thousands, except ownership equivalent units and monthly rents):

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FREE CASH FLOW FROM BUSINESS SEGMENTS

For the Three Months Ended September 30, 2003 and 2002

(in thousands, except unit and monthly rents data)