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

UNITED STATES
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)

(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 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 July 30, 2004: 103,293,742

AIMCO PROPERTIES, L.P.

FORM 10-Q

INDEX

1

AIMCO PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(In Thousands)

See notes to consolidated financial statements.

2

AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Unit Data)
(Unaudited)

See notes to consolidated financial statements.

3

AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)

See notes to consolidated financial statements.

4

AIMCO PROPERTIES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)

NOTE 1—Organization

        AIMCO Properties, L.P., a Delaware limited partnership, or 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. Our securities include Partnership Common Units, or common OP Units, Partnership Preferred Units, or preferred OP Units, and High Performance Partnership Units, or High Performance Units, which are collectively referred to as "OP Units." Apartment Investment and Management Company, or Aimco, is the owner of our general partner, AIMCO-GP, Inc., or the General Partner, and special limited partner, AIMCO-LP, Inc., or 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 our limited partners, 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 our prior right 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, or the Partnership Agreement.

        We, through our operating divisions and subsidiaries, hold substantially all of Aimco's assets and manage the daily operations of Aimco's business and assets. Aimco is required to contribute all proceeds from offerings of its securities to us. In addition, substantially all of Aimco's assets must be owned through the Partnership; therefore, Aimco is generally required to contribute all assets acquired to us. In exchange for the contribution of offering proceeds or assets, Aimco receives additional interests in us 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).

        Aimco frequently consummates transactions for our benefit. For legal, tax or other business reasons, Aimco may hold title or ownership of certain assets until they can be transferred to us. However, we have a controlling financial interest in substantially all of Aimco's assets in the process of transfer to us. As of June 30, 2004, we owned or managed 1,578 apartment properties containing 278,011 apartment units located in 47 states, the District of Columbia and Puerto Rico. We serve approximately one million residents per year.

        As of June 30, 2004, we:

•

owned an equity interest in and consolidated 174,760 units in 698 properties (which we refer to as "consolidated"), of which 174,646 units were also managed by us;



•

owned an equity interest in and did not consolidate 54,245 units in 382 properties (which we refer to as "unconsolidated"), of which 47,446 units were also managed by us; and



•

provided services or managed, for third party owners, 49,006 units in 498 properties, primarily pursuant to long-term agreements (including 39,472 units in 416 properties that are asset managed only, and not property managed), although in certain cases we may indirectly own a small interest (generally less than one percent) in such properties through a partnership syndication or other fund.

        At June 30, 2004, we had outstanding 103,261,789 common OP Units, 39,446,977 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 6).

        Except as the context otherwise requires, "we," "our," "us" and the "Company" refer to the Partnership, the Partnership's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively. Except as the context otherwise requires, "Aimco" refers to Aimco and Aimco's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively.

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NOTE 2—Basis of Presentation

        The accompanying unaudited consolidated financial statements 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 disclosures 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 six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

        The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.

        For further information, refer to the financial statements and notes thereto included in AIMCO Properties, L.P.'s Annual Report on Form 10-K for the year ended December 31, 2003. Certain 2003 financial statement amounts have been reclassified to conform to the 2004 presentation, including certain intercompany eliminations and the treatment of discontinued operations.

        The accompanying consolidated financial statements include the accounts of the Partnership, its consolidated corporate subsidiaries and consolidated real estate partnerships. Pursuant to a Management and Contribution Agreement between the Partnership and Aimco, we have acquired, in exchange for interests in the Partnership, the economic benefits of subsidiaries of Aimco in which we do not have an interest, and Aimco has granted us a right of first refusal to acquire such subsidiaries' assets for no additional consideration. Pursuant to the agreement, Aimco has also granted us 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. Interests held in consolidated real estate partnerships by limited partners other than us are reflected as minority interest in consolidated real estate partnerships. All significant intercompany balances and transactions have been eliminated in consolidation. The assets of consolidated real estate partnerships owned or controlled by Aimco or us generally are not available to pay creditors of Aimco or the Partnership.

        We reflect partners' interests in consolidated real estate partnerships as minority interest in consolidated real estate partnerships. Minority interest in consolidated real estate partnerships represents the non-controlling partners' share of the underlying net assets of our consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions to partners in excess of their minority interest balances, we record a charge equal to the minority partners' excess of distributions over their minority interest balances, even though there is no economic effect or cost. We classify this charge in the consolidated statements of income as deficit distributions to minority partners. We allocate to minority partners losses until such time as such losses exceed the minority partners' capital account balances, in which case, we recognize 100% of the losses when the partnership is in a deficit equity position, even though there is no economic effect or cost. Approximately $1.2 million and $2.5 million in depreciation related net losses were charged to operations for the three and six months ended June 30, 2004, respectively, and approximately $0.5 million and $1.7 million in depreciation related net losses were charged to operations for the three and six months ended June 30, 2003, respectively.

NOTE 3—Acquisitions and Joint Ventures

        On May 26, 2004, we completed the acquisition of five contiguous apartment properties located in New York City on the Upper East Side of Manhattan, containing an aggregate of 72 units, for a total purchase price of $14.5 million. We funded the acquisition primarily through the assumption of mortgage debt of approximately $9.3 million and tax-free exchange funds.

        On May 19, 2004, we completed the acquisition of a property located in Fall River, Massachusetts, containing 240 units, for a total purchase price of $19.0 million. We funded the acquisition primarily through the assumption of mortgage debt of approximately $10.0 million and tax-free exchange funds.

        On January 30, 2004, Aimco completed the acquisition of The Palazzo at Park La Brea located in Los Angeles California, a mid-rise apartment community with 521 units, for $162.9 million, which included $0.5 million in transaction costs. The Palazzo at Park La Brea is the second of three phases recently completed as part of the Park

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La Brea development. Aimco paid approximately $69.7 million in cash and was required to repay existing construction loan financing of approximately $92.7 million. The repayment of existing mortgage indebtedness was primarily funded through a non-recourse, long-term, variable rate, partially amortizing property note of $88.1 million, with an interest rate of 1.50% over 30-day LIBOR.

        In order to fund the acquisition of The Palazzo at Park La Brea, we loaned $69.7 million to Aimco in exchange for a note receivable, which we refer to as The Palazzo at Park La Brea Note. The note bears interest at the rate of 5.25% per annum, with interest payments due on December 31 of each year, with all unpaid principal and interest due on December 31, 2014. Upon completion of the purchase, Aimco contributed the assets and liabilities of The Palazzo at Park La Brea to us in exchange for 2,787,111 Class Twelve Partnership Preferred Units, or the Class Twelve Preferred Units. The Class Twelve Preferred Units pay distributions of $1.3125 per unit on December 31 of each year, with the first distribution being prorated from the date of issuance. Aimco repaid The Palazzo at Park La Brea Note with the proceeds from the issuance of Class U Cumulative Preferred Stock (see Note 6).

        Additionally during the first quarter, we completed the acquisition of a three-property portfolio located in New York City, containing an aggregate of 75 units, for a total purchase price of $17.8 million. The acquisition was primarily funded through non-recourse, long-term, fixed rate, partially amortizing property notes totaling $12.2 million, with interest rates of 5.38%.

GE Joint Venture

        On December 30, 2003 we entered into an equity financing with GE Real Estate in the form of a joint venture, which we refer to the as the GE JV. In March 2004, we contributed to the GE JV interests in an additional four of our apartment properties with a total of 900 units, and GE Real Estate contributed cash of which we received approximately $11.0 million before transaction costs and funding of reserves. The four apartment properties we contributed had an agreed upon transaction value of approximately $36.0 million and mortgage debt of approximately $21.0 million that was assumed by the GE JV. We have a 25% managing member interest in the GE JV and GE Real Estate has a 75% non-managing member interest. As a result of our control over day-to-day operations, we continue to consolidate the properties contributed to the GE JV in our consolidated financial statements and did not recognize any gain as a result of this transaction. GE Real Estate's interest in these net assets through the GE JV is included in minority interest in consolidated real estate partnerships.

NOTE 4—Mandatorily Redeemable Preferred Securities

        In April 2003, Aimco sold 4,000,000 shares of floating rate Class S Cumulative Redeemable Preferred Stock, or the Class S Preferred Stock, through a private placement to an institutional investor. The proceeds were contributed to the Partnership in exchange for Class S Partnership Preferred Units, or the Class S Preferred Units. On January 30, 2004, Aimco redeemed 1,015,228 shares of the Class S Preferred Stock at a redemption price of $24.625 per share. Additionally, on March 26, 2004, with proceeds from the issuance of the 7.75% Class U Cumulative Preferred Stock (see Note 6), Aimco redeemed the remaining 2,984,772 shares of the Class S Preferred Stock at a redemption price of $24.75 per share. Concurrently with these redemptions, we redeemed for cash 1,015,228 and 2,984,772 Class S Preferred Units, respectively. In accordance with Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, or SFAS 150, for the six months ended June 30, 2004, we recorded to interest expense approximately $0.8 million of distributions paid on the Class S Preferred Units and $0.4 million resulting from a redemption value adjustment on February 1, 2004.

NOTE 5—Commitments and Contingencies

Commitments

        In connection with the March 11, 2002 acquisition of Casden Properties, Inc., or Casden, which included the merger of Casden into Aimco, and the merger of a subsidiary of Aimco into another real estate investment trust affiliated with Casden, all of which we collectively refer to as the Casden Merger, we and Aimco have commitments to:

•

purchase the following two properties upon satisfactory completion of construction and attainment of 60% occupancy:

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•

Palazzo East at Park La Brea—comprised of a total of 610 units, construction of which was completed in December 2003, and which we expect to acquire in late 2004 or early 2005 for a minimum consideration of approximately $199 million; and



•

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



•

provide a stand-by facility of $64.5 million in debt financing associated with the development of Palazzo East at Park La Brea and Westwood (as of June 30, 2004, 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 June 30, 2004, we had invested $22.9 million. Casden Properties LLC acts as general contractor for the entity that is developing Palazzo East at Park La Brea and Westwood. In addition, Casden Properties LLC intends to pursue new development opportunities in Southern California and other markets. We have an option, but not an obligation, to purchase at completion all multifamily rental projects developed by Casden Properties LLC; and



•

pay $2.5 million per quarter for five years (for an aggregate amount of $50 million) to Casden Properties LLC as a retainer on account for redevelopment services on our assets (as of June 30, 2004, $22.5 million has been paid).

Guarantees

        In the ordinary course of business, we provide various guarantees that are covered by the provisions of Financial Accounting Standards Board, or FASB, Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, or FIN 45. These guarantees include: (i) standby letters of credit, which we may provide to enhance credit or guarantee our performance under contractual obligations; (ii) limited guarantees, which we may provide to certain of our lenders and that may require us to provide funds to maintain a required loan-to-value ratio; and (iii) guarantees in connection with our syndication of historical and affordable housing tax credits, which we may provide to make available additional funding to cover operating cash flow deficiencies, cover shortfalls related to the delivery of tax credits and cover financing shortfalls related to project development. These guarantees have varying expiration dates ranging from less than one year to fourteen years. The fair values of these guarantees issued after December 31, 2002 (effective date under FIN 45), are not material to our financial statements.

Legal

        In addition to the matters described below, we are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which we expect to have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.

Limited Partnerships

        In connection with our acquisitions of interests in real estate partnerships, we are 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. We may incur costs in connection with the defense or settlement of such litigation. We believe that we comply with our fiduciary obligations and relevant partnership agreements. Although the outcome of any litigation is uncertain, we do not expect any such legal actions to have a material adverse affect on our 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 management, and 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 or presence of the hazardous substances. The presence of, or the failure to manage or remedy properly, hazardous substances may

8

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 government agencies, the presence of hazardous substances 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, remediation or disposal of hazardous substances through a licensed disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous 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, we could potentially be liable for environmental liabilities or costs associated with our properties or properties we acquire or manage in the future.

Mold

        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, we are 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. We have only limited insurance coverage for property damage loss claims arising from the presence of mold and for personal injury claims related to mold exposure. We have implemented a national policy and procedures to prevent or eliminate mold from our properties and believe that our measures will eliminate, or at least minimize, the effects that mold could have on our residents. To date, we have 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 we can make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.

San Francisco Litigation

        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 ("DBI") and certain of its employees, alleging constitutional violations arising out of its arbitrary and discriminatory application of its codes, and other tortious conduct. Effective May 3, 2004, Aimco and the four affiliated partnerships entered into a settlement agreement with CCSF, DBI and certain DBI employees, subject to certain conditions subsequent that must be satisfied no later than November 1, 2004 in order for the settlement agreement to become effective. The conditions subsequent include (a) approval by the Board of Supervisors of CCSF, (b) the negotiation by Aimco of a new Memorandum of Understanding with the U.S. Department of Housing and Urban Development permitting Aimco to complete a renovation of the four properties in the Hunters Point area that were the subject of CCSF's lawsuit, (c) certain repairs to nine apartment units, (d) an agreement between CCSF and Aimco and the four affiliated partnerships relative to improved public safety in the immediate vicinity of the properties, and (e) an order from the Court staying the litigation until either the above conditions are satisfied or the settlement is terminated, which order was entered May 5, 2004. If the settlement becomes effective, Aimco intends to complete a renovation of the properties. We do not believe that the ultimate outcome will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.

National Union Litigation

        As previously disclosed, National Program Services, Inc. and Vito Gruppuso (collectively "NPS") were insurance agents who 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 under two agreements by which NPS indemnified Aimco from losses relating to the matters described below. As a result of such defaults Aimco had a $16.7 million insurance-related receivable that was subsequently reduced to $6.7 million following Aimco's settlement with Lumbermens Mutual Casualty Company ("Lumbermens") and an insurance agency. 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. The contingent liabilities arising from the NPS defaults also resulted in litigation against us by Cananwill, Inc. ("Cananwill"), a premium funding company, regarding an alleged balance due of $5.7 million on a premium finance agreement that funded premium payments made to National Union. Aimco is also a plaintiff in litigation against Cananwill and Combined Specialty Insurance Company, formerly known as Virginia

9

Surety Company, Inc., 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 lawsuit initiated by Cananwill. The matter in which Aimco is a plaintiff has been stayed by the court pending resolution of the action filed by Cananwill against us. The previously disclosed litigation brought by WestRM—West Risk Markets, Ltd. ("WestRM") against XL Reinsurance America, Inc. ("XL"), Greenwich Insurance Company ("Greenwich") and Lumbermens in which Aimco has been made a third party defendant continues. During the second quarter, a summary judgment was entered against defendants XL and Greenwich. Similarly, the previously disclosed litigation brought by Highlands Insurance Company ("Highlands") against Cananwill, XL, Greenwich and us also continues. In those cases in which Aimco is a defendant, Aimco believes that it has meritorious defenses to assert, and will vigorously defend itself against claims brought against it. In addition, Aimco will vigorously prosecute its own claims. Although the outcome of any claim or matter in litigation is uncertain, we do not believe that we will incur any material loss in connection with the insurance-related receivable or that the ultimate outcome of these separate but related matters will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.

FLSA Litigation

        As previously disclosed, on August 8, 2003, we were served with a complaint in the United States District Court, District of Columbia alleging that we willfully violated the Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. On March 5, 2004, the plaintiffs filed an amended complaint also naming NHP Management Company, an affiliate of ours. The complaint attempts 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 we failed to compensate maintenance workers for time that they were required to be "on-call." Additionally, the complaint alleges that we failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call." We have filed an answer to the amended complaint denying the substantive allegations. Some discovery has taken place and settlement negotiations continue. Although the outcome of any litigation is uncertain, we do not believe that the ultimate outcome will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.

SEC Investigation

        As previously disclosed, the Central Regional Office of the United States Securities and Exchange Commission is conducting a formal investigation relating to certain matters. We believe the areas of investigation include Aimco's miscalculated monthly net rental income figures in third quarter 2003, forecasted guidance, accounts payable, rent concessions, vendor rebates, and capitalization of expenses and payroll. Aimco is cooperating fully. We do not believe that the ultimate outcome will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.

NOTE 6—Partners' Capital

Preferred OP Units

        On April 21, 2004, Aimco redeemed for cash all 3,999,662 outstanding shares of the 9.0% Class P Convertible Cumulative Preferred Stock, or the Class P Preferred Stock, for a total redemption price of $25.0375 per share, which included a redemption price of $25 per share, and $0.0375 per share of accumulated and unpaid dividends through April 20, 2004. Concurrently, we redeemed all of the Class P Partnership Preferred Units at a price per unit equal to the redemption price per share of the Class P Preferred Stock.

        On March 24, 2004, Aimco sold 8,000,000 shares of 7.75% Class U Cumulative Preferred Stock, par value $0.01 per share, or the Class U Preferred Stock, in a registered public offering generating net proceeds of approximately $193.7 million. Proceeds of $69.8 million were paid by Aimco to us to repay The Palazzo at Park La Brea Note (see Note 3) and concurrently 2,787,111 Class Twelve Preferred Units were converted into 2,787,111 Class U Partnership Preferred Units, or the Class U Preferred Units. The remaining net proceeds were contributed by Aimco to us in exchange for 5,212,889 Class U Preferred Units. We used approximately $74.0 million of the net proceeds to redeem the floating rate Class S Preferred Units (see Note 4) and the remainder to pay down our revolving credit facility, and redeem Class P Partnership Preferred Units on April 21, 2004 as discussed above. The Class U Preferred Units have substantially the same terms as the shares of Class U Preferred Stock. Holders of the Class U Preferred Stock are entitled to receive quarterly dividend payments of $0.484375 per share, equivalent to $1.9375 per share on an annual

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basis, or 7.75% of the $25 per share liquidation preference. Class U 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 dividends/distributions by Aimco are made to any holders of Aimco Class A Common Stock or common OP Units, the holders of the Class U Preferred Stock and Class U 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 U Preferred Stock is redeemable at Aimco's option beginning March 24, 2009 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 U Preferred Units at the same time and in the same amount as dividends on the Class U Preferred Stock.

Common OP Units

        During the three and six months ended June 30, 2004, we completed tender offers for limited partnership interests resulting in the issuance of approximately 12,000 and 24,000 common OP Units, respectively. During the three and six months ended June 30, 2003, we completed tender offers for limited partnership interests resulting in the issuance of approximately 6,000 and 23,000 common OP Units, respectively.

        During the three and six months ended June 30, 2004, approximately 304,000 and 662,000 common OP Units, respectively, were tendered for redemption and acquired by Aimco in exchange for shares of Aimco Class A Common Stock. During the three and six months ended June 30, 2003, approximately 9,000 and 84,000 common OP Units, respectively, were tendered for redemption and acquired by Aimco in exchange for shares of Aimco Class A Common Stock. During the three and six months ended June 30, 2004, approximately 2,000 and 5,000 common OP Units, respectively, were redeemed in exchange for cash. During the three and six months ended June 30, 2003, approximately 19,000 and 24,000 common OP units were redeemed in exchange for cash.

        In addition, during the three and six months ended June 30, 2004, approximately 429,000 and 480,000 restricted shares of Aimco Class A Common Stock, respectively, were issued to certain officers and employees, compared to approximately 219,000 and 232,000 for the three and six months ended June 30, 2003. The issuance of restricted stock was recorded at the fair market value of the Aimco Class A Common Stock on the date of issuance. Concurrently, we issued to Aimco the same number of common OP Units.

        On February 18, 19 and 24, 2004, Aimco purchased on the open market 30,000, 60,000 and 20,000 shares of Aimco Class A Common Stock, respectively, at an average price per share of approximately $32.03, $32.17 and $31.26, respectively. Concurrently, we purchased 30,000, 60,000 and 20,000 common OP Units from Aimco.

        On February 24, 2004, Aimco completed the purchase of 287,272 shares of Aimco Class A Common Stock from the representatives of the plaintiffs in the litigation known as In re Real Estate Associates v. Casden et al, or the REAL Litigation. Aimco paid in cash an aggregate of approximately $9.1 million to the representatives of the plaintiffs for the shares, or $31.60 per share. The plaintiffs received these shares from Alan I. Casden on December 30, 2003 pursuant to the previously disclosed Stipulation of Settlement with the plaintiffs and their counsel relating to the REAL Litigation and the previously disclosed Settlement Agreement with the prior shareholders of Casden Properties, Inc., National Partnership Investments Corp., or NAPICO, which we acquired in the Casden Merger, and Aimco. Concurrently, we purchased 287,727 common OP Units from Aimco.

        Additionally, in connection with the previously disclosed Settlement Agreement and the indemnification agreement we have with the Casden sellers, we have notes receivable from Alan I. Casden for an aggregate total of $35 million. Pursuant to the Settlement Agreement and the indemnification agreement, these notes can be satisfied with an aggregate total of approximately 804,000 shares of Aimco Class A Common Stock (including shares to cover interest that will accrue

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over the terms of the notes), which shares will be valued at $47 per share. In the event shares of Aimco Class A Common Stock are used to satisfy these obligations, we will record contingent consideration to the extent the fair value of Aimco Class A Common Stock is less than $47 per share at that date.

High Performance Units

        On April 30, 2004, Aimco stockholders approved the sale of up to 5,000 Class VII High Performance Partnership Units, or the Class VII Units, for which the valuation period began on January 1, 2004 and will end on December 31, 2006. On June 18, 2004, we issued 2,892 Class VII Units to a limited liability company owned by a limited number of employees for an aggregate offering price of approximately $530,000. Additional Class VII Units (up to the 5,000 maximum) may be issued in future periods.

        Additionally, at June 30, 2004, we had outstanding 4,398 Class V High Performance Partnership Units, or the Class V Units, for which the valuation period began on January 1, 2002 and will end on December 31, 2004. Additionally, we had outstanding 5,000 Class VI High Performance Partnership Units, or the Class VI Units, for which the valuation period began on January 1, 2003 and will end on December 31, 2005. At June 30, 2004, we did

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not meet the required measurement benchmarks for the Class V Units, Class VI Units or Class VII Units. Therefore, as of June 30, 2004 such High Performance Units have no dilutive effect.

NOTE 7—Stock-Based Compensation

        Aimco, from time to time, issues stock options. Upon exercise of the stock options, Aimco must contribute to us 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, or 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, or 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. Prior to January 1, 2003, Aimco followed Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations in accounting. Under APB 25, because the exercise price of Aimco's employee stock options and warrants equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized. 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 (loss) and earnings (loss) per unit if the fair value based method had been applied to all outstanding and unvested awards in each period presented. Our pro forma information for the three and six months ended June 30, 2004 and 2003 is as follows (in thousands, except per unit data):

        The effects of applying SFAS 123 in calculating pro forma income attributable to common unitholders and pro forma basic and diluted earnings per unit may not necessarily be indicative of the effects of applying SFAS 123 to future years' earnings.

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NOTE 8—Discontinued Operations and Assets Held for Sale

        At June 30, 2004, we had seven properties with an aggregate of 1,751 units classified as held for sale. For the three and six months ended June 30, 2004 and 2003, we included the results of operations of these properties in discontinued operations. During the six months ended June 30, 2004, we sold 20 properties with an aggregate of 4,119 units. For the three and six months ended June 30, 2004 and 2003, we also included in discontinued operations the results of operations of these 20 properties before the sale and the related gain/loss on sale. During the year ended December 31, 2003, we sold 72 properties with an aggregate of 18,291 units. For the three and six months ended June 30, 2003, we also included in discontinued operations the results of operations of these 72 properties before the sale and the related gain/loss on sale.

        The following is a summary of the components of income from discontinued operations for the three and six months ended June 30, 2004 and 2003 (dollars in thousands):

        We are currently marketing for sale certain real estate properties that are inconsistent with our long-term investment strategy. We expect that all properties classified as held for sale will sell within one year from the date classified as held for sale. Assets classified as held for sale of $105.3 million at June 30, 2004 include real estate with a net book value of $90.2 million and restricted cash and other assets of $15.1 million. Liabilities related to assets classified as held for sale of $83.9 million at June 30, 2004 include mortgage debt of $78.8 million. Assets classified as held for sale of $243.9 million at December 31, 2003 include real estate net book value of $207.4 million, represented by 27 properties with 5,870 units that were classified as assets held for sale during 2003 and 2004. Liabilities related to assets classified as held for sale of $168.0 million at December 31, 2003 include mortgage debt of $159.1 million. The estimated proceeds, less anticipated costs to sell certain of these assets, were less than the net book value, and therefore we recorded impairments of $0.5 million for the three and six months ended June 30, 2004, respectively, and impairments of $2.7 million and $7.9 million for the three and six months ended June 30, 2003, respectively. We are also marketing for sale properties other than those described above, both consolidated and unconsolidated that are not accounted for as assets held for sale because they do not meet the required criteria.

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NOTE 9—Earnings Per Unit

        We calculate earnings per unit 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 six months ended June 30, 2004 and 2003 (in thousands, except per unit data):

        All of our convertible preferred OP Units are anti-dilutive on an "as converted" basis, therefore, we deduct all of the distributions payable on the convertible preferred OP Units to arrive at the numerator and no additional units are included in the denominator. We have excluded from diluted earnings per unit the common OP Unit equivalents related to approximately 12.5 million and 12.1 million of vested and unvested stock options, units issued for non-recourse notes receivable, and restricted stock awards for the three and six months ended June 30, 2004, respectively, and approximately 11.8 million and 10.7 million for the three and six months ended June 30, 2003, respectively, because their effect would be anti-dilutive. For purposes of calculating diluted earnings per unit in accordance with Statement on Financial Accounting Standards No. 128, Earnings per Share, we treat the unvested portion of restricted shares as common OP Unit equivalents.

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NOTE 10—Business Segments

        We have two reportable segments: real estate (owning and operating apartments) and investment management business (providing property management, syndication based activities, and other services relating to the apartment business to third parties and affiliates). We own and operate 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. We separately evaluate the performance of each of our properties. However, because each of our properties has similar economic characteristics, the properties have been aggregated into a single apartment communities, or real estate, segment. All real estate revenues are from external customers and no real estate revenues are generated from transactions with other segments. No single resident or related group of residents contributed 10% or more of total revenues during the three and six months ended June 30, 2004 and 2003. A significant portion of the revenues earned in the investment management business are from transactions with affiliates in the real estate segment.

        Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, or SFAS 131, requires that segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing segment performance. Our chief operating decision maker is comprised of several members of our executive management team who use several generally accepted industry financial measures to assess the performance of the business including net operating income, free cash flow, funds from operations, and adjusted funds from operations. In 2004, the chief operating decision maker has emphasized net operating income as a key measurement of segment profit or loss. Accordingly, below we disclose net operating income for each of our segments. Net operating income is defined as segment revenues (after the elimination of intersegment revenues) less direct segment operating expenses. In 2003, we reported free cash flow as the primary basis for measurement of segment profit or loss. Certain reclassifications have been made to the 2003 amounts to conform to the 2004 presentation. These reclassifications primarily represent presentation changes related to discontinued operations and intercompany eliminations.

        The following table presents revenues and net operating income for the three and six months ended June 30, 2004 and 2003, from these segments, and reconciles net operating income of reportable segments to operating income as reported in the Consolidated Statements of Income (in thousands):

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(1)

Total assets for reportable segments include assets associated with both the real estate and investment management business segments.

NOTE 11—Recent Accounting Developments

FASB Interpretation No. 46

        As of March 31, 2004, we adopted FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46, and applied its requirements to all entities in which we hold a variable interest. FIN 46 addresses the consolidation by business enterprises of variable interest entities. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. FIN 46 requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE. The primary beneficiary generally is the entity that will receive a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both.

        Upon adoption of FIN 46, we determined that we were the primary beneficiary of 27 previously unconsolidated and five previously consolidated VIEs. These VIEs consisted of partnerships that are engaged, directly or indirectly, in the ownership and management of 29 apartment properties with 3,478 units. The initial consolidation of the previously unconsolidated entities as of March 31, 2004 resulted in an increase in our consolidated total assets (primarily real estate), liabilities (primarily indebtedness) and minority interest of approximately $113.5 million, $90.6 million and $26.8 million, respectively. We recorded a charge of approximately $4.0 million for the cumulative effect on retained earnings resulting from the adoption of FIN 46. This charge is attributable to our recognition of cumulative losses allocable to minority interests that would otherwise have resulted in minority interest deficits.

        As of June 30, 2004, we were the primary beneficiary of 34 consolidated VIEs which owned 31 apartment properties with 4,012 units. Substantially all of the assets of each consolidated VIE are collateral for the VIE's obligations. The creditors of the consolidated VIEs do not have recourse to our general credit. As of June 30, 2004, we also held variable interests in 65 VIEs for which we were not the primary beneficiary. Those 65 VIEs consist primarily of partnerships, in which we acquired an interest prior to the adoption of FIN 46, that are engaged, directly or indirectly, in the ownership and management of 72 apartment properties with 7,754 units. We are involved with those VIEs as a non-controlling equity holder, lender, management agent, or through other contractual relationships. Our maximum exposure to loss as a result of our involvement with unconsolidated VIEs is limited to our recorded investments in and receivables from those VIEs totaling $35.3 million at June 30, 2004. We may be subject to additional losses to the extent of any financial support that we voluntarily provide in the future.

        We do not expect that the ongoing effects of FIN 46 will be material to our consolidated financial condition or results of operations taken as a whole.

NOTE 12—Related Party Notes Receivable

        In exchange for the sale of certain real estate assets to Aimco in December 2000, we received notes receivable, which we refer to as the Notes, totaling $10.1 million. The Notes bear interest at the rate of 5.7% per annum. Of the $10.1 million total, $7.6 million is due upon demand, and the remainder is due in scheduled semi-annual payments with all unpaid principal and interest due on December 31, 2010. At June 30, 2004, the balance of the Notes totaled $12.3 million, which includes accrued and unpaid interest.

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

        The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements in certain circumstances. Certain information included in this Report contains or may contain information that is forward-looking, including, without limitation, statements regarding the effect of acquisitions, our future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the general level of interest rates; the terms of governmental regulations that affect us and interpretations of those regulations; the competitive environment in which we operate; financing risks, including the risk that our cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; acquisition and development risks, including failure of such acquisitions to perform in accordance with projections; litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and possible environmental liabilities, including costs that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us. In addition, Aimco's current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on its ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership. Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2003 and the other documents we file from time to time with the Securities and Exchange Commission. As used herein and except as the context otherwise requires, "we," "our," "us" and the "Company" refer to the Partnership and the Partnership's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively.

Executive Overview

        We are engaged in the ownership, acquisition, management and redevelopment of apartment properties. Our property operations are characterized by diversification of product, location and price point. As of June 30, 2004, we owned or managed 1,578 apartment properties containing 278,011 units located in 47 states, the District of Columbia and Puerto Rico. Our primary sources of income and cash are rents associated with apartment leases.

        The key financial indicators that we use in managing our business and in evaluating our financial condition and operating performance are: Funds From Operations, or FFO, less spending for Capital Replacements; same store property operating results; net operating income; net operating income less spending for Capital Replacements; financial coverage ratios; and leverage as shown on our balance sheet. These terms are defined and described in the sections captioned "Funds From Operations" and "Capital Expenditures" below. The key macro-economic factors and non-financial indicators that affect our financial condition and operating performance are: rates of job growth; unemployment rates; single-family and multifamily housing starts; and interest rates.

        Because our operating results depend primarily on income from our properties, the supply and demand for apartments substantially influences our results. Additionally, the level of expenses required to operate and maintain our properties and the pace and price at which we redevelop, acquire and dispose of our apartment properties can affect our operating results. Our cost of capital is affected by the conditions in the capital and credit markets and the terms that we negotiate for our equity and debt financings.

        We have grown rapidly over the past decade, and during the past three years our growth has moderated. In the first and second quarters of 2004, the apartment industry continued to face a challenging operating environment—unemployment, job growth at a pace slower than anticipated, low interest rates and an abundant supply of housing alternatives. In addition, we experienced greater difficulty as compared to our peers because our property operating systems and structure were not as effective as our peers in meeting the challenges presented by the apartment markets. In response, we are adjusting our business strategies to compete successfully in challenging times and to be ready to maximize our opportunities as the economy improves.

        In first and second quarters of 2004, we continued to address property operations and those efforts will continue throughout the remainder of 2004. We have focused on a number of areas related to improving operations, including those related to resident selection, marketing, pricing, operating cost management and customer satisfaction. Our focus on resident selection is designed to make our communities more desirable places to live and

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work, which drives better financial performance from higher and more stable occupancy levels, increased pricing power and reduced costs. Although, we still have a number of steps to take to build revenue through increased occupancy with residents that meet our financial stability standards, we believe that our improvement efforts are working. In combination, our initiatives are resulting in improved customer service, better pricing decisions, increased resident quality, a focus on sales and marketing and a higher standard of employee satisfaction. These initiatives have resulted in a positive trend in certain operating results and are the foundation for long-term benefits that we expect to realize beginning in the second half of 2004 and beyond. In part, these initiatives have also resulted in improved asset quality, and we will continue to seek opportunities to reinvest in our properties through capital expenditures and to manage our portfolio through property sales and acquisitions.

        The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the financial statements.

Results of Operations

Overview

Three months ended June 30, 2004 compared to three months ended June 30, 2003

        We recognized net income of $15.2 million and net loss attributable to common unitholders of $8.5 million for the three months ended June 30, 2004, compared to net income of $66.7 million and net income attributable to common unitholders of $39.0 million for the three months ended June 30, 2003, a decrease of $51.5 million and $47.5 million, respectively. These decreases were principally due to:

•

a decline in same store net operating results;



•

an increase in general and administrative expenses; and



•

a decrease in net gain on disposition of real estate recognized in discontinued operations.

        These decreases were partially offset by:

•

an increase in activity fees and asset management revenues; and



•

lower minority interest allocations as a result of lower property operating results.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

        We recognized net income of $30.9 million and net loss attributable to common unitholders of $15.0 million for the six months ended June 30, 2004, compared to net income of $91.9 million and net income attributable to common unitholders of $38.8 million for the six months ended June 30, 2003, a decrease of $61.0 million and $53.8 million, respectively. These decreases were principally due to:

•

a decline in same store net operating results;



•

an increase in general and administrative expenses;



•

a decrease in net gain on disposition of real estate recognized in discontinued operations; and



•

the cumulative effect of change in accounting principle due to implementation of the Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, or FIN 46.

        These decreases were partially offset by:

•

an increase in activity fees and asset management revenues; and



•

lower minority interest allocations as a result of lower property operating results.

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        The following paragraphs discuss these and other items affecting our results of operations in more detail.

Rental Property Operations

        Our operating income is primarily generated from the operations of our consolidated properties. The principal components within our total consolidated property operations are: consolidated same store properties, which consist of all conventional properties that were owned, stabilized and consolidated for all periods presented; and other consolidated entities, which include acquisition, newly consolidated, affordable and redevelopment properties.

        The following table summarizes the overall performance of our consolidated properties for the three and six months ended June 30, 2004 and 2003 (in thousands):