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Section 1: 10-Q (FORM 10-Q FOR PERIOD ENDING 6-30-2007)

form10-q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from   to ______

Commission File Number: 1-12762

MID-AMERICA APARTMENT COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)

TENNESSEE
62-1543819
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

6584 POPLAR AVENUE, SUITE 300
 
MEMPHIS, TENNESSEE
38138
(Address of principal executive offices)
(Zip Code)

 (901) 682-6600
(Registrant's telephone number, including area code)

N/A
   (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.
[X] Yes  [  ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[  ] Yes  [X] No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 
Number of Shares Outstanding
Class
at July 18, 2007
Common Stock, $.01 par value
25,513,105

 
 

 
MID-AMERICA APARTMENT COMMUNITIES, INC.
 
     
TABLE OF CONTENTS
 
   
Page
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006
2
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007, and 2006 (Unaudited)
3
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007, and 2006 (Unaudited)
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
8
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
17
Item 4.
Controls and Procedures
17
     
 
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
18
Item 1A.
Risk Factors
18
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
18
Item 3.
Defaults Upon Senior Securities
18
Item 4.
Submission of Matters to a Vote of Security Holders
18
Item 5.
Other Information
18
Item 6.
Exhibits
19
 
Signatures
20


 
                            Mid-America  Apartment  Communities,  Inc.
           
                            Condensed Consolidated  Balance  Sheets
           
                            June 30, 2007 (Unaudited) and December 31, 2006
           
(Dollars in thousands, except per share data)
 
               
     
June 30, 2007
   
December 31, 2006
 
Assets:
             
Real estate assets:
           
 
Land
  $
209,146
    $
206,635
 
 
Buildings and improvements
   
1,961,618
     
1,921,462
 
 
Furniture, fixtures and equipment
   
51,376
     
51,374
 
 
Capital improvements in progress
   
27,171
     
20,689
 
       
2,249,311
     
2,200,160
 
 
Less accumulated depreciation
    (573,473 )     (543,802 )
       
1,675,838
     
1,656,358
 
                   
 
Land held for future development
   
2,360
     
2,360
 
 
Commercial properties, net
   
7,120
     
7,103
 
 
Investments in and advances to real estate joint venture
   
51
     
3,718
 
 
Real estate assets, net
   
1,685,369
     
1,669,539
 
                   
Cash and cash equivalents
   
4,292
     
5,545
 
Restricted cash
   
4,149
     
4,145
 
Deferred financing costs, net
   
16,175
     
16,033
 
Other assets
   
38,445
     
38,865
 
Goodwill
   
4,105
     
4,472
 
Assets held for sale
   
8,573
     
8,047
 
 
Total assets
  $
1,761,108
    $
1,746,646
 
                   
Liabilities and Shareholders' Equity:
               
Liabilities:
               
 
Notes payable
  $
1,195,570
    $
1,196,349
 
 
Accounts payable
   
647
     
2,773
 
 
Accrued expenses and other liabilities
   
63,882
     
57,919
 
 
Security deposits
   
8,345
     
7,670
 
 
Liabilities associated with assets held for sale
   
235
     
269
 
 
Total liabilities
   
1,268,679
     
1,264,980
 
                   
Minority interest
   
32,086
     
32,600
 
                   
Redeemable stock
   
2,901
     
3,418
 
                   
Shareholders' equity:
               
 
Preferred stock, $.01 par value per share, 20,000,000 shares authorized,
               
 
$166,863 or $25 per share liquidation preference;
               
 
9 1/4% Series F Cumulative Redeemable Preferred Stock,
               
 
3,000,000 shares authorized, 474,500 shares issued and outstanding
   
5
     
5
 
 
8.30% Series H Cumulative Redeemable Preferred Stock,
               
 
6,200,000 shares authorized, 6,200,000 shares issued and outstanding
   
62
     
62
 
 
Common stock, $.01 par value per share, 50,000,000 shares authorized;
               
 
25,511,314 and 25,093,156 shares issued and outstanding at
               
 
June 30, 2007, and December 31, 2006, respectively (1)
   
255
     
251
 
 
Additional paid-in capital
   
835,930
     
814,006
 
 
Accumulated distributions in excess of net income
    (396,652 )     (379,573 )
 
Accumulated other comprehensive income
   
17,842
     
10,897
 
 
Total shareholders' equity
   
457,442
     
445,648
 
 
Total liabilities and shareholders' equity
  $
1,761,108
    $
1,746,646
 
                   
See accompanying notes to condensed consolidated financial statements.
               
                   
(1)
Number of shares issued and outstanding represent total shares of common stock regardless of classification on the
 
 
condensed consolidated balance sheet.       
 
 
 

 
Mid-America  Apartment  Communities,  Inc.           
 
Condensed Consolidated Statements of Operations           
 
Three and six months ended June 30, 2007, and 2006           
 
(Dollars  in  thousands, except  per  share  data)           
 
                           
     
Three months ended June 30,
   
Six months ended June 30,
 
     
2007
   
2006
   
2007
   
2006
 
Operating revenues:
                       
 
Rental revenues
  $
82,875
    $
76,305
    $
164,087
    $
150,159
 
 
Other property revenues
   
3,904
     
3,438
     
7,649
     
6,923
 
 
Total property revenues
   
86,779
     
79,743
     
171,736
     
157,082
 
 
Management fee income
   
-
     
52
     
34
     
104
 
 
Total operating revenues
   
86,779
     
79,795
     
171,770
     
157,186
 
Property operating expenses:
                               
 
Personnel
   
10,099
     
9,358
     
19,822
     
18,308
 
 
Building repairs and maintenance
   
3,188
     
2,910
     
6,244
     
5,325
 
 
Real estate taxes and insurance
   
11,624
     
9,878
     
22,722
     
19,363
 
 
Utilities
   
4,761
     
4,519
     
9,548
     
9,145
 
 
Landscaping
   
2,296
     
2,111
     
4,568
     
4,182
 
 
Other operating
   
4,128
     
3,601
     
7,847
     
6,983
 
 
Depreciation
   
21,108
     
19,386
     
42,396
     
38,026
 
 
Total property operating expenses
   
57,204
     
51,763
     
113,147
     
101,332
 
Property management expenses
   
4,431
     
3,464
     
8,880
     
5,975
 
General and administrative expenses
   
2,882
     
2,682
     
5,812
     
6,043
 
Income from continuing operations before non-operating items
   
22,262
     
21,886
     
43,931
     
43,836
 
Interest and other non-property income
   
51
     
215
     
145
     
332
 
Interest expense
    (16,034 )     (15,736 )     (32,048 )     (31,338 )
Loss on debt extinguishment
    (52 )     (1 )     (52 )     (551 )
Amortization of deferred financing costs
    (574 )     (504 )     (1,135 )     (989 )
Minority interest in operating partnership income
    (763 )     (408 )     (1,801 )     (821 )
Loss from investments in real estate joint ventures
    (51 )     (35 )     (58 )     (119 )
Incentive fee from real estate joint ventures
   
-
     
-
     
1,019
     
-
 
Net gain on insurance and other settlement proceeds
   
332
     
225
     
842
     
225
 
Gain on sale of non-depreciable assets
   
226
     
-
     
226
     
-
 
Gain on dispositions within real estate joint ventures
   
-
     
-
     
5,387
     
-
 
Income from continuing operations
   
5,397
     
5,642
     
16,456
     
10,575
 
Discontinued operations:
                               
 
Income from discontinued operations before
                               
 
asset impairment, settlement proceeds and gain on sale
   
278
     
250
     
543
     
443
 
 
Gain on sale of discontinued operations
   
3,443
     
-
     
3,443
     
-
 
Net income
   
9,118
     
5,892
     
20,442
     
11,018
 
Preferred dividend distribution
   
3,490
     
3,491
     
6,981
     
6,981
 
Net income available for common shareholders
  $
5,628
    $
2,401
    $
13,461
    $
4,037
 
                                   
Weighted average shares outstanding (in thousands):
                               
 
Basic
   
25,288
     
23,152
     
25,188
     
22,645
 
 
Effect of dilutive stock options
   
176
     
222
     
189
     
228
 
 
Diluted
   
25,464
     
23,374
     
25,377
     
22,873
 
                                   
Net income available for common shareholders
  $
5,628
    $
2,401
    $
13,461
    $
4,037
 
Discontinued property operations
    (3,721 )     (250 )     (3,986 )     (443 )
Income from continuing operations available for common shareholders
  $
1,907
    $
2,151
    $
9,475
    $
3,594
 
                                   
Earnings per share - basic:
                               
 
Income from continuing operations
                               
 
    available for common shareholders
  $
0.07
    $
0.09
    $
0.37
    $
0.16
 
 
Discontinued property operations
   
0.15
     
0.01
     
0.16
     
0.02
 
 
Net income available for common shareholders
  $
0.22
    $
0.10
    $
0.53
    $
0.18
 
                                   
Earnings per share - diluted:
                               
 
Income from continuing operations
                               
 
    available for common shareholders
  $
0.07
    $
0.09
    $
0.37
    $
0.16
 
 
Discontinued property operations
   
0.15
     
0.01
     
0.16
     
0.02
 
 
Net income available for common shareholders
  $
0.22
    $
0.10
    $
0.53
    $
0.18
 
                                   
Dividends declared per common share (1)
  $
0.605
    $
0.595
    $
1.210
    $
1.785
 
                                   
(1)
The Company declared and paid $1.19 per common share during the six months ended June 30, 2006. During that same period
 
 
the Company also declared an additional $0.595 per common share that was not paid until July 31, 2006.
         
                                   
See accompanying notes to condensed consolidated financial statements.
                         
 
 

 
Mid-America Apartment Communities, Inc.
           
Consolidated Statements of Cash Flows
           
Six Months Ended June 30, 2007 and 2006
           
(Dollars in thousands)
           
             
   
2007
   
2006
 
Cash flows from operating activities:
           
 Net income
  $
20,442
    $
11,018
 
 Adjustments to reconcile net income to net cash provided by operating activities:
         
Income from discontinued operations before asset impairment, settlement
               
proceeds and gain on sale
    (543 )     (443 )
Depreciation and amortization of deferred financing costs
   
43,531
     
39,015
 
Stock compensation expense
   
490
     
646
 
Stock issued to employee stock ownership plan
   
440
     
385
 
Redeemable stock issued
   
184
     
186
 
Amortization of debt premium
    (1,018 )     (930 )
Income from investments in real estate joint ventures
   
58
     
119
 
Minority interest in operating partnership income
   
1,801
     
821
 
Loss on debt extinguishment
   
52
     
551
 
Derivative interest expense
   
98
      (120 )
Gain on sale of non-depreciable assets
    (226 )    
-
 
Gain on sale of discontinued operations
    (3,443 )    
-
 
Gain on disposition within real estate joint ventures
    (5,387 )    
-
 
Incentive fee from real estate joint ventures
    (1,019 )    
-
 
Net gain on insurance and other settlement proceeds
    (842 )     (225 )
Changes in assets and liabilities:
               
Restricted cash
    (4 )    
689
 
Other assets
   
5,479
     
2,741
 
Accounts payable
    (2,124 )    
2,874
 
Accrued expenses and other
   
226
     
2,574
 
Security deposits
   
652
     
780
 
Net cash provided by operating activities
   
58,847
     
60,681
 
Cash flows from investing activities:
               
Purchases of real estate and other assets
    (35,225 )     (82,213 )
Improvements to existing real estate assets
    (13,916 )     (14,356 )
Renovations to existing real estate assets
    (4,709 )     (2,468 )
Development
    (9,950 )     (551 )
Distributions from real estate joint ventures
   
9,855
     
137
 
Contributions to real estate joint ventures
    (98 )    
-
 
Proceeds from disposition of real estate assets
   
13,778
     
1,089
 
Net cash used in investing activities
    (40,265 )     (98,362 )
Cash flows from financing activities:
               
Net change in credit lines
   
11,572
     
1,659
 
Proceeds from notes payable
   
-
     
13,235
 
Principal payments on notes payable
    (11,333 )     (28,737 )
Payment of deferred financing costs
    (1,298 )     (1,905 )
Proceeds from issuances of common shares and units
   
21,783
     
87,321
 
Distributions to unitholders
    (3,012 )     (2,990 )
Dividends paid on common shares
    (30,566 )     (26,619 )
Dividends paid on preferred shares
    (6,981 )     (6,981 )
Net cash (used by) provided by financing activities
    (19,835 )    
34,983
 
Net increase (decrease) in cash and cash equivalents
    (1,253 )     (2,698 )
Cash and cash equivalents, beginning of period
   
5,545
     
14,064
 
Cash and cash equivalents, end of period
  $
4,292
    $
11,366
 
                 
Supplemental disclosure of cash flow information:
               
   Interest paid
  $
33,809
    $
32,989
 
Supplemental disclosure of noncash investing and financing activities:
               
   Conversion of units to common shares
  $
84
    $
136
 
   Interest capitalized
  $
520
    $
47
 
   Marked-to-market adjustment on derivative instruments
  $
6,945
    $
17,505
 
   Reclass of redeemable stock from equity to liabilities
  $
442
    $
-
 
                 
See accompanying notes to condensed consolidated financial statements.
               
 
 

 
Mid-America Apartment Communities, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2007, and 2006 (Unaudited)


1.           BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the management of Mid-America Apartment Communities, Inc., or Mid-America, in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities and Exchange Commission and Mid-America’s accounting policies in effect as of December 31, 2006, as set forth in our annual consolidated financial statements, as of such date. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included and all such adjustments were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six month periods ended June 30, 2007, are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with our audited financial statements and notes thereto included in Mid-America’s Annual Report on Form 10-K for the year ended December 31, 2006.

RECLASSIFICATION

Certain prior period amounts have been reclassified to conform to the 2007 presentation.  The reclassifications had no effect on net income available for common shareholders.

2.           SEGMENT INFORMATION

At June 30, 2007, Mid-America owned 137 multifamily apartment communities in 13 different states from which it derives all significant sources of earnings and operating cash flows. Our operational structure is organized on a decentralized basis, with individual property managers having overall responsibility and authority regarding the operations of their respective properties. Each property manager individually monitors local and area trends in rental rates, occupancy percentages, and operating costs. Property managers are given the on-site responsibility and discretion to react to such trends in the best interest of Mid-America. Our chief operating decision maker evaluates the performance of each individual property based on its contribution to net operating income in order to ensure that the individual property continues to meet our return criteria and long-term investment goals. We define each of our multifamily communities as an individual operating segment. We have also determined that all of our communities have similar economic characteristics and also meet the other criteria which permit the communities to be aggregated into one reportable segment, which is the acquisition and operation of the multifamily communities owned.

3.           COMPREHENSIVE INCOME

Total comprehensive income and its components for the three and six month periods ended June 30, 2007, and 2006, were as follows (dollars in thousands):
 
   
Three months
   
Six months
 
   
ended June 30,
   
ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Net income
  $
9,118
    $
5,892
    $
20,442
    $
11,018
 
Marked-to-market adjustment 
                             
 on derivative instruments
   
9,871
     
7,088
     
6,945
     
17,505
 
Total comprehensive income
  $
18,989
    $
12,980
    $
27,387
    $
28,523
 
 
The marked-to-market adjustment on derivative instruments is based upon the change of interest rates available for derivative instruments with similar terms and remaining maturities existing at each balance sheet date.

 4.           REAL ESTATE DISPOSITIONS

On May 3, 2007, Mid-America sold the Gleneagles and Hickory Farms apartments, 184 and 200 units, respectively, generating a $3.4 million gain for Mid-America. Both communities are located in Memphis, Tennessee.

5.           REAL ESTATE ACQUISITIONS

On May 30, 2007, Mid-America acquired the Ranchstone and Park Place apartments, 220 and 229 units, respectively.  Both communities are located in Houston, Texas.

6.           DISCONTINUED OPERATIONS

As part of Mid-America’s disposition strategy to selectively dispose of mature assets that no longer meet our investment criteria and long-term strategic objectives, in April 2006, we entered into an agreement to list the 184-unit Gleneagles apartments and the 200-unit Hickory Farm apartments both located in Memphis, Tennessee, for sale. Both of these communities were subsequently sold on May 3, 2007. Also in line with this strategy, in March 2007, we entered into an agreement to list the 144-unit Somerset apartments and the 192-unit Woodridge apartments both located in Jackson, Mississippi, for sale. In accordance with Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these communities are considered held for sale in the accompanying condensed consolidated financial statements.

The following is a summary of discontinued operations for the three and six month periods ended June 30, 2007, and 2006, (dollars in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,   
   
June 30,   
 
   
2007
   
2006
   
2007
   
2006
 
                         
Revenues
                       
Rental revenues
  $
786
    $
1,143
    $
1,962
    $
2,334
 
Other revenues
   
46
     
58
     
113
     
122
 
Total revenues
   
832
     
1,201
     
2,075
     
2,456
 
Expenses
                               
Property operating expenses
   
432
     
624
     
1,096
     
1,195
 
Depreciation
    (1 )    
130
     
132
     
420
 
Interest expense
   
123
     
197
     
304
     
398
 
Total expense
   
554
     
951
     
1,532
     
2,013
 
Income from discontinued operations before
                               
gain on sale and settlement proceeds
   
278
     
250
     
543
     
443
 
Income from discontinued operations
  $
278
    $
250
    $
543
    $
443
 
 
 

 
7.           SHARE AND UNIT INFORMATION

At June 30, 2007, 25,511,314 common shares and 2,482,593 operating partnership units were outstanding, representing a total of 27,993,907 shares and units. Additionally, Mid-America had outstanding options for the purchase of 144,620 shares of common stock at June 30, 2007, of which 64,477 were anti-dilutive. At June 30, 2006, 24,025,183 common shares and 2,508,403 operating partnership units were outstanding, representing a total of 26,533,586 shares and units. Additionally, Mid-America had outstanding options for the purchase of 246,952 shares of common stock at June 30, 2006, of which 116,865 were anti-dilutive.

During the three month period ended June 30, 2007, we issued 90,000 shares of common stock through at-the-market offerings or negotiated transactions and received net proceeds of approximately $5.1 million under a controlled equity offering program.

8.           DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, Mid-America uses certain derivative financial instruments to manage, or hedge, the interest rate risk associated with our variable rate debt or as hedges in anticipation of future debt transactions to manage well-defined interest rate risk associated with the transaction.

We do not use derivative financial instruments for speculative or trading purposes. Further, Mid-America has a policy of entering into contracts with major financial institutions based upon their credit rating and other factors.  When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designated to hedge, Mid-America has not sustained any material loss from those instruments nor do we anticipate any material adverse effect on our net income or financial position in the future from the use of derivatives.

Mid-America requires that derivative financial instruments designated as cash flow hedges be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet the hedging criteria are formally designated as hedging instruments at the inception of the derivative contract. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the hedge transaction. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives used are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative has ceased to be a highly effective hedge, Mid-America discontinues hedge accounting prospectively.

All of our derivative financial instruments are reported at fair value and represented on the balance sheet, and are characterized as cash flow hedges. These transactions hedge the future cash flows of debt transactions through interest rate swaps that convert variable payments to fixed payments and interest rate caps that limit the exposure to rising interest rates. The unrealized gains/losses in the fair value of these hedging instruments are reported on the balance sheet with a corresponding adjustment to accumulated other comprehensive income, with any ineffective portion of the hedging transactions reclassified to earnings. During the three and six month periods ended June 30, 2007, and 2006, the ineffective portion of the hedging transactions was not significant.

9.           RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Mid-America adopted FIN 48 effective January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken in tax returns. Mid-America has identified and examined our tax positions, including our status as a real estate investment trust, for all open tax years through December 31, 2006, and concluded that the full benefit of each tax position taken should be recognized in the financial statements. There are no significant changes in unrecognized tax benefits that are reasonably possible within the twelve months following the adoption date.

FIN 48 requires that an enterprise must calculate interest and penalties related to unrecognized tax benefits.  The decision regarding where to classify interest and penalties on the income statement is an accounting policy decision that should be consistently applied.  Interest and penalties calculated on any future uncertain tax positions will be presented as a component of income tax expense.  No interest and penalties are accrued under FIN 48 on our balance sheet as of June 30, 2007.

Mid-America’s tax years that remain subject to examination for U.S. federal purposes range from 2003 through 2006. Our tax years that remain open for state examination vary but range from 2002 through 2006.

In September 2006, the FASB issued Statement No. 157 “Fair Value Measurements”, or Statement 157. Statement 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Statement 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Mid-America does not believe the adoption of Statement 157 will have a material impact on our consolidated financial condition or results of operations taken as a whole.
 
 

 
10.           SUBSEQUENT EVENTS

REAL ESTATE DISPOSITIONS

On July 16, 2007, Mid-America sold the Somerset and Woodridge apartments, 144 and 192 units, respectively. Both communities are located in Jackson, Mississippi.

REAL ESTATE ACQUISITIONS

On July 6, 2007, Mid-America acquired the Chalet at Fall Creek apartments, 268 units, located in Houston, Texas.

Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of financial condition and results of operations are based upon Mid-America’s condensed consolidated financial statements, and the notes thereto, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates and assumptions.

We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require the most subjective determinations, form the basis of accounting policies deemed to be most critical. These critical accounting policies include revenue recognition, capitalization of expenditures and depreciation of assets, impairment of long-lived assets, including goodwill, and fair value of derivative financial instruments.

Revenue Recognition

Mid-America leases multifamily residential apartments under operating leases primarily with terms of one year or less. Rent and other property income is recorded when due from residents and is recognized monthly as it is earned. Other property income consists primarily of utility rebillings, other expense reimbursements, and administrative, application and other fees charged to residents.  Interest, management fees, and all other sources of income are recognized as earned.

We record all gains and losses on sales of real estate in accordance with Statement No. 66, Accounting for Sales of Real Estate.

Capitalization of expenditures and depreciation of assets

Mid-America carries real estate assets at their depreciated cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, which range from 8 to 40 years for land improvements and buildings, 5 years for furniture, fixtures, and equipment, and 3 to 5 years for computers and software, all of which are subjective determinations. Repairs and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized. The cost to complete any deferred repairs and maintenance at properties acquired by us in order to elevate the condition of the property to our standards are capitalized as incurred.

Development costs, which are limited to adding new units to three existing properties, are capitalized in accordance with Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects and Statement No. 34, Capitalization of Interest Cost.


 
Impairment of long-lived assets, including goodwill

Mid-America accounts for long-lived assets in accordance with the provisions of Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or Statement 144, and evaluates goodwill for impairment under Statement No. 142, Goodwill and Other Intangible Assets, or Statement 142. We evaluate goodwill for impairment on an annual basis in our fiscal fourth quarter, or sooner if a goodwill impairment indicator is identified. We periodically evaluate long-lived assets, including investments in real estate and goodwill, for indicators that would suggest that the carrying amount of the assets may not be recoverable. The judgments regarding the existence of such indicators are based on factors such as operating performance, market conditions, and legal factors.

In accordance with Statement 144, long-lived assets, such as real estate assets, equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. In the apartment industry, the primary method used for determining fair value is to divide annual operating cash flows by an appropriate capitalization rate. We determine the appropriate capitalization rate by reviewing the prevailing rates in a property’s market or submarket. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Fair value of derivative financial instruments

Mid-America utilizes certain derivative financial instruments, primarily interest rate swaps and caps, during the normal course of business to manage, or hedge, the interest rate risk associated with our variable rate debt or as hedges in anticipation of future debt transactions to manage well-defined interest rate risk associated with the transaction. The valuation of the derivative financial instruments under Statement No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended, requires us to make estimates and judgments that affect the fair value of the instruments.

In order for a derivative contract to be designated as a hedging instrument, the relationship between the hedging instrument and the hedged item must be highly effective. While our calculation of hedge effectiveness contains some subjective determinations, the historical correlation of the cash flows of the hedging instruments and the underlying hedged item are measured before entering into the hedging relationship and have been found to be highly correlated.

We measure ineffectiveness using the change in the variable cash flows method at the inception of the hedge and for each reporting period thereafter, through the term of the hedging instruments. Any amounts determined to be ineffective are recorded in earnings.  The change in fair value of the interest rate swaps and caps designated as cash flow hedges are recorded to accumulated other comprehensive income in the statement of shareholders’ equity.


 
OVERVIEW OF THE THREE MONTHS ENDED JUNE 30, 2007

Mid-America’s operating results for the three months ended June 30, 2007, benefited from continued improvement in market conditions which helped us grow rental rates at our existing communities. Our operations also benefited from a full quarter of performance from the four communities acquired in 2006 after the first quarter, as well as a month of operations from the two communities acquired in May 2007.  Increasing operating and administrative expenses offset some of the benefit of the revenue increases.

Net income benefited from the sale of land and the disposition of two communities, resulting in gains of approximately $226,000 and $3.4 million, respectively.

On May 9, 2007, Mid-America entered into a joint venture, Mid-America Multifamily Fund I, LLC. The joint venture was established to acquire multifamily properties. No properties had been acquired by the joint venture as of June 30, 2007.

The following is a discussion of the consolidated financial condition and results of operations of Mid-America for the three and six month periods ended June 30, 2007. This discussion should be read in conjunction with the condensed consolidated financial statements appearing elsewhere in this report. These financial statements include all adjustments, which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim period presented, and all such adjustments are of a normal recurring nature.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2007, TO THE THREE MONTHS ENDED JUNE 30, 2006

Property revenues for the three months ended June 30, 2007, increased by approximately $7,036,000 from the three months ended June 30, 2006, due to (i) a $3,087,000 increase in property revenues from the six properties acquired since the end of the first quarter of 2006, and (ii) a $3,949,000 increase in property revenues from all other communities. The increase in property revenues from all other communities was generated primarily by our same store portfolio and was driven by a 2.8% increase in average rent per unit and a reduction in the rate of concessions of net potential rent from 4.1% to 2.7% from the second quarter of 2006 to the second quarter of 2007, respectively.

Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other property related costs. Property operating expenses for the three months ended June 30, 2007, increased by approximately $3,719,000 from the three months ended June 30, 2006, due primarily to increases in property operating expenses of (i) $1,485,000 from the six properties acquired since the end of the first quarter of 2006, and (ii) $2,234,000 from all other communities. The increase in property operating expenses from all other communities consisted primarily of our same store portfolio and was driven by an increase in insurance expense of $724,000 over the same quarter last year as a result of higher premiums incurred upon our policy renewal on July 1, 2006, as well as an increase of $334,000 over the same quarter last year due to real estate taxes.

Depreciation expense for the three months ended June 30, 2007, increased by approximately $1,722,000 from the three months ended June 30, 2006, primarily due to the increases in depreciation expense of (i) $948,000 from the six properties acquired since the end of the first quarter of 2006, (ii) $632,000 from all other communities, and (iii) $142,000 from the amortization of the fair market value of leases of acquired communities. Increases of depreciation expense from all other communities resulted from asset additions made during the normal course of business.

Property management expenses increased by approximately $967,000 from the second quarter of 2006 to the second quarter of 2007 primarily related to an increase in personnel incentives resulting from improved property operations, and increased franchise and excise taxes resulting from state law changes. General and administrative expenses increased by approximately $200,000 over this same period mainly as a result of increased corporate level staffing.

Interest expense increased approximately $298,000 in the three months ended June 30, 2007, from the three months ended June 30, 2006, due to the increase in our average borrowing cost from 5.49% for the second quarter of 2006, to 5.51% for the second quarter of 2007, as well as a $30.7 million increase in the average debt outstanding from the second quarter of 2006 to the second quarter of 2007 related to new acquisitions, and our development and redevelopment programs.

In the three months ended June 30, 2007, Mid-America benefited from a $226,000 gain due to the sale of excess land to a municipality, as well as a $3.4 million gain due to the sale of two of our communities. No such gains were experienced in the second quarter of 2006.

Primarily as a result of the foregoing, net income increased by approximately $3,226,000 in the second quarter of 2007 from the second quarter of 2006.
 
 

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2007, TO THE SIX MONTHS ENDED JUNE 30, 2006

Property revenues for the six months ended June 30, 2007, increased by approximately $14,654,000 from the six months ended June 30, 2006, due to (i) a $7,212,000 increase in property revenues from the eight properties acquired in 2006 and 2007, and (ii) a $7,442,000 increase in property revenues from all other communities. The increase in property revenues from all other communities was generated primarily by our same store portfolio and was driven by increases in average rent per unit and a reduction in the rate of concessions of net potential rent from the first six months of 2006 to the first six months of 2007.

Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other property related costs. Property operating expenses for the six months ended June 30, 2007, increased by approximately $7,445,000 from the six months ended June 30, 2006, due primarily to increases in property operating expenses of (i) $3,556,000 from the eight properties acquired in 2006 and 2007, and (ii) $3,889,000 from all other communities. The increase in property operating expenses from all other communities consisted primarily of our same store portfolio and was driven by an increase in insurance expense over the same quarter last year as a result of higher premiums incurred upon our policy renewal on July 1, 2006.

Depreciation expense for the six months ended June 30, 2007, increased by approximately $4,370,000 from the six months ended June 30, 2006, primarily due to the increases in depreciation expense of (i) $2,281,000 from the eight properties acquired in 2006 and 2007, (ii) $1,286,000 from all other communities, and (iii) $803,000 from the amortization of the fair market value of leases of acquired communities. Increases of depreciation expense from all other communities resulted from asset additions made during the normal course of business.

Property management expenses increased by approximately $2,905,000 from the first half of 2006 to the first half of 2007 primarily related to an increase in personnel incentives resulting from improved property operations, and increased franchise and excise taxes resulting from state law changes. General and administrative expenses decreased by approximately $231,000 over this same period mainly as a result of decreased corporate level personnel bonuses.

Interest expense increased approximately $710,000 in the six months ended June 30, 2007, from the six months ended June 30, 2006, due to the increase in our average borrowing cost from 5.45% for the first six months of 2006, to 5.52% for the first six months of 2007, as well as a $26.5 million increase in the average debt outstanding from the first six months of 2006 to the first six months of 2007 related to new acquisitions, and our development and redevelopment programs.

In the six months ended June 30, 2007, Mid-America benefited from a net gain on insurance and other settlement proceeds of approximately $842,000 compared to $225,000 for the first six months of 2006.

During the first six months of 2007, Mid-America also benefited from the sale of our last joint venture property with Crow Holdings, resulting in a gain of $5.4 million and incentive fees of $1.0 million, a $226,000 gain due to the sale of excess land to a municipality, and a $3.4 million gain due to the sale of two of our communities. No such gains were experienced in the first six months of 2006.

Primarily as a result of the foregoing, net income increased by approximately $9,424,000 in the first half of 2007 from the first half of 2006.

FUNDS FROM OPERATIONS AND NET INCOME

Funds from operations, or FFO, represents net income (computed in accordance with GAAP), excluding extraordinary items, minority interest in Operating Partnership income, gain on disposition of real estate assets, plus depreciation of real estate, and adjustments for joint ventures to reflect FFO on the same basis. This definition of FFO is in accordance with the National Association of Real Estate Investment Trust’s, or NAREIT, definition.  Disposition of real estate assets includes sales of discontinued operations as well as proceeds received from insurance and other settlements from property damage.

In response to the Securities and Exchange Commission’s Staff Policy Statement relating to EITF Topic D-42 concerning the calculation of earnings per share for the redemption of preferred stock, we include the amount charged to retire preferred stock in excess of carrying values in our FFO calculation.

Mid-America’s policy is to expense the cost of interior painting, vinyl flooring, and blinds as incurred for stabilized properties. During the stabilization period for acquisition properties, these items are capitalized as part of the total repositioning program of newly acquired properties, and, thus are not deducted in calculating FFO.

FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, as an indicator of operating performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. We believe that FFO is helpful to investors in understanding our operating performance in that such calculation excludes depreciation expense on real estate assets. We believe that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies. Our calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs.
 
 

 
The following table is a reconciliation of FFO to net income for the three and six month periods ended June 30, 2007, and 2006 (dollars and shares in thousands):
 
   
Three months
   
Six months
 
   
ended June 30,
   
ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
Net income
  $
9,118
    $
5,892
    $
20,442
    $
11,018
 
Depreciation of real estate assets
   
20,781
     
19,042
     
41,752
     
37,344
 
Net gain on insurance and other settlement proceeds
    (332 )     (225 )     (842 )     (225 )
Gain on dispositions within real estate joint ventures
   
-
     
-
      (5,387 )    
-
 
Depreciation of real estate assets of
                               
discontinued operations
    (1 )    
130
     
132
     
420
 
Gain on sale of discontinued operations
    (3,443 )    
-
      (3,443 )    
-
 
Depreciation of real estate assets of
                               
real estate joint ventures
   
-
     
121
     
14
     
261
 
Preferred dividend distribution
    (3,490 )     (3,491 )     (6,981 )     (6,981 )
Minority interest in operating partnership income
   
763
     
408
     
1,801
     
821
 
Funds from operations
  $
23,396
    $
21,877
    $
47,488
    $
42,658
 
                                 
Weighted average shares and units:
                               
Basic
   
27,775
     
25,662
     
27,676
     
25,160
 
Diluted
   
27,951
     
25,884
     
27,865
     
25,387
 
 
FFO for the three and six month periods ended June 30, 2007, increased primarily as the result of recently acquired properties and improved performance from existing properties, as well as the sale of excess land of $226,000 to a municipality which was classified as a non-depreciable asset.

TRENDS

Mid-America believes that the primary driver of demand by apartment residents is by job growth, which has continued to be strong throughout the Sunbelt, our operating region.

In the first six months of 2007, community performance continued to be stable and growing throughout most of Mid-America’s markets.  Overall, demand for apartment homes continues to be strong throughout our markets, allowing for absorption of new supply and continued pricing traction in most markets.  Some of our markets were weaker than the portfolio as a whole, including Tampa and Orlando, where we have a total of 5 communities. These markets experienced some reversing of condominiums to the rental market. Columbus, Georgia, where military deployment caused a temporary reduction in demand, was also weaker than the portfolio as a whole.

Mid-America faces cost pressures from increasing operating expenses, especially insurance and real estate tax costs, as well as increasing prices of materials that we use in maintaining, renovating and further developing our apartments.

We believe that the current environment of strong demand and reduced competition from single family homes, while somewhat offset by rising expenses, will continue to contribute to better operating results in the near future.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flow provided by operating activities decreased by approximately $1.9 million from $60.7 million in the first six months of 2006 to $58.8 million in the first six months of 2007 as cash from improved existing and new property operations was more than offset by a decrease in our accounts payable levels from the first six months of 2006 to the first six months of 2007.


 
Net cash used in investing activities decreased during the first six months of 2007 from the first six months of 2006 to approximately $40.3 million from $98.4 million mainly related to $82.2 million of cash used for acquisitions in the first six months of 2006 compared to $35.2 million for the first six months of 2007. Mid-America also received $23.6 million in cash during the first six months of 2007 as the result of property sales, this compares to only $1.2 million for the first six months of 2006.

The first six months of 2007 used net cash for financing activities of $19.8 million while the first six months of 2006 provided net cash from financing activities of $35.0 million. This change was due mainly to the $87.3 million of proceeds from issuances of common stock in the first six months of 2006 compared to only $21.8 million for the first six months of 2007.

The weighted average interest rate at June 30, 2007, for the $1.2 billion of debt outstanding was 5.5% compared to 5.6% on $1.1 billion of debt outstanding at June 30, 2006. Mid-America utilizes both conventional and tax exempt debt to help finance its activities. Borrowings are made through individual property mortgages and secured credit facilities. We utilize fixed rate borrowings, interest rate swaps and interest rate caps to manage our current and future interest rate risk. More details on our borrowings can be found in the schedule presented later in this section.

At June 30, 2007, Mid-America had secured credit facility relationships with Prudential Mortgage Capital which are credit enhanced by the Federal National Mortgage Association, or FNMA, Federal Home Loan Mortgage Corporation, or Freddie MAC, and a group of banks led by AmSouth Bank. Together, these credit facilities provided a total borrowing capacity of $1.4 billion and an availability to borrow of $1.2 billion at June 30, 2007. Mid-America had total borrowings outstanding under these credit facilities of $1.0 billion at June 30, 2007.

Approximately 71% of Mid-America’s outstanding obligations at June 30, 2007, were borrowed through facilities with/or credit enhanced by FNMA, also referred to as the FNMA facilities. The FNMA facilities have a combined line limit of $1.0 billion, all of which was available to borrow at June 30, 2007. Mid-America had total borrowings outstanding under the FNMA facilities of approximately $854 million at June 30, 2007. Various traunches of the facilities mature from 2010 through 2014. The FNMA facilities provide for both fixed and variable rate borrowings. The interest rate on the majority of the variable portion renews every 90 days and is based on the FNMA Discount Mortgage Backed Security, or DMBS, rate on the date of renewal, which has typically approximated three-month LIBOR less an average spread of 0.05% - 0.06% over the life of the FNMA facilities, plus a credit enhancement fee of 0.62% to 0.795%.

Each of Mid-America’s secured credit facilities is subject to various covenants and conditions on usage, and are subject to periodic re-evaluation of collateral. If we were to fail to satisfy a condition to borrowing, the available credit under one or more of the facilities could not be drawn, which could adversely affect our liquidity. In the event of a reduction in real estate values the amount of available credit could be reduced. Moreover, if we were to fail to make a payment or violate a covenant under a credit facility, after applicable cure periods, one or more of our lenders could declare a default, accelerate the due date for repayment of all amounts outstanding and/or foreclose on properties securing such facilities. Any such event could have a material adverse effect.

As of June 30, 2007, Mid-America had entered into interest rate swaps totaling a notional amount of $689 million, including a $25 million swap which does not go into effect until July 2007. To date, these swaps have proven to be highly effective hedges. We also had interest rate cap agreements totaling a notional amount of approximately $42 million as of June 30, 2007.
 
 

 
Summary details of the debt outstanding at June 30, 2007, follow in the table below:
               
Outstanding
             
               
Balance/
 
Average
 
Average
 
Average
 
       
Line
 
Line
 
Notional
 
Interest
 
Rate
 
Contract
 
       
Limit
 
Availability
 
Amount
 
Rate
 
Maturity
 
Maturity
 
                               
COMBINED DEBT
                         
Fixed Rate or Swapped
                         
 
Conventional
         
 $             853,154,809
 
5.6%
 
9/28/2011
 
9/28/2011
 
 
Tax Exempt
         
                   73,355,000
 
4.3%
 
1/3/2012
 
1/3/2012
 
   
Subtotal Fixed Rate or Swapped
     
                926,509,809
 
5.5%
 
10/5/2011
 
10/5/2011
 
Variable Rate
                         
 
Conventional
         
                  216,179,262
 
5.9%
 
8/27/2007
 
10/24/2012
 
 
Tax Exempt
         
                    10,855,004
 
4.7%
 
7/22/2007
 
5/30/2020
 
 
Conventional - Capped
         
                    17,936,000
 
5.9%
 
11/13/2009
 
11/13/2009
 
 
Tax Exempt - Capped
         
                   24,090,000
 
4.6%
 
11/27/2009
 
11/27/2009
 
   
Subtotal Variable Rate
         
                269,060,266
 
5.8%
 
8/22/2007
 
4/11/2013
 
Total Combined Debt Outstanding
       
 $ 1,195,570,075
 
5.5%
 
10/31/2010
 
2/7/2012
 
                               
UNDERLYING DEBT
                         
Individual Property Mortgages/Bonds
                     
 
Conventional Fixed Rate
         
 $              135,154,809
 
4.8%
 
8/29/2013
 
8/29/2013
 
 
Tax Exempt Fixed Rate
         
                    12,025,000
 
5.2%
 
12/1/2028
 
12/1/2028
 
 
Tax Exempt Variable Rate
         
                     4,760,004
 
4.8%
 
7/31/2007
 
6/1/2028
 
FNMA Credit Facilities
                         
 
Tax Free Borrowings
 
 $              91,515,000
 
 $              91,515,000
 
                     91,515,000
 
4.6%
 
7/15/2007
 
3/1/2014
 
 
Conventional Borrowings
                         
   
Fixed Rate Borrowings
 
                90,000,000
 
                90,000,000
 
                   90,000,000
 
7.5%
 
7/1/2009
 
7/1/2009
 
   
Variable Rate Borrowings
 
               862,914,000
 
               862,914,000
 
                 672,318,000
 
5.9%
 
8/30/2007
 
5/9/2013
 
Subtotal FNMA Facilities
 
           1,044,429,000
 
           1,044,429,000
 
                853,833,000
 
5.9%
 
11/3/2007
 
1/12/2013
 
Freddie Mac Credit Facility I
 
               100,000,000
 
                96,404,000
 
                   96,404,000
 
5.9%
 
9/7/2007
 
7/1/2011
 
Freddie Mac Credit Facility II
 
              200,000,000
 
                47,325,000
 
                   47,325,000
 
5.8%
 
8/31/2007
 
6/2/2014
 
AmSouth Credit Facility
 
                40,000,000
 
                 33,144,020
 
                      6,177,450
 
7.3%
 
7/31/2007
 
5/24/2008
 
Union Planters Bank
         
                    39,890,812
 
6.4%
 
7/31/2007
 
4/1/2009
 
Total Underlying Debt Outstanding
       
 $ 1,195,570,075
 
5.8%
 
9/5/2008
 
2/7/2013
 
                               
HEDGING INSTRUMENTS
                         
Interest Rate Swaps
                         
 
LIBOR indexed
         
 $            628,000,000
 
5.5%
 
8/5/2011
     
 
BMA indexed
         
                    61,330,000
 
4.1%
 
9/10/2008
     
Total Interest Rate Swaps
         
 $            689,330,000
 
5.4%
 
5/2/2011
     
                               
Interest Rate Caps
                         
 
LIBOR indexed
         
 $                17,936,000
 
6.2%
 
11/13/2009
     
 
BMA indexed
         
                   24,090,000
 
6.0%
 
11/27/2009
     
Total Interest Rate Caps
         
 $               42,026,000
 
6.1%
 
11/21/2009
     
 
Mid-America believes that it has adequate resources to fund its current operations, annual refurbishment of its properties, and incremental investment in new apartment properties. We rely on the efficient operation of the financial markets to finance debt maturities, and are also heavily reliant on the creditworthiness of FNMA, which provided credit enhancement for approximately $854 million of our debt as of June 30, 2007. The interest rate market for FNMA DMBS, which in our experience is highly correlated with three-month LIBOR interest rates, is also an important component of our liquidity and interest rate swap effectiveness. In the event that the FNMA DMBS market becomes less efficient, or the credit of FNMA becomes impaired, we would seek alternative sources of debt financing.

For the six months ended June 30, 2007, Mid-America’s net cash provided by operating activities was in excess of covering funding improvements to existing real estate assets, distributions to unitholders, and dividends paid on common and preferred shares by approximately $4.4 million. This compares to an excess of approximately $9.7 million for the same period in 2006. While Mid-America has sufficient liquidity to permit distributions at current rates through additional borrowings, if necessary, any significant deterioration in operations could result in our financial resources being insufficient to pay distributions to shareholders at the current rate, in which event we would be required to reduce the distribution rate.

 
The following table reflects the Company’s total contractual cash obligations which consists of its long-term debt and operating leases as of June 30, 2007, (dollars in thousands):
 
Contractual
 
Payments Due by Period            
 
Obligations
 
2007
   
2008
   
2009
   
2010
   
2011
   
Thereafter
   
Total
 
Long-Term Debt (1)
  $
2,226
    $
116,583
    $
106,623
    $
121,827
    $
216,962
    $
631,349
    $
1,195,570
 
Operating Lease
   
6
     
12
     
3
     
-
     
-
     
-
     
21
 
Total
  $
2,232
    $
116,595
    $
106,626
    $
121,827
    $
216,962
    $
631,349
    $
1,195,591
 
                                                         
(1) Represents principal payments.
                                         
 
OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2007, and 2006, Mid-America did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. On May 9, 2007, Mid-America entered into a joint venture, Mid-America Multifamily Fund I, LLC. The joint venture was established to acquire multifamily properties. No properties had been acquired by the joint venture as of June 30, 2007. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships. Mid-America does not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with us or our related parties other than those disclosed in Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements Note 14 in the Company’s 2006 Annual Report on Form 10-K.

Mid-America’s investments in real estate joint ventures are unconsolidated and are recorded on the equity method as we do not have a controlling interest.

INSURANCE

Mid-America renegotiated our insurance programs July 1, 2007. Management believes that the property and casualty insurance program in place provides appropriate insurance coverage for financial protection against insurable risks such that any insurable loss experienced would not have a significant impact on Mid-America’s liquidity, financial position or results of operation. Management expects to obtain a reduction in annual policy premiums of approximately $1.5 million from the increased rates experienced at the July 1, 2006, renewal.

INFLATION

Substantially all of the resident leases at our communities allow, at the time of renewal, for adjustments in the rent payable hereunder, and thus may enable us to seek rent increases. Almost all leases are for one year or less. The short-term nature of these leases generally serves to reduce the risk of the adverse effects of inflation.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or Interpretation 48. Interpretation 48 provides clarification concerning the accounting for uncertainty in income taxes in an enterprise’s financial statement in accordance with FASB Statement No. 109, Accounting for Income Taxes.   Interpretation 48 is effective for fiscal years beginning after December 15, 2006. Mid-America adopted Interpretation 48 effective January 1, 2007. The adoption of Interpretation 48 had no material impact on Mid-America’s consolidated financial condition or results of operations taken as a whole.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or Statement 157. Statement 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Statement 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Mid-America does not believe the adoption of Statement 157 will have a material impact on our consolidated financial condition or results of operations taken as a whole.
 

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS

This and other sections of this Quarterly Report contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. These statements include, but are not limited to, statements about anticipated market conditions, expected growth rates of revenues and expenses, planned asset dispositions, disposition pricing, planned acquisitions and developments, property financings, expected interest rates and planned capital expenditures. In some cases, you can identify forward-looking statements by terms including “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Mid-America or any other person that the objectives and plans of Mid-America will be achieved. In evaluating any forward-looking statement, you should specifically consider the information set forth under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, as supplemented herein by Part II, Item 1A: “Risk Factors,” as well as other cautionary statements contained elsewhere in this report, including the matters discussed in “Critical Accounting Policies and Estimates” above.

Item 3.                      Quantitative and Qualitative Disclosures About Market Risk

This information has been omitted as there have been no material changes in Mid-America’s market risk as disclosed in the 2006 Annual Report on Form 10-K except for the changes as discussed under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the “Liquidity and Capital Resources” section, which is incorporated by reference herein.

Item 4.                      Controls and Procedures

MANAGEMENT’S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The management of Mid-America, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to Mid-America’s management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of June 30, 2007, (the end of the period covered by this Quarterly Report on Form 10-Q).

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended June 30, 2007, there were no changes in Mid-America’s internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, Mid-America’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.               Legal Proceedings
None.

Item 1A.                      Risk Factors
As of June 30, 2007, there have been no material changes to the risk factors previously disclosed under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.                      Defaults Upon Senior Securities
None.

Item 4.                      Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of Mid-America was held on May 22, 2007.

Nominees Mary E. McCormick and William B. Sansom were elected to serve as class I directors by a plurality of votes cast at the meeting. Shares on this proposal were voted as follows:
            
       
For
   
Withheld
 
Mary E. McCormick
   
23,649,225
     
280,679
 
William B. Sansom
   
23,616,336
     
313,568
 
 
Ernst & Young LLP was ratified as Mid-America’s independent registered public accounting firm for the 2007 fiscal year by a majority of the shares represented at the meeting. Shares on this proposal were voted as follows:
 
   
For
   
Against
   
Abstain
 
Ernst & Young LLP
   
23,827,527
     
85,839
     
16,538
 
 
 

 
Item 5.                      Other Information
None.

Item 6.                      Exhibits

(a)  
The following exhibits are filed as part of this report.

Exhibit Number
Exhibit Description
10
Limited Liability Company Agreement of Mid-America Multifamily Fund I, LLC dated as of May 9, 2007
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 


Signatures

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


 
MID-AMERICA APARTMENT COMMUNITIES, INC.
   
Date:  August 2, 2007
/s/Simon R.C. Wadsworth
 
Simon R.C. Wadsworth
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)

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Section 2: EX-10 (EXHIBIT 10)

ex10.htm

LIMITED LIABILITY COMPANY AGREEMENT


OF



MID-AMERICA MULTIFAMILY FUND I, LLC

(a Delaware limited liability company)



Dated as of May 9, 2007




THE INTERESTS REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “FEDERAL ACT”), OR THE SECURITIES LAWS OF THE VARIOUS STATES (“STATE LAW”).  THEY HAVE BEEN ISSUED AND SOLD PURSUANT TO AN EXEMPTION FROM THE FEDERAL ACT AND STATE LAW AND MAY NOT, EXCEPT AS SPECIFICALLY PROVIDED HEREIN, BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED BY THE HOLDERS THEREOF AT ANY TIME, AND WHICH MAY BE CONDITIONED UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGING MEMBER THAT SUCH SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION OR QUALIFICATION.  TRANSFER OF AN INTEREST IS PROHIBITED EXCEPT PURSUANT TO REGISTRATION IN ACCORDANCE WITH THE FEDERAL ACT AND EACH RELEVANT STATE LAW OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE FEDERAL ACT AND EACH RELEVANT STATE LAW.  HEDGING TRANSACTIONS INVOLVING AN INTEREST MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE FEDERAL ACT AND ALL APPLICABLE STATE LAWS.



 
ARTICLE 1
DEFINED TERMS
1.1.  Definitions
1.2.  Other Terms
 
ARTICLE 2
 
ORGANIZATION
2.1.  Formation
2.2.  Name
2.3.  Principal Place of Business
2.4.  Term
2.5.  Registered Agent and Registered Office
2.6.  Purpose
2.7.  Investment Period
 
ARTICLE 3
 
CAPITAL
3.1.  Initial Cash Contributions
3.2.  Additional Capital Contributions
3.3.  Company Loan
3.4.  Borrow Funds
3.5.  Wire Transfers
3.6.  Failure to Make Capital Contribution
3.7.  Percentage Interest and Final Sharing Ratio Adjustment.
3.8.  Capital Accounts
3.9.  Interest On and Return of Capital
3.10.  No Further Capital Contribution
3.11.  Waiver of Right of Partition and Dissolution
 
ARTICLE 4
 
PROFITS AND LOSSES
4.1.  Allocation of Profits and Losses
4.2.  Special Allocations
4.3.  Compliance With Section 704(c)
4.4.  Intent of Allocations
4.5.  Member Acknowledgment

 
ARTICLE 5
 
DISTRIBUTIONS
5.1.  Distributions
5.2.  Timing
5.3.  Distribution Limitation Under Act; Reserves
 
ARTICLE 6
 
MANAGEMENT
6.1.  Executive Committee
6.2.  Members of the Executive Committee
6.3.  Major Decisions
 

6.4.  Negative Covenants
6.5.  Conditionally Permitted Actions
6.6.  Managing Member Powers
6.7.  Actions Requiring Unanimous Consent
6.8.  Managing Member Duties.
6.9.  Removal of MAA as the Managing Member.
6.10.  Members
6.11.  Company Expenses.
6.12.  Liability of Members.
6.13.  Fees
6.14.  Memphis Commercial Group
6.15.  Property Management Agreement
 
ARTICLE 7
 
PURCHASE AND PUT OPTIONS
7.1.  Purchase Events
7.2.  Exercise of Purchase Option
7.3.  Closing and Terms
7.4.  Effect on Seller’s Interest
7.5.  Put Option.
7.6.  Term of Options
7.7.  Financing
7.8.  Separateness
7.9.  Tax Exempt Bond Financing
7.10.  Release of Managing Member
7.11.  2530 Participation Certification
 
ARTICLE 8
 
BUY-SELL PROVISIONS
8.1.  Master Buy-Sell Provision
8.2.  Closing
8.3.  Remedies; Coordination of Rights
8.4.  Terms Governing the Escrow Funds
8.5.  Property Buy-Sell Provision
8.6.  Closing
8.7.  Remedies; Coordination of Rights in Connection with Property Buy-Sell
8.8.  Terms Governing the Escrow Funds in Connection with Property Buy-Sell
 
ARTICLE 9
 
BOOKS AND RECORDS
9.1.  Books and Records
9.2.  Accounting and Fiscal Year
9.3.  Reports.
9.4.  The Company Accountant
9.5.  The Budget and Operating Plan.
9.6.  Tax Matters Member
9.7.  Draw Requests
9.8.  Periodic Asset Valuation
 
 

 
ARTICLE 10
TRANSFER OF INTERESTS
10.1.  Transfer Restrictions
10.2.  Permitted Transfers
10.3.  Transferees
10.4.  Section 754 Election
10.5.  Non-Complying Transfers Void
 
ARTICLE 11
 
DISSOLUTION AND TERMINATION
11.1.  Dissolution Events
11.2.  Continuation
11.3.  Method of Liquidation.
11.4.  Deemed Distribution and Recontribution
11.5.  Date of Termination
 
ARTICLE 12
 
INVESTMENT REPRESENTATIONS OF THE PARTNERS
12.1.  Investment Intent
12.2.  Unregistered Company Interests
12.3.  Nature of Investment
12.4.  Legend on Agreement
 
ARTICLE 13
 
MISCELLANEOUS
13.1.  Representations and Warranties of the Members
13.2.  Managing Member Representations and Warranties
13.3.  Appraisal Procedures for Fair Market Value
13.4.  Further Assurances
13.5.  Conflicts
13.6.  Notices
13.7.  Cumulative Remedies
13.8.  Governing Law
13.9.  Arbitration.
13.10.  Attorney Fees
13.11.  Captions
13.12.  Pronouns
13.13.  Successors and Assigns
13.14.  Extension Not a Waiver
13.15.  Creditors and Third Parties Not Benefited
13.16.  Recalculations of Interest
13.17.  Severability
13.18.  Entire Agreement
13.19.  Publicity
13.20.  Counterparts
13.21.  Confidentiality.
13.22.  No Electronic Transactions
13.23.  Exclusivity
 

 
EXHIBITS
 
EXHIBIT A                                -           EXAMPLE IRR CALCULATION
 
EXHIBIT B                                -           FORM OF PROPERTY MANAGEMENT AGREEMENT
 
EXHIBIT C                                -           EXAMPLE PERCENTAGE INTEREST AND FINAL SHARING RATIOADJUSTMENT
 
EXHIBIT D                                -           FORM OF DUE DILIGENCE AND CLOSING CHECKLIST
 
EXHIBIT E                                -           FORM OF SINGLE PURPOSE ENTITY AGREEMENT
 
EXHIBIT F                                -           INVESTMENT CRITERIA

EXHIBIT G                                -           INSURANCE COVERAGE

EXHIBIT H                                –           INITIAL BUDGET AND OPERATING PLAN

EXHIBIT I                                  –     FORM OF CAPITAL CONTRIBUTION CERTIFICATE
 
EXHIBIT J                                -           ORGANIZATIONAL CHART OF THE MANAGING MEMBER AND MAAC
 
EXHIBIT K                                –           ADDITIONAL REPORTING REQUIREMENTS
 
EXHIBIT L                                –           CONSTRUCTION MANAGEMENT SERVICES
 
EXHIBIT M                                –           FORM OF CONSTRUCTION BUDGET
 
 

 
LIMITED LIABILITY COMPANY AGREEMENT
OF
MID-AMERICA MULTIFAMILY FUND I, LLC
 
This LIMITED LIABILITY COMPANY AGREEMENT of MID-AMERICA MULTIFAMILY FUND I, LLC, a Delaware limited liability company, is made and entered into as of May 9, 2007 (the “Formation Date”), by and among MID-AMERICA APARTMENTS, L.P. (“MAA”), a Tennessee limited partnership and FANNIE MAE, a corporation organized under the laws of the United States of America.
 
ARTICLE 1
 
DEFINED TERMS
 
1.1.  Definitions.  As used in this Agreement, the following terms will have the following meanings when used herein with initial capital letters:
 
 
1933 Act” means the Securities Act of 1933, as amended.
 
3.6.2 Contribution” shall have the meaning set forth in Section 3.6.2.
 
 
AAA” shall have the meaning set forth in Section 13.9.2.
 
 
Act” means the Delaware Limited Liability Company Act, as amended from time to time.
 
 
Acquisition Contract” shall have the meaning set forth in Section 6.3.6.
 
 
Additional Capital Contributions” shall have the meaning set forth in Section 3.2.
 
 
Adjusted Capital Account Deficit” means with respect to any Member for any taxable year, the deficit balance, if any, in such Member’s Capital Account as of the end of such taxable year, after increasing such Capital Account by any amounts that such Member is actually obligated or deemed obligated to restore as described in the penultimate sentences of Treasury Regulation Section 1.704-2(g)(1) and Treasury Regulation Section 1.704-2(i)(5), and reducing such Capital Account by any amounts described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).  The definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
 
 
Affected Member” shall have the meaning set forth in Section 6.2.1.
 
 
Affiliate” means, with respect to any Person, any other Person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control, with such Person; provided, however, that no individual Person or any Person who controls, is controlled by, or is under common control with, such individual Person shall be deemed an Affiliate of another Person solely by reason of such individual’s status as a director, officer or employee of such Person; provided further, that, without limiting the foregoing, MAA and MAAC are Affiliates of each other and MAA and MAAC individually and collectively are not Affiliates of Fannie Mae and vice versa. As used in this definition, the terms “control,” “controlling,” “controlled by” or “under common control with” means the possession, directly or indirectly, through one or more intermediaries, of the power to direct or cause the direction of the management and policies of a Person, whether through voting securities, by contract or otherwise.
 


 
Agreement” means this Limited Liability Company Agreement, as it may be amended from time to time.
 
 
Book Basis” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes; provided, however, (a) if property is contributed to the Company, the initial Book Basis of such property shall equal its Fair Market Value on the date of contribution as determined by the Executive Committee; and (b) if the Capital Accounts of the Company are adjusted pursuant to Treasury Regulation Section 1.704-1(b) to reflect the Fair Market Value of any Company asset, the Book Basis of such asset shall be adjusted to equal its respective Fair Market Value as of the time of such adjustment in accordance with such Treasury Regulation.  The Book Basis of all assets shall be adjusted thereafter by depreciation and amortization as provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(g).
 
 
Budget and Operating Plan” shall have the meaning set forth in Section 9.5.1.
 
 
Business Day” means any day other than Saturday, Sunday or other day on which banks in Memphis, Tennessee or Washington, D.C. are required to be closed.
 
 
Buyer” shall have the meaning set forth in Section 7.1.
 
 
Buy-Sell Offer” shall have the meaning set forth in Section 8.1.
 
 
Capital Account” means that capital account maintained for each Member pursuant to Section 3.8.
 
 
Capital Contributions” means, with respect to any Member, the amount of cash, including any Initial Cash Contribution and Additional Capital Contribution, and the initial Book Basis of any property or other asset (net of liabilities assumed by the Company resulting from such contribution, and liabilities to which that property or asset is subject), contributed or deemed contributed to the Company with respect to the Percentage Interest held by the Member.
 
 
Cash Needs” shall have the meaning set forth in Section 3.2.
 
 
Certificate of Formation” shall have the meaning set forth in Section 2.1.
 
 
Change in Control” with respect to MAAC shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 and the regulations promulgated thereunder), acquires, directly or indirectly, in any transaction or series of transactions 40% or more of the Full Voting Power of MAAC or substantially all of the assets of MAAC (a “CIC Threshold Transaction”); provided, however, that a Change in Control shall not be deemed to have occurred if after a CIC Threshold Transaction (1) the Chief Executive Officer and Chief Financial Officer (who held such positions as of the Formation Date or are otherwise approved by all the Members) continue to hold his respective position with MAAC or any surviving entity after a CIC Threshold Transaction, or (2) such CIC Threshold Transaction is a transaction described in Rule 13e-3 under the Securities Exchange Act of 1934 and the Chief Executive Officer and Chief Financial Officer of MAAC (who held such positions as of the Formation Date or are otherwise approved by all the Members) remain in those positions with MAAC or any surviving entity after such CIC Threshold Transaction, (ii) an event occurs in which the Chief Executive Officer, Chief Financial Officer and at least 50% of the directors of MAAC (who held such positions as of the Formation Date or are otherwise approved by all Members) do not continue to hold those positions with MAAC or any surviving entity after such event, or (iii) either of H. Eric Bolton or Simon R.C. Wadsworth is removed as a member of the Executive Committee or either is no longer the Chief Executive Officer or Chief Financial Officer, respectively, provided however that MAAC shall have the right to appoint a successor in place of either H. Eric Bolton or Simon R.C. Wadsworth and if such substitution is reasonably satisfactory to Fannie Mae as set forth in writing to MAA then no Change in Control shall be deemed to have occurred. A Change in Control with respect to MAA means any event (including any sale, assignment, Transfer, merger, consolidation, combination, reorganization, liquidation, division, dividend, stock split or other restructure) which results in (1) MAAC (or an Affiliate of MAAC) no longer controlling MAA, or substantially all the assets owned by MAA, prior to such event or (2) any Change in Control with respect to MAAC.  As used in the previous sentence, the term “controlling” shall have the same meaning as set forth in the definition of Affiliate.
 
 
 


 
 
CIC Threshold Transaction” shall have the meaning set forth in the definition of “Change in Control”.
 
 
Code” means the Internal Revenue Code of 1986, as amended.
 
 
Company” means the company formed and governed by this Agreement.
 
 
Company Accountant” shall have the meaning set forth in Section 9.4.
 
 
Company Indemnitees” shall have the meaning set forth in Section 6.12.2.5.
 
 
Company Loan” shall have the meaning set forth in Section 3.3.
 
 
Company Minimum Gain” shall have the meaning of “partnership minimum gain” set forth in Treasury Regulation Section 1.704-2(d).
 
 
Confidential Information” shall have the meaning set forth in Section 13.21.1 hereof.
 
 
Construction Budget” means a construction, rehabilitation or renovation budget for a particular Property which is based on the form of construction budget attached hereto as Exhibit M which shall separate hard and soft costs expected to be incurred in connection with such Property.
 
 
Construction Management Fee” shall have the meaning set forth in Section 6.13.3 hereof.
 
 
Contributing Member” shall have the meaning set forth in Section 3.6.
 
 
Depreciation” means, for each allocation period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable for federal income tax purposes with respect to an asset for such allocation period, except that if the Book Basis of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such allocation period.  Depreciation shall be an amount that bears the same ratio to such beginning Book Basis as the federal income tax depreciation, amortization, or other cost recovery deduction for such allocation period bears to such beginning adjusted tax basis, provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such allocation period is zero, Depreciation shall be determined with reference to such beginning Book Basis using any reasonable method selected by the Executive Committee.
 
 
Election” shall have the meaning set forth in Section 8.1.3.
 
 
Escrow Fund” shall have the meaning set forth in Section 8.1.1.
 
 
Executive Committee” means the committee formed pursuant to Section 6.1.
 
 
Expenditures” means, for any period, the sum of the total gross expenditures of the Company during such period, including (a) all cash operating expenses, (b) all costs and expenses of any financing and all debt service payments including debt service on Company Loans, (c) all expenditures which are treated as capital expenditures (as distinguished from expense deductions) under GAAP, (d) all real estate taxes, personal property taxes and sales taxes, (e) all deposits of Receipts to the Company’s reserve accounts, and (f) all costs and expenditures related to any acquisition, sale, disposition, financing, refinancing or securitization of a Property;  provided, however, that Expenditures shall not include (i) any payment or expenditure to the extent (A) the sources of funds used for such payment or expenditure are not included in Receipts or (B) such payment or expenditure is paid directly out of any Company reserve account (as opposed to first being deposited into an operating account and then applied to the applicable expense), or (ii) any expenditure properly attributable to the liquidation of the Company.
 
 
Failed Contribution” shall have the meaning set forth in Section 3.6.
 

Fair Market Value” means the highest price available for a particular asset or the Company in an open and unrestricted market between informed, prudent parties, acting at arms length and under no compulsion to act, expressed in terms of money or money’s worth and will disregard any value that might be assigned by a purchaser with a special interest or any discount for minority interest.
 
Fannie Mae” means Fannie Mae, a corporation organized under the laws of the United States of America.
 
 
Fannie Mae Credit Enhanced Bond Loan” shall have the meaning set forth in Section 7.9.2.
 
 
 

 

 
 
Fannie Mae Indemnitees” shall have the meaning set forth in Section 6.12.1 or MAAC.
 
 
Final Sharing Ratio” means with respect to a Member, the percentage set forth under the heading Final Sharing Ratio opposite the name of that Member in Section 3.1 as it may be increased or decreased pursuant to this Agreement.
 
 
Financing” shall have the meaning set forth in Section 7.7.
 
 
Force Majeure” means acts of God, war, terrorism, the inability to obtain labor or materials or reasonable substitutes therefor, newly enacted governmental regulations or controls, a national emergency, strike, labor dispute, adverse weather conditions not reasonably foreseeable, or any other act, event, occasion, circumstance, condition, or occurrence beyond the reasonable control of the Managing Member, provided however, that Force Majeure shall not include any acts, events, occasions, circumstances, conditions or occurrences caused in whole or in part by the Affiliates of Managing Member or any general contractor or its subcontractors engaged by or through Managing Member.
 
 
Formation Date” shall have the meaning given to such term in the first paragraph of this Agreement.
 
 
Full Voting Power” shall mean the right to vote in the election of one or more directors through proxy or by the beneficial ownership of common stock of MAAC or other securities then entitled to vote in the election of one or more directors.  For purposes of calculating the percentage ownership of Full Voting Power of a person, all warrants, options or rights to purchase common stock or other securities of MAAC that would be entitled to vote in the election of directors of MAAC held by all persons shall be deemed to have been exercised and all securities convertible into or exchangeable for MAAC common stock or voting securities, including Class A common units of limited partnership interest in MAA, shall be deemed to have been converted or exchanged, as the case may be (disregarding for such purposes any restrictions on conversion, voting (such as proxies), exchange or exercise), in each case for the maximum number of shares of common stock of MAAC or other securities entitled to then vote in the election of one or more directors.
 
 
GAAP” shall have the meaning set forth in Section 9.2.
 
 
Indemnitee” shall have the meaning set forth in Section 6.12.2.4.
 
 
Initial Cash Contributions” shall have the meaning set forth in Section 3.1.
 
 
Interest” means, with respect to any Member at any time, the interest of such Member in the Company at such time, including the right of such Member to any and all of the benefits to which such Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all of the terms and provisions of this Agreement.
 
 
Investment Criteria” shall have the meaning set forth in Section 2.7.
 
 
IRR” means with respect to contributions (i.e. Capital Contributions) to the Company by a Member and distributions (i.e. distributions made under Sections 5.1 and 11.3) from the Company to a Member, the monthly rate of compounding which satisfies the condition that the sum of the present values of each contribution equals the sum of the present values of each distribution, where each such present value is determined as of the Formation Date.  For purposes of this Agreement, IRR will be calculated by treating each contribution and distribution which occurs during a month as occurring at the beginning of that month and by using the computer program Microsoft EXCEL (Internal Rate of Return Calculation).  Any IRR expressed in this Agreement will be expressed as an annual rate taking into consideration the monthly compounding required to yield such annual rate.  An example IRR calculation in accordance with this definition is attached hereto as Exhibit A.
 
 


 
Liquidating Amount” With respect to a Member, means at the end of any fiscal year or other allocation period, the amount which such Member would then be entitled to receive if, immediately following such fiscal year or other allocation period: (a) all of the assets of the Company (other than cash and claims of the Company for contributions) were sold for cash equal to their respective Book Basis (or, in the case of assets subject to liabilities for which the creditor’s right is limited to assets of the Company, the amounts of such liabilities, if greater than the aggregate Book Basis of such assets); (b) all unconditional obligations to contribute to the Company were collected in full; and (c) the proceeds of such sale and collections, and all other cash of the Company, were distributed as provided in Section 11.3.1.
 
 
Liquidator” shall have the meaning set forth in Section 11.3.1.
 
 
Loan Needs” shall have the meaning set forth in Section 3.3.
 
 
Lock-out Period means the three (3) year period from the Formation Date.
 
 
Loss” means, with respect to the Company, for each taxable year, each item of the Company’s taxable loss or deduction for such taxable year, as determined under Section 703(a) of the Code, and Section 1.703-1 of the Treasury Regulations (for this purpose, all items of deduction and loss required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable loss), but with the following adjustments:
 
 
(a)  Any expenditures of the Company described in Section 705(a)(2)(B) of the Code, including any items treated under Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations as items described in Section 705(a)(2)(B) of the Code, shall be considered an item of taxable deduction or loss;
 
 
(b)  In the event the Book Basis of any Company asset is reduced as a result of an adjustment to Book Basis under Treasury Regulation Section 1.704-1(b)(2)(iv)(f), the amount of such reduction shall be taken into account as loss from the disposition of such asset for purposes of computing Loss;
 
 
(c)  Loss resulting from any disposition of property with respect to which loss is recognized for federal income tax purposes shall be computed by reference to the Book Basis of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Book Basis;
 
 
(d)  Any items which are specially allocated pursuant to Section 4.2 shall not be taken into account in computing Loss; and
 
 
(e)  To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in complete liquidation of a Member’s Interest, the amount of such adjustment shall be treated as an item of loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Losses; and
 
 
(f)  In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable loss or deduction, there shall be taken into account Depreciation for such taxable year or other period.
 
 

 
 
MAA” means Mid-America Apartments, L.P., a Tennessee limited partnership.
 
 
MAAC” means Mid-America Apartment Communities, Inc., a Tennessee corporation.
 
 
Major Decision” shall have the meaning set forth in Section 6.3.
 
 
Managing Member” means MAA (until removed) or any other Person who is selected as the Managing Member in accordance with this Agreement.
 
 
Managing Member Indemnitees” shall have the meaning set forth in Section 6.12.1.2.
 
 
Maximum Contribution Amount” shall have the meaning set forth in Section 3.2.
 
 
Member” means Fannie Mae, MAA or any other Person designated as a Member on the signature pages to this Agreement or who or which is admitted hereafter as a member of the Company in accordance with ARTICLE 10 of this Agreement and applicable law.
 
 
Member Minimum Gain” means “partner minimum gain” as defined in Treasury Regulation Section 1.704-2(i)(2).
 
 
Member Nonrecourse Debt” means “partner nonrecourse debt” as defined in Treasury Regulation Section 1.704-2(b)(4).
 
 
Member Nonrecourse Deductions” means “partner nonrecourse deductions” as defined in Treasury Regulations Section 1.704-2(i)(1).
 
 
Net Cash Flow” means, for any period, the excess of (a) Receipts for such period, over (b) Expenditures for such period.
 
 
Net Profits and Net Losses” means for each taxable year or other period the excess of items of Profit over items of Loss for such period, or the items of Loss over the items of Profit for such period, as appropriate.  Net Profits and Net Losses shall not include items of Profit and Loss allocated pursuant to Section 4.2.
 
 
Non-Contributing Member” shall have the meaning set forth in Section 3.6.
 
 
Non-Offering Member” shall have the meaning set forth in Section 8.5.
 
 
Nonrecourse Debt” shall have the meaning given to the term “nonrecourse liability” by Treasury Regulation Section 1.704-2(b)(3).
 
 
Nonrecourse Deductions” shall have the meaning set forth in Treasury Regulation Section 1.704-2.
 
 
 
Notices” shall have the meaning set forth in Section 13.6.
 

OFAC” shall have the meaning set forth in Section 13.1.6.

Offeree” shall have the meaning set forth in Section 8.1.
 
Offeree Value” shall have the meaning set forth in Section 8.1.2.
 
 
Offering Member” shall have the meaning set forth in Section 8.5.
 
 
Offeror” shall have the meaning set forth in Section 8.1.
 
Offeror Value” shall have the meaning set forth in Section 8.1.2
 
 

 

 
 
Percentage Interest” means, with respect to a Member, that percentage set forth under the heading Percentage Interest opposite the name of that Member on Section 3.1 as it may be increased or decreased pursuant to this Agreement.