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

FORM 10-K

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

For the fiscal year ended December 31, 2005
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    333-44467-01
Essex Portfolio, L.P.
(Exact name of Registrant as Specified in its Charter)

California
77-0369575
  (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)

925 East Meadow Drive
Palo Alto, California  94303
(Address of Principal Executive Offices including Zip Code)
(650) 494-3700
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes [X]   No [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [ ]   No [X]  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                               Yes [X]   No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer.

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 Act).
                                                 Yes [ ]   No [X]
LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part III, Item 15, on page number 39.

DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the Annual Report on Form 10-K: Proxy statement for the annual meeting of stockholders of Essex Property Trust, Inc. to be held May 9, 2006.



Essex Portfolio, L.P.
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I.
Page
    Item 1.
Business
    Item 1A.
Risk Factors
    Item 1B.
Unresolved Staff Comments
    Item 2.
Properties
    Item 3.
Legal Proceedings
    Item 4.
Submission of Matters to a Vote of Security Holders
Part II.
    Item 5.
Market for Registrant's Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities
    Item 6.
Selected Financial Data
    Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
    Item 7A.
Quantitative and Qualitative Disclosures About Market Risks
    Item 8.
Financial Statements and Supplementary Data
    Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
37
    Item 9A.
Controls and Procedures
37
    Item 9B.
Other Information
37
Part III.
    Item 10.
Directors and Executive Officers of the Registrant
    Item 11.
Executive Compensation
    Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    Item 13.
Certain Relationships and Related Transactions
    Item 14.
Principal Accounting Fees and Services
Part IV.
    Item 15.
Exhibits and Financial Statement Schedules
Signatures

PART I
As used herein, the terms “Company” and “Essex” mean Essex Property Trust, Inc., a Maryland real estate investment trust, those entities controlled by Essex Property Trust, Inc., unless the context indicates otherwise and the term “Operating Partnership” refers to Essex Portfolio, L.P., a California limited partnership, formed on March 15, 1994 as to which the Company owns an approximate 90.4% general partnership interest, as of December 31, 2005 (except with regard to Item IA, Risk Factors of this Form 10-K, wherein all reference to the “Company” shall be deemed to be references to the Company and the Operating Partnership, unless the context indicates otherwise).
Forward Looking Statements
This Form 10-K contains forward-looking statement within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1943. Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including Item 1A, Risk Factors of this Form 10-K.
Item 1. Business
OVERVIEW
Essex Portfolio, L.P. (the “Operating Partnership”) is engaged in the ownership, acquisition, development and management of multifamily apartment communities, and effectively holds the assets and liabilities and conducts the operating activities of Essex Property Trust, Inc. (the “Company”). The Company is as a real estate investment trust (“REIT”) and is the sole general partner of the Operating Partnership with a 90.4% general partnership interest as of December 31, 2005. Members of the Company’s Board of Directors, senior management and certain third-party investors own limited partnership interests of approximately 9.6% in the Operating Partnership. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership. The Operating Partnership either controls or has significant influence over the Properties. In this report, the terms “we”, “us” and “our” refer to Essex unless indicated otherwise.
The Company has elected to be treated as a REIT for federal income tax purposes, commencing with the year ended December 31, 1994 as the Company completed an initial public offering on June 13, 1994. In order to maintain compliance with REIT tax rules, the Operating Partnership utilizes taxable REIT subsidiaries (“TRS”) for various revenue generating or investment activities. The TRSs’ are consolidated by the Operating Partnership.
The Operating Partnership is engaged primarily in the ownership, operation, management, acquisition, development and re-development of real estate. Our real estate consists primarily of apartment communities. As of December 31, 2005, the Operating Partnership owned or held an interest in 126 apartment communities, aggregating 26,587 units, located predominantly along the West Coast (collectively, the “Properties”, and individually, a “Property”). Our other properties included three recreational vehicle parks (totaling 562 spaces), three office buildings (totaling approximately 166,340 square feet), which the Operating Partnership primarily occupies and uses as office space, and one manufactured housing community (containing 157 pads). The Operating Partnership currently has three development projects, with 505 units in various stages of development (together with the Properties, the “Portfolio”).

The Company’s and the Operating Partnership’s website address is http://www.essexpropertytrust.com. The Operating Partnership’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are available, free of charge, on our website as soon as practicable after we file the reports with the Securities and Exchange Commission (“SEC”).
BUSINESS OBJECTIVES AND STRATEGIES

The following is a discussion of the Operating Partnership’s business objectives and strategies with respect to real estate investment and management. One or more of these criteria may be amended or rescinded from time to time without stockholder vote.
Business Objectives
The Operating Partnership’s primary business objectives are to increase unitholders’ value by investing in properties located in supply constrained markets, improving operating results and the value of the Operating Partnership’s Properties while maintaining a conservative balance sheet. The Operating Partnership intends to achieve these objectives by:
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·  Pursuing an occupancy and rent rate growth strategy that capitalizes on the desirable locations of our properties;
·  Expanding the Operating Partnership’s Portfolio through acquisitions, development and, when appropriate, re-development of multifamily properties in selected major metropolitan areas;
·  Optimizing financial performance through a portfolio asset allocation program, and to increase or decrease investments in a market based on projected changes in regional economic and local market conditions; and
·  Maintaining a conservative leverage ratio by identifying and utilizing capital resources that provide a lower cost of capital.

The Operating Partnership can not assure that it will achieve its business objectives.

Business Strategies
Research Driven Approach - The Operating Partnership believes that successful real estate investment decisions and portfolio growth begin with extensive regional economic research and local market knowledge. Utilizing a proprietary research model that the Operating Partnership has developed over the last 19 years, it continually assess markets where we currently operate, as well as markets where we would consider future investment opportunities by evaluating:
·  Markets in major metropolitan areas that have regional population in excess of one million people, thereby creating liquidity, which is an important element when modifying the geographic concentration of the Operating Partnership’s portfolio in response to changing market conditions;
·  Demand for housing that is greater than supply driven by: (i) low availability of developable land sites where competing housing could be built; (ii) political growth barriers, such as protected land, urban growth boundaries, and potential lengthy and expensive development permit processes; and (iii) natural limitations to development, such as mountains or waterways;
·  Markets where rental demand is enhanced by expensive for-sale housing; and
·  Housing demand that is based on proximity to jobs, high quality of life and related commuting factors, as well as potential job growth.
Recognizing that all real estate markets are cyclical, the Operating Partnership regularly evaluates the results of its regional economic, as well as its local market research and adjusts the geographic focus of its portfolio accordingly. The Operating Partnership seeks to increase its portfolio allocation in markets projected to have the strongest local economies and to decrease such allocations in markets projected to have declining economic conditions. Likewise, the Operating Partnership also seeks to increase its portfolio allocation in markets that have attractive property valuations and to decrease such allocations in markets that have inflated valuations and low relative yields.
Property Operations - The Operating Partnership manages its Properties by focusing on and marketing strategies that will generate above-average rental growth, tenant retention/satisfaction and long-term asset appreciation. The Operating Partnership intends to achieve this by utilizing the strategies set forth below:
·  
Property Management- The Chief Operating Officer, Divisional Managers, Regional Managers and Area Managers are accountable for the performance and maintenance of the Properties. They supervise, provide training for the on-site managers, manage budgeted expectations against performance, monitor market trends and prepare operating and capital budgets.
·  
Business Planning and Control - Comprehensive business plans are implemented in conjunction with every investment decision. These plans include benchmarks on future financial performance, based on collaborative discussions between on-site managers and senior management.
·  
Development and Redevelopment - The Operating Partnership focus on acquiring and developing multifamily residential communities in supply constrained markets, and redeveloping its existing communities to improve the financial and physical aspects of its communities.

CURRENT BUSINESS ACTIVITIES
Acquisitions
Acquisitions have been a significant growth component of the Operating Partnership’s business. In 2005, the Operating Partnership completed, in addition to acquisitions by the Essex Apartment Value Fund II (“Fund II”) discussed below, a series of acquisitions that added to the Operating Partnership’s overall portfolio.
·  On February 2, 2005, the Operating Partnership acquired Cedar Terrace, a 180-unit apartment community located in Bellevue, Washington for approximately $22.3 million.
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·  On June 18, 2005, the Operating Partnership acquired Mission Hills, a 282-unit apartment community located in Oceanside, California for approximately $50.5 million.
·  On September 28, 2005, the Operating Partnership acquired Marbella, a 60-unit apartment community located in Los Angeles, California for approximately $13.6 million.
In January 2006, the Operating Partnership acquired two apartment communities - Chimney Sweep and CBC, aggregating 239 units, located in Isla Vista, California for a combined price of approximately $57.1 million.
Dispositions
As part of the Operating Partnership’s strategic plan to own quality real estate in supply-constrained markets, the Operating Partnership continually evaluates its Properties and sell those which no longer meet our strategic criteria. The Operating Partnership may use the capital generated from the dispositions to invest in higher-return Properties or repay debts. The Operating Partnership believes that the sale of these Properties will not have a material impact on its future results of operations or cash flows nor will their sale materially affect its ongoing operations. Generally, any impact of earnings dilution resulting from these dispositions will be offset by the positive impact of our acquisitions, development and redevelopment activities.
·  In January 2005, the Operating Partnership sold four non-core assets that were acquired in conjunction with the merger with John M. Sachs, Inc. in 2002. The four non-core assets were: Two small office buildings, located in San Diego, California, aggregating 7,200 square feet, and the Riviera Recreational Vehicle Park and the Riviera Manufactured Home Park, both located in Las Vegas, Nevada, and for which the Operating Partnership had previously entered into a master lease and option agreement with an unrelated entity.
·  In June 2005, we sold the Eastridge Apartments, located in San Ramon, California, for a contract price of approximately $47.5 million. Eastridge was acquired in 1996 for $19.2 million. In conjunction with the sale, $2.2 million of the gain on the sale was deferred because an affiliate of the Operating Partnership originated a participating loan to the buyer in the amount of approximately $2.2 million, which allows the Operating Partnership to financially participate in the buyer’s condominium conversion plan.
·  In January 2006, the Operating Partnership sold the Vista Capri East and Casa Tierra Apartment Communities for approximately $7.0 million.
Development
Development communities are defined as new apartment properties that are being constructed or are newly constructed and in a phase of lease-up and have not reached 95% physical occupancy (stabilized operations). In the first quarter of 2005, the Operating Partnership stabilized the second phase of development at San Marcos, which is located in Richmond, California. Total construction costs for the 120 units were approximately $23.9 million.
In connection with the properties currently under development, the Operating Partnership has entered into contractual construction-related commitments with unrelated third parties. As of December 31, 2005, the Operating Partnership is committed to approximately $96.6 million in estimated development expenditures to complete these projects.
As of December 31, 2005, the Operating Partnership had three development projects in various stages of construction and other pre-development costs in our pipeline with combined estimated costs of $133.7 million.
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The following table sets forth information regarding the Operating Partnership’s development communities at December 31, 2005.
       
As of 12/31/05 ($ millions)
  
       
Estimated
  
Incurred
 
Projected
Development Communities
 
Location
 
Units
  
Project Cost(1)
  
Project Cost
 
Stabilization
Northwest Gateway Los Angeles, CA 275
 
$71.1
 
$16.9 Sep-08
Moorpark Moorpark, CA 200
 
 
43.2
 
 
5.0 Aug-08
Tuscana Tracy, CA 30
 
 
8.5
 
 
4.3 Jan-07
Pre-development costs   
 
 
 
10.9
 
 
10.9 -
Total Development Communities   505
 
$133.7
 
$37.1  
             
(1) Includes incurred costs and estimated costs to complete the development projects.
Redevelopment
Redevelopment is defined as investment on existing Properties with the expectation of increased financial returns through property improvement. During redevelopment certain apartment units typically are not available for rent and, as a result, may have less than stabilized operations. As of December 31, 2005, the Operating Partnership had ownership interests in six redevelopment communities aggregating 1,450 apartment units with estimated redevelopment costs of $36.8 million, of which approximately $23.5 million remains to be expended.
The following table illustrates those redevelopment projects:

       
As of 12/31/05 ($ millions)
       
Estimated
  
Incurred
Redevelopment Communities
 
Location
 
Units
  
Renovation(1)
  
Project Cost
Kings Road Los Angeles, CA 196 $6.1 $3.8
Mira Woods Mira Mesa, CA 355  5.7  2.8
Palisades - Phase I and II Bellevue, WA 192  5.9  2.0
Avondale Woodland Hills, CA446  11.4  3.1
Bridle Trails Kirkland, WA 108  4.5  1.5
Sammamish View Bellevue, WA 153  3.2  0.1
Total Redevelopment Communities   1,450 $36.8 $13.3
           
(1)  Includes incurred costs and estimated costs to complete these redevelopment projects.
Debt Transactions
On February 1, 2005, the Operating Partnership obtained a non-recourse mortgage on a previously unencumbered property in the amount of $21.8 million with a 4.94% fixed interest rate for a 9-year term, maturing in March 2014, with an option to extend the maturity for one year thereafter at a floating rate of 2.4% over one month LIBOR. During the extension period, the loan may be paid in full with no prepayment penalty.
On April 15, 2005, the Operating Partnership obtained two non-recourse mortgage loans on previously unencumbered properties in the aggregate amount of $32.9 million with fixed interest rates of 5.44% that mature on May 1, 2014.
On May 19, 2005, Operating Partnership obtained three non-recourse mortgage loans in the aggregate amount of $12.9 million, secured by second deeds of trusts, with an average interest rate of 5.32% and maturity dates ranging from May 1, 2009 to January 1, 2013.
On July 14, 2005, Operating Partnership obtained a non-recourse mortgage loan on previously unencumbered property in the aggregate amount of $40.3 million with a fixed interest rate of 4.935% for a 10-year term that matures on August 1, 2015.
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During October and November 2005, the Operating Partnership raised $225 million from the sale of exchangeable senior notes (the “Notes”) with a coupon of 3.625% due 2025. On or after November 1, 2020, the Notes will be exchangeable at the option of the holder into cash and, in certain circumstances at the Operating Partnership’s option, shares of the Company’s common stock at an initial exchange price of $103.25 per share subject to certain adjustments. The Notes will also be exchangeable prior to November 1, 2020, but only upon the occurrence of certain specified events. On or after November 4, 2010, the Operating Partnership may redeem all or a portion of the Notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Note holders may require the Operating Partnership to repurchase all or a portion of the Notes at a purchase price equal to the principal amount plus accrued and unpaid interest (including additional interest, if any), on the Notes on November 1, 2010, November 1, 2015 and November 1, 2020.
With the proceeds from the sale of the Notes, the Company repurchased $25 million in common stock and paid down $135 million on the outstanding lines of credit. In part using proceeds from the sale of the Notes, in the fourth quarter of 2005, the Operating Partnership paid-off ten mortgage notes payable totaling $89 million with fixed rates ranging from 6.5% to 7.9%, and the Operating Partnership originated two new mortgage notes payable totaling $35 million with fixed rates of 5.5% and 5.6%.
Derivative Transactions
To hedge the cash flows associated with the refinancings of a portion of the debt that matures in 2007 and 2008 the Operating Partnership entered into the following contracts:
·  On February 16, 2005, a $50.0 million notional forward-starting swap with a commercial bank at a fixed rate of 4.927%, with a settlement date on or before October 1, 2007,
·  On August 18, 2005, a $50.0 million notional forward-starting swap with a commercial bank at a fixed rate of 4.869% and a settlement date on or before October 1, 2008.
We believe that these transactions will be effective in offsetting changes in future cash flows for forecasted transactions and qualify for hedge accounting. The increase in the fair value of these derivatives during 2005 was approximately $660,000 and is reflected in accumulated other comprehensive income in the Operating Partnership’s consolidated financial statements.
On February 22, 2006, the Operating Partnership entered into additional notional forward-starting swaps. The first was for $25.0 million with a commercial bank at a fixed rate of 5.082% and a settlement date on or before January 1, 2009. The second and third swaps are for a total of $100.0 million with two commercial banks at a fixed rate of 5.099% and a settlement date on or before January 1, 2011. These derivatives will be used to economically hedge the cash flows associated with the refinancing of debt that matures in 2008 and 2010, respectively
Equity Transactions
The Company repurchased $25 million of the Company’s common stock in conjunction with our exchangeable bond offering in the fourth quarter of 2005. The Company also granted stock options and certain employees exercised their options pursuant to the Company’s Stock Incentive Plan.
ESSEX APARTMENT VALUE FUNDS
The Operating Partnership and several institutional partners formed Essex Apartment Value Fund (“Fund I”) to broaden the Operating Partnership’s capital alternatives. The Operating Partnershp is a 1% general partner and 20.4% limited partner in Fund I. Fund I was in the process of liquidation as of December 31, 2005. Essex Apartment Value Fund II (“Fund II”) was formed in 2004, and the Operating Partnership is a 1% general partner and 27.2% limited partner. Fund II is the Operating Partnership’s investment vehicle (subject to certain exceptions) until October 31, 2006, or when Fund II’s capital has been invested, whichever occurs first.
Acquisitions
·  On March 2, 2005, Fund II acquired Regency Tower, a 178-unit apartment community located in Oakland, California for approximately $21.2 million.
·  On June 2, 2005, Fund II acquired Tower @ 801, a 173-unit apartment community located in Seattle, Washington for approximately $31.9 million.
·  On September 1, 2005, Fund II acquired Echo Ridge, a 120-unit apartment community located in Snoqualmie, Washington for approximately $17.9 million.
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·  On September 30, 2005, Fund II acquired Morning Run, a 222-unit apartment community located in Monroe, Washington for approximately $19.8 million.
·  On December 23, 2005, Fund II acquired The Enclave, a 637-unit apartment community located in San Jose, California for approximately $127.0 million.
Dispositions
·  On March 31, 2005, the Fund I sold Coronado at Newport South, a 715-unit apartment community located in Newport Beach, California for approximately $106.0 million. 
·  On August 31, 2005, Fund I sold River Terrace, a newly developed 250-unit apartment community located in Santa Clara, California, for approximately $63.0 million.
·  On October 1, 2005, Fund I sold Kelvin Avenue, a land parcel, which is permitted for the development of a 132-unit multifamily community, located in Irvine, California, for approximately $10.5 million.
OFFICES AND EMPLOYEES
The Operating Partnership is headquartered in Palo Alto, California, and has regional offices in Woodland Hills, California; Irvine, California; San Diego, California; Bellevue, Washington; and Portland, Oregon. As of December 31, 2005, the Operating Partnership had approximately 820 employees.
INSURANCE
The Operating Partnership carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses, such as, for example, losses for terrorism or earthquake, for which the Operating Partnership may not have sufficient insurance coverage. Substantially all of the Properties are located in areas that are subject to earthquake activity. The Operating Partnership has obtained earthquake insurance for most the Properties. Most of the Properties are included in an earthquake insurance program that is subject to an aggregate limit of $80.0 million payable upon a covered loss in excess of a $15.0 million self-insured retention amount and a 5% deductible. In the future, the Operating Partnership may selectively exclude properties from being covered by earthquake insurance based on management's evaluation of the following factors: (i) the availability of coverage on terms acceptable to the Operating Partnership, (ii) the location of the property and the amount of seismic activity affecting that region, and, (iii) the age of the property and building codes in effect at the time of construction. Despite earthquake coverage on most of the Operating Partnership's Properties, should a property sustain damage as a result of an earthquake, the Operating Partnership may incur losses due to deductibles, co-payments and losses in excess of applicable insurance, if any.
Although the Operating Partnership may carry insurance for potential losses associated with its properties, employees, residents, and compliance with applicable laws, the Operating Partnership may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage.
COMPETITION
There are numerous housing alternatives that compete with our multifamily properties in attracting residents. These include other multifamily rental apartments and single-family homes that are available for rent in the markets in which the properties are located. The properties also compete for residents with new and existing homes and condominiums that are for sale. If the demand for the Operating Partnership’s properties is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis, rental rates and occupancy may drop, which may have a material adverse affect on the Operating Partnership financial condition and results of operations.
The Operating Partnership faces competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties. Some of the competitors are larger and have greater financial resources than we do. This competition may result in increased costs of properties we acquire and/or develop.
WORKING CAPITAL
The Operating Partnership believes that cash flows generated by its operations, existing cash balances, availability under existing lines of credit, access to capital markets and the ability to generate cash gains from the disposition of real estate are sufficient to meet all of the Operating Partnership’s reasonably anticipated cash needs during 2006.
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The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect the Operating Partnership’s plans for acquisitions, dispositions, development and redevelopment activities.
ENVIRONMENTAL CONSIDERATIONS
See the discussion under the caption, “Possible environmental liabilities” in Item 1A, Risk Factors, for information concerning the potential effect of environmental regulations on the Operating Partnership’s operations.
OTHER MATTERS
Certain Policies of the Operating Partnership
The Operating Partnership intends to continue to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Operating Partnership has in the past five years and may in the future (i) issue securities senior to its Common Stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of Common Stock and/or units of limited partnership interest in the Operating Partnership or affiliated partnerships as partial consideration for property acquisitions. The Operating Partnership from time to time acquires partnership interests in partnerships and joint ventures, either directly or indirectly through subsidiaries of the Operating Partnership, when such entities' underlying assets are real estate. In general, the Operating Partnership does not (i) underwrite securities of other issuers or (ii) actively trade in loans or other investments.
The Operating Partnership invests primarily in multifamily properties that are located in predominantly coastal markets within Southern California, the San Francisco Bay Area, and parts of Pacific Northwest. The Operating Partnership currently intends to continue to invest in multifamily properties in such regions. However, these practices may be reviewed and modified periodically by the Board of Directors and may change these practices without unitholder approval.
Item 1A. Risk Factors
Our business, operating results, cash flows and financial conditions are subject to various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual results to vary materially from recent results or form our anticipated future results.
We depend on our key personnel - Our success depends on our ability to attract and retain executive officers, senior officers and company managers. There is substantial competition for qualified personnel in the real estate industry and the loss of several of our key personnel could have an adverse effect on us.
Debt financing - At December 31, 2005, we had approximately $1.35 billion of indebtedness (including $186.7 million of variable rate indebtedness, of which $152.7 million is subject to interest rate protection agreements). We are subject to the risks normally associated with debt financing, including the following:
·  cash flow may not be sufficient to meet required payments of principal and interest;
·  inability to refinance maturing indebtedness on encumbered properties;
·  the terms of any refinancing may not be as favorable as the terms of existing indebtedness;
·  inability to comply with debt covenants could cause an acceleration of the maturity date; and
·  repaying debt before the scheduled maturity date could result in prepayment penalties.
Uncertainty of our ability to refinance balloon payments - As of December 31, 2005, we had approximately $1.35 billion of mortgage debt, exchangeable bonds and line of credit borrowings, most of which are subject to balloon payments. We do not expect to have sufficient cash flows from operations to make all of these balloon payments. These mortgages, bonds and lines of credit borrowings have the following scheduled principal and balloon payments:
2006--$26.2 million;
2007--$82.0 million;
2008--$155.7 million;
2009--$34.4 million;
2010--$159.3 million;
Thereafter--$872.2 million.
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We may not be able to refinance such mortgage indebtedness, bonds, or lines of credit. The Properties subject to these mortgages could be foreclosed upon or otherwise transferred to the lender. This could cause us to lose income and asset value. We may be required to refinance the debt at higher interest rates or terms of such refinancing may not be as favorable as the terms of existing indebtedness.
Debt financing on Properties may result in insufficient cash flow - Where possible, we intend to continue to use leverage to increase the rate of return on our investments and to provide for additional investments that we could not otherwise make. There is a risk that the cash flow from the properties will be insufficient to meet both debt payment obligations and the distribution requirements of the real estate investment trust provisions of the Internal Revenue Code. We may obtain additional debt financing in the future, through mortgages on some or all of the properties. These mortgages may be recourse, non-recourse, or cross-collateralized.
As of December 31, 2005, Essex had 72 of its 120 consolidated multifamily properties encumbered by debt. Of the 72 properties, 53 are secured by deeds of trust relating solely to those properties. With respect to the remaining 19 properties, there are 4 cross-collateralized mortgages secured by 8 properties, 6 properties, 3 properties and 2 properties, respectively. The holders of this indebtedness will have a claim against these properties and, to the extent indebtedness is cross-collateralized, lenders may seek to foreclose upon properties, which are not the primary collateral for their loan. This may accelerate other indebtedness secured by properties. Foreclosure of properties would reduce our income and asset value.
Risk of rising interest rates - Current interest rates are at historic lows and could potentially increase rapidly, which could result in higher interest expense on our variable rate indebtedness. Prolonged interest rate increases could negatively impact our ability to make acquisitions and develop properties at economic returns on investment and our ability to refinance existing borrowings at acceptable rates.
As of December 31, 2005, we had approximately $186.7 million of long-term variable rate indebtedness bearing interest at floating rates tied to the rate of short-term tax-exempt revenue bonds (which mature at various dates from 2020 through 2034), and $25.0 million of variable rate indebtedness under our lines of credit, bearing interest at the Freddie Mac Reference Rate plus from 0.55% to 0.59%. Approximately $152.7 million of the long-term indebtedness is subject to interest rate cap protection agreements, which may reduce the risks associated with fluctuations in interest rates. The remaining $34.0 million of long-term variable rate indebtedness was not subject to any interest rate cap protection agreements as of December 31, 2005. An increase in interest rates may have an adverse effect on our net income and results of operations.
Risk of losses on interest rate hedging arrangement - Periodically, we have entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, we may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject us to increased credit risks. In order to minimize counterparty credit risk, our policy is to enter into hedging arrangements only with large financial institutions.
Bond compliance requirements may limit income from certain Properties - At December 31, 2005, we had approximately $186.7 million of variable rate tax-exempt financing relating to the Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Huntington Breakers Apartments, Camarillo Oaks Apartments, Fountain Park, Anchor Village and Parker Ranch Apartments. This tax-exempt financing subjects these properties to certain deed restrictions and restrictive covenants. We expect to engage in tax-exempt financings in the future. In addition, the Internal Revenue Code and rules and regulations thereunder impose various restrictions, conditions and requirements excluding interest on qualified bond obligations from gross income for federal income tax purposes. The Internal Revenue Code also requires that at least 20% of apartment units be made available to residents with gross incomes that do not exceed a specified percentage, generally 50%, of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government. In addition to federal requirements, certain state and local authorities may impose additional rental restrictions. These restrictions may limit income from the tax-exempt financed properties if we are required to lower rental rates to attract residents who satisfy the median income test. If Essex does not reserve the required number of apartment homes for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and we may be subject to additional contractual liability.
Adverse effect to property income and value due to general real estate investment risks - Real property investments are subject to a variety of risks.
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The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and the ability to make distributions to stockholders will be adversely affected. The performance of the economy in each of the areas in which the properties are located affects occupancy, market rental rates and expenses. Consequently, the income from the properties and their underlying values may be impacted. The financial results of major local employers may have an impact on the cash flow and value of certain of the properties as well.
Income from the properties may be further adversely affected by, among other things, the following factors:
·  the general economic climate;
·  local economic conditions in which the properties are located, such as oversupply of housing or a reduction in demand for rental housing;
·  the attractiveness of the properties to tenants;
·  competition from other available space; and
·  Essex’s ability to provide for adequate maintenance and insurance.
As leases on the properties expire, tenants may enter into new leases on terms that are less favorable to us. Income and real estate values also may be adversely affected by such factors as applicable laws (e.g., the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing. Real estate investments are relatively illiquid and, therefore, our ability to vary our portfolio promptly in response to changes in economic or other conditions may be quite limited.
Economic environment and impact on operating results - The national economy and the economies of the western states in markets where we operate can impact our operating results. Some of these markets are concentrated in high-tech sectors, which have experienced economic downturns, and could again in the future. Our property type and diverse geographic locations provide some degree of risk mitigation. However, we are not immune to prolonged economic downturns. Although we believe we are well positioned to meet these challenges, it is possible a reduction in rental rates, occupancy levels, property valuations and increases in operating costs such as advertising, turnover and repair and maintenance expense could occur in the event of economic uncertainty.
Risk of Inflation/Deflation - Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses.
Risks that acquisitions will fail to meet expectations - We intend to continue to acquire multifamily residential properties. However, there are risks that acquisitions will fail to meet our expectations. Our estimates of future income, expenses and the costs of improvements or redevelopment that are necessary to allow us to market an acquired property as originally intended may prove to be inaccurate. We expect to finance future acquisitions, in whole or in part, under various forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or related partnerships or additional equity by Essex. The use of equity financing, rather than debt, for future developments or acquisitions could dilute the interest of Essex’s existing stockholders. If we finance new acquisitions under existing lines of credit, there is a risk that, unless we obtain substitute financing, Essex may not be able to secure further lines of credit for new development or such lines of credit may be not available on advantageous terms.
Risks that development activities will be delayed, not completed, and/or not achieve expected results - These risks may reduce the funds available for distribution to Essex’s stockholders. Further, the development of properties is also subject to the general risks associated with real estate investments. For further information regarding these risks, please see “Adverse effect to property income and value due to general real estate investment risks.”
We pursue multifamily residential property development projects and these projects generally require various governmental and other approvals, which have no assurance of being received. Our development activities generally entail certain risks, including the following:
·  funds may be expended and management's time devoted to projects that may not be completed;
·  construction costs of a project may exceed original estimates, possibly making the project economically unfeasible;
·  development projects may be delayed due to, without limitation, adverse weather conditions, labor shortages, or unforeseen complications;
·  occupancy rates and rents at a completed project may be less than anticipated; and
·  costs at a completed development may be higher than anticipated.
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The geographic concentration of our Properties and fluctuations in local markets may adversely impact our financial condition and operating results - We generated significant amounts of rental revenues for the year ended December 31, 2005 from Properties concentrated in Southern California (Los Angeles, Ventura, Orange, San Diego and Riverside counties), Northern California (the San Francisco Bay Area), and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas). As of December 31, 2005, more than half (73%) of our Properties were located in California. This geographic concentration could present risks if local property market performance falls below expectations. The economic condition of these markets could affect occupancy, market rental rates, and expenses, as well as impact the income generated from the Properties and their underlying asset values. The financial results of major local employers also may impact the cash flow and value of certain of the Properties. This could have a negative impact on our financial condition and operating results, which could affect our ability to pay expected dividends to our stockholders.
Competition in the multifamily residential market may adversely affect operations and the rental demand for our Properties - There are numerous housing alternatives that compete with our multifamily properties in attracting residents. These include other multifamily rental apartments and single-family homes that are available for rent in the markets in which the Properties are located. The Properties also compete for residents with new and existing homes and condominiums that are for sale. If the demand for our Properties is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis, rental rates may drop, which may have a material adverse affect on our financial condition and results of operations.
We also face competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties. Some of the competitors are larger and have greater financial resources than we do. This competition may result in increased costs of properties we acquire and/or develop.
Dividend requirements as a result of preferred stock may lead to a possible inability to sustain dividends - The Operating Partnership has approximately $25 million of Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) outstanding. The Series B Preferred Units, the Series D Preferred Units, and the Series F Preferred Stock are collectively referred to as the “Preferred Equity”. The terms of the Series F Preferred Stock and of the preferred stock into which each series of Preferred Units are exchangeable provide for certain cumulative preferential cash distributions per each share of preferred stock. These terms also provide that while such preferred stock is outstanding, Essex cannot authorize, declare, or pay any distributions on the Common Stock, unless all distributions accumulated on all shares of such preferred stock have been paid in full. The distributions payable on such preferred stock may impair Essex’s ability to pay dividends on its Common Stock.
If Essex wishes to issue any Common Stock in the future (including, upon exercise of stock options), the funds required to continue to pay cash dividends at current levels will be increased. Essex’s ability to pay dividends will depend largely upon the performance of the Properties and other properties that may be acquired or developed in the future.
If Essex cannot pay dividends on its stock, Essex’s status as a real estate investment trust may be jeopardized. Our ability to pay dividends on our common stock is further limited by the Maryland General Corporation Law. Under the Maryland General Corporation Law, Essex may not make a distribution on stock if, after giving effect to such distribution, either:
·  we would not be able to pay our indebtedness as it becomes due in the usual course of business; or
·  our total assets would be less than our total liabilities.
Resale of shares pursuant to our effective registration statement may have an adverse effect on the market price of the shares - Pursuant to the acquisition of John M. Sachs, Inc., a real estate company, in December 2002, we issued 2,719,875 shares of common stock, as partial consideration for the acquisition, to the trusts that were the shareholders of that company. In connection with the acquisition, Essex entered into a registration rights agreement with these trusts, pursuant to which in January 2003 we filed a registration statement on Form S-3 in order to enable the resale of these shares of common stock. In an amendment to this registration statement filed in April 2003, we also registered, pursuant to certain registration rights, 50,000 shares of common stock which are issuable to the trusts in connection with certain contractual obligations and 2,270,490 shares of common stock which are issuable upon exchange of limited partnership interests in the Operating Partnership. These limited partnership interests are held by senior members of our management, certain members of our Board of Directors and certain outside investors, or the Operating Partnership holders, and comprise approximately 9.6% of the limited partnership interests of the Operating Partnership as of December 31, 2005. In the 2003 registration statement, we registered, pursuant to certain registration rights, 1,473,125 shares of common stock, which are issuable upon redemption of all of the limited partnership interests in such real estate partnerships.
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In total, this 2003 registration statement covers in aggregate 6,513,490 shares of our common stock. In January 2006, we filed registration statements that cover (1) the resale of up to 142,076 shares issuable in connection with our Waterford and Vista Belvedere acquisitions and (2) the resale of shares issuable in connection with the exchange rights of our 3.625% Senior Exchangeable Notes, as to which there is a principal amount of $225 million outstanding. The resale of the shares of common stock pursuant to these various registration statements may have an adverse effect on the market price of our shares.
The exchange and repurchase rights of Exchangeable Senior Notes may be detrimental to holders of common stock - The Operating Partnership has $225 million principal amount of 3.625% Exchangeable Senior Notes (the “Notes”) outstanding which mature on November 1, 2025. The Notes are exchangeable into the Company's common shares on or after November 1, 2020 or prior to November 1, 2020 under certain circumstances. The Notes are redeemable at the Operating Partnership's option for cash at any time on or after November 4, 2010 and are subject to repurchase for cash at the option of the holder on November 1st in the years 2010, 2015 and 2020, or upon the occurrence of certain events. The Notes are senior unsecured and unsubordinated obligations of the Operating Partnership. The exchange of Notes for common stock would dilute stockholder ownership in the Company, and could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. If the Notes are not exchanged, the repurchase rights of holders of the Notes may discourage or impede transactions that might otherwise be in the interest of holders of common stock. Further, these repurchase rights might be triggered in situations where Essex needs to conserve its cash reserves, in which event such repurchase might adversely affect Essex and its common holders.
Our Chairman is involved in other real estate activities and investments, which may lead to conflicts of interest - Our Chairman, George M. Marcus is not an employee of Essex, and is involved in other real estate activities and investments, which may lead to conflicts of interest. Mr. Marcus owns interests in various other real estate-related businesses and investments. He is the Chairman of The Marcus & Millichap Company, or “TMMC”, which is a holding company for certain real estate brokerage and services companies. TMMC has an interest in Pacific Property Company, a company that invests in West Coast multifamily residential properties. In 1999 we sold an office building to TMMC, which Essex previously occupied as its corporate headquarters.
Mr. Marcus has agreed not to divulge any information that may be received by him in his capacity as Chairman of Essex to any of his affiliated companies and that he will abstain his vote on any and all resolutions by the Essex Board of Directors regarding any proposed acquisition and/or development of a multifamily property where it appears that there may be a conflict of interest with any of his affiliated companies.  Notwithstanding this agreement, Mr. Marcus and his affiliated entities may potentially compete with us in acquiring and/or developing multifamily properties, which competition may be detrimental to us. In addition, due to such potential competition for real estate investments, Mr. Marcus and his affiliated entities may have a conflict of interest with us, which may be detrimental to the interests of Essex’s stockholders.
The influence of executive officers, directors and significant stockholders may be detrimental to holders of common stock - As of December 31, 2005, George M. Marcus, the Chairman of our Board of Directors, wholly or partially owned 1,752,111 shares of common stock (including shares issuable upon exchange of limited partnership interests in the Operating Partnership and certain other partnerships and assuming exercise of all vested options). This represents approximately 7.6% of the outstanding shares of our common stock. Mr. Marcus currently does not have majority control over us. However, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions. Consequently, his influence could result in decisions that do not reflect the interests of all our stockholders.
Under the partnership agreement of the Operating Partnership, the consent of the holders of limited partnership interests is generally required for any amendment of the agreement and for certain extraordinary actions. Through their ownership of limited partnership interests and their positions with us, our directors and executive officers, including Mr. Marcus and Mr. William A. Millichap, a director of Essex, have substantial influence on us. Consequently, their influence could result in decisions that do not reflect the interests of all stockholders.
The voting rights of preferred stock may allow holders of preferred stock to impede actions that otherwise benefit holders of common stock - In general, the holders of Series F Preferred stock and of the preferred stock into which our preferred units are exchangeable do not have any voting rights. However, if full distributions are not made on any outstanding preferred stock for six quarterly distributions periods, the holders of preferred stock who have not received distributions, voting together as a single class, will have the right to elect two additional directors to serve on Essex’s Board of Directors. These voting rights continue until all distributions in arrears and distributions for the current quarterly period on the preferred stock have been paid in full. At that time, the holders of the preferred stock are divested of these voting rights, and the term and office of the directors so elected immediately terminates.
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These voting rights of the preferred stock may allow holders of preferred stock to impede or veto actions that would otherwise benefit the holders of Essex’s Common Stock. While any shares of Series F Preferred Stock or shares of preferred stock into which the preferred units are exchangeable are outstanding, Essex may not, without the consent of the holders of two-thirds of the outstanding shares of each series of preferred stock, each voting separately as a single class;
·  authorize or create any class of series of stock that ranks senior to such preferred stock with respect to the payment of dividends, rights upon liquidation, dissolution or winding-up of our business;
·  amend, alter or repeal the provisions of Essex’s Charter or Bylaws, that would materially and adversely affect the rights of such preferred stock; or
·  in the case of the preferred stock into which our preferred units are exchangeable, merge or consolidate with another entity or transfer substantially all of its assets to another entity, except if such preferred stock remains outstanding with the surviving entity and has the same terms and in certain other circumstances.
The redemption rights of the Series B preferred units, Series D preferred units and Series F preferred stock may be detrimental to holders of Essex common stock - Upon the occurrence of one of the following events, the terms of the Operating Partnership’s Series B and D Preferred Units require it to redeem all of such units and the terms of Essex’s Series F Preferred Stock provide the holders of the majority of the outstanding Series F Preferred Stock the right to require Essex to redeem all of such stock:
·  Essex completes a “going private” transaction and its common stock is no longer registered under the Securities Exchange Act of 1934, as amended;
·  Essex completes a consolidation or merger or sale of substantially all of its assets and the surviving entity’s debt securities do not possess an investment grade rating; or
·  Essex fails to qualify as a REIT.
The aggregate redemption price of the Series B Preferred Units would be $80 million, the aggregate redemption price of the Series D Preferred Units would be $50 million and the aggregate redemption price of the Series F Preferred Stock would be $25 million, plus, in each case, any accumulated distributions.
These redemption rights may discourage or impede transactions that might otherwise be in the interest of holders of common stock. Further, these redemption rights might trigger situations where Essex needs to conserve its cash reserves, in which event such redemption might adversely affect Essex and its common holders.
Maryland business combination law may not allow certain transactions between Essex and its affiliates to proceed without compliance with such law - The Maryland General Corporation Law establishes special requirements for “business combinations” between a Maryland corporation and “interested stockholders” unless exemptions are applicable. An interested stockholder is any person who beneficially owns ten percent or more of the voting power of the then-outstanding voting stock.
The law also requires a supermajority stockholder vote for such transactions. This means that the transaction must be approved by at least:
·  80% of the votes entitled to be cast by holders of outstanding voting shares; and
·  66% of the votes entitled to be cast by holders of outstanding voting shares other than shares held by the interested stockholder with whom the business combination is to be effected.
However, as permitted by the statute, the Board of Directors of Essex irrevocably has elected to exempt any business combination by us, George M. Marcus, William A. Millichap, who are the chairman and a director of Essex, respectively, and TMMC or any entity owned or controlled by Messrs. Marcus and Millichap and TMMC. Consequently, the super-majority vote requirement described above will not apply to any business combination between us and Mr. Marcus, Mr. Millichap, or TMMC. As a result, we may in the future enter into business combinations with Messrs. Marcus and Millichap and TMMC, without compliance with the super-majority vote requirements and other provisions of the Maryland General Corporation Law.
Anti-takeover provisions contained in the Operating Partnership agreement, charter, bylaws, and certain provisions of Maryland law could delay, defer or prevent a change in control - While Essex is the sole general partner of the Operating Partnership, and generally has full and exclusive responsibility and discretion in the management and control of the Operating Partnership, certain provisions of the Operating Partnership agreement place limitations on Essex’s ability to act with respect to the Operating Partnership.
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Such limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interest of the stockholders or that could otherwise adversely affect the interest of Essex’s stockholders.
The partnership agreement provides that if the limited partners own at least 5% of the outstanding units of limited partnership interest in the Operating Partnership, Essex cannot, without first obtaining the consent of a majority-in-interest of the limited partners in the Operating Partnership, transfer all or any portion of our general partner interest in the Operating Partnership to another entity. Such limitations on Essex’s ability to act may result in our being precluded from taking action that the Board of Directors believes is in the best interests of Essex’s stockholders. As of December 31, 2005, George M. Marcus held or controlled more than 50% of the outstanding units of limited partnership interest in the Operating Partnership, allowing such actions to be blocked the limited partner.
Essex’s Charter authorizes the issuance of additional shares of common stock or preferred stock and the setting of the preferences, rights and other terms of such preferred stock without the approval of the holders of the common stock. We may establish one or more series of preferred stock that could delay, defer or prevent a transaction or a change in control. Such a transaction might involve a premium price for our stock or otherwise be in the best interests of the holders of common stock. Also, such a class of preferred stock could have dividend, voting or other rights that could adversely affect the interest of holders of common stock.
Essex’s Charter, as well as Essex’s stockholder rights plan, contains other provisions that may delay, defer or prevent a transaction or a change in control that might be in the best interest of Essex’s stockholders. Essex’s stockholder rights plan is designed, among other things, to prevent a person or group from gaining control of us without offering a fair price to all of Essex’s stockholders. The Bylaws may be amended by the Board of Directors to include provisions that would have a similar effect, although Essex presently has no such intention. The Charter contains ownership provisions limiting the transferability and ownership of shares of capital stock, which may have the effect of delaying, deferring or preventing a transaction or a change in control. For example, subject to receiving an exemption from the Board of Directors, potential acquirers may not purchase more than 6% in value of the stock (other than qualified pension trusts which can acquire 9.9%). This may discourage tender offers that may be attractive to the holders of common stock and limit the opportunity for stockholders to receive a premium for their shares of common stock.
The Maryland General Corporations Law restricts the voting rights of shares deemed to be “control shares.” Under the Maryland General Corporations Law, “control shares” are those which, when aggregated with any other shares held by the acquirer, entitle the acquirer to exercise voting power within specified ranges. Although the Bylaws exempt Essex from the control share provisions of the Maryland General Corporations Law, the Board of Directors may amend or eliminate the provisions of the Bylaws at any time in the future. Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the Maryland General Corporations Law not only to control shares which may be acquired in the future, but also to control shares previously acquired. If the provisions of the Bylaws are amended or eliminated, the control share provisions of the Maryland General Corporations Law could delay, defer or prevent a transaction or change in control that might involve a premium price for the stock or otherwise be in the best interests of Essex’s stockholders.
Essex’s joint ventures and joint ownership of properties and partial interests in corporations and limited partnerships could limit Essex’s ability to control such Properties and partial interests - Instead of purchasing properties directly, we have invested and may continue to invest as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, it is possible that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests, or our policies or objectives. Consequently, a co-venturer’s actions might subject property owned by the joint venture to additional risk. Although we seek to maintain sufficient influence of any joint venture to achieve its objectives, we may be unable to take action without our joint venture partners’ approval, or joint venture partners could take actions binding on the joint venture without consent. Should a joint venture partner become bankrupt, we could become liable for such partner’s share of joint venture liabilities.
From time to time, we, through the Operating Partnership, invest in corporations, limited partnerships, limited liability companies or other entities that have been formed for the purpose of acquiring, developing or managing real property. In certain circumstances, the Operating Partnership’s interest in a particular entity may be less than a majority of the outstanding voting interests of that entity. Therefore, the Operating Partnership’s ability to control the daily operations of such an entity may be limited. Furthermore, the Operating Partnership may not have the power to remove a majority of the board of directors (in the case of a corporation) or the general partner or partners (in the case of a limited partnership) of such an entity in the event that its operations conflict with the Operating Partnership’s objectives. The Operating Partnership may not be able to dispose of its interests in such an entity. In the event that such an entity becomes insolvent, the Operating Partnership may lose up to its entire investment in and any advances to the entity.
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We have and in the future may enter into transactions that could require us to pay the tax liabilities of partners, which contribute assets into joint ventures or the Operating Partnership, in the event that certain taxable events, which are within our control, occur. Although we plan to hold the contributed assets or defer recognition of gain on their sale pursuant to the like-kind exchange rules under Section 1031 of the Internal Revenue Code, we can provide no assurance that we will be able to do so and if such tax liabilities were incurred they can expect to have a material impact on our financial position.
Dedicated investment activities and other factors specifically related to Fund II - Fund II involves risks to us such as the following:
·  our partners in Fund II might remove Essex as the general partner of Fund II;
·  our partners in Fund II might become bankrupt (in which event we might become generally liable for the liabilities of Fund II);
·  have economic or business interests or goals that are inconsistent with our business interests or goals;
·  fail to fund capital commitments as contractually required; or
·  fail to approve decisions regarding Fund II that are in our best interest.
We will, however, generally seek to maintain sufficient influence over Fund II to permit it to achieve its business objectives.
Investments in mortgages and other real estate securities - We may invest in securities related to real estate, which could adversely affect our ability to make distributions to stockholders. We may purchase securities issued by entities, which own real estate and invest in mortgages or unsecured debt obligations. These mortgages may be first, second or third mortgages that may or may not be insured or otherwise guaranteed. In general, investments in mortgages include the following risks:
·  that the value of mortgaged property may be less than the amounts owed, causing realized or unrealized losses;
·  the borrower may not pay indebtedness under the mortgage when due, requiring us to foreclose, and the amount recovered in connection with the foreclosure may be less than the amount owed;
·  that interest rates payable on the mortgages may be lower than our cost of funds; and
·  in the case of junior mortgages, that foreclosure of a senior mortgage would eliminate the junior mortgage.
If any of the above were to occur, cash flows from operations and our ability to make expected dividends to stockholders could be adversely affected.
Possible environmental liabilities - Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on, in, to or migrating from such property. Such laws often impose liability without regard as to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s or operator’s ability to sell or rent such property or to borrow using such property as collateral. Persons exposed to such substances, either through soil vapor or ingestion of the substances may claim personal injury damages. Persons who arrange for the disposal or treatment of hazardous or toxic substances or wastes also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility to which such substances or wastes were sent, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials (“ACMs”) into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Operating Partnership could be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries of persons and property.
Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. We carry certain limited insurance coverage for this type of environmental risk. We have conducted environmental studies which revealed the presence of groundwater contamination at certain properties. Such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination.
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The environmental studies noted that certain properties are located adjacent to any possible down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. In general, in connection with the ownership, operation, financing, management and development of real properties, we may be potentially liable for removal or clean-up costs, as well as certain other costs and environmental liabilities. We may also be subject to governmental fines and costs related to injuries to persons and property.
Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Operating Partnership has been sued for mold related matters and has settled some, but not all, such matters, which matters remain unresolved and pending. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Operating Partnership has, however, purchased pollution liability insurance, which includes limited coverage for mold, although the insurance may not cover all pending or future mold claims. The Operating Partnership has adopted programs designed to manage the existence of mold in its properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property. The Operating Partnership cannot assure you that it will not be sued in the future for mold related matters not can it assure you that the liabilities resulting from such current or future mold related matters will not be substantial. The costs of carrying insurance to address potential mold related claims may also be substantial.
California has enacted legislation commonly referred to as “Proposition 65” requiring that “clear and reasonable” warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity, including tobacco smoke. Although we have sought to comply with Proposition 65 requirements, we cannot assure you that we will not be adversely affected by litigation relating to Proposition 65.
Methane gas is a naturally-occurring gas that is commonly found below the surface in several areas, particularly in the Southern California coastal areas.  Methane is a non-toxic gas, but can be ignitable in confined spaces.  Although naturally-occurring, methane gas is not regulated at the state or federal level, some local governments, such as the County of Los Angeles, have imposed requirements that new buildings install detection systems in areas where methane gas is known to be located.  Methane gas is also associated with certain industrial activities, such as former municipal waste landfills. Radon is also a naturally-occurring gas that is found below the surface. The Operating Partnership cannot assure you that it will not be adversely affected by costs related to its compliance with methane gas related requirements or litigation costs related to methane or radon gas.
Except with respect to three Properties, the Operating Partnership has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties. The Operating Partnership has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the properties formerly owned by the Operating Partnership. No assurance can be given that existing environmental studies with respect to any of the Properties reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Operating Partnership, or that a material environmental condition does not exist as to any one or more of the Properties. The Operating Partnership has limited insurance coverage for the types of environmental liabilities described above.
General uninsured losses - We have a comprehensive insurance program covering our property and operating activities. There are, however, certain types of extraordinary losses for which we may not have insurance. Accordingly, we may sustain uninsured losses due to insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess of applicable coverage.
Changes in real estate tax and other laws - Generally we do not directly pass through costs resulting from changes in real estate tax laws to residential property tenants. We also do not generally pass through increases in income, service or other taxes, to tenants under leases. These costs may adversely affect funds from operations and the ability to make distributions to stockholders. Similarly, compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing may result in significant unanticipated expenditures, which would adversely affect funds from operations and the ability to make distributions to stockholders.
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Changes in financing policy; no limitation on debt - We have adopted a policy of maintaining a debt-to-total-market-capitalization ratio of less than 50%. The calculation of debt-to-total-market-capitalization is as follows: total property indebtedness divided by the sum of total property indebtedness plus total equity market capitalization. As used in this calculation, total equity market capitalization is equal to the aggregate market value of the outstanding shares of common stock (based on the greater of current market price or the gross proceeds per share from public offerings of the outstanding shares plus any undistributed net cash flow), assuming the conversion of all limited partnership interests in the Operating Partnership into shares of common stock and the gross proceeds of the preferred units. Based on this calculation (including the current market price and excluding undistributed net cash flow), our debt-to-total-market-capitalization ratio was approximately 35% as of December 31, 2005.
Our organizational documents do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, the Board of Directors of Essex could change current policies and the policies of the Operating Partnership regarding indebtedness. If we changed these policies, we could incur more debt, resulting in an increased risk of default on our obligations and the obligations of the Operating Partnership, and an increase in debt service requirements that could adversely affect our financial condition and results of operations. Such increased debt could exceed the underlying value of the properties.
We are subject to certain tax risks -We have elected to be taxed as a REIT under the Internal Revenue Code. Our qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. Although we intend that its current organization and method of operation enable it to qualify as a REIT, it cannot assure you that it so qualifies or that it will be able to remain so qualified in the future. Future legislation, new regulations, administrative interpretations or court decisions (any of which could have retroactive effect) could adversely affect our ability to qualify as a REIT or adversely affect its stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, and would not be allowed to deduct dividends paid to its shareholders in computing its taxable income. We may also be disqualified from treatment as a REIT for the four taxable years following the year in which it failed to qualify. The additional tax liability would reduce our net earnings available for investment or distribution to stockholders, and we would no longer be required to make distributions to its stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.

We have established several taxable REIT subsidiaries. Despite our qualifications as a REIT, our taxable REIT subsidiaries must pay U.S. federal income tax on their taxable income. While we will attempt to ensure that our dealings with taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, or our taxable REIT subsidiaries may be denied deductions, to the extent its dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature. No assurances can be given that our dealings with our taxable REIT subsidiaries will be arm’s length in nature.
From time to time, we may transfer or otherwise dispose of some of our properties. Under the Internal Revenue Code, any gain resulting from transfers of Properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to Essex from the prohibited transaction and our ability to retain future gains on real property sales may be jeopardized. Income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT for U.S. federal income tax purposes. Therefore, no assurances can be given that we will be able to satisfy the income tests for qualification as a REIT.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
The Operating Partnership’s core apartment portfolio as of December 31, 2005 (including partial ownership interests) was comprised of 126 multifamily properties (comprising 26,587 apartment units), of which 13,382 units are located in Southern California, 6,557 units are located in
16
the San Francisco Bay Area, 5,471 units are located in the Seattle Metropolitan Area, and 875 units are located in the Portland Metropolitan Area. The Operating Partnership’s multifamily properties accounted for 99% of the Operating Partnership’s property revenues for the year ended December 31, 2005.
Occupancy Rates
The 126 apartment communities had an average Same-Properties occupancy (as defined in Item 7), based on “financial occupancy,” during the year ended December 31, 2005, of approximately 96.9%. With respect to stabilized multifamily properties with sufficient operating history, occupancy figures are based on financial occupancy (the percentage resulting from dividing actual rental revenue by total possible rental revenue). Actual rental revenue represents contractual revenue pursuant to leases without considering delinquency and concessions. Total possible rental revenue represents the value of all apartment units, with occupied units valued at contractual rental rates pursuant to leases and vacant units valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates as disclosed by other REITs may not be comparable to our calculation of financial occupancy.
As of December 31, 2005, the headquarters building was 100% occupied by the Operating Partnership and the Southern California office building was 99% occupied, based on physical occupancy. With respect to office buildings, occupancy figures are based on “physical occupancy” which refers to the percentage resulting from dividing leased and occupied square footage by rentable square footage. With respect to recreational vehicle parks, manufactured housing communities, or multifamily properties which have not yet stabilized or have insufficient operating history, occupancy figures are based on “physical occupancy” which refers to the percentage resulting from dividing leased and occupied units by rentable units.
For the year ended December 31, 2005, none of the Operating Partnership’s Properties had book values equal to 10% or more of total assets of the Operating Partnership or gross revenues equal to 10% or more of aggregate gross revenues of the Operating Partnership.
Multifamily Residential Properties
The Operating Partnership’s apartment communities are generally suburban garden apartments and town homes comprising multiple clusters of two and three story buildings situated on three to fifteen acres of land. The multifamily properties have on average 210 units, with a mix of studio, one, two and some three-bedroom units. A wide variety of amenities are available at each apartment community, including covered parking, fireplaces, swimming pools, clubhouses with complete fitness facilities, volleyball and playground areas and tennis courts.
The Operating Partnership selects, trains and supervises a full team of on-site service and maintenance personnel. The Operating Partnership believes that the following primary factors enhance our ability to retain tenants:
·  well built communities that have been well maintained since acquisition; and
·  proactive customer service approach.
Office Buildings
The Operating Partnership’s corporate headquarters is located in a two-story office building with approximately 17,400 square feet located at 925 East Meadow Drive, Palo Alto, California. The Operating Partnership acquired this property in 1997. The Operating Partnership also owns an office building in Southern California (Woodland Hills), comprised of approximately 38,940 square feet building, of which the Operating Partnership occupies approximately 11,200 square feet at December 31, 2005. The building has nine third party tenants occupying approximately 27,400 feet. The largest single tenant occupies approximately 10,900 square feet. The Operating Partnership acquired this property in 2001. The Operating Partnership has a mortgage loan receivable on an office building with approximately 110,000 square feet located in Irvine, California, which is consolidated under FIN 46R.
Recreational Vehicle Parks and Manufactured Housing Community
The Operating Partnership owns three recreational vehicle parks (comprising of 562 spaces), acquired in the Operating Partnership’s December 2002 acquisition of John M. Sachs, Inc., located in El Cajon and San Jaciento, California. The Operating Partnership owns one manufactured housing community (containing 157 sites), acquired in the Operating Partnership’s December 2002 acquisition of John M. Sachs, Inc., located in Vista, California.
17
The following tables describe the Operating Partnership’s Properties as of December 31, 2005. The first table describes the Operating Partnership’s multifamily residential properties and the second table describes the Operating Partnership’s other real estate assets.
                               
Rentable
      
      
Square
 
Year
 
Year
  
Multifamily Residential Properties (1)
 
Location
 
Units
 
Footage
 
Built
 
Acquired
 
Occupancy(2)
Southern California
            
Alpine Country Alpine, CA 108 81,900 1986 2002 94%
Alpine Village Alpine, CA 306 254,400 1971 2002 96%
Barkley Apartments(3)(4) Anaheim, CA 161 139,800 1984 2000 97%
Vista Pointe(5) Anaheim, CA 286 242,400 1968 1985 94%
Bonita Cedars Bonita, CA 120 120,800 1983 2002 96%
Camarillo Oaks Camarillo, CA 564 459,000 1985 1996 94%
Mountain View Camarillo, CA 106 83,900 1980 2004 97%
Cambridge Chula Vista, CA 40 22,100 1965 2002 95%
Woodlawn Colonial Chula Vista, CA 159 104,500 1974 2002 97%
Mesa Village Clairemont, CA 133 43,600 1963 2002 98%
Parcwood(6) Corona, CA 312 270,000 1989 2004 95%
Casa Tierra El Cajon, CA 40 28,700 1972 2002 97%
Coral Gardens El Cajon, CA 200 182,000 1976 2002 95%
Tierra del Sol/Norte El Cajon, CA 156 117,000 1969 2002 97%
Grand Regency Escondido, CA 60 42,400 1967 2002 99%
Valley Park(7) Fountain Valley, CA 160 169,700 1969 2001 98%
Capri at Sunny Hills(7) Fullerton, CA 100 128,100 1961 2001 98%
Wilshire Promenade(8) Fullerton, CA 149 128,000 1992(8) 1997 99%
Montejo(7) Garden Grove, CA 124 103,200 1974 2001 99%
Hampton Court (Columbus) Glendale, CA 83 71,500 1974(9) 1999 98%
Hampton Place (Loraine) Glendale, CA 132 141,500 1970(10) 1999 98%
Devonshire Hemet, CA 276 207,200 1988 2002 94%
Huntington Breakers Huntington Beach, CA 342 241,700 1984 1997 97%
Hillsborough Park La Habra, CA 235 215,500 1999 1999 99%
Trabuco Villas Lake Forest, CA 132 131,000 1985 1997 98%
Marbrisa Long Beach, CA 202 122,800 1987 2002 99%
Pathways Long Beach, CA 296 197,700 1975 1991 99%
Bunker Hill Los Angeles, CA 456 346,600 1968 1998 97%
City Heights(5) Los Angeles, CA 687 424,100 1968 2000 97%
Cochran Apartments Los Angeles, CA 58 51,400 1989 1998 99%
Kings Road Los Angeles, CA 196 132,100 1979(11) 1997 98%
MarbellaLos Angeles, CA 60 50,108 1991 2005 91%
Park Place Los Angeles, CA 60 48,000 1988 1997 99%
Windsor Court Los Angeles, CA 58 46,600 1988 1997 99%
Marina City Club(12) Los Angeles, CA 101 127,200 1971 2004 97%
Mirabella Marina Del Rey, CA 188 176,800 2000 2000 97%
Mira Woods Villa Mira Mesa, CA 355 262,600 1962(13) 2002 96%
Hillcrest Park (Mirabella) Newbury Park, CA 608 521,900 1973(14)(15) 1998 97%
Fairways(16) Newport Beach, CA 74 107,100 1972 1999 93%
Country Villas Oceanside, CA 180 179,700 1976 2002 98%
Mission Hills Oceanside, CA 282 244,000 1984 2005 97%
Mariners Place Oxnard, CA 105 77,200 1987 2000 97%
Tierra Vista(17) Oxnard, CA 404 387,100 2001 2001 96%
Monterey Villas (Village Apartments) Oxnard, CA 122 122,100 1974(18) 1997 96%
Monterra del Mar (Windsor Terrace) Pasadena, CA 123 74,400 1972(19) 1999 98%
Monterra del Rey (Glenbrook) Pasadena, CA 84 73,100 1972(20) 1999 98%
Monterra del Sol (Euclid) Pasadena, CA 85 69,200 1972(21) 1999 98%
Villa Angelina(7) Placentia, CA 256 217,600 1970 2001 98%
Fountain Park Playa Vista, CA 705 608,900 2002 2004 92%
Highridge(7) Rancho Palos Verdes, CA255 290,200 1972 1997 95%
18
      
Rentable
      
      
Square
 
Year
 
Year
  
 
Location
 
Units
 
Footage
 
Built
 
Acquired
 
Occupancy(2)
Southern California (continued)
            
Bluffs II, The(22) San Diego, CA 224 126,700 1974 1997 98%
Emerald Palms San Diego, CA 152 133,000 1986 2002 96%
Summit Park San Diego, CA 300 229,400 1972 2002 97%
Vista Capri - East San Diego, CA 26 16,800 1967 2002 97%
Vista Capri - North San Diego, CA 106 51,800 1975 2002 97%
Hearthstone(7) Santa Ana, CA 140 154,800 1970 2001 98%
Treehouse(7) Santa Ana, CA 164 135,700 1970 2001 96%
Carlton Heights Santee, CA 70 48,400 1979 2002 98%
Meadowood Simi Valley, CA 320 264,500 1986 1996 96%
Hidden Valley (Parker Ranch)(23) Simi Valley, CA 324 310,900 2004 2004 97%
Shadow Point Spring Valley, CA 172 131,200 1983 2002 97%
Lofts at Pinehurst, The (Villa Scandia) Ventura, CA 118 71,100 1971(24) 1997 97%
Pinehurst(25) Ventura, CA 28 21,200 1973 2004 97%
Woodside Village Ventura, CA 145 136,500 1987 2004 95%
Walnut Height Walnut, CA 163 146,700 1964 2003 95%
Avondale at Warner Center Woodland Hills, CA 446 331,000 1970(26) 1999 97%
    
13,382
 
10,998,108
     
97%
             
Northern California
            
Carlmont Woods(6) Belmont, CA 195 107,200 1971 2004 99%
Brookside Oaks (7) Cupertino, CA 170 119,900 1973 2000 98%
Point at Cupertino, The (Westwood)(17) Cupertino, CA 116 135,200 1963(27) 1998 98%
Harbor Cove(6) Foster City, CA 400 306,600 1971 2004 98%
Waterstone at Fremont(28) Fremont, CA 526 433,100 1975 2000 94%
Stevenson Place Fremont, CA 200 146,200 1971(29) 1983 97%
Treetops Fremont, CA 172 131,200 1978 1996 96%
Wimbledon Woods Hayward, CA 560 462,400 1975 1998 95%
Summerhill Commons Newark, CA 184 139,000 1987 1987 96%
Regency Towers(6) Oakland, CA 178 140,900 1975 2005 83%
San Marcos (Vista del Mar) Richmond, CA 432 407,600 2003 2003 97%
Mt. Sutro Terrace San Francisco, CA 99 64,000 1973 1999 97%
The Carlyle San Jose, CA 132 129,200 2000 2000 97%
The Enclave(6) San Jose, CA 637 525,463 1998 2005 100%
Waterford Place San Jose, CA 238 219,600 2000 2000 98%
EsplanadeSan Jose, CA 278 279,000 2002 2004 96%
Bel Air.. San Ramon, CA 462 391,000 1988(30) 1995 96%
Foothill Gardens San Ramon, CA 132 155,100 1985 1997 98%
Twin Creeks San Ramon, CA 44 51,700 1985 1997 98%
Le Parc Luxury Apartments (Plumtree) Santa Clara, CA 140 113,200 1975(31) 1994 97%
Marina Cove (32) Santa Clara, CA 292 250,200 1974 1994 97%
Bristol Commons Sunnyvale, CA 188 142,600 1989 1995 98%
Oak Pointe Sunnyvale, CA 390 294,100 1973 1988 99%
Summerhill Park Sunnyvale, CA 100 78,500 1988 1988 98%
Windsor Ridge Sunnyvale, CA 216 161,800 1989 1989 98%
Vista Belvedere Tiburon, CA 76 78,300 1963 2004 98%
    
6,557
 
5,463,063
     
97%
19

      
Rentable
      
      
Square
 
Year
 
Year
  
Multifamily Residential Properties (1)
 
Location
 
Units
 
Footage
 
Built
 
Acquired
 
Occupancy(2)
Pacific Northwest
            
Seattle, Washington Metropolitan Area
            
Cedar Terrace Bellevue, WA 180 174,200 1984 2005 96%
Emerald Ridge Bellevue, WA 180 144,000 1987 1994 97%
Foothill Commons Bellevue, WA 360 288,300 1978 1990 98%
Palisades, The Bellevue, WA 192 159,700 1977(33) 1990 99%
Sammamish View Bellevue, WA 153 133,500 1986(34) 1994 98%
Woodland Commons Bellevue, WA 236 172,300 1978 1990 98%
Canyon Pointe Bothell, WA 250 210,400 1990 2003 97%
Inglenook Court Bothell, WA 224 183,600 1985 1994 96%
Salmon Run at Perry Creek Bothell, WA 132 117,100 2000 2000 98%
Stonehedge Village Bothell, WA 196 214,800 1986 1997 96%
Park Hill at Issaquah (35) Issaquah, WA 245 277,700 1999 1999 97%
Peregrine Point Issaquah, WA 67 85,900 2003 2003 97%
Wandering Creek Kent, WA 156 124,300 1986 1995 97%
Bridle Trails Kirkland, WA 92 73,400 1986(36) 1997 96%
Evergreen Heights Kirkland, WA 200 188,300 1990 1997 96%
Laurels at Mill Creek Mill Creek, WA 164 134,300 1981 1996 97%
Morning Run(6) Monroe, WA 222 221,786 1991 2005 94%
Anchor Village (7) Mukilteo, WA 301 245,900 1981 1997 96%
Castle Creek Newcastle, WA 216 191,900 1997 1997 97%
Brighton Ridge Renton, WA 264 201,300 1986 1996 95%
Forest View Renton, WA 192 182,500 1998 2003 95%
Fairwood Pond Renton, WA 194 189,200 1997 2004 96%
Fountain Court Seattle, WA 320 207,000 2000 2000 98%
Linden Square Seattle, WA 183 142,200 1994 2000 96%
Maple Leaf Seattle, WA 48 35,500 1986 1997 98%
Spring Lake Seattle, WA 69 42,300 1986 1997 97%
Tower @ 801(6)Seattle, WA 173 118,500 1970 2005 97%
Wharfside Pointe Seattle, WA 142 119,200 1990 1994 97%
Echo Ridge(6) Snoqualmie, WA 120 124,359 2000 2005 92%
Portland, Oregon Metropolitan Area
            
Jackson School Village Hillsboro, OR 200 196,800 1996 1996 97%
Landmark Hillsboro, OR 285 282,900 1990 1996 98%
Meadows at Cascade Park Vancouver, WA 198 199,300 1989 1997 97%
Village at Cascade Park Vancouver, WA 192 178,100 1989 1997 97%
    
6,346
 
5,560,545
     
97%
             
Other areas
            
St. Cloud Houston, TX 302 306,800 1968 2002 88%
    
302
 
306,800
     
88%
Total/Weighted Average
   
26,587
 
22,328,516
     
97%
20

     
Rentable
                       
      
Square
 
Year
 
Year
  
Other real estate assets(1)
 
Location
 
Tenants
 
Footage
 
Built
 
Acquired
 
Occupancy(2)
Office Buildings
            
925 East Meadow Drive Palo Alto, CA 1 17,400 1988 1997 100%(37)
17461 Derian Ave(38) Irvine, CA 3 110,000 1983 2000 100%(39)
22110-22120 Clarendon Street Woodland Hills, CA 9 38,940 1982 2001 99%(40)
Total Office Buildings
   
13
 
166,340
     
100%
             
Recreational Vehicle Parks
            
Circle RV El Cajon, CA 179 spaces   1977 2002 (41)
Vacationer El Cajon, CA 159 spaces   1973 2002 (41)
Diamond Valley San Jaciento, CA 224 spaces   1974 2002 (41)
Total Recreational Vehicle Parks
   
562 spaces
        
             
Manufactured Housing Community
            
Green Valley Vista, CA 157 sites   1973 2002 (41)
Total Manufactured Housing Community
 
157 sites
        
  (1)Unless otherwise specified, the Company has a 100% ownership interest in each Property.
  (2)For multifamily residential properties, occupancy rates are based on financial occupancy for the year ended December 31, 2005; for the office buildings, recreational vehicle parks, manufactured housing communities or properties which have not yet stabilized or have insufficient operating history, occupancy rates are based on physical occupancy as of December 31, 2005. For an explanation of how financial occupancy and physical occupancy are calculated, see “Properties-Occupancy Rates” in this Item 2.
  (3)The Company has a 30% special limited partnership interest in the entity that owns this multifamily property. This investment was made under arrangements whereby EMC became the general partner and the existing partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company’s Common Stock in satisfaction of the applicable partnership's cash redemption obligation.
  (4)The property is subject to a ground lease, which, unless extended, will expire in 2082.
   (5)The Company owns the land and has leased the improvements to an unrelated third party. The leasehold interest entitles the Company to receive a monthly payment for the 34-year term of the land lease. The Company may be required to sell its interest in the property anytime following the seventh anniversary of the leasehold date which was created in 2000.
(6)  This property is owned by Fund II. The Company has a 28.2% interest in Fund II and is accounted for using the equity method of accounting.
(7)  The Company holds a 1% special limited partner interest in the partnerships which own these multifamily properties. These investments were made under arrangements whereby EMC became the 1% sole general partner and the other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company’s Common Stock in satisfaction of the applicable partnership’s cash redemption obligation.
(8)  In 2002 the Company purchased an additional 21 units adjacent to this property for $3 million. This property was built in 1991.
(9)  The Company completed an approximate $1.6 million redevelopment on this property in 2000.
(10)  The Company completed an approximate $2.3 million redevelopment on this property in 2000.
(11)  The Company is in the process of performing a $6.1 million redevelopment on this property.
(12)  This property is subject to a ground lease, which, unless extended, will expire in 2067.
(13)  The Company is in the process of performing a $5.7 million redevelopment on this property.
(14)  The Company completed an $11.0 million redevelopment on this property in 2001.
(15)  The Company completed a $3.6 million redevelopment on this property in 2005.
(16)  This property is subject to a ground lease, which, unless extended, will expire in 2027.
(17)  The Company had a 20.0% ownership interest this property. In 2004, the Company acquired the remaining 80%.
(18)  The Company completed an approximate $3.2 million redevelopment on this property in 2002.
(19)  The Company completed a $1.9 million redevelopment on this property in 2000.
(20)  The Company completed a $1.9 million redevelopment on this property in 2001.
21

(21)  The Company completed a $1.7 million redevelopment on this property in 2001.
(22)  The Company has an 85.0% controlling limited partnership interest in this property.
(23)  The Company and EMC have a 74.0% and 1% member interests, respectively, in this property.
(24)  The Company completed an approximate $3.5 million redevelopment on this property in 2002.
(25)  The property is subject to a ground lease, which, unless extended, will expire in 2028.
(26)  The Company is in the process of performing an $11.4 million redevelopment on this property.
(27)  The partnership that owned this property completed a $2.7 million redevelopment on this property in 2001.
(28)  The Company has a preferred limited partnership interest in this property.
(29)  The Company completed an approximately $4.5 million redevelopment on this property in 1998.
(30)  The Company completed construction of 114 units of the property’s 462 total units in 2000.
(31)  The Company completed an approximate $3.4 million redevelopment on this property in 2002.
(32)  A portion of this Property on which 84 units are presently located is subject to a ground lease, which, unless extended, will expire in 2028.
(33)  The Company is in the process of performing a $5.9 million redevelopment on this property.
(34)  The Company is in the process of performing a $3.2 million redevelopment on this property
(35)  The Company had an approximate 45% preferred limited partnership interest in this property. In 2004 the Company acquired the remaining 55% partnership interest.
(36)  The Company is in the process of performing a $4.5 million redevelopment on this property.
(37)  The Company occupies 100% of this property.
(38)  The Company has a mortgage receivable on this property and consolidates this property pursuant to FIN 46R.
(39)  The Company occupies 4.6% of this property.
(40)  The Company occupies 29% of this property.
(41)  The Company leased this property in 2003 to an unrelated third party for approximately 5 years with an option to purchase the property in approximately 4 years.
Item 3. Legal Proceedings
In April 2004, an employee lawsuit entitled Chance Nelson and Douglas Korte, et al vs. Essex Property Trust, as filed against the Company in the California Superior Court in the County of Alameda. In this lawsuit, two former Operating Partnership maintenance employees seek unpaid wages, associated penalties and attorneys’ fees on behalf of a putative class of the Operating Partnership’s current and former maintenance employees who were required to wear a pager while they were on call during evening and weekend hours. In June 2005, the Operating Partnership recorded $1.5 million for legal settlement costs. There has been no change to the settlement amount since the second quarter of 2005. However, litigation is subject to inherent uncertainties, and such amount represents management’s best estimate of the total cost of the litigation at this time.
Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Operating Partnership has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Operating Partnership has, however, purchased pollution liability insurance, which includes coverage for mold. The Operating Partnership has adopted programs designed to manage the existence of mold in its properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property. Liabilities resulting from such mold related matters and the costs of carrying insurance to address potential mold related claims may also be substantial.
The Operating Partnership is subject to various other lawsuits in the normal course of its business operations.
22

Accordingly, such lawsuits, as well as the class action lawsuit described above, could result in substantial costs and diversion of resources and could have a material adverse effect on the Operating Partnership’s financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2005, no matters were submitted to a vote of security holders.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
During the fourth quarter of 2005, there were no sales of unregistered securities.
Issuer Purchases of Equity Securities
 
Period
 
 
Total Number of Shares Purchased
 
 
Average Price Paid per Share
 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
 
Maximum Number of Shares that may Yet be Purchased Under the Plans or Programs
 
October 28, 2005
 
 
286,073
 
 
 
$87.39
 
 
 
286,073
 
 
 
-
 
In October and November 2005, the Operating Partnership raised $225 million from the sale of Exchangeable Senior Notes. In conjunction with the sale of the Notes, on October 28, 2005 the Company repurchased an aggregate of 286,073 of the Company’s shares at a cost of approximately $25 million.
23

Item 6. Selected Financial Data
The following tables set forth summary financial and operating information for the Operating Partnership from January 1, 2001 through December 31, 2005.

 
                                                                                            
  Years Ended December 31,
  
 2005
 
 2004
 
 2003(1)
 
 2002(1)
 
 2001(1)
 
  
 (Dollars in thousands, except share and per share amounts)
 
OPERATING DATA:
                
REVENUES
                
   Rental and other property $316,340 $280,719 $248,806 $208,190 $178,234 
   Management and other fees from affiliates  10,951  23,146  6,027  5,604  1,194 
   327,291  303,865  254,833  213,794  179,428 
EXPENSES
                
   Property operating expenses, excluding depreciation                
    and amortization  105,351  95,801  80,737  63,767  51,337 
   Depreciation and amortization  79,978  71,656  56,647  43,377  35,384 
   Amortization of deferred financing costs  1,970  1,587  1,197  814  657 
   General and administrative  19,148  18,084  9,637  8,636  7,498 
   Interest(2)
  73,614  63,023  52,410  43,186  38,746 
   Other expenses  5,827  -  -  -  - 
   285,888  250,151  200,628  159,780  133,622 
                 
   Gain on the sales of real estate  6,391  7,909  -  145  3,788 
   Interest and other income  8,621  3,173  688  6,901  7,529 
   Equity income in co-investment  19,030  41,230  3,296  5,402  13,429 
   Minority interests  (5,687) (3,498) (4,134) (3,664) (196)
   Income from continuing operations before income tax provision  69,758  102,528  54,055  62,798  70,356 
   Income tax provision  (2,538) (257) -  -  - 
   Income from continuing operations  67,220  102,271  54,055  62,798  70,356 
   Discontinued operations                
    Operating income from real estate sold  1,861  2,255  2,911  1,781  2,392 
    Gain on sale of real estate  29,219  -  -  9,051  - 
    Impairment loss  -  (718) -  -  - 
Net income  98,300  103,808  56,966  73,630  72,748 
Write off of Series C preferred units offering costs  -  -  (625) -  - 
Write off of Series E preferred units offering costs  -  (1,575) -  -  - 
Amortization of discount on Series F preferred stock  -  -  (336) -  - 
Distributions on preferred units - Series F  (1,953) (1,952) (195) -  - 
Distribution on preferred units - limited partners  (10,238) (14,175) (17,996) (18,319) (18,319)
Net income available to common units $86,109 $86,106 $37,814 $55,311 $54,429 
                 
Per common unit data:                
  Basic:                
   Income from continuing operations available to common units $2.17 $3.35 $1.47 $2.14 $2.52 
   Net income available to common units $3.40 $3.41 $1.59 $2.66 $2.63 
  Weighted average number of common units outstanding                
    during the year  25,344  25,255  23,737  20,812  20,688 
                 
  Diluted:                
   Income from continuing operations available to common units $2.14 $3.32 $1.46 $2.12 $2.48 
   Net income available to common units $3.35 $3.38 $1.58 $2.63 $2.59 
  Weighted average number of common units outstanding                
    during the year  25,694  25,490  23,948  21,008  21,005 
Cash distributions per common unit $3.24 $3.16 $3.12 $3.08 $2.80 
24

                                                                                
 As of December 31,
   
BALANCE SHEET DATA:
 
 2005
   
 2004
   
 2003(1)
   
 2002(1)
   
 2001(1)
   
  Investment in real estate (before accumulated
                          
    depreciation) $2,499,929    $2,371,194    $1,984,122    $1,762,221    $1,175,200    
  Net investment in real estate  2,100,075     2,041,542     1,718,359     1,554,209     1,018,931    
  Real estate under development  37,143     38,320     55,183     143,818     93,256    
  Total assets  2,239,290     2,217,217     1,916,811     1,806,299     1,329,458    
  Total property indebtedness  1,354,918     1,316,984     989,045     949,889     638,660    
  Partners' capital  761,909     777,403     811,808     741,870     631,727    
                                
  
 As of and for the years ended December 31, 
   
   
2005
     
2004
     
2003(1)
     
2002(1)
     
2001(1)
    
OTHER DATA:
                               
Interest coverage ratio(2)
  2.8  X  3.1  X  3.2  X  3.5  X  3.7  X 
Gross operating margin(3)
  67%    66%    68%    69%    71%   
Average same property monthly rental rate per                               
  apartment unit(4)(5)
 $1,079    $1,055    $1,088    $1,108    $1,153    
Average same property monthly operating expenses                               
  per apartment unit(4)(6)
 $339    $331    $325    $310    $293    
Total multifamily units (at end of period)  26,587     25,518     26,012     23,699     20,762    
Same property occupancy rate(7)
  97%    96%    96%    95%    95%   
Total Properties (at end of period)  126     131     132     123     94    
                                                                                 
 Years Ended December 31,
   
  
 2005
   
 2004
   
 2003(1)
   
 2002(1)
   
 2001(1)
   
  
     (Dollars in thousands)    
   
RECONCILIATION OF NET INCOME TO
                         
ADJUSTED EBITDA (2):
                          
Net income $98,300    $103,808    $56,966    $73,630    $72,748   
Interest expense  73,614     63,023     52,410     43,186     38,746   
Tax expense  2,538     257     --     --     --   
Depreciation and amortization  79,978     71,656     56,647     43,377     35,384   
Amortization of deferred financing costs  1,970     1,587     1,197     814     657   
Gain on the sales of real estate  (6,391)    (7,909)    --     (145)    (3,788)  
Gain on the sales of co-investment activities, net  (18,115)    (39,242)    --     (705)    --   
Minority interests  5,687     3,498     4,134     3,664     196   
Income from discontinued operations  (31,080)    (1,537)    (2,911)    (10,832)    (2,392)  
Adjusted EBITDA(2)
  206,501     195,141     168,443     152,989     141,551   
Interest expense  73,614     63,023     52,410     43,186     38,746   
Interest coverage ratio(2)
  2.8  X  3.1  X  3.2  X  3.5  X  3.7 X  
(1)  The above financial and operating information from January 1, 2002 through December 31, 2003 reflect the retroactive adoption of FIN 46R and SFAS 123. The above financial and operating information from January 1 through December 31, 2001 has not been restated to reflect the retroactive adoption of FIN 46R and SFAS 123. The results of operations for 2004, 2003, and 2002 have been reclassified to reflect discontinued operations for properties sold subsequent to December 31, 2004. Results of operations for 2001 have not been reclassified. Because 2001 results have not been reclassified, the results for that period may not be comparable to the results for the later periods set forth above.
(2)  Interest coverage ratio represents earnings before minority interests, gain on sales of real estate, interest expense, taxes, depreciation and amortization (“adjusted EBITDA”) divided by interest expense. The Operating Partnership believes that the interest coverage ratio is useful to readers because it is frequently used by investors, lenders, security analysts and other interested parties in the evaluation of companies in our industry. In addition, the Operating Partnership believes that this ratio is useful in evaluating our performance compared to that of other companies in our industry because the calculation of the adjusted EBITDA component of the interest coverage ratio generally eliminates the effects of financing costs, income taxes, and depreciation and amortization, which items may vary for different companies for reasons unrelated to operating performance.
25

The adjusted EBITDA component of the interest coverage ratio, however, is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP. When analyzing our operating performance, readers should use the interest coverage ratio and its adjusted EBITDA component in addition to, and not as an alternative for, net income, as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of the interest coverage ratio and its adjusted EBITDA component may not be comparable to similarly titled measures of other companies. Furthermore, the interest coverage ratio is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as income tax payments, debt service requirements, capital expenditures and other fixed charges. The amounts shown for the interest coverage ratio and adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which can be further adjusted to reflect certain other cash and non-cash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities such as incurring additional debt and making certain restricted payments.
(3)Gross operating margin represents rental revenues and other property income less property operating expenses, exclusive of depreciation and amortization, divided by rental revenues and other property income.
(4)A multifamily stabilized property, or “Same-Property” apartment units (as defined in Item 7), are those units in properties that the Operating Partnership has consolidated for the entire two years ended as of the end of the period set forth. The number of same property apartment units in such properties may vary at each year-end. Percentage changes in averages per unit do not correspond to total same property revenues and expense percent changes which are discussed in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(5)Average Same-Property monthly rental rate per apartment unit represents total scheduled rent for the same property apartment units for the period (actual rental rates on occupied apartment units plus market rental rates on vacant apartment units) divided by the number of such apartment units and further divided by the number of months in the period.
(6)Average Same-Property monthly expenses per apartment unit represents total monthly operating expenses, exclusive of depreciation and amortization, for the same property apartment units for the period divided by the total number of such apartment units and further divided by the number of months in the period.
(7)Occupancy rates are based on financial occupancy. For an explanation of how financial occupancy is calculated, see “Properties-Occupancy Rates” in Item 2 of Part I of this Form 10-K.
26

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These consolidated financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature.
OVERVIEW
The Operating Partnership acquires, develops, redevelops and manages multifamily residential properties in selected communities located primarily in the west coast of the United States. The Company is a self-administered and self-managed REIT that owns all of its interest directly or indirectly through the Operating Partnership. The Company is the sole general partner of the Operating Partnership with a 90.4% interest as of December 31, 2005.

The Operating Partnership investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets to identify areas with the characteristics that underlie rental growth. The Operating Partnership’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift its acquisition, development, and disposition activities to markets that will optimize the performance of the portfolio.

By region, the Operating Partnership's operating results and rent growth analysis are as follows:
Southern California Region: As of December 31, 2005, the Operating Partnership had ownership interests in this region representing 50% of our multifamily units. During the year ended December 31, 2005, the region continued to perform well, as Same-Property (as defined below) revenues increased 5.3% compared to 2004. The Operating Partnership expects new residential supply of 26,000 single family homes and 19,000 multi-family units which represents a total new supply of 0.8% of existing stock. The Operating Partnership expects this region to generate positive rent growth of approximately 3.75% in 2006.
Northern California Region: As of December 31, 2005, the Operating Partnership had ownership interests in this region representing 25% of its multifamily units. The region improved from a decrease in Same-Property revenues of 4.2% in 2004 compared to 2003, to an increase in Same-Property revenues of 1.9% in 2005 compared to 2004. The Operating Partnership expects new residential supply of 10,000 single family homes and 7,000 multi-family units which represents a total new supply of 0.8% of existing stock. The Operating Partnership expects this region to generate positive rent growth of approximately 4.0% in 2006.
Pacific Northwest Region: As of December 31, 2005, the Operating Partnership had ownership interests in this region representing 24% of its multifamily units. The region improved from an increase in Same-Property revenues of 1.4% in 2004 compared to 2003, to an increase in Same-Property revenues of 3.3% in 2005 compared to 2004. The Operating Partnership expects new residential supply of 22,000 single family homes and 5,500 multi-family units which represents a total new supply of 1.5% of existing stock. The Operating Partnership expects this region to generate positive rent growth of approximately 3.5% in 2006.
As of December 31, 2005, Operating Partnership had ownership interests in 126 multifamily properties, comprising 26,587 apartment units. It’s multifamily residential properties are located in three major West Coast regions:

Southern California (Los Angeles, Ventura, Orange, Riverside and San Diego counties)
Northern California (the San Francisco Bay Area)
Pacific Northwest (Seattle, Washington and Portland, Oregon metropolitan areas)

The Operating Partnership’s consolidated multifamily properties are as follows:

As of December 31, 2005As of December 31, 2004
 Number of Apartment Homes%Number of Apartment Homes
%
Southern California13,38250%13,47954%
Northern California6,55725%5,28421%
Pacific Northwest6,34624%5,65123%
Other3021%5782%
Total
26,587100%24,992100%
27

At December 31, 2005, Operating Partnership also had ownership interests in three office buildings (with approximately 166,340 square feet), three recreational vehicle parks (comprising 562 spaces) and one manufactured housing community (containing 157 sites).

Operating Partnership currently have three development projects and other pre-development projects in our pipeline, aggregating 505 units, with total incurred costs as of December 31, 2005 of $37.1 million and estimated remaining costs of approximately $96.6 million. These consolidated development projects are:

·  Northwest Gateway, in Los Angeles, California consisting of 275 units.
·  Moorpark, in Ventura County, California consisting of 200 units.
·  Tuscana, in Tracy, California consisting of 30 units.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004
Average financial occupancy rates of the Operating Partnership’s multifamily stabilized properties or “Same-Properties” (properties consolidated by the Operating Partnership for each of the years ended December 31, 2005 and 2004) increased to 96.9% for the year ended December 31, 2005 from 96.0% for the year ended December 31, 2004. Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total possible rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total possible rental revenue represents the value of all apartment units, with occupied units valued at contractual rental rates pursuant to leases and vacant units valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates as disclosed by other REITs may not be comparable to our calculation of financial occupancy.
The regional breakdown of the Operating Partnership’s Same-Property portfolio for financial occupancy for the years ended December 31, 2005 and 2004 are as follows:
 
Years ended
 
December 31,
 
2005
 
2004
Southern California96.8% 96.1%
Northern California97.0% 96.1%
Pacific Northwest96.8% 95.6%
Total Property revenues increased by $35.6 million or by 12.7% to $316.3 million in 2005 from $280.7 million in 2004. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to Same-Properties.

     
Years Ended
      
  
Number of
  
December 31,
  
Dollar
 
Percentage
 
  
Properties
  
2005
  
2004
  
Change
 
Change
 
Revenues    
(dollars in thousands)
      
    Property revenues              
    Same-Properties:              
      Southern California 49 $128,782 $122,289 $6,493 5.3%
      Northern California 16  50,723  49,792  931 1.9 
      Pacific Northwest 25  47,858  46,313  1,545 3.3 
        Total property revenues              
          Same-Properties 90  227,363  218,394  8,969 4.1 
    Property revenues - properties acquired subsequent              
      to January 1, 2004 (1)    88,977  62,325  26,652 42.8 
        Total property revenues   $316,340 $280,719 $35,621 12.7%
(1)  Also includes three office buildings, one multifamily property located in Houston, Texas, three recreational vehicle parks, one manufactured housing community, and redevelopment communities and development communities.
28

Same-Property revenues increased by $9.0 million or 4.1% to $227.4 million in 2005 from $218.4 million in 2004. The majority of this increase was due to strong rental rate growth of 4.0% or $5.0 million attributable to the 49 Same-Properties located in Southern California and rental rate growth of 1.1% or approximately $526,000 attributable to the 25 Same-Properties located in the Pacific Northwest. The 16 multifamily residential properties located in Northern California achieved rental rate growth of 0.7% or approximately $352,000. Property revenues for Same-Properties also increased due to an increase in occupancy from 96.0% in 2004 to 96.9% for 2005, for an increase in revenues of $1.9 million. Rent concessions also decreased in the second half of 2005, which increased 2005 revenues by approximately $415,000 for the Same-Property portfolio.
Non-Same Property Revenues increased by $26.7 million or 42.8% to $89.0 million for 2005 from $62.3 million for 2004. Non-Same Properties include properties acquired subsequent to January 1, 2004, the three office buildings, three recreational vehicle parks, one manufactured housing community, and development and redevelopment communities. The increase was primarily generated from communities acquired and or developed and increased rents from redeveloped properties. Subsequent to January 1, 2004, we acquired 16 multifamily communities or 3,262 units and completed the construction of 756 units.
Management and other fees from affiliates decreased by approximately $12.2 million in 2005 due primarily to the promote distributions from Fund I being reduced from $18.3 million in 2004 to $7.0 million in 2005 as Fund I finished the liquidation of its assets. Development and redevelopment fees from Fund I decreased by $1.1 million during 2005 from $1.3 million in 2004 to $204,000 in 2005 as the expenditures for Fund I’s development assets decreased as the assets were sold in the second half of 2004 and early 2005.
Total Expenses increased 10% to $285.9 million for 2005 from $250.2 million for 2004. The increase was due primarily to depreciation and amortization, real estate taxes, property operating expenses, interest expense, and other expenses. For 2005 as compared to 2004, depreciation and amortization increased 12% or $8.3 million, real estate taxes increased 11% or $2.8 million, and property operating expenses increased 9% or $6.7 million due to an increase in the number of owned properties during 2005.
Interest expense increased 17% to $73.6 million, net of $1.1 of capitalized interest for 2005, as compared to $63.0 million, net of $2.0 million of capitalized interest, for 2004. The increase was primarily due to an increase in LIBOR during 2005, and during the fourth quarter of 2005 the Operating Partnership issued $225 million in exchangeable bonds. The proceeds from the bond issuance were used to pay the lines of credit and certain mortgage notes payable, and repurchase $25 million in common stock.
Other expenses were $5.8 million for 2005. Other expenses included a provision of $1.5 million for a legal settlement recorded in the second quarter of 2005, see Item 3 of Part I “Legal Proceedings”. A $1.4 million incentive compensation reward was accrued in the third quarter and paid during the fourth quarter of 2005 for key members of the management team that contributed to the success of the $6.1 million interest income realized on the $5 million participating loan at The Essex at Lake Merritt. During the fourth quarter, the Operating Partnership recorded an impairment loss of $1.3 million related to a property in Houston, Texas, and pre-payment penalties and write-off of deferred charges in the amount of $1.6 million related to the early termination of various mortgage notes payable.
Gain on sale of real estate decreased by $1.5 million for 2005 to $6.4 million compared to $7.9 million recorded in 2004. During 2005, Essex recognized $5.0 million in gains previously deferred in 2004 on the sale of Essex at Lake Merritt and $1.4 million in gains related to additional real estate sales. The gain of $7.9 million recorded in the third quarter of 2004 related to the sale of The Essex at Lake Merritt.
Interest and other income increased by $5.4 million to $8.6 million for 2005 compared to $3.2 million for 2004. The increase is primarily attributable to the receipt of $6.1 million in interest income related to The Essex at Lake Merritt participating loan in 2005.
Equity income in co-investments decreased by $22.2 million to $19.0 million for 2005 compared to $41.2 million in 2004. During 2005 the Operating Partnership recorded its pro-rata allocation of gains of $18.1 million on sales of Fund I properties and equity income from Funds I, II and other joint ventures totaling approximately $915,000. During 2004, the Operating Partnership recorded its pro-rata allocation of gains of $39.2 million on sales of Fund I properties and the sale of its direct interest in Coronado at Newport - North, and equity income from Funds I, II and joint ventures totaling approximately $2.0 million.
Income tax provision increased by $2.3 million during 2005 due to taxable income related to the Operating Partnership’s taxable REIT subsidiaries.
29

Discontinued operations increased by $29.6 million to $31.1 million for 2005 from $1.5 million for 2004. The increase was due mainly to a gain on sale of the Eastridge property during the second quarter of 2005, for $29.2 million which is net of deferred gain of $2.2 million.
Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003
Average financial occupancy rates of the Operating Partnership’s 2004/2003 Same-Property portfolio (properties consolidated by the Operating Partnership for each of the years ended December 31, 2004 and 2003) for the year ended December 31, 2004 increased to 96.0% from 95.8% for the year ended December 31, 2003.
The regional breakdown of financial occupancy for the 2004/2003 Same-Properties for the years ended December 31, 2004 and 2003 are as follows:

                                       
Years ended
 
December 31,
 
2004
 
2003
Southern California96.1% 96.0%
Northern California96.1% 95.9%
Pacific Northwest95.6% 95.1%
Total Property revenues increased by $31.9 million or 12.8% to $280.7 million in 2004 from $248.8 million in 2003. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to 2004/2003 Same-Properties.
     
Years Ended
      
  
Number of
  
December 31,
  
Dollar
 
Percentage
 
  
Properties
  
2004
  
2003(1)
  
Change
 
Change
 
     
(dollars in thousands)
      
Revenues              
    Property revenues -              
    2004/2003 Same-Properties:              
      Southern California 40 $89,605 $86,460 $3,145 3.6%
      Northern California 16  47,688  49,787  (2,099) (4.2) 
      Pacific Northwest 22  39,572  39,039  533 1.4 
   Total property revenues
              
      Same-Properties
 78  176,865  175,286  1,579 0.9 
    Property revenues - properties acquired subsequent              
      to January 1, 2003(1)
    103,854  73,520  30,334 41.3 
   Total property revenues
   $280,719 $248,806 $31,913 12.8%
               
(1)Also includes three office buildings, one multifamily property located in Houston, Texas, three recreational vehicle parks, one manufactured housing community, and redevelopment communities and development communities. 
2004/2003 Same-Property revenues increased by $1.6 million or 0.9% to $176.9 million in 2004 from $175.3 million in 2003. The majority of this increase was attributable to the 40 2004/2003 Same-Properties located in Southern California and the 22 2004/2003 Same-Properties located in the Pacific Northwest. 2004/2003 Same-Property revenues for the Southern California region increased by $3.1 million or 3.6% to $89.6 million in 2004 from $86.5 million in 2003. The increase in Southern California is primarily attributable to rental rate increases and a slight increase in financial occupancy to 96.1% in 2004 from 96.0% in 2003. 2004/2003 Same-property revenues for the Pacific Northwest region increased by approximately $533,000 or 1.4% to $39.6 million in 2004 from $39.0 million in 2003. The $533,000 increase in the Pacific Northwest is primarily attributable to rental rate increases and an increase in financial occupancy to 95.6% in 2004 from 95.1% in 2003. The 16 2004/2003 Same-Properties located in Northern California offset the net increase in total property revenues from the other regions. 2004/2003 Same-Property revenues for the Northern California region decreased $2.1 million or 4.2% to $47.7 million in 2004 from $49.8 million in 2003. The $2.1 million decrease is primarily attributable to rental rate decreases offset by an increase in financial occupancy to 96.1% in 2004 from 95.9% in 2003.
30

2004/2003 Non-Same Property revenuesincreased by $30.3 million or 41.3% to $103.9 million for 2004 from $73.5 million for 2003. 2004/2003 Non-Same Properties include properties acquired subsequent to January 1, 2003, five office buildings, four recreational vehicle parks, two manufactured housing communities, and development and redevelopment communities. The increase is primarily attributable to the 14 multifamily properties acquired subsequent to January 1, 2003.
Total Expenses increased by $49.5 million or approximately 25% to $250.1 million in 2004 from $200.6 million in 2003. This increase was mainly due to an increase in property operating expenses of $30.1 million or 22% to $167.5 million in 2004 from $137.4 million in 2003. Of such operating expense increase, $13.5 million was attributable to the 14 multifamily properties purchased subsequent to January 1, 2003, three development properties that stabilized operations and five communities that are in redevelopment excluding depreciation and amortization expense. Depreciation and amortization expense increased by $15.0 million, which was attributable mainly to the 14 properties purchased subsequent to January 1, 2003 and a correction of depreciation expense recorded in the first quarter of 2004.
Interest expense increased by $10.6 million or 20% to $63.0 million in 2004 from $52.4 million in 2003. The increase in interest expense is primarily due to increases in the mortgage notes payable and line of credit balances, the majority of which relates to the 14 communities purchased subsequent to January 1, 2003.
General and Administrative (G&A) expenses increased by $8.4 million or 88% to $18.1 million in 2004 from $9.6 million in 2003. The increase in G&A was primarily attributable to incentive compensation, increases in headcount and related compensation expense, compliance with Rule 404 of the Sarbanes-Oxley Act of 2002, and accrued litigation costs.
Gain on sale of real estate was $7.9 million for 2004 and there were no sales in 2003. The Essex at Lake Merritt property, a 270-unit multifamily community located in Oakland, California, was sold in August 2004 for a total gain of $12.9 million reduced by a deferred gain of $5.0 million related to a participating loan with the buyer.
Interest and other income increased by $2.5 million to $3.2 million in 2004 from approximately $688,000 in 2003. The increase relates primarily to an increase in leasing income related to the recreational vehicle parks and manufactured housing communities.
Equity income in co-investments increased by $37.9 million to $41.2 million in 2004 from $3.3 million in 2003. During 2004, the Operating Partnership recorded its pro-rata allocation of gains of $39.2 million on sales of Fund I properties and the sale of its direct interest in Coronado at Newport - North, and equity income from Funds I, II and joint ventures totaling approximately $2.0 million.
Discontinued operations decreased by $1.4 million to $1.5 million in 2004 from $2.9 million in 2003. The decrease in income from discontinued operations was mainly due to an impairment charge of approximately $718,000 in 2004 for Golden Village Recreational Vehicle Park, located in Hemet, California. This property was sold in July 2004 for $6.7 million. The decrease in discontinued operations was offset by the sale of two small office buildings located in San Diego, California, aggregating 7,200 square feet, and Eastridge Apartments, a 188-unit apartment community located in San Ramon, California, during 2005. In compliance with the provisions of SFAS No. 144, the results of operations of those properties are reported as a component of discontinued operations for 2005, 2004 and 2003.
Liquidity and Capital Resources
Standard and Poor's and Fitch ratings have existing issuer credit ratings of BBB/Stable for Essex Property Trust, Inc. and Essex Portfolio L.P.
At December 31, 2005, the Operating Partnership had $14.3 million of unrestricted cash and cash equivalents. The Operating Partnership believes that cash flows generated by its operations, existing cash balances, availability under existing lines of credit, access to capital markets and the ability to generate cash gains from the disposition of real estate are sufficient to meet all of our reasonably anticipated cash needs during 2006. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect our plans for acquisitions, dispositions, development and redevelopment activities.
Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property. For the year ended December 31, 2005, non-revenue generating capital expenditures totaled approximately $595 per unit. The Operating Partnership expects to incur approximately $770 per unit in non-revenue generating capital expenditures for the year ended December 31, 2006. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for deferred maintenance on acquisition properties, expenditures for property renovations and improvements which are expected to generate additional revenue, and renovation expenditures required pursuant to tax-exempt bond financings. The Operating Partnership expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2006 and/or the funding thereof will not be significantly different than the Operating Partnership’s current expectations.
31

The Operating Partnership expects to incur approximately $770 per unit in non-revenue generating capital expenditures for the year ended December 31, 2006. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for deferred maintenance on acquisition properties, expenditures for property renovations and improvements which are expected to generate additional revenue, and renovation expenditures required pursuant to tax-exempt bond financings. The Operating Partnership expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2006 and/or the funding thereof will not be significantly different than the Operating Partnership’s current expectations.
The Operating Partnership is currently developing three multifamily residential projects, with an aggregate of 505 units. Such projects involve certain risks inherent in real estate development. See discussion under caption “Risks that development activities will be delayed or not completed and/or fail to achieve expected results” in Item 1A, Risk Factors, of this Form 10-K. In connection with these development projects, the Operating Partnership has directly, or in some cases through its joint venture partners entered into contractual construction related commitments with unrelated third parties and the total projected estimated cost for these projects is approximately $133.7 million. As of December 31, 2005, the remaining commitment to fund these development projects is approximately $96.6 million. The Operating Partnership expects to fund such commitments by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.
The Operating Partnership redevelopment strategy strives to improve the financial and physical aspects of its redevelopment apartment communities and to target a 10 to 12 percent return on the incremental renovation investment. Many of the Operating Partnership’s properties are older and in excellent neighborhoods, providing lower density with large floor plans that represent attractive redevelopment opportunities. As of December 31, 2005, we had six communities, aggregating 1,450 units in various stages of redevelopment. Total redevelopment cost of these projects as of December 31, 2005 is approximately $36.8 million, of which $23.5 million remains to be expended.

The Operating Partnership had a $185.0 million unsecured line of credit as of December 31, 2005, and $0 was outstanding with an average interest rate on the line of credit of approximately 4.4%. This facility matures in April 2007, with an option for a one-year extension. The underlying interest rate on this line is based on a tiered rate structure tied to our corporate ratings and is currently LIBOR plus 1.0%. Operating Partnership also had a $100.0 million credit facility from Freddie Mac, which is secured by six of Essex's multifamily communities. As of December 31, 2005, the Operating Partnership had $25.0 million outstanding under this line of credit, which bears an average interest rate of 3.1 percent and matures in January 2009. The underlying interest rate on this line is between 55 and 59 basis points over the Freddie Mac Reference Rate. Fund II obtained a credit facility during the first quarter of 2005, aggregating $50.0 million, and during the second quarter of 2005 Fund II amended the credit facility increasing the facility to $115.0 million. This line bears interest at LIBOR plus 0.875%, and matures in June 30, 2007. As of December 31, 2005, the Company had the capacity to issue up to $219.5 million in equity securities, and the Operating Partnership had the capacity to issue up to $250.0 million of debt securities under our existing shelf registration statements. 

During October and November 2005, the Operating Partnership raised $225 million from the sale of exchangeable senior notes (the “Notes”) with a coupon of 3.625% due 2025. On or after November 1, 2020, the Notes will be exchangeable at the option of the holder into cash and, in certain circumstances at Essex’s option, shares of Company’s common stock at an initial exchange price of 103.25 per share subject to certain adjustments. The Notes will also be exchangeable prior to November 1, 2020, but only upon the occurrence of certain specified events. On or after November 4, 2010, the operating partnership may redeem all or a portion of the Notes at a redemption price equal to the principal amount plus accrued and unpaid interest (including additional interest, if any). Note holders may require the Operating Partnership to repurchase all or a portion of the Notes at a purchase price equal to the principal amount plus accrued and unpaid interest (including additional interest, if any) on the Notes on November 1, 2010, November 1, 2015 and November 1, 2020.
With the proceeds from the sale of the Notes, the Company repurchased $25 million in common stock and paid down $135 million on the outstanding lines of credit. In part using proceeds from the sale of Notes, in the fourth quarter of 2005, the Operating Partnership paid-off ten mortgage notes payable totaling $89 million with fixed rates ranging from 6.5% to 7.9%, and the Operating Partnership originated two new mortgage notes payable totaling $35 million with fixed rates of 5.5% and 5.6%.
As of December 31, 2005, the Operating Partnership’s mortgage notes payable totaled $1.10 billion, which consisted of $918.2 million in fixed rate debt with interest rates varying from 4.14% to 8.18% and maturity dates ranging from 2006 to 2026 and $186.7 million of tax-exempt variable rate demand bonds with a weighted average interest rate of 4.0%. The tax-exempt variable rate demand bonds have maturity dates ranging from 2020 to 2034, and are subject to interest rate caps.
32

The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Operating Partnership primarily in short-term investment grade securities or is used by the Operating Partnership to reduce balances outstanding under its line of credit.

In an effort to hedge the cash flows associated with the forecasted issuance of debt expected to occur in 2007 and 2008, on February 16, 2005, the Operating Partnership entered into a $50.0 million notional forward-starting swap with a commercial bank at a fixed rate of 4.927%, with a settlement date on or before October 1, 2007. Additionally, on August 18, 2005, the Operating Partnership entered into a $50.0 million notional forward-starting swap with a commercial bank at a fixed rate of 4.869% and a settlement date on or before October 1, 2008. On February 22, 2006, the Operating Partnership entered into additional notional forward-starting swaps. The first was for $25.0 million with a commercial bank at a fixed rate of 5.082% and a settlement date on or before January 1, 2009. The second and third swaps are for a total of $100.0 million with two commercial banks at a fixed rate of 5.099% and a settlement date on or before January 1, 2011. These derivatives will be used to economically hedge the cash flows associated with the refinancing of debt that matures in 2008 and 2010, respectively

There can be no assurance that Operating Partnership will have access to the debt and equity markets in a timely fashion to meet such future funding requirements. Future working capital and borrowings under the lines of credit may not be available, or if available, may not be sufficient to meet the Operating Partnership's requirements, and it may not be able to sell properties in a timely manner and under terms and conditions that we deem acceptable.

Alternative Capital Sources

The Essex Apartment Value Fund II (“Fund II”), a value added discretionary fund, is the Operating Partnership’s investment vehicle (subject to certain exceptions) until October 31, 2006, or when Fund II’s committed capital has been invested, whichever occurs first. Fund II invests in multifamily properties in the Operating Partnership’s targeted West Coast markets with a focus on investment opportunities in the Seattle Metropolitan Area and the San Francisco Bay Area. Fund II announced its final closing on partner equity commitments on September 27, 2004. There are eight institutional investors including the Operating Partnership with combined partner equity commitments of $265.9 million. The Operating Partnership has committed $75.0 million, which represents a 28.2% interest as general partner and limited partner. Fund II expects to utilize leverage equal to approximately 65% of the estimated value of the underlying real estate. Consistent with Fund I, the Operating Partnership will record revenue for its asset management, property management, development and redevelopment services, and promote distributions if Fund II’s returns exceed certain financial return benchmarks.
Contractual Obligations and Commercial Commitments
The following table summarizes the maturation or due dates of our contractual obligations and other commitments at December 31, 2005, and the effect such obligations could have on our liquidity and cash flow in future periods:

     
 2007 and
 
 2009 and
       
(In thousands)
 
 2006
 
 2008
 
 2010
 
 Thereafter
 
 Total
 
Mortgage notes payable $26,192 $237,696 $193,782 $647,248 $1,104,918 
Exchangeable bonds  -  -  -  225,000  225,000 
Lines of credit  -  -  25,000  -  25,000 
Interest on indebtedness  10,340  33,175  32,073  155,455  231,043 
Development commitments  50,000  46,600  -  -  96,600 
Redevelopment commitments.  21,226  2,309  -  -  23,535 
Essex Apartment Value Fund II, L.P.               
    capital commitment  55,228  -  -  -  55,228 
  $162,986 $319,780 $250,855 $1,027,703 $1,761,324 
                 
33

Variable Interest Entities

Consolidated Variable Interest Entities
In accordance FIN 46R, the Operating Partnership consolidates EMC, EFC, 17 Down REIT limited partnerships (comprising ten properties), an office building that is subject to loans made by the Operating Partnership, and the multifamily improvements owned by a third party in which the Operating Partnership owns the land underlying these improvements and from which the Operating Partnership receives fees, including land lease, subordination and property management fees, and a joint venture to develop a building in Los Angeles, California. The Operating Partnership consolidated these entities because it is deemed the primary beneficiary under FIN 46R. The Operating Partnership's total assets and liabilities related to these variable interest entities (VIEs), net of intercompany eliminations, were approximately $230.9 million and $146.7 million, respectively, at December 31, 2005 and $238.1 million and $155.1 million, respectively, at December 31, 2004.
Interest holders in VIEs consolidated by the Operating Partnership are allocated net income equal to the cash payments made to those interest holders for services rendered or distributions from cash flow. The remaining results of operations are generally allocated to the Operating Partnership.
Properties consolidated in accordance with FIN 46R were encumbered by third party, non-recourse loans totaling $141.8 million and $151.3 million as of December 31, 2005 and 2004, respectively.
Unconsolidated Variable Interest Entities
As of December 31, 2005 the Operating Partnership is involved with four VIEs, of which it is not deemed to be the primary beneficiary. Total assets and liabilities of these entities as of December 31, 2005 were approximately $94.0 million and $73.7 million, respectively. The Operating Partnership does not have a significant exposure to loss resulting from its involvement with these unconsolidated VIEs.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements, in accordance with U.S. generally accepted accounting principles requires the Operating Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We define critical accounting policies as those accounting policies that require our management to exercise their most difficult, subjective and complex judgments. Our critical accounting policies relate principally to the following key areas: (i) consolidation under applicable accounting standards of various entities; (ii) assessing the carrying values of our real estate properties and investments in and advances to joint ventures and affiliates; (iii) internal cost capitalization; (iv) and qualification as a REIT. The Operating Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates made by management.
The Operating Partnership assesses each entity in which it has an investment or contractual relationship to determine if it may be deemed to be a VIE. If such an entity is a VIE, then the Operating Partnership analyzes the expected losses and expected residual returns to determine who is the primary beneficiary. If the Operating Partnership is the primary beneficiary, then the entity is consolidated. The analysis required to identify VIEs and primary beneficiaries is complex and judgmental, and the analysis must be applied to various types of entities and legal structures.
Rental properties are recorded at cost less accumulated depreciation. Depreciation components on rental properties have been provided over estimated useful lives ranging from 3 to 30 years using the straight-line method. Development costs include acquisition, direct and indirect construction costs, interest and real estate taxes incurred during the construction and property stabilizations periods. Maintenance and repair expenses that do not add to the value or prolong the useful life of the property are expensed as incurred. Asset replacements and improvements are capitalized and depreciated over their estimated useful lives.
The Operating Partnership assesses the carrying value of its real estate investments by monitoring investment market conditions and performance compared to budget for operating properties and joint ventures, and by monitoring estimated costs for properties under development. Local market knowledge and data is used to assess carrying values of properties and the market value of acquisition opportunities. Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount is evaluated.
34

If the sum of the property’s expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Operating Partnership will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. Adverse changes in market conditions or poor operating results of real estate investments could result in impairment charges. When the Operating Partnership determines that a property is held for sale, it discontinues the periodic depreciation of that property. The criteria for determining when a property is held for sale requires judgment and has potential financial statement impact as depreciation would cease and an impairment loss could occur upon determination of held for sale status. Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell. With respect to investments in and advances to joint ventures and affiliates, the Operating Partnership looks to the underlying properties to assess performance and the recoverability of carrying amounts for those investments in a manner similar to direct investments in real estate properties. An impairment charge or investment valuation charge is recorded if the carrying value of the investment exceeds its fair value.
The Operating Partnership capitalizes all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s estimates of the direct and incremental personnel costs and indirect project costs associated with our development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development accounting, legal fees, and various office costs that clearly relate to projects under development.
The Operating Partnership bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.
Forward Looking Statements
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Operating Partnership's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Operating Partnership's expectations as to the timing of completion of current development and redevelopment projects and the stabilization dates of such projects, expectation as to the total projected costs and rental rates of development and redevelopment projects, beliefs as to the adequacy of future cash flows to meet operating requirements and to provide for dividend payments in accordance with REIT requirements, expectations as to the amount of capital expenditures, expectations as to the amount of non-revenue generating capital expenditures, future acquisitions, the Operating Partnership's anticipated development projects in 2006, the anticipated performance of the second Essex Apartment Value Fund ("Fund II"), the anticipated performance of existing properties, anticipated results from various geographic regions and the Operating Partnership’s investment focus in such regions, statements regarding the Operating Partnership's financing activities, and the use of proceeds from such activities.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Operating Partnership will fail to achieve its business objectives, that the actual completion of development projects will be subject to delays, that the stabilization dates of such projects will be delayed, that the total projected costs of current development projects will exceed expectations, that the Operating Partnership's 2006 development strategy will change, that such development projects will not be completed, that development projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Operating Partnership's current expectations, that the Operating Partnership's partners in Fund II fail to fund capital commitments as contractually required, that there may be a downturn in the markets in which the Operating Partnership's properties are located, that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, as well as those risks, special considerations, and other factors discussed under the caption “Potential Factors Affecting Future Operating Results” below and those discussed in Item 1A, Risk Factors, of this Form 10-K, and those risk factors and special considerations set forth in the Operating Partnership's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of the Operating Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All forward-looking statements are made as of today, and the Operating Partnership assumes no obligation to update this information.
35

Potential Factors Affecting Future Operating Results
Many factors affect the Operating Partnership’s actual financial performance and may cause the Operating Partnership’s future results to be different from past performance or trends. These factors include those set forth under the caption “Risk Factors” in Item 1A. of this Annual Report on Form 10-K and the following:
Development and Redevelopment Activities
The Operating Partnership pursues multifamily residential properties and development and redevelopment projects from time to time. These projects generally require various government and other approvals, the receipt of which cannot be assured. The Operating Partnership's development and redevelopment activities generally entail certain risks, including the following:
·funds may be expended and management's time devoted to projects that may not be completed;
·construction costs of a project may exceed original estimates possibly making the project economically unfeasible;
·projects may be delayed due to, among other things, adverse weather conditions;
·occupancy rates and rents at a completed project may be less than anticipated; and
·expenses at a completed development project may be higher than anticipated.
These risks may reduce the funds available for distribution to the Operating Partnership's unitholders. Further, the development and redevelopment of properties is also subject to the general risks associated with real estate investments.
Interest Rate Fluctuations
The Operating Partnership monitors changes in interest rates and believes that it is well positioned from both a liquidity and interest rate risk perspective. However, current interest rates are at historic lows and potentially could increase rapidly to levels more in line with higher historical levels. The immediate effect of significant and rapid interest rate increases would result in higher interest expense on the Operating Partnership's variable interest rate debt. The effect of prolonged interest rate increases could negatively impact the Operating Partnership's ability to make acquisitions and develop properties at economic returns on investment and the Operating Partnership's ability to refinance existing borrowings at acceptable rates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Operating Partnership is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Operating Partnership’s real estate investment portfolio and operations. The Operating Partnership’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Operating Partnership borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Operating Partnership does not enter into derivative or interest rate transactions for speculative purposes.
The Operating Partnership’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows. Management believes that the carrying amounts of its LIBOR debt approximates fair value as of December 31, 2005 because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available to the Operating Partnership for similar instruments. Management has estimated that the fair value of the Operating Partnership’s $1.14 billion of fixed rate mortgage notes payable and exchangeable bonds at December 31, 2005 is approximately $1.18 billion based on the terms of existing mortgage notes payable compared to those available in the marketplace.
   
For the Years Ended December 31
   
2006
  
2007(1)
  
2008(2)
  
2009
  
2010(3)
  
Thereafter
  
Total
  
Fair value
(In thousands)                        
Fixed rate debt $11,640
 
$70,804
 
$148,813
 
$25,276
 
$158,871
 
$727,789
 
$1,143,193
 
$1,184,182
Average interest rate  7.1%  5.9%  6.7%  6.7%  8.0%  5.1%      
Variable rate LIBOR debt $- $- $- $25,000 $- $186,725
(4)
$211,725 $211,725
Average interest rate 
 
-
 
 
-
 
 
-
 
 
6.7%
 
 
-
 
 
4.0%
 
 
 
 
 
 
36

(1) $50,000 covered by a forward-starting swap at a fixed rate of 4.927%, with a settlement date on or before October 1, 2007.
(2) $50,000 covered by a forward-starting swap at a fixed rate of 4.869%, with a settlement date on or before October 1, 2008. Also, effective February 2006, $25,000 covered by a forward-starting swap at a fixed rate of 5.082%, with a settlement date on or before January 1, 2009.
(3) Effective February 2006, $100,000 covered by two forward-starting swaps at a fixed rate of 5.099%, with a settlement date on or before January 1, 2011.
(4) $152,749 subject to interest rate caps.
The table incorporates only those exposures that exist as of December 31, 2005; it does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates.
The Operating Partnership’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks.  To accomplish this objective, the Operating Partnership primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
Item 8. Financial Statements and Supplemental Data
The response to this item is submitted as a separate section of this Form 10-K. See Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of December 31, 2005, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to material information relating to the Operating Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission.
There were no changes in the Operating Partnership’s internal control over financial reporting, that occurred during the quarter ended December 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Operating Partnership have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2005, our internal control over financial reporting was effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included herein.
Item 9B. Other Information
None.
37

PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders’ meeting to be held on May 9, 2006.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders’ meeting to be held on May 9, 2006.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders’ meeting to be held on May 9, 2006.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders’ meeting to be held on May 9, 2006.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders’ meeting to be held on May 9, 2006.
38

PART IV
Item 15. Exhibits and Financial Statement Schedules
(A) Financial Statements
(1) Consolidated Financial Statements
Page
Reports of Independent Registered Public Accounting Firm
Balance Sheets:
As of December 31, 2005 and 2004 
Statements of Operations:
Years ended December 31, 2005, 2004 and 2003 
F-5
Statements of Partners’ Capital:
Years ended December 31, 2005, 2004 and 2003
Statements of Cash Flows:
Years ended December 31, 2005, 2004 and 2003
F-7
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedule - Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2005
(3) See the Exhibit Index immediately following the signature page and certifications for a list of exhibits filed or incorporated by reference as part of this report.
(B) Exhibits
The Operating Partnership hereby files, as exhibits to this Form 10-K, those exhibits listed on the Exhibit Index referenced in Item 15(A)(3) above.
39

Report of Independent Registered Public Accounting Firm

The Partners
Essex Portfolio, L.P.:
We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting, appearing under Item 9A, that Essex Portfolio, L.P. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Essex Portfolio L.P.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Essex Portfolio, L.P.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Essex Portfolio, L.P. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Essex Portfolio, L.P. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
F-1
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Essex Portfolio, L.P. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2005 and the related financial statement schedule III, and our report dated March 15, 2006, expressed an unqualified opinion on those consolidated financial statements.
/S/ KPMG LLP
              KPMG LLP
San Francisco, California
March 15, 2006


F-2

Report of Independent Registered Public Accounting Firm

The Partners
Essex Portfolio, L.P.:
We have audited the accompanying consolidated balance sheets of Essex Portfolio, L.P. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule III. These consolidated financial statements and the accompanying financial statement schedule III are the responsibility of Essex Portfolio, L.P.’s management. Our responsibility is to express an opinion on these consolidated financial statements and the accompanying financial statement schedule III based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Essex Portfolio, L.P. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule III, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Essex Portfolio, L.P.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/S/ KPMG LLP
              KPMG LLP
San Francisco, California
March 15, 2006


F-3

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004
(Dollars in thousands)
  
 2005
 
 2004
 
ASSETS
       
Real estate:       
  Rental properties:       
      Land and land improvements $554,449 $536,600 
      Buildings and improvements  1,945,480  1,834,594 
   2,499,929  2,371,194 
Less accumulated depreciation  (399,854) (329,652)
   2,100,075  2,041,542 
Real estate investments held for sale, net of accumulated     
    depreciation of $496 as of December 31, 2004  -  14,445 
Investments  27,228  49,712 
Real estate under development  37,143  38,320 
   2,164,446  2,144,019 
Cash and cash equivalents-unrestricted  14,337  10,644 
Cash and cash equivalents-restricted  13,937  21,255 
Notes receivable and other receivables from related parties  672  1,435 
Notes and other receivables  7,705  9,535 
Prepaid expenses and other assets.  23,078  19,591 
Deferred charges, net  15,115  10,738 
        Total assets $2,239,290 $2,217,217 
        
LIABILITIES AND PARTNERS' CAPITAL
       
Mortgage notes payable $1,104,918 $1,067,449 
Exchangeable bonds  225,000  - 
Lines of credit  25,000  249,535 
Accounts payable and accrued liabilities  32,982  29,997 
Distributions payable  22,496  21,976 
Other liabilities  12,520  11,853 
Deferred gain  2,193  5,000 
        Total liabilities  1,425,109  1,385,810 
Minority interests  47,522  49,254 
Redeemable convertible limited partnership units  4,750  4,750 
        
Partners' Capital:       
  General partner:       
      Common Equity  555,895  566,865 
     Preferred Equity (liquidation value of $25,000)  24,412  24,412 
   580,307  591,277 
Limited partners:       
    Common Equity  54,252  59,436 
    Preferred Equity (liquidation value of $130,000)  126,690  126,690 
   180,942  186,126 
Accumulated other comprehensive income  660  - 
      Total partners' capital  761,909  777,403 
Commitments and contingencies       
        
      Total liabilities and partners' capital $2,239,290 $2,217,217 
See accompanying notes to consolidated financial statements.
F-4
               ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003
(Dollars in thousands, except per unit amounts)
  
 2005
 
 2004
 
 2003
 
Revenues:          
    Rental and other property $316,340 $280,719 $248,806 
    Management and other fees from affiliates  10,951  23,146  6,027 
   327,291  303,865  254,833 
Expenses:          
    Property operating, excluding real estate taxes  77,967  71,238  61,578 
    Real estate taxes  27,384  24,563  19,159 
    Depreciation and amortization  79,978  71,656  56,647 
    Interest  73,614  63,023  52,410 
    Amortization of deferred financing costs  1,970  1,587  1,197 
    General and administrative  19,148  18,084  9,637 
    Other expenses  5,827  -  - 
   285,888  250,151  200,628 
           
Gain on the sale of real estate  6,391  7,909  - 
Interest and other income  8,621  3,173  688 
Equity income in co-investments  19,030  41,230  3,296 
Minority interests  (5,687) (3,498) (4,134)
      Income from continuing operations before income tax provision  69,758  102,528  54,055 
Income tax provision  (2,538) (257) - 
Income from continuing operations  67,220  102,271  54,055 
           
Discontinued operations:          
    Operating income from real estate sold  1,861  2,255  2,911 
    Gain on sale of real estate  29,219  -  - 
    Impairment loss  -  (718) - 
      Income from discontinued operations  31,080  1,537  2,911 
      Net income  98,300  103,808  56,966 
Write off of Series C preferred units offering costs  -  -  (625)
Write off of Series E preferred units offering costs  -  (1,575) - 
Amortization of discount on Series F preferred stock  -  -  (336)
Distribution on preferred units - Series F  (1,953) (1,952) (195)
Distribution on preferred units - limited partners  (10,238) (14,175) (17,996)
    Net income available to common units $86,109 $86,106 $37,814 
Per common unit data:          
  Basic:          
    Income from continuing operations available to common units $2.17 $3.35 $1.47 
    Income from discontinued operations  1.23  0.06  0.12 
      Net income available to common units $3.40 $3.41 $1.59 
           
Weighted average number of common units outstanding during the          
  year  25,343,695  25,255,190  23,737,077 
Diluted:          
  Income from continuing operations available to common units $2.14 $3.32 $1.46 
  Income from discontinued operations  1.21  0.06  0.12 
    Net income available to common units $3.35 $3.38 $1.58 
           
Weighted average number of common units outstanding during the          
  year  25,693,637  25,490,266  23,947,930 
           
See accompanying notes to consolidated financial statements.
F-5
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Partners’ Capital
Years ended December 31, 2005, 2004 and 2003
(Dollars and units in thousands)
                                       
General Partner
 
Limited Partners
 
 Accumulated
    
       
 Preferred
      
 Preferred
 
 Other
    
  
Common Equity
 
 Equity
 
Common Equity
 
 Equity
 
 Comprehensive
    
  
Units
 
 Amount
 
 Amount
 
Units
 
 Amount
 
 Amount
 
 Income
 
 Total
 
Balances at December 31, 2002  20,983  485,691  -  2,320  51,689  204,490  -  741,870 
                          
Issuance of common units under                         
    stock-based compensation plans  207  7,501  -  -  -  -  -  7,501 
Issuance of general partner common units  1,636  99,202  -  -  -  -  -  99,202 
Contribution of general partner                         
    preferred equity  -  -  24,076  -  -  -  -  24,076 
Amortization of discount on general                         
partner preferred equity  -  (302) 336  -  (34) -  -  - 
Redemption of limited partner common units  -  -  -  (15) (769) -  -  (769)
Redemption of Series C preferred unit  -  -  -  -  -  (25,000) -  (25,000)
Write off of Series C preferred unit                         
    offering costs  -  (562) -  -  (63) 625  -  - 
Vested series Z incentive units  -  -  -  16  545  -  -  545 
Reallocation of partners' capital  -  (2,203) -  -  2,203  -  -  - 
Net income  -  34,798  195  -  3,977  17,996  -  56,966 
Partners' distributions  -  (67,138) (195) -  (7,254) (17,996) -  (92,583)
Balances at December 31, 2003  22,826  556,987  24,412  2,321  50,294  180,115  -  811,808 
                          
Issuance of common units under                         
    stock-based compensation plans  155  6,058  -  -  -  -  -  6,058 
Issuance of general partner common units  53  2,307                 2,307 
Issuance of limited partners' common units        -  184  7,213  -  -  7,213 
Redemption of limited partner common units  -  -  -  (62) (3,757) -  -  (3,757)
Redemption of Series E preferred unit  -  -  -  -  -  (55,000) -  (55,000)
Write off of Series E preferred unit                         
    offering costs  -  (1,422) -  -  (153) 1,575  -  - 
Vested series Z and Z-1 incentive units  -  -  -  35  537  -  -  537 
Reallocation of partners' capital  -  (4,264) -  -  4,264  -  -  - 
Net income  -  79,163  1,952  -  8,518  14,175  -  103,808 
Partners' distributions  -  (71,964) (1,952) -  (7,480) (14,175) -  (95,571)
Balances at December 31, 2004  23,034 $566,865 $24,412  2,478 $59,436 $126,690 $- $777,403 
Comprehensive income:                         
    Net income  -  77,763  1,953  -  8,346  10,238  -  98,300 
    Change in fair value of cash flow hedges  -  -  -  -  -  -  660  660 
Comprehensive income                       98,960 
Issuance of common units under                         
    stock-based compensation plans  103  5,767  -  -  -  -  -  5,767 
Retirement of Essex Property Trust, Inc.                         
    common stock  (286) (25,000) -  -  -  -  -  (25,000)
Redemption of limited partner common units  -  -  -  (89) (2,861) -  -  (2,861)
Vested series Z and Z-1 incentive units  -  -  -  48  2,351  -  -  2,351 
Reallocation of partners' capital (1)  -  5,135  -  -  (5,135) -  -  - 
Partners' distributions  -  (74,635) (1,953) -  (7,885) (10,238) -  (94,711)
Balances at December 31, 2005  22,851 $555,895 $24,412 $2,437 $54,252 $126,690 $660 $761,909 
(1) During the twelve months ended December 31, 2005, the Operating Partnership recorded a true-up of the reallocation of minority interest as of December 31, 2004. This true-up was not material to stockholders’ equity at either December 31, 2005 or December 31, 2004.
See accompanying notes to consolidated financial statements.
F-6

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
(Dollars in thousands)

   
  
2005
 
 2004
 
 2003
 
Cash flows from operating activities:         
  Net income $98,300 $103,808 $56,966 
  Minority interests  5,687  3,498  4,134 
  Adjustments to reconcile net income to net          
   cash provided by operating activities:          
   Gain on the sales of real estate  (37,802) (7,909) - 
   The Company's share of gain on the sales of co-investments assets  (18,115) (39,241) - 
   Impairment loss  1,300  718  - 
   Equity income of limited partnerships  (7,420) (20,279) (3,295)
   Depreciation and amortization  80,075  72,923  57,587 
   Amortization of deferred financing costs  1,970  1,587  1,197 
   Changes in operating assets and liabilities:          
      Prepaid expenses and other assets  (4,762) (1,189) (3,103)
      Accounts payable and accrued liabilities  4,709  5,942  (6,212)
      Other liabilities  667  1,842  682 
    Net cash provided by operating activities
  124,609  121,700  107,956 
Cash flows from investing activities:          
  Additions to real estate:          
      Acquisitions of real estate  (91,496) (229,437) (65,607)
      Acquisition of Sachs' Portfolio  -  -  (1,766)
      Improvements to recent acquisitions  (5,009) (10,062) (9,319)
      Redevelopment  (14,229) (8,056) (3,329)
      Revenue generating capital expenditures  (2,933) (2,483) (219)
      Non-revenue generating capital expenditures.  (14,568) (10,095) (9,248)
  Disposition of real estate  68,585  143,549  - 
  Decrease (increase) in restricted cash  7,318  (10,080) 3,724 
  Additions to notes receivable from investees          
    other related parties and other receivables  (3,220) (5,365) (3,228)
  Repayments of notes from investees, other          
    related parties and other receivables  4,880  4,251  183 
  Net distribution from (contribution) to investments in          
    corporations and limited partnerships  44,690  31,129  (26,814)
  Additions to real estate under development  (24,861) (28,372) (30,441)
    Net cash used in investing activities
  (30,843) (125,021) (146,064)
Cash flows from financing activities:          
  Proceeds from mortgage and other notes payable and lines of credit  205,096  447,870  306,238 
  Repayment of mortgage and other notes payable and lines of credit  (389,363) (287,359) (271,229)
  Additions to deferred charges  (6,339) (4,050) (1,758)
  Proceeds from exchangeable bonds  225,000  -  - 
  Retirement of Essex Property Trust, Inc. common stock  (25,000) -  - 
  Net proceeds from stock options exercised  4,489  5,483  6,865 
  Net proceeds for issuance of common units to general partner  -  -  97,072 
  Net proceeds for issuance of preferred equity to general partner  -  -  24,664 
  Redemption of limited partner units and minority interest  (4,528) (7,080) (27,399)
  Redemption of limited preferred partner Series E units  -  (55,000) - 
  Distributions to limited partner units and minority interest  (23,165) (27,948) (30,487)
  Distributions to general partner  (76,263) (72,719) (63,166)
    Net cash (used in) provided by financing activities
  (90,073) (803) 40,800 
Net increase (decrease) in cash and cash equivalents  3,693  (4,124) 2,692 
Cash and cash equivalents at beginning of year  10,644  14,768  12,076 
Cash and cash equivalents at end of year $14,337 $10,644 $14,768 
           
See accompanying notes to consolidated financial statements. (Continued)
F-7
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
  
 2005
 
 2004
 
 2003
 
Supplemental disclosure of cash flow information:          
    Cash paid for interest, net of $1,100, $1,997 and $4,084          
    capitalized in 2005, 2004 and 2003, respectively $71,619 $60,007 $48,284 
Supplemental disclosure of noncash investing and          
  financing activities:          
    Real estate investment transferred to rental properties $- $(1,400)$- 
    Mortgage notes payable assumed in connection          
      with the purchase of real estate $- $167,635 $- 
    Issuance of Operating Partnership units in          
      connection with the purchase of real estate $- $4,805 $- 
    Capitalized costs relating to arbitration agreement in          
      connection with the purchase of real estate $- $- $7,200 
    Issuance of common stock in exchange for the          
      redemption of Down REIT units $- $2,307 $- 
    Real estate assets acquired due to merger:          
      Real estate $- $- $3,970 
      Additional paid in capital  -  -  (2,170)
   $ - $- $1,800 
           
(Concluded)
See accompanying notes to consolidated financial statements.
F-8

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
(Dollars in thousands, except for per share and per unit amounts)
(1) Organization
The accompanying consolidated financial statements present the accounts of Essex Portfolio, L.P. (the "Operating Partnership"), and its subsidiaries. Essex Property Trust, Inc. (the "Company") was incorporated in the state of Maryland in March 1994. On June 13, 1994, the Company commenced operations with the completion of an initial public offering (the Offering) in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112.1 million were used to acquire a 77.2% general partnership interest in the Operating Partnership.
The common equity limited partners own a 9.6% interest in the Operating Partnership as of December 31, 2005. The common equity limited partners may convert their 2,296,973 Operating Partnership units into an equivalent number of shares of Company common stock. The Company has reserved shares of common stock for such conversions. These conversion rights may be exercised by the common equity limited partners at any time through 2024.
On December 17, 2002, the Operating Partnership acquired, by merger, John M. Sachs, Inc. (“Sachs Portfolio”) resulting in the acquisition of its real estate portfolio, which consisted of 20 multifamily properties, five recreational vehicle parks, two manufactured housing communities and two small office buildings. Total consideration in the transaction was $306.7 million and was structured as a tax-free reorganization whereby the Company: (i) issued 2,719,875 shares of its common stock valued at $136.8 million, (ii) assumed mortgages on four of the newly acquired properties for approximately $64.6 million with a fixed interest rate of 5.51%, maturing in January 2013, (iii) assumed and repaid unsecured liabilities in the amount of approximately $33.0 million, and (iv) paid the balance in cash of $72.2 million. The Operating Partnership accounted for this transaction using the purchase method of accounting which resulted in the allocation of the purchase price to the assets and liabilities acquired based on their fair values. The fair value of assets and liabilities were based on management’s estimates. No goodwill was recognized in connection with this purchase.
As of December 31, 2005, the Operating Partnership operates and has ownership interests in 126 multifamily properties (containing 26,587 units), three recreational vehicle parks (containing 562 spaces), three office buildings (totaling approximately 166,340 square feet), and one manufactured housing community (containing 157 sites) (collectively, the “Properties”). The Properties are located in Southern California (Los Angeles, Ventura, Orange, San Diego, and Riverside counties), Northern California (the San Francisco Bay Area), the Pacific Northwest (Seattle, Washington, and Portland, Oregon metropolitan areas) and other areas (Nevada and Houston, Texas).
(2) Summary of Critical and Significant Accounting Policies
(a) Principles of Consolidation
The accounts of the Operating Partnership, its controlled subsidiaries and its VIEs in which it is the primary beneficiary are consolidated in the accompanying financial statements. All significant inter-company accounts and transactions have been eliminated. We use the equity method to account for investments that do not qualify as variable interest entities and where we do not own a majority of the economic interest, but have the ability to exercise significant influence over the operating and financial policies of the investee. For an investee accounted for under the equity method, our share of net earnings or losses of the investee is reflected in income as earned and distributions are credited against the investment as received.
As of January 1, 2004, the Operating Partnership adopted FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (revised) using the retroactive restatement approach and amounts have been restated for the year ended December 31, 2003. The accompanying consolidated financial statements for all periods present the consolidated financial position and results of operations of Essex Management Corporation (EMC), Essex Fidelity I Corporation (EFC), 17 Down REIT limited partnerships (comprising ten properties), an office building that is subject to loans made by the Operating Partnership, and the multifamily improvements owned by a third party in which the Operating Partnership owns the land underlying these improvements and from which the Operating Partnership receives fees, including land lease, subordination and property management fees.
F-9
The Operating Partnership's total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $230.9 million and $146.7 million, respectively, at December 31, 2005 and $238.1 million and $155.1 million, respectively, at December 31, 2004.
The Down REIT entities that collectively own ten multifamily properties (1,831 units) were investments made under arrangements whereby EMC became the general partner, the Operating Partnership became a special limited partner, and the other limited partners were granted rights of redemption for their interests. Such limited partners can request to be redeemed and the Operating Partnership can elect to redeem their rights for cash or by issuing shares the Company’s common stock on a one share per unit basis. Conversion values will be based on the market value of the Company's common stock at the time of redemption multiplied by the number of units stipulated under the above arrangements. The other limited partners receive distributions based on the Company's current dividend rate times the number of units held. At December 31, 2005, the maximum number of shares that could be issued to meet redemption of these Down REIT entities is 1,300,179. As of December 31, 2005 and 2004, the carrying value of the other limited partners' interests is presented at their historical cost and is classified within minority interests in the accompanying consolidated balance sheets.
Minority interests include the 9.6% and 9.7% limited partner interests in the Operating Partnership not held by the Company at December 31, 2005 and 2004, respectively. The Company periodically adjusts the carrying value of minority interest in the Operating Partnership to reflect its share of the book value of the Operating Partnership. Such adjustments are recorded to stockholders’ equity as a reallocation of minority interest in the Operating Partnership in the accompanying consolidated statements of stockholders’ equity. The minority interest balance also includes the Operating Partnership’s cumulative redeemable preferred units (see Note 12).
Interest holders in VIEs consolidated by the Operating Partnership are allocated a priority of net income equal to the cash payments made to those interest holders for services rendered or distributions from cash flow. The remaining results of operations are generally allocated to the Operating Partnership.
Properties consolidated in accordance with FIN 46R were encumbered by third party, non-recourse loans totaling $141.8 million and $151.3 million as of December 31, 2005 and 2004, respectively.
As of December 31, 2005 the Operating Partnership is involved with four VIEs, of which it is not deemed to be the primary beneficiary. Total assets and liabilities of these entities as of December 31, 2005 were approximately $94.0 million and $73.7 million, respectively. The Operating Partnership does not have a significant exposure to loss resulting from its involvement with these unconsolidated VIEs.
(b) Real Estate Rental Properties
Significant expenditures, which improve or extend the life of an asset and have a useful life of greater than one year, are capitalized. Operating real estate assets are stated at cost and consist of land, buildings and improvements, furniture, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Expenditures for maintenance and repairs are charged to expense as incurred.

The depreciable life of various categories of fixed assets are as follows:
Computer equipment
3 years
Interior unit improvements5 years
Land improvements and certain exterior components of real property
10 years
Real estate structures30 years
In accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” the Operating Partnership capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Operating Partnership currently believes future development is probable. Pre-development costs for which a future development is no longer considered probable are charged to expense.
Costs incurred with the development or redevelopment of real estate assets are capitalized if they are clearly associated with the development or redevelopment of rental property, or are associated with the construction or expansion of real property. Such capitalized costs include land, land improvements, allocated costs of the Operating Partnership’s project management staff, construction costs, as well as interest and related loan fees, property taxes and insurance.
F-10
Capitalization begins when active development commences or when a redevelopment asset is taken out-of-service. Capitalization ends when the apartment home is completed and the property is available for a new residence.
In accordance with FASB’s Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” the Operating Partnership allocates the purchase price of real estate to land and building, and identifiable intangible assets, such as the value of above, below and at-market in-place leases. The values of the above and below market leases are amortized and recorded as either a decrease (in the case of above market leases) or an increase (in the case of below market leases) to rental revenue over the remaining term of the associated leases acquired. Acquired at-market leases are amortized to expense over the term the Operating Partnership expects to retain the acquired tenant, which is generally 20 months.
In accordance with SFAS 141 and its applicability to acquired in-place leases, we perform the following evaluation for properties we acquire:
(1)  estimate the value of the real estate “as if vacant” as of the acquisition date;  
(2)  allocate that value among land and building and determine the associated asset life for each;      
(3)  compute the value of the difference between the “as if vacant” value and the purchase price, which will represent the total intangible assets;  
(4)  allocate the value of the above and below market leases to the intangible assets and determine the associated life of the above market/ below market leases;
(5)  allocate the remaining intangible value to the at-market in-place leases or customer relationships, if any, and the associated lives of these assets.
Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment or held for sale may not be fully recoverable, the carrying amount will be evaluated for impairment. If the sum of the property’s expected future cash flows (undiscounted and without interest charges) is less than the carrying amount (including intangible assets) of the property, then the Operating Partnership will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. Such fair value of a property is determined using conventional real estate valuation methods, such as discounted cash flow, the property’s unleveraged yield in comparison to the unleveraged yields and sales prices of similar properties that have been recently sold, and other third party information, if available. During the fourth quarter of 2005, the Operating Partnership recorded an impairment loss of $1.3 million resulting from the write-down of a property in Houston, Texas, to reduce the property’s carrying value to its estimated fair value as of December 31, 2005, and the amount is recorded in other expenses in the accompanying consolidated statements of operations.
In the normal course of business, the Operating Partnership will receive offers for sale of its properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. Essex classifies real estate as "held for sale" when all criteria under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) have been met. In accordance with SFAS 144, the Operating Partnership presents income and gains/losses on properties sold as discontinued operations net of minority interests. Real estate investments accounted for under the equity method of accounting remain classified in continuing operations upon disposition. (See Note 7 for a description of the Operating Partnership’s discontinued operations for 2005, 2004, and 2003).
(c) Investments and Joint Ventures
The Operating Partnership owns investments in joint ventures and affiliates and has significant influence but its ownership interest does not meet the criteria for consolidation in accordance with FIN 46R. Therefore, we account for our interest using the equity method of accounting. Under the equity method of accounting, the investment is carried at the cost of assets contributed or distributed, plus the Operating Partnership’s equity in undistributed GAAP earnings or losses since its initial investment. The Operating Partnership’s share of equity in income and gains on sales of real estate are included in other income in the accompanying consolidated statements of operations.
Some of these investments and/or joint ventures compensate the Operating Partnership for its asset management services and may provide promote distributions if certain financial return benchmarks are achieved. Asset management fees and promote fees are recognized when the earnings events have occurred and there is GAAP earnings in the underlying entities. Asset management fees and promote fees are reflected in interest and other and equity income in co-investments respectively, in the accompanying consolidated statements of operations.
F-11
(d) Revenues and Gains on Sale of Real Estate
Revenues from tenants renting or leasing apartment units, recreational vehicle park spaces or manufactured housing community spaces are recorded when due from tenants and are recognized monthly as it is earned, which is not materially different than on a straight-line basis. Units or spaces are rented under short-term leases (generally, lease terms of 6 to 12 months) and may provide no rent for one or two months, depending on the market conditions and leasing practices of our competitors in each sub-market at the time the leases are executed.
The Operating Partnership recognizes gains on sales of real estate when a contract is in place, a closing has taken place, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property and the Operating Partnership does not have a substantial continuing involvement in the property.
(e) Income Taxes
The Operating Partnership utilizes taxable REIT subsidiaries (“TRS”) for various revenue generating or investment activities. The TRS’s are subject to tax and are consolidated by the Operating Partnership. No provision for income taxes has been made for the Operating Partnership, except for consolidated TRS entities, as taxable income or loss as is reportable on the tax returns of the individual partners on their proportionate interest in the Operating Partnership.
(f) Notes Receivable and Interest Income
Notes receivable relate to real estate financing arrangements that exceed one year. They bear interest at a market rate based on the borrower’s credit quality and are recorded at face value. Interest is recognized over the life of the note. The Operating Partnership requires collateral for the notes.
Each note is analyzed to determine if it is impaired pursuant to SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. A note is impaired if it is probable that the Operating Partnership will not collect all principal and interest contractually due. The impairment is measured periodically based on the present value of expected future cash flows discounted at the note’s effective interest rate. The Operating Partnership does not accrue interest when a note is considered impaired. All cash receipts on impaired notes are applied to reduce the principal amount of such notes until the principal has been recovered and, thereafter, are recognized as interest income.
(g) Interest Rate Protection, Swap, and Forward Contracts
The Operating Partnership has from time to time used interest rate protection, swap and forward contracts to manage its interest rate exposure on current or identified future debt transactions. The Operating Partnership accounts for such derivative contracts using SFAS No. 133. Under SFAS No. 133, derivative instruments are required to be included in the balance sheet at fair value. The changes in the fair value of the derivatives are accounted for depending on the use of the derivative and whether it has been designated and qualifies as a part of a hedging relationship.
The Operating Partnership records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Operating Partnership assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. All existing instruments are considered cash flow hedges, and the Operating Partnership does not have any fair value hedges as of December 31, 2005.
F-12
The Operating Partnership’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks.  To accomplish this objective, the Operating Partnership primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Operating Partnership’s hedged debt. The Operating Partnership is hedging its exposure to the variability in future cash flows for a portion of its forecasted transactions over a maximum period of 30 months as of December 31, 2005.
(h) Deferred Charges
Deferred charges are principally comprised of loan fees and related costs which are amortized over the terms of the related borrowing in a manner which approximates the effective interest method.
(i) Interest
The Operating Partnership capitalized $1.1 million, $2.0 million, and $4.1 million of interest related to the development of real estate during 2005, 2004, and 2003, respectively.
(j) Cash Equivalents and Restricted Cash
Highly liquid investments with original maturities of three months or less when purchased are classified as cash equivalents. Restricted cash relates to reserve requirements in connection with the Operating Partnership’s mortgage debt.
(k) Stock-based Compensation
As of January 1, 2004, the Company adopted the fair value method of accounting for its stock-based compensation plans using the retroactive restatement method as provided by SFAS No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." Under the fair value method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is expensed over the vesting period. The fair value of stock options granted for the years ended December 31, 2005, 2004 and 2003 was $10.06, $8.84 and $4.18 per share, respectively, and was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:

2005
2004
2003
Stock price$69.11-$91.88$62.34-$84.46$51.01-$61.58
Risk-free interest rates3.64%-4.50%3.34%-3.94%2.58%-3.21%
Expected lives5-6 years5 years5-6 years
Volatility18.09%-18.54%19.07%-19.14%17.89%-19.18%
Dividend yield4.22%-5.13%4.26%-5.07%5.66%-6.12%
The Operating Partnership has adopted an incentive program involving the issuance of Series Z Incentive Units and Series Z-1 Incentive Units (collectively referred to as “Z Units”) of limited partnership interest in the Operating Partnership. Vesting in the Z Units is based on performance criteria established in the plan. The criteria can be revised at the beginning of the year by the Board's Compensation Committee if the committee deems that the plan's criteria is unachievable for any given year.  The sale of Z units is contractually prohibited and cannot be converted into Operating Partnership units until certain conditions are met or 15 years after the inception of the plan. The estimated fair value of a Z unit is determined on the grant date and considers the Company's current stock price, the dividends that are not paid on unvested units and a marketability discount for the 8 to 15 years of illiquidity.  Compensation expense is calculated by taking annual vesting increases multiplied by the estimated fair value as of the grant date less its $1.00 purchase price.
(l) Legal costs
Legal costs associated with matters arising out of the normal course of our business are expensed as incurred. Legal costs incurred in connection with non-recurring litigation that is not covered by insurance are accrued when amounts are probable and estimable.
F-13
(m) Accounting Estimates and Reclassifications
The preparation of consolidated financial statements, in accordance with U.S. generally accepted accounting principles (GAAP), requires the Operating Partnership to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Operating Partnership evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties, its investments in and advances to joint ventures and affiliates, its notes receivables and its qualification as a Real Estate Investment Trust (“REIT”). The Operating Partnership bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.
Certain reclassifications have been made to prior year balances in order to conform to the current year presentation. Such reclassifications have no impact on reported earnings, total assets or total liabilities.
(n) New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets an amendment of APB No. 29”. This Statement amends APB Opinion No. 29, “Accounting for Non-monetary Transactions” to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. That exception required that some non-monetary exchanges be recorded on a carryover basis versus this Statement, which requires that an entity record a non-monetary exchange at fair value and recognize any gain or loss if the transaction has commercial substance. This Statement is effective for fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS No. 153 will have a material impact on our financial position, net earnings or cash flows.

In December 2004, the FASB issued SFAS No. 123 revised, “Share-Based Payment”. This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees”. The Statement requires companies to recognize in the income statement the grant-date fair value of stock options and other equity based compensation issued to employees. We will adopt the provisions of SFAS 123 revised effective January 1, 2006. The adoption of this Statement is not expected to have a material impact on our future results of operations.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, An Interpretation of FASB Statement No. 143”. A conditional asset retirement obligation refers to a legal obligation to retire assets where the timing and/or method of settlement are conditioned on future events. FIN No. 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. We adopted the provisions of FIN 47 in 2005. The adoption of this Interpretation did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2005, the FASB ratified the EITF’s consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partner Have Certain Rights.” This consensus establishes the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the consensus provides additional guidance. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. This consensus is currently applicable to the Operating Partnership for new or modified partnerships, and will otherwise be applicable to existing partnerships in 2006. We adopted the provisions of EITF 04-5 in 2005 with respect to agreements that were modified (Fund II), and we will adopt the provisions of EITF Issue No. 04-5 in 2006 for agreements that were not modified (Fund I). The adoption of this consensus did not and will not have a material impact on our consolidated financial position, results of operations or cash flows.
(3) Real Estate
(a) Sales of Real Estate and Assets Held for Sale
The Operating Partnership recognizes sales of real estate when a contract has been executed, a closing has occurred, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property and the Operating Partnership does not have a substantial continuing involvement in the property.
F-14
Each property is considered a separately identifiable component of the Operating Partnership and is reported in discontinued operations when the operations and cash flows of the property have been (or will be) eliminated from the ongoing operations of the Operating Partnership as a result of a disposal transaction.
For the year ended December 31, 2004, the gain on the sale of The Essex at Lake Merritt was $12.9 million, of which $5.0 million was deferred in 2004 and recognized in 2005 on the cost recovery method when the cash was received. The $5.0 million was deferred because of our continuing involvement with the property. The sale transaction was included in continuing operations as we continued to manage the rented apartment units in the project during the conversion process.
For the year ended December 31, 2005, the gain on the sale of The Eastridge Apartments was $28.0 million net of minority interest, of which $2.2 million was deferred as of December 31, 2005. The $2.2 million was deferred because of our continuing involvement with the property.
(b) Investments
The Operating Partnership has investments in a number of affiliates, which are accounted for under the equity method. The affiliates own and operate multifamily rental properties.
Essex Apartment Value Fund, L.P. (“Fund I”), is an investment fund organized by the Operating Partnership in 2001 to add value through rental growth and asset appreciation, utilizing the Operating Partnership’s acquisition, development, redevelopment and asset management capabilities. Fund I was considered fully invested in 2003. An affiliate of the Operating Partnership, Essex VFGP, L.P. (“VFGP”), is a 1% general partner and is a 20.4% limited partner. The Operating Partnership owns a 99% limited partnership interest in VFGP. Since its formation, Fund I acquired or developed ownership interests in 19 multifamily residential properties, representing 5,406 apartment units with an aggregate cost of approximately $618.0 million and a land parcel in Irvine, California.
In the third quarter of 2004, Fund I entered into a purchase and sale agreement with United Dominion Realty, L.P. (“UDR”) for a sale of sixteen apartment communities, totaling 4,646 units owned by Fund I and, with respect to Coronado at Newport North and South, both Fund I’s and the Operating Partnership’s separate ownership interests, for a contract price of approximately $756.0 million. On October 27, 2004, an additional seven of the remaining nine properties, including the Operating Partnership’s approximate 49.9% ownership interest in Coronado at Newport - North, were sold to UDR for a contract price of $322.0 million, of which $267.6 million represents Fund I’s allocated portion of the contract price based on its ownership interest.
The remaining two multifamily properties under the UDR agreement closed in 2005. Coronado at Newport - South, a 715-unit apartment community in Newport Beach, California was sold in the first quarter of 2005 for $106.0 million and River Terrace, a newly developed 250-unit apartment community in Santa Clara was sold in the third quarter of 2005 for $63.0 million. The remaining asset in Fund I, the Irvine, California land parcel, was sold in the fourth quarter for approximately $10.5 million. As of December 31, 2005, Fund I is in the process of liquidation and will wind-down affairs during 2006.
The Fund I dispositions in 2004, combined with the sale of its 49.9% direct ownership interest in Coronado at Newport North, resulted in the Operating Partnership recognizing equity income from investments of $38.8 million. The Operating Partnership’s share of the gain on the sale of real estate of $39.3 million was reduced by a $505 non-cash loss on the early extinguishment of debt related to the write-off of unamortized loan fees. The Operating Partnership’s general partnership interest provides for “promote distributions” upon attainment of certain financial return benchmarks. During 2004, the Operating Partnership recognized $18.3 million in promote income from Fund I which is recorded in management and other fees from affiliates in the accompanying consolidated statements of operations. The Fund I dispositions in 2005 resulted in the Operating Partnership recognizing equity income from the gain on the sale of investments of $18.1 million, and $7.0 million in promote income.
On September 27, 2004 the Operating Partnership announced the final closing of the Essex Apartment Value Fund II (“Fund II”). Fund II has eight institutional investors including Essex with combined equity commitments of $265.9 million. Essex has committed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II expects to utilize leverage of approximately 65% of the estimated value of the underlying real estate. Fund II will invest in multifamily properties in the Operating Partnership’s targeted West Coast markets with an emphasis on investment opportunities in the Seattle metropolitan area and the San Francisco Bay Area.
F-15
Subject to certain exceptions, Fund II will be the Operating Partnership’s exclusive investment vehicle until October 31, 2006, or when Fund II’s committed capital has been invested, whichever occurs first. Consistent with Fund I, the Operating Partnership will be compensated for its asset management, property management, development and redevelopment services and may receive promote distributions if Fund II exceeds certain financial return benchmarks. As of December 31, 2005 Fund II owned eight apartment communities. There have been no sales in Fund II through December 31, 2005.
In August 2005, the Operating Partnership purchased 500,000 Series A Preferred shares in Multifamily Technology Solutions, Inc. (MTS). The Operating Partnership owns less than 5% of the voting stock of MTS and therefore accounts for this investment on the cost method.

  
 2005
 
 2004
 
Investments in joint ventures accounted for under the equity       
method of accounting:       
        
Direct and indirect LLC member interests of approximately 49.9%:       
  Newport Beach South, LLC $- $11,524 
Limited partnership interest of 20.4% and general partner       
  interest of 1% in Essex Apartment Value Fund, L.P (Fund I)  582  14,140 
Limited partnership interest of 27.2% and general partner       
  interest of 1% in Essex Apartment Value Fund II, L.P (Fund II)  19,340  17,242 
Preferred limited partnership interest in Mountain Vista       
  Apartments (A)  6,806  6,806 
   26,728  49,712 
Investments accounted for under the cost method of accounting:       
        
    Series A Preferred Stock interest in Multifamily Technology       
      Solutions, Inc  500  - 
        
      Total investments $27,228 $49,712 
        
(A)  The preferred limited partnership interest is held in an entity that includes an affiliate of The Marcus & Millichap Company (“TMMC”). TMMC’s Chairman is also the Chairman of the Company.
F-16
The combined summarized financial information of investments in joint ventures, which are accounted for under the equity method, is as follows:
   
December 31,
                       
   
2005
  
2004
   
Balance sheets:         
    Real estate and real estate under development $431,655
 
$322,233   
    Other assets  18,655
 
 
36,709   
      Total assets $450,310
 
$358,942   
          
    Mortgage notes payable $268,325
 
$203,171   
    Other liabilities  83,979
 
 
21,276   
    Partners' capital  98,007
 
 
134,495   
      Total liabilities and partners' capital $450,311
 
$358,942   
          
Operating Partnership's share of capital $26,728 $49,712   
          
   
Years ended
   
December 31,
   
2005
  
2004
  
2003
Statements of operations:         
    Total property revenues $27,566
 
$53,960
 
$68,011
    Total gain on the sale of real estate  41,985 
 
138,657
 
 
-
    Total expenses  (29,240)
 
 
(50,957)
 
 
(66,241)
      Total net income $40,311
 
$141,660
 
$1,770
          
Operating Partnership's share of net income $19,030 $41,230 $3,296
          
(c) Real Estate Under Development
The Operating Partnership is developing three multifamily residential communities, with an aggregate of 505 units. In connection with these development projects, the Operating Partnership has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties and the total estimated cost for these projects is approximately $133,700. As of December 31, 2005, the Operating Partnership’s remaining development commitment, including those held in joint ventures, is approximately $96,600.
(d) Depreciation
Beginning in 2003, the Operating Partnership implemented an upgrade to its subsidiary ledger for accounting for fixed assets. The Operating Partnership completed this system upgrade in the first quarter of 2004. In conjunction with this system upgrade, the Operating Partnership determined that cumulative depreciation expense generated by consolidated or equity method rental properties was understated by approximately $2.1 million through December 31, 2003 and this amount was recorded during the quarter ended March 31, 2004.

(4) Notes Receivable and Other Receivables from Related Parties
Notes receivable and other receivables from related parties consist of the following as of December 31, 2005 and 2004:

  
 2005
 
 2004
 
        
Related party receivables, unsecured:       
Loans made to officers prior to July 31, 2002, bearing interest at 8%,       
due beginning April 2006 $375 $625 
Related party receivables, substantially due on demand  297  810 
Total notes and other receivable from related parties $672 $1,435 
        
Other related party receivables consist primarily of accrued interest income on related party notes receivable from loans to officers, advances, and accrued management fees from joint venture investees. The Operating Partnership’s officers and directors do not have an economic interest in these joint venture investees.
On January 2, 2006 the Compensation Committee of the Operating Partnership’s Board of Directors voted to forgive certain loans made in 1996 by the Operating Partnership to the CEO and COO (then CFO).
F-17
These loans were made to those officers to assist them with paying certain tax liabilities related to their ownership interest in the Operating Partnership. The loans bore interest at 8% per annum and were due and payable in 2006. The loans forgiven totaled $150 in principal and approximately $112 in accrued interest for the CEO, $100 in principal and approximately $75 in accrued interest for the COO. The loans and accrued interest forgiven are recorded in general and administrative expenses in the accompanying consolidated statements of operations.
(5) Notes and Other Receivables
Notes and other receivables consist of the following as of December 31, 2005 and 2004:

  
 2005
 
 2004
 
Note receivable from Lennar Emerald Merritt Partners, LLC, secured,       
  bearing interest at 14%, due August 2008 $- $5,000 
Note receivable from Pacifica Companies, LLC, secured,       
  bearing interest at 12%, due June 2008  2,193  - 
Other receivables  5,512  4,535 
  $7,705 $9,535 
        
Other receivables consist primarily of other advances and subordination fees and land lease fees for the Vista Pointe property.
(6) Related Party Transactions
The Company’s Chairman, George Marcus, is also the Chairman of TMMC, which is a real estate brokerage firm. During the years ended December 31, 2005, 2004, and 2003, the Operating Partnership paid brokerage commissions totaling $0, $350, and $854 to TMMC on the purchase and sales of real estate. The commissions are either capitalized as a cost of acquisition or are reflected as a reduction of the gain on sales of real estate in the accompanying consolidated statements of operations.
Management and other fees from affiliates includes management, promote, development and redevelopment fees totaling $10,951, $23,146, and $6,027 for the years ended December 31, 2005, 2004, and 2003, respectively.

(7) Discontinued Operations

At June 30, 2004, Golden Village Recreational Vehicle Park, a property located in Hemet, California and acquired as part of the John M. Sachs merger in December 2002, met the "held for sale" criteria under SFAS 144. In accordance with SFAS 144, assets and liabilities and the results of operations of the property were presented as discontinued operations in the consolidated financial statements for the period ended June 30, 2004. Upon reclassification as held for sale at June 30, 2004, the Operating Partnership presented Golden Village at its estimated fair value less disposal costs which resulted in an impairment charge of approximately $718. Such fair value was determined using the contractual sales price pursuant to the contract with the buyer of the property. On July 18, 2004, the Operating Partnership sold Golden Village for $6.7 million. No gain or loss was recognized on the sale.
In January 2005, the Operating Partnership sold four non-core assets that were acquired in conjunction with the John M. Sachs’s merger in 2002 for $14.9 million. The four non-core assets were: The Riviera Recreational Vehicle Park and a Manufactured Home Park, located in Las Vegas, Nevada, for which the Operating Partnership had previously entered into master lease and option agreements with an unrelated entity; and two small office buildings, located in San Diego California, aggregating 7,200 square feet. The Operating Partnership recorded a gain of $668 on the sale of these assets, net of minority interests. As of December 31, 2004 Riviera RV Resort and Riviera Mobile Home Park met the “held for sale” criteria under SFAS 144. In accordance with SFAS 144, assets and liabilities and the results of operations of the properties are presented as discontinued operations in the consolidated financial statements for all periods presented.
On June 21, 2005, the Operating Partnership sold Eastridge Apartments, a 188-unit apartment community located in San Ramon, California for a contract price of approximately $47.5 million. The Operating Partnership acquired Eastridge in 1996 for $19.2 million. In conjunction with the sale, the Operating Partnership deferred $2.2 million of the gain on the sale of Eastridge because an affiliate of Essex originated a participating loan to the buyer in the amount of approximately $2.2 million, which allows the Operating Partnership to financially participate in the buyer’s condominium conversion plan.
F-18
The Operating Partnership has recorded the operations and gain on sale of Eastridge Apartments as part of discontinued operations in the accompanying consolidated statement of operations for all periods presented.
The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Operating Partnership owned such assets, as described above.
  
 2005
 
 2004
 
 2003
 
           
Rental revenues $1,233 $2,764 $4,348 
Interest and other  1,134  1,815  547 
      Revenues  2,367  4,579  4,895 
           
Property operating expenses  (506) (2,324) (1,984)
      Operating income from real estate sold  1,861  2,255  2,911 
           
Gain on sale of real estate  29,219  -  - 
Impairment loss  -  (718) - 
           
Income from discontinued operations $31,080 $1,537 $2,911 
           
F-19

(8) Mortgage Notes Payable and Exchangeable Bonds
Mortgage notes payable and exchangeable bonds consist of the following as of December 31, 2005 and 2004:
 
                                                       
   
2005
  
2004
Mortgage notes payable to a pension fund, secured by deeds of trust, bearing      
    interest at rates ranging from 6.62% to 8.18%, interest only payments due      
    monthly for periods ranging from October 2001 through November 2004,      
    principal and interest payments due monthly thereafter, and maturity dates      
    ranging from October 2008 through October 2010. Under certain conditions      
    a portion of these loans can be converted to an unsecured note payable      
   Three loans are cross-collateralized by a total of 13 properties $232,197
 
$235,492
Mortgage notes payable, secured by deeds of trust, bearing interest at ranges      
    ranging from 4.14% to 7.90%, principal and interest payments due monthly,      
    and maturity dates ranging from February 2006 through August 2015 685,996
 
 
620,732
Multifamily housing mortgage revenue bonds secured by deeds of trust on      
    rental properties and guaranteed by collateral pledge agreements, payable      
    monthly at a variable rate as defined in the Loan Agreement      
    (approximately 3.20% at December 2005 and 2.68% at December 2004),      
    plus credit enhancement and underwriting fees ranging from approximately 1.2%      
    to 1.9%. The bonds are convertible to a fixed rate at the Operating Partnership's      
    option. Among the terms imposed on the properties, which are security for      
    the bonds, is a requirement that 20% of the units are subject to tenant income      
    criteria. Principal balances are due in full at various maturity dates from July      
    2020 through March 2034. These bonds are subject to various interest rate cap      
    agreements which limit the maximum interest rate with respect to such bonds  186,725
 
 
188,832
Mortgage note payable, secured by deed of trust, bearing interest at 7.00%, principal      
    and interest payments due monthly through April 2005. Repaid in March 2005  -
 
 
6,846
Multifamily housing mortgage revenue bonds secured by deed of trust on a      
    rental property and guaranteed by a collateral pledge agreement, bearing      
    interest at 6.455%, principal and interest payments due monthly through      
    January 2026. Among the terms imposed on the property, which is      
    security for the bonds, is a requirement that 20% of the units are subject      
    to tenant income criteria. Repaid in December 2005  -
 
 
15,547
   1,104,918
 
 
1,067,449
Exchangeable bonds, unsecured obligations of the Operating Partnership and guaranteed     
    by the Company, bearing interest at 3.625% per year, payable November 1 and May 1     
    of each year, beginning May 1, 2006 which mature on November 1, 2025. The bonds     
    are exchangeable at the option of the holder into cash and, in certain circumstances      
    at Essex's option, shares of the Company's common stock at an initial exchange price      
    of $103.25 per share subject to certain adjustments. These bonds will also be      
    exchangeable prior to November 1, 2020 under certain circumstances. The bonds are      
    redeemable at the Operating Partnership's option for cash at any time on or after      
    November 4, 2010 and are subject to repurchase for cash at the option of the holder on     
    November 1st in years 2010, 2015, and 2020 or upon the occurrence of certain events 225,000
 
 
-
  $1,329,918
 
$1,067,449
       
The aggregate scheduled principal payments of mortgage notes payable and exchangeable bonds are as follows:

  $26,192
2007  81,964
2008  155,732
2009  34,438
2010  159,344
Thereafter  872,248
  $1,329,918
    
Repayment of debt before the scheduled maturity date could result in prepayment penalties.
F-20
(9) Lines of Credit
The Operating Partnership has two outstanding lines of credit in the aggregate committed amount of $285,000. The first line, in the committed amount of $185,000, matures in April 2007, with an option to extend it for one year thereafter. Outstanding balances under this line of credit bear interest at a rate, determined using a tiered rate structure tied to the Operating Partnership’s corporate ratings, if any, and leverage rating, which has been priced at LIBOR plus 1.00% and LIBOR plus 1.10% during 2005 and 2004, respectively. As of December 31, 2005 and 2004, the interest rate on the line of credit was approximately 4.82% and 3.40%, respectively. At December 31, 2005 the Operating Partnership had $0 outstanding on this line of credit. In December 2003, the Operating Partnership obtained a 5-year, $90,000 credit facility from Freddie Mac. The aggregate maximum principal amount of the facility increased to $100,000 in July 2004 and is secured by six of Operating Partnership’s multifamily communities. At December 31, 2005 the Operating Partnership had outstanding $25,000 under this facility, at an all-in rate of 3.62% (59 basis points over Freddie Mac’s Reference Rate). The credit agreements contain debt covenants related to limitations on indebtedness and liabilities, maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization and maintenance of minimum tangible net worth. The Operating Partnership was in compliance with the line of credit covenants as of December 31, 2005.
(10) Derivative Instruments and Hedging Activities

To hedge the cash flows associated with the refinancing of debt that matures in 2007 and 2008, on February 16, 2005, the Operating Partnership entered into a $50.0 million notional forward-starting swap with a commercial bank at a fixed rate of 4.927%, with a settlement date on or before October 1, 2007. Additionally, on August 18, 2005, the Operating Partnership entered into a $50.0 million notional forward-starting swap with a commercial bank at a fixed rate of 4.869% and a settlement date on or before October 1, 2008. The Operating Partnership believes that these transactions will be effective in offsetting changes in future cash flows for forecasted transactions and qualify for hedge accounting. The increase in the fair value of these derivatives during 2005 was approximately $660 and is reflected in accumulated other comprehensive income in the Operating Partnership’s consolidated financial statements. No hedge ineffectiveness on cash flow hedges was recognized during 2005. The Operating Partnership did not have accumulated other comprehensive income in 2004.
On February 22, 2006, the Operating Partnership entered into additional notional forward-starting swaps. The first was for $25.0 million with a commercial bank at a fixed rate of 5.082% and a settlement date on or before January 1, 2009. The second and third swaps are for a total of $100.0 million with two commercial banks at a fixed rate of $5.099% and a settlement date on or before January 1, 2011. These derivatives will be used to economically hedge the cash flows associated with the refinancing of debt that matures in 2008 and 2010, respectively.
(11) Lease Agreements
During the fourth quarter of 2003, the Operating Partnership entered into lease and purchase option agreements with unrelated third parties related to its five recreational vehicle parks that are comprised of 1,717 spaces, and two manufactured housing communities that contain 607 sites. Based on the agreements, the unrelated third parties have an option to purchase the assets in approximately four years for approximately $41.7 million - a 5% premium to the gross book value of the assets. The Operating Partnership received $474 as consideration for entering into the option agreement and a non-refundable upfront payment of $4.0 million, which was recorded as deferred revenue and has been amortized into income over the five year lease term. Under the lease agreements the Operating Partnership receives fixed monthly lease payments and passes through all executory costs such as property taxes. In July 2004, the Operating Partnership sold Golden Village Recreational Vehicle Park and in January 2005, the Operating Partnership sold Riviera RV Resort and Riviera Mobile Home Park.
The Operating Partnership is a lessor under a land lease associated with a property located in Southern California. The land lease entitles the Operating Partnership to receive fixed annual land lease payments totaling a minimum of $477 over a thirty-four year term ended 2034. The Operating Partnership has the option to purchase the property in 2006 or can be required to sell the land in 2006 as specified in the buyout provisions of the agreement.
The Operating Partnership is a lessor of an office building located in Southern California. The tenants’ lease terms expire at various times through 2009 with average annual lease payments of approximately $737.
F-21
The future minimum non-cancelable base rent to be received under these operating leases for each of the years ending after December 31, 2005 are summarized as follows:
   
Future
   
Minimum
   
Rent
2006 $3,042
2007  3,042
2008  2,761
2009  1,673
2010  1,353
2011 and thereafter  12,682
  $24,553
    
The carrying value of the rental properties as of December 31, 2005 and 2004 is $34,957 and $33,970, respectively.
The Operating Partnership is also a lessee of an office building located in Palo Alto next to the Operating Partnership’s headquarters. The lease term expires on September 30, 2009, with average annual lease payments of approximately $146.
(12) Equity Transactions
As of December 31, 2005, the Operating Partnership has the following cumulative redeemable preferred securities outstanding:
Liquidation
Description
Issue Date
Preference
 Cumulative redeemable preferred limited partner units:
7.875% Series BFebruary 19981,200,000 units $        60,000
7.875% Series BApril 1998400,000 units        20,000
7.875% Series DJuly 19992,000,000 units       50,000
 $     130,000
Cumulative redeemable preferred general partner interest:
7.8125% Series FSeptember 2003 $      25,000
Dividends on the securities are payable quarterly. The holders of the securities have limited voting rights if the required dividends are in arrears. The Series B and D preferred units represent preferred interests issued by the Operating Partnership and are included in minority interests in the accompanying consolidated balance sheets. The preferred units can be exchanged for Series B and D preferred stock of the Company under limited conditions.
On July 30, 2003, in connection with the Operating Partnership’s acquisition, by merger, of John M. Sachs, Inc. (“Sachs”) that was completed on December 17, 2002, and under the terms of the merger agreement, a final analysis was prepared, which indicated that the actual net liabilities of Sachs were less than the net liabilities of Sachs estimated to be outstanding as of the merger date.  Based on the final analysis and as a post-closing adjustment payment pursuant to the merger agreement, the Operating Partnership made a final payment of approximately $1,766 in cash and issued an additional 35,860 shares of common stock valued at $2,170 to certain of the pre-merger shareholders of Sachs.
On September 23, 2003, the Company issued 1,000,000 shares of its Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) at a fixed price of $24.664 per share, a discount from the $25.00 per share liquidation value of the shares.  The shares pay quarterly distributions at an annualized rate of 7.8125% per year of the liquidation value and will be redeemable by the Company on or after September 23, 2008.  The shares were issued pursuant to the Company’s existing shelf registration statement.  The Operating Partnership used the net proceeds from this sale of Series F Preferred Stock to redeem all of the 9.125% Series C Cumulative Redeemable Preferred Units (the “Series C Preferred Units”).   
On October 6, 2003, the Company sold 1.6 million newly issued shares of common stock and received offering proceeds (before expenses) of $60.67 per share, representing a 3.25% discount to the common stock’s closing price on September 30, 2003, the date of the underwriting agreement between the Company and the underwriter, pursuant to which the shares were sold.  The shares were issued pursuant to the Company’s existing shelf registration statement. 
F-22
The proceeds of the offering of approximately $97,072 were used for the acquisition of multifamily communities located in the Operating Partnership’s targeted West Coast markets and general corporate purposes, including the repayment of debt and the funding of development activities.
On October 14, 2003, the Operating Partnership issued a notice of redemption to the holders of its 9.125% Series C Cumulative Redeemable Preferred Units. Pursuant to the provisions of the Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., the Operating Partnership redeemed all outstanding Series C Preferred Units on November 24, 2003. In connection with this redemption the Operating Partnership incurred a non-cash charge of $625 related to the write-off of the issuance costs.
In January 2004, the Operating Partnership restructured its previously issued $50,000, 9.30% Series D Cumulative Redeemable Preferred Units ("Series D Units"), and its previously issued $80,000, 7.875% Series B Cumulative Redeemable Preferred Units ("Series B Units"). The existing distribution rate of 9.30% of the Series D Units continued until July 27, 2004 - the end of the non-call period. Effective July 28, 2004, the distribution rate on the Series D Units was reduced to 7.875%. The date that the Series D Units can first be redeemed at the Operating Partnership's option was extended by six years to July 28, 2010. The date that the Series B Units can first be redeemed at the Operating Partnership's option was extended from February 6, 2003 to December 31, 2009.
On June 14, 2000 the Operating Partnership purchased Waterford Place, a 238-unit apartment community located in San Jose, California for a contract price of $35,000 and an additional contingent payment. The amount of the contingent payment was disputed and submitted to binding arbitration. As a result of the arbitration, the Operating Partnership was directed to issue an additional 109,874 units of limited partnership interest ("Units") in the Operating Partnership to the sellers of Waterford Place. On March 31, 2004, the Operating Partnership completed the issuance of these Units to the sellers. In connection with this issuance, on March 31, 2004, the Operating Partnership also redeemed for cash 55,564 Units from these sellers.
On September 3, 2004, the Operating Partnership redeemed all of its outstanding, $55,000, 9.25% Series E Cumulative Redeemable Preferred Units of the Operating Partnership. In connection with this redemption the Operating Partnership incurred a non-cash charge of $1,575 related to the write-off of the issuance costs, which is classified as a component of minority interest in the accompanying statement of operations.
On August 6, 2004, the Operating Partnership acquired Vista Belvedere, a 76-unit apartment community located in the Marin County town of Tiburon, California. The Operating Partnership acquired the multifamily community in a UPREIT structured transaction for an agreed upon value of approximately $17.1 million. The Operating Partnership issued 73,088 limited operating partnership units to the prior owner.
F-23
(13) Net Income Per Common Unit
Basic and diluted income from continuing operations per unit are calculated as follows for the years ended December 31:

  
 2005
 
 2004
     
 2003
     
     
Weighted-
 
Per
    
Weighted-
 
Per
    
Weighted-
 
Per
 
     
average
 
Common
    
average
 
Common
    
average
 
Common
 
     
Common
 
Unit
    
Common
 
Unit
    
Common
 
Unit
 
  
 Income
 
Units
 
Amount
 
 Income
 
Units
 
Amount
 
 Income
 
Units
 
Amount
 
Basic:                      
  Income from continuing operations                      
    available to common units $55,029  25,343,695 $2.17 $84,569  25,255,190 $3.35 $34,903  23,737,077 $1.47 
  Income from discontinued operations  31,080  25,343,695  1.23  1,537  25,255,190  0.06  2,911  23,737,077  0.12 
   86,109     3.40  86,106     3.41  37,814     1.59 
                             
  Effect of Dilutive Securities:                            
    Convertible limited partnership                            
      Units  -  -     -  -     -  -    
    Stock options (1)  -  227,139     -  154,364     -  154,941    
    Vested series Z incentive units  -  122,803     -  80,712     -  55,912    
    -  349,942     -  235,076     -  210,853    
  Diluted:                            
    Income from continuing operations                            
      available to common units  55,029  25,693,637  2.14  84,569  25,490,266  3.32  34,903  23,947,930  1.46 
    Income from discontinued operations  31,080  25,693,637  1.21  1,537  25,490,266  0.06  2,911  23,947,930  0.12 
  $86,109    $3.35 $86,106    $3.38 $37,814    $1.58 
                             
The Operating Partnership has the ability and intent to redeem Down REIT limited Partnership units for cash and does not consider them to be common stock equivalents.
(1)Stock options of 22,229, 29,500, and 0 for the years ended December 31, 2005, 2004, and 2003, respectively, were not included in the diluted earnings per share calculation because the exercise price of the options were greater than the average market price of the common shares for the year and, therefore, were anti-dilutive.
(14) Stock Based Compensation Plans
The Essex Property Trust, Inc. 2004 Stock Incentive Plan provides incentives to attract and retain officers, directors and key employees. The Stock Incentive Plan provides for the grants of options to purchase a specified number of shares of common stock or grants of restricted shares of common stock. Under the Stock Incentive Plan, the total number of shares available for grant is approximately 1,200,000. The Board of Directors (the Board) may adjust the aggregate number and type of shares reserved for issuance. Participants in the Stock Incentive Plans are selected by the Stock Incentive Plan Committee of the Board, which is comprised of independent directors. The Stock Incentive Plan Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100% of the fair market value of the common stock on the grant date. The Company’s options have a life of ten years. Option grants fully vest between one year and five years after the grant date. For every stock option issued to purchase Company common stock, an option is issued to the general partner by the Operating Partnership to purchase Operation Partnership units with identical terms. Stock-based compensation expense for stocks options and Z and Z-1 Units (as discussed below) under the fair value method for the years ended December 31, 2005, 2004 and 2003 was approximately $2.4 million, $784 and $991, respectively. A summary of the status of the Company’s stock option plans as of December 31, 2005, 2004, and 2003 and changes during the years ended on those dates is presented below:
  
2005  
 
2004  
 
2003  
 
  
 
 
 Weighted-
 
 
 
 Weighted-
 
 
 
 Weighted-
 
 
 
 
 
 average
 
 
 
 average
 
 
 
 average
 
 
 
 
 
 exercise
 
 
 
 exercise
 
 
 
 exercise
 
 
 
Shares
 
 price
 
Shares
 
 price
 
Shares
 
 price
 
Outstanding at beginning of year  463,376 $47.07  590,231 $42.93  743,692 $39.81 
Granted  188,800  78.01  49,500  74.10  73,500  55.09 
Exercised  (103,201) 43.47  (142,835) 38.71  (197,741) 34.72 
Forfeited and canceled  (18,600) 76.70  (33,520) 49.72  (29,220) 49.52 
Outstanding at end of year  530,375  57.73  463,376  47.07  590,231  42.93 
                    
Options exercisable at year end  248,015  43.77  267,366  40.58  301,851  37.70 
F-24
The following table summarizes information about stock options outstanding as of December 31, 2005:

  
Options outstanding
 
Options exercisable
  
Number
 
Weighted-
    
Number
   
  
outstanding
 
average
  
Weighted-
 
exercisable
  
Weighted-
  
as of
 
remaining
  
average
 
as of
  
average
Range of
 
December 31,
 
contractual
  
exercise
 
December 31,
  
exercise
exercise prices
 
2005
 
life
  
price
 
2005
  
price
$18.38-27.56 600 0.0 years $19.08 600 $19.08
27.56-36.75 91,019 2.2 years  31.09 91,019  31.09
36.75-45.94 28,827 4.4 years  38.87 28,827  38.87
45.94-55.13 166,169 6.0 years  49.89 83,989  49.67
55.13-64.32 41,300 7.9 years  60.25 38,900  60.17
64.32-73.50 68,460 9.1 years  72.80 80  65.49
73.50-82.69 100,500 9.4 years  80.00 3,600  81.23
82.69-91.88 33,500 9.5 years  85.25 1,000  84.46
  530,375 6.7 years  57.73 248,015  43.77
             
The issuance of Z Units is administered by the Operating Partnership’s Compensation Committee which has the authority to select participants and determine the awards to be made up to a maximum of 600,000 Z Units. The conversion ratio (accounted for as vesting) of the Z Units into common units, will increase by up to 10% (up to 20% in certain circumstances following their initial issuance) on January 1 of each year for each participating executive who remains employed by the Operating Partnership if the Operating Partnership has met such targets as the Compensation Committee deems appropriate, for the prior year, up to a maximum conversion ratio of 100%. The Operating Partnership has the option to redeem Z Units held by any executive whose employment has been terminated with either common units of the Operating Partnership or shares of the Company’s Common Stock based on the then-effective conversion ratio.
In June 2001, the Operating Partnership issued 200,000 Series Z Incentive Units of limited partner interest to eleven senior executives of the Company in exchange for a capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate offering price of $200. The 2001 Z Unit grant had conversion ratios of 20, 28, 35.5 and 45.5 percent as of January 1, 2002, 2003, 2004 and 2005 respectively.
In June 2004, the Operating Partnership issued 95,953 Series Z-1 Incentive Units of limited partner interest to fourteen senior executives of the Company in exchange for cash or a capital commitment of $1.00 per Series Z-1 Incentive Unit, for an aggregate offering price of $96.0. The 2004 Z Unit grant had a conversion ratio of 20 upon issuance and 30 percent as of January 1, 2004 and 2005 respectively. In 2005 an additional 27,000 Z-1 Units were granted to two executives pursuant to the 2004 grant terms with a 20% conversion ratio at issuance.
In December 2005, the Operating Partnership issued 89,999 Series Z-1 Incentive Units of limited partner interest to fourteen senior executives of the Company in exchange for cash or a capital commitment of $1.00 per Series Z-1 Incentive Unit, for an aggregate offering price of $90. The 2005 Z-1 Unit grant had a conversion ratio of 20 percent as of December 31, 2005.
(15) Segment Information
In accordance with FASB No. 131, Disclosures about Segments of an Enterprise and Related Information, the Operating Partnership defines its reportable operating segments as the three geographical regions in which its multifamily residential properties are located: Northern California, Southern California, and the Pacific Northwest.
Nonsegment revenues and net operating income included in the following schedule consist of revenue generated from the commercial properties, recreational vehicle parks, and manufactured housing communities. Also excluded from segment revenues are interest and other corporate income. Other nonsegment assets include investments, real estate under development, cash, notes receivables, other assets and deferred charges.
The accounting policies of the segments are the same as those described in Note 2. The Operating Partnership evaluates performance based upon net operating income from the combined properties in each segment.
F-25
The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the years ended and as of December 31, 2005, 2004, and 2003:
  
 Years Ended December 31,
 
  
 2005
 
 2004
 
 2003
 
Revenues:          
    Southern California $188,926 $167,044 $137,662 
    Northern California  66,005  60,987  61,082 
    Pacific Northwest  57,354  49,963  44,913 
    Other areas  4,055  2,725  5,149 
    Total property revenues
 $316,340 $280,719 $248,806 
           
Net operating income:          
    Southern California $128,542 $112,334 $95,226 
    Northern California  44,206  40,575  41,813 
    Pacific Northwest  36,745  31,587  29,251 
    Other areas  1,496  422  1,779 
    Total segment net operating income
  210,989  184,918  168,069 
           
Depreciation and amortization:          
    Southern California..  (41,884) (39,264) (28,544)
    Northern California  (15,984) (15,507) (13,208)
    Pacific Northwest  (14,784) (11,022) (12,202)
    Other areas  (7,326) (5,863) (2,693)
   (79,978) (71,656) (56,647)
Interest:          
    Southern California  (30,818) (26,900) (22,595)
    Northern California  (16,117) (13,955) (12,044)
    Pacific Northwest  (7,079) (6,539) (4,844)
    Nonsegment  (19,600) (15,629) (12,927)
   (73,614) (63,023) (52,410)
           
Amortization of deferred financing costs  (1,970) (1,587) (1,197)
General and administrative  (19,148) (18,084) (9,637)
Other expenses  (5,827) -  - 
Management and other fees from affiliates  10,951  23,146  6,027 
Gain on sale or real estate  6,391  7,909  - 
Interest and other income  8,621  3,173  688 
Equity income in co-investments  19,030  41,230  3,296 
Minority interests  (5,687) (3,498) (4,134)
Income tax provision  (2,538) (257) - 
           
Income from continuing operations $67,220 $102,271 $54,055 
           
Assets:          
    Southern California $1,211,372 $1,162,803    
    Northern California  456,093  458,199    
    Pacific Northwest  374,958  358,219    
    Other areas  57,652  62,321    
    Net real estate assets
  2,100,075  2,041,542    
Nonsegment assets  139,215  175,675    
    Total assets
 $2,239,290 $2,217,217    

(16) 401(k) Plan
The Operating Partnership has a 401(k) benefit plan (the Plan) for all full-time employees who have completed six months of service. Employees may contribute up to 23% of their compensation, limited by the maximum allowed under Section 401(k) of the Internal Revenue Code. The Operating Partnership matches the employee contributions for nonhighly compensated personnel, up to 50% of their contribution up to a specified maximum. Operating Partnership contributions to the Plan were approximately $189, $98, and $93 for the years ended December 31, 2005, 2004, and 2003.
(17) Fair Value of Financial Instruments
Management believes that the carrying amounts of its variable rate mortgage notes payable, lines of credit, notes receivable from investees and other related parties and notes and other receivables approximate fair value as of December 31, 2005 and 2004, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available to the Operating Partnership for similar instruments. Management has estimated that the fair value of the Operating Partnership’s $1,143,193 of fixed rate mortgage notes payable and exchangeable bonds at December 31, 2005 are approximately $1,184,182 based on the terms of existing mortgage notes payable compared to those available in the marketplace. At December 31, 2004, the Operating Partnership’s fixed rate mortgage notes payable of $878,617 had an approximate market value of $945,607. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, other liabilities and dividends payable approximate fair value as of December 31, 2005 and 2004 due to the short-term maturity of these instruments.
(18) Commitments and Contingencies
At December 31, 2005 we had four non-cancelable ground leases for certain apartment communities and buildings that expire between 2027 and 2080. Land lease payments are typically the greater of a stated minimum or a percentage of gross rents generated by these apartment communities. Total lease commitments, under land leases and operating leases, are approximately $1,600 per year.
Company has a performance guarantee with a commercial bank related to the Northwest Gateway development.
To the extent that an environmental matter arises or is identified in the future that has other than a remote risk, as defined in SFAS 5, of having a material impact on the financial statements, the Operating Partnership will disclose the estimated range of possible outcomes, and, if an outcome is probable, accrue appropriate liability for remediation and other potential liability. The Operating Partnership will consider whether such occurrence results in an impairment of value on the affected property and, if so, accrue an appropriate reserve for impairment.
Except with respect to three Properties, the Operating Partnership has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties. The Operating Partnership has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the properties formerly owned by the Operating Partnership. No assurance can be given that existing environmental studies with respect to any of the Properties reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Operating Partnership, or that a material environmental condition does not otherwise exist as to any one or more of the Properties. The Operating Partnership has limited insurance coverage for the types of environmental liabilities described above.
The Operating Partnership may enter into transactions that could require us to pay the tax liabilities of the partners in the Operating Partnership or in the Down REIT entities, which are within our control. Although the Operating Partnership plans to hold the contributed assets or defer recognition of gain on their sale pursuant to like-kind exchange rules under Section 1031 of the Internal Revenue Code we can provide no assurance that we will be able to do so and if such tax liabilities were incurred they can expect to have a material impact on our financial position.
In April 2004, an employee lawsuit was filed against the Company in the California Superior Court in the County of Alameda. In this lawsuit, two former Operating Partnership maintenance employees seek unpaid wages, associated penalties and attorneys’ fees on behalf of a putative class of the Operating Partnership’s current and former maintenance employees who were required to wear a pager while they were on call during evening and weekend hours. In June 2005, the Operating Partnership recorded $1.5 million for legal settlement costs.
F-27
There has been no change to the settlement amount since the second quarter of 2005. However, litigation is subject to inherent uncertainties, and such amount represents management’s best estimate of the total cost of the litigation at this time.
Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Operating Partnership has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Operating Partnership has, however, purchased pollution liability insurance, which includes coverage for mold. The Operating Partnership has adopted programs designed to manage the existence of mold in its properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property. Liabilities resulting from such mold related matters and the costs of carrying insurance to address potential mold related claims may also be substantial.
The Operating Partnership is subject to various other lawsuits in the normal course of its business operations. Accordingly, such lawsuits, as well as the class action lawsuit described above, could result in substantial costs and diversion of resources and could have a material adverse effect on the Operating Partnership’s financial condition, results of operations or cash flows.

F-28

(19) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for 2005 and 2004:

  
 Quarter ended
 
 Quarter ended
 
 Quarter ended
 
 Quarter ended
 
  
 December 31(1)
 
 September 30(1)
 
 June 30(1)
 
 March 31(1)
 
2005:
             
Total property revenues $81,489 $80,219 $77,965 $76,667 
              
Income from continuing operations $8,413 $12,243 $16,202 $30,362 
              
    Net income
 $8,413 $12,243 $45,410 $32,234 
    Net income available to common
             
    units
 $5,365 $9,195 $42,362 $29,187 
Per unit data:             
  Net income:             
    Basic $0.22 $0.36 $1.67 $1.15 
              
    Diluted $0.17 $0.39 $1.65 $1.14 
Distributions per common unit $0.81 $0.81 $0.81 $0.81 
              
2004:
             
Total property revenues $73,728 $71,733 $69,616 $65,642 
              
Income from continuing operations $38,239 $43,069 $10,405 $10,558 
              
    Net income
 $38,476 $43,722 $10,358 $11,252 
    Net income available to common
             
    units
 $35,428 $38,157 $5,861 $6,660 
Per unit data:             
  Net income:             
    Basic $1.40 $1.51 $0.23 $0.27 
              
    Diluted $1.40 $1.49 $0.23 $0.26 
Distributions per common unit $0.79 $0.79 $0.79 $0.79 
              
(1)  Net earnings from discontinued operations have been reclassified for all periods presented.
F-29
(20) Subsequent Events
On January 6, 2006, the Operating Partnership acquired two apartment communities - Chimney Sweep and CBC, aggregating 239 units, located in Isle Vista, California for a combined price of approximately $57.1 million.
On January 31, 2006, the Operating Partnership acquired substantially all of the ownership of the Northwest Gateway development project.
On February 23, 2006, the Operating Partnership announced that the Board of Directors had approved a $.12 per share annual increase to the quarterly cash dividend. Accordingly, the first quarter dividend distribution, payable on April 17, 2006 to shareholders of record as of March 31, 2006, will be $0.84 per share.
In the first quarter of 2006, we sold Vista Capri East and Casa Tierra for approximately $7.0 million.


F-30

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Financial Statement Schedule III
Real Estate and Accumulated Depreciation
December 31, 2005
(Dollars in thousands)

             
Costs
                       
         
Initial cost
 
capitalized
 
Gross amount carried at close of period
       
           
Buildings and
 
subsequent to
 
Land and
 
Buildings and
   
Accumulated
 
Date of
 
Date
 
Lives
Property
 
Units
 
Location
 
Encumbrance
 
Land
 
improvements
 
acquisition
 
improvements
 
improvements
 
Total(1)
 
depreciation
 
construction
 
acquired
 
(years)
Encumbered multifamily properties
                           
Foothill Commons 360 Bellevue, WA $ $2,435$9,821$4,233$2,440$14,048 16,489$7,994 1978 03/90 3-30
Oak Pointe 390 Sunnyvale, CA    4,842 19,776 8,686 4,847 28,457 33,304 15,724 1973 12/88 3-30
Palisades 192 Bellevue, WA    1,560 6,242 4,482 1,565 10,719 12,284 4,970 1969/1977(2) 05/90 3-30
Pathways 296 Long Beach, CA    4,083 16,757 9,165 6,239 23,767 30,005 11,001 1975 02/91 3-30
Stevenson Place (The Apple) 200 Fremont, CA    996 5,582 6,754 1,001 12,330 13,332 7,883 1971 04/82 3-30
Summerhill Commons 184 Newark, CA    1,608 7,582 2,494 1,525 10,159 11,684 5,976 1987 07/87 3-30
Summerhill Park 100 Sunnyvale, CA    2,654 4,918 886 2,656 5,802 8,458 3,498 1988 09/88 3-30
Woodland Commons 236 Bellevue, WA    2,040 8,727 2,529 2,044 11,252 13,296 6,269 1978 03/90 3-30
       93,743 20,218 79,405 39,229 22,317 116,535 138,852 63,314      
Fountain Court 320 Bellevue, WA    6,702 27,306 760 6,985 27,783 34,768 5,554 2000 03/00 3-30
Hillcrest Park (Mirabella) 608 Newbury Park, CA    15,318 40,601 11,510 15,755 51,673 67,429 12,766 1973 03/98 3-30
Hillsborough Park 235 La Habra, CA    6,291 15,455 581 6,272 16,055 22,327 3,466 1999 09/99 3-30
       78,782 28,311 83,362 12,850 29,012 95,511 124,523 21,787      
The Shores 462 San Ramon, CA    12,105 18,252 16,359 12,682 34,034 46,716 9,674 1988 01/97 3-30
Waterford 238 San Jose, CA    11,808 24,500 10,404 15,165 31,547 46,712 5,303 2000 06/00 3-30
       59,669 23,913 42,752 26,763 27,847 65,581 93,428 14,977      
Bonita Cedars 120 Bonita, CA    2,496 9,913 658 2,503 10,564 13,067 1,135 1983 12/02 3-30
Castle Creek 216 Newcastle, WA    4,149 16,028 1,312 4,833 16,655 21,489 5,148 1997 12/97 3-30
Forest View 192 Renton, WA    3,731 14,530 273 3,731 14,803 18,534 1,136 1998 10/03 3-30
Mira Woods 355 Mira Mesa, CA    7,165 28,459 3,710 7,186 32,147 39,334 3,086 1982 12/02 3-30
Walnut Heights 163 Walnut, CA    4,858 19,168 829 4,887 19,968 24,855 1,471 1964 10/03 3-30
       25,000 22,399 88,098 6,782 23,140 94,138 117,279 11,976      
Alpine Village 306 Alpine, CA  17,577 4,967 19,728 1,244 4,982 20,958 25,939 2,174 1971 12/02 3-30
Anchor Village 301 Mukilteo, WA  10,750 2,498 10,595 3,762 2,616 14,239 16,855 5,723 1981 01/97 3-30
Brighton Ridge 264 Renton, WA  16,466 2,623 10,800 1,959 2,656 12,725 15,382 4,859 1986 12/96 3-30
Brookside Oaks 170 Sunnyvale, CA  14,539 7,301 16,310 1,376 7,591 17,395 24,987 3,665 1973 06/00 3-30
Camarillo Oaks 564 Camarillo, CA  54,894 10,953 25,254 3,895 11,075 29,026 40,102 11,266 1985 07/96 3-30
Capri at Sunny Hills 100 Fullerton, CA  11,896 3,337 13,320 2,250 3,609 15,299 18,907 2,215 1961 09/01 3-30
Canyon Ponte 250 Bothell, WA  16,181 4,692 18,288 486 4,693 18,773 23,466 1,401 1990 10/03 3-30
City Heights(3) 687 Los Angeles, CA  32,850 9,655 37,078 4,884 9,901 41,716 51,617 9,436 1968 12/00 3-30
Coral Gardens 200 El Cajon, CA  11,303 3,638 14,452 550 3,649 14,991 18,640 1,574 1976 12/02 3-30
Devonshire 276 Hemet, CA  11,444 3,470 13,786 1,084 3,482 14,858 18,340 1,612 1988 12/02 3-30
Emerald Ridge 180 Bellevue, WA  11,039 3,449 7,801 1,457 3,449 9,258 12,707 4,154 1987 11/94 3-30
Esplanade 278 San Jose, CA  40,153 18,170 40,086 1,729 18,424 41,561 59,985 1,546 2002 11/04 3-30
Evergreen Heights 200 Kirkland, WA  11,234 3,566 13,395 1,527 3,649 14,839 18,488 4,617 1990 06/97 3-30
Fountain Park 705 Playa Vista, CA  83,179 25,073 94,980 870 25,203 95,720 120,923 6,214 2002 02/94 3-30
                           (Continued)
F-31

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 2005
(Dollars in thousands)

                                  
 
Costs
              
         
Initial cost
 
capitalized
 
Gross amount carried at close of period
        
    
    
 
 
 
 
 
 
Buildings and
 
subsequent to
 
Land and
 
Buildings and
 
 
 
Accumulated
 
Date of
 
Date
 
Lives
Property
 
Units
 
Location
 
 
Encumbrance
 
Land
 
improvements
 
acquisition
 
improvements
 
improvements
 
Total(1)
 
depreciation
 
construction
 
acquired
 
(years)
Encumbered multifamily properties (continued)
                         
Hearthstone II 140 Santa Ana, CA
 
 
9,652
 
2,833
 
11,303
 
1,428
 
3,021
 
12,543
 
15,564
 
1,776 1970 11/01 3-30
Hidden Valley - Parker Ranch 324 Simi Valley, CA
 
 
33,977
 
14,174
 
34,065
 
208
 
11,700
 
36,748
 
48,447
 
1,865 2004 12/04 3-30
Highridge 255 Rancho Palos Verde, CA 
 
19,043
 
5,419
 
18,347
 
4,861
 
5,658
 
22,968
 
28,627
 
7,262 1972 05/97 3-30
Huntington Breakers 342 Huntington Beach, CA 
 
21,720
 
9,306
 
22,720
 
2,779
 
9,315
 
25,490
 
34,805
 
7,358 1984 10/97 3-30
Inglenook Court 224 Bothell, WA 
 
8,300
 
3,467
 
7,881
 
2,439
 
3,474
 
10,313
 
13,787
 
4,632 1985 10/94 3-30
Kings Road 196 Los Angeles, CA 
 
15,083
 
4,023
 
9,527
 
4,678
 
4,031
 
14,197
 
18,228
 
3,634 1979 06/97 3-30
Le Pac Luxury Apartments (Plumtree) 140 Santa Clara, CA  14,149
 
3,090
 
7,421
 
4,440
 
3,092
 
11,859
 
14,951
 
4,025 1975 02/94 3-30
Marbrisa 202 Long Beach, CA 
 
21,583
 
4,700
 
18,605
 
937
 
4,760
 
19,483
 
24,242
 
2,264 1987 09/02 3-30
Mariners Place 105 Oxnard, CA 
 
4,013
 
1,555
 
6,103
 
767
 
1,562
 
6,863
 
8,425
 
1,521 1987 05/00 3-30
Montejo 124 Garden Grove, CA 
 
5,981
 
1,925
 
7,685
 
760
 
2,097
 
8,273
 
10,370
 
1,220 1974 11/01 3-30
Monterey Villas (The Village) 122 Oxnard, CA 
 
14,234
 
2,349
 
5,579
 
4,127
 
2,424
 
9,632
 
12,055 2,438 1974 07/97 3-30
Monterra del Rey (Glenbrook) 84 Pasadena, CA 
 
10,463
 
2,312
 
4,923
 
4,185
 
2,825
 
8,595
 
11,420 1,794 1972 04/99 3-30
Monterra del Sol (Euclid) 85 Pasadena, CA 
 
2,687
 
2,202
 
4,794
 
4,269
 
2,824
 
8,440
 
11,265
 
1,570 1972 04/99 3-30
Mt. Sutro 99 San Francisco, CA
 
 
5,878
 
2,334
 
8,507
 
974
 
2,725
 
9,091
 
11,815
 
1,986 1973 06/01 3-30
Park Place/Windsor Court/Cochran 176 Los Angeles, CA  22,669
 
4,965
 
11,806
 
1,516
 
5,015
 
13,272
 
18,287
 
4,422 1988 08/97 3-30
Pointe at Cupertino, The (Westwood) 116 Cupertino, CA 
 
13,389
 
4,505
 
17,605
 
270
 
4,505
 
17,875
 
22,380
 
962
 
1963 08/98(6) 3-30
Sammamish View 153 Bellevue, WA  11,097
 
3,324
 
7,501
 
1,238
 
3,331
 
8,732
 
12,063 3,644 1986 11/94 3-30
San Marcos 432 Richmond, CA  50,657
 
15,563
 
36,204
 
23,621
 
22,817
 
52,571
 
75,388
 
3,680 2003 11/03 3-30
Stonehedge Village 196 Bothell, WA  14,146
 
3,167
 
12,603
 
1,584
 
3,201
 
14,153
 
17,354
 
4,033 1986 10/97 3-30
Summit Park 300 San Diego, CA  21,796
 
5,959
 
23,670
 
1,383
 
5,977
 
25,035
 
31,012
 
2,737 1972 12/02 3-30
The Barkley 161 Anahiem, CA  5,081
 
2,272
 
8,520
 
1,417
 
2,343
 
9,866
 
12,209
 
2,404 1984 04/00 3-30
The Bluffs 224 San Diego, CA  12,569
 
3,405
 
7,743
 
831
 
3,442
 
8,537
 
11,979
 
2,852 1974 06/97 3-30
The Carlyle 132 San Jose, CA  15,852
 
3,954
 
15,277
 
8,885
 
5,801
 
22,315
 
28,116
 
3,621 2000 04/00 3-30
Tierra Vista 404 Oxnard, CA  37,179
 
13,652
 
53,336
 
347
 
13,661
 
53,674
 
67,335
 
2,915 2001 01/01(7) 3-30
Treehouse 164 Santa Ana, CA  8,053
 
2,626
 
10,485
 
1,067
 
2,836
 
11,342
 
14,178
 
1,692 1970 11/01 3-30
Treetops 172 Fremont, CA  9,800
 
3,520
 
8,182
 
1,810
 
3,580
 
9,933
 
13,512
 
3,851 1978 01/96 3-30
Valley Park 160 Fountain Valley  10,202
 
3,361
 
13,420
 
1,383
 
3,585
 
14,578
 
18,164
 
2,163 1969 11/01 3-30
Villa Angelina 256 Placentia  13,796
 
4,498
 
17,962
 
1,364
 
4,777
 
19,047
 
23,824
 
2,694 1970 11/01 3-30
Vista Belvedere 76 Tiburon, CA  11,636
 
5,573
 
11,901
 
597
 
5,573
 
12,498
 
18,071
 
547 1963 08/04 3-30
Wandering Creek 156 Kent, WA  5,300
 
1,285
 
4,980
 
1,595
 
1,296
 
6,564
 
7,860
 
2,774 1986 11/95 3-30
Wharfside Pointe 142 Seattle, WA  8,059 2,245 7,020 1,649 2,256 8,658 10,914 3,825 1990 06/94 3-30
Wimbledon Woods 560 Hayward, CA  53,143
 
9,883
 
37,670
 
5,542
 
10,350
 
42,745
 
53,095
 
11,291 1975 03/98 3-30
Windsor Ridge 216 Sunnyvale, CA  11,639
 
4,017
 
10,315
 
1,984
 
4,021
 
12,295
 
16,316
 
6,886 1989 03/89 3-30
       1,123,524
 
355,696
 
1,113,150
 
207,632
 
375,169
 
1,301,308
 
1,676,477
 
282,849      
                           (Continued)
F-32

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 2005
(Dollars in thousands)
                                                         
                                    
       
Costs
              
         
Initial cost
 
capitalized
 
Gross amount carried at close of period
        
           
Buildings and
 
subsequent to
 
Land and
 
Buildings and
   
Accumulated
 
Date of
 
Date
 
Lives
Property
 
Units
 
Location
 
Encumbrance
 
Land
 
improvements
 
acquisition
 
improvements
 
improvements
 Total 
depreciation
 
construction
 
acquired
 
(years)
Unencumbered multifamily properties
                         
Alpine Country 108 Alpine, CA    1,741 6,914 318 1,746 7,227 8,973 761 1986 12/02 3-30
Avondale at Warner Center 446 Woodland Hills, CA    10,536 24,522 6,710 10,601 31,167 41,768 7,271 1989 01/97 3-30
Bridle Trails 92 Kirkland, WA    1,500 5,930 1,983 1,531 7,882 9,413 2,070 1986 10/97 3-30
Bristol Commons 188 Sunnyvale, CA    5,278 11,853 1,779 5,293 13,616 18,910 4,702 1989 01/97 3-30
Bunker Hill Towers 456 Los Angeles, CA    11,498 27,871 2,229 11,639 29,960 41,598 8,689 1968 03/98 3-30
Cambridge 40 Chula Vista, CA    497 1,973 148 498 2,120 2,618 220 1965 12/02 3-30
Carlton Heights 70 Santee, CA    1,099 4,368 243 1,103 4,607 5,710 495 1979 12/02 3-30
Casa Tierra 40 El Cajon, CA    522 2,074 166 523 2,239 2,762 249 1972 12/02 3-30
Cedar Terrace 180 Bellevue, WA    5,543 16,442 924 5,652 17,258 22,909 525 1984 01/05 3-30
Country Villas 180 Oceanside, CA    4,174 16,583 1,203 4,187 17,773 21,960 1,885 1976 12/02 3-30
Emerald Palms 152 San Diego, CA    2,909 11,556 543 2,918 12,090 15,008 1,293 1986 12/02 3-30
Fairway (8) 74 Newport Beach, CA    - 7,850 2,284 9 10,125 10,134 2,773 1972 06/99 3-30
Fairwood Pond 194 Renton, WA    5,296 15,564 165 5,300 15,726 21,025 621 1997 10/04 3-30
Foothill/Twincreeks 176 San Ramon, CA    5,875 13,992 1,883 5,964 15,787 21,750 5,620 1985 02/97 3-30
Grand Regency 60 Escondido, CA    881 3,498 161 883 3,657 4,540 391 1967 12/02 3-30
Hampton Park (Columbus) 83 Glendale, CA    2,407 5,672 1,480 2,426 7,133 9,559 1,524 1974 06/99 3-30
Hampton Place (Lorraine) 132 Glendale, CA    4,288 11,081 1,588 4,307 12,650 16,957 2,774 1970 06/99 3-30
Jackson School Village 200 Hillsboro, OR    2,588 10,452 972 2,698 11,315 14,012 2,100 1996 09/00 3-30
Landmark 285 Hillsboro, OR    3,655 14,200 1,878 3,700 16,033 19,733 5,654 1990 08/96 3-30
Linden Square 183 Seattle, WA    4,374 11,588 559 4,202 12,319 16,521 2,408 1994 06/00 3-30
Lofts at Pinehurst (Villa Scandia) 118 Ventura, CA    1,570 3,912 3,815 1,618 7,679 9,297 1,951 1971 06/97 3-30
Maple Leaf 48 Seattle, WA    805 3,283 229 828 3,490 4,317 1,072 1986 10/97 3-30
Marina City Club (9) 101 Marina Del Rey, CA    - 28,167 1,650 - 29,817 29,817 1,885 1971 01/04 3-30
Marina Cove (10) 292 Santa Clara, CA    5,320 16,431 2,963 5,324 19,390 24,714 8,809 1974 06/94 3-30
Meadows @ Cascade 198 Vancouver, WA    2,261 9,070 1,761 2,337 10,756 13,092 3,537 1988 11/97 3-30
Meadowood 320 Simi Valley, CA    7,852 18,592 2,217 7,898 20,763 28,661 7,293 1986 11/96 3-30
Mesa Village 133 Clairemont, CA    1,888 7,498 396 1,894 7,888 9,782 807 1963 12/02 3-30
Mirabella 188 Marina Del Rey, CA    6,180 26,673 1,048 6,270 27,631 33,901 5,359 2000 05/00 3-30
Mission Hills 282 Oceanside, CA    10,099 38,778 317 10,154 39,040 49,194 787 1984 Jul-05 3-30
Monterra del Mar (Windsor Terrace)123 Pasadena, CA    2,188 5,263 3,818 2,735 8,534 11,269 2,379 1972 09/97 3-30
Mountain View 106 Camarillo, CA    3,167 11,106 215 3,117 11,372 14,488 749 1980 01/04 3-30
Park Hill 245 Issaquah, CA    7,284 21,937 210 7,284 22,147 29,431 940 1999 02/99(4) 3-30
Peregrine Point 67 Issaquah, CA    3,384 13,523 (223)
(5)
3,317 13,367 16,684 1,559 2003 1/03 3-30
Pinehurst 28 Ventura, CA    355 1,356 183 6 1,888 1,894 75 1973 12/04 3-30
Salmon Run 132 Bothell, WA    3,717 11,483 390 3,802 11,789 15,590 2,016 2000 10/00 3-30
Shadow Point 172 Spring Valley, CA    2,812 11,170 1,006 2,820 12,167 14,988 1,339 1983 12/02 3-30
Spring Lake 69 Seattle, WA    838 3,399 255 859 3,633 4,492 1,145 1986 10/97 3-30
St. Cloud 302 Houston, TX    2,140 8,496 (57) 2,146 8,433 10,579 1,118 1968 12/02 3-30
                           (Continued)
F-33

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 2005
(Dollars in thousands)

                                                                         
Costs
             
          
Initial cost
 
capitalized
 
Gross amount carried at close of period
        
            
Buildings and
 
subsequent to
 
Land and
 
Buildings and
   
Accumulated
 
Date of
 
Date
 
Lives
Property
 
Units
  
Location
 
Encumbrance
 
Land
 
improvements
 
acquisition
 
improvements
 
improvements
 Total 
depreciation
 
construction
 
acquired
 
(years)
Unencumbered multifamily properties (continued)
                       
The Laurels 164  Mill Creek, WA    1,559 6,430 1,101 1,595 7,495 9,090 2,689 1981 12/96 3-30
The Marbella 60  Los Angeles, CA    2,826 11,269 58 2,871 11,283 14,153 94 1991 09/05 3-30
Tierra del Sol/Norte 156  El Cajon, CA    2,455 9,753 369 2,463 10,114 12,577 1,077 1969 12/02 3-30
Trabucco Villas 132  Lake Forest, CA    3,638 8,640 1,260 3,853 9,684 13,538 3,136 1985 10/97 3-30
Village @ Cascade 192  Vancouver, WA    2,103 8,753 714 2,154 9,416 11,570 2,791 1995 12/97 3-30
Vista Capri - East 26  San Diego, CA    262 1,040 235 262 1,275 1,537 129 1967 12/02 3-30
Vista Capri - North 106  San Diego, CA    1,663 6,609 363 1,668 6,967 8,635 696 1975 12/02 3-30
Vista Point (3)(11) -  Anaheim, CA    - - 73 73 - 73 - 1968 07/85 --
Wilshire Promenade 149  Fullerton, CA    3,118 7,385 4,811 3,797 11,517 15,314 3,524 1992 01/97 3-30
Woodlawn Colonial 159  Chula Vista, CA    2,344 9,311 806 2,350 10,111 12,461 1,101 1974 12/02 3-30
Woodside Village 145  Ventura, CA    5,331 21,036 449 5,342 21,474 26,816 714 1987 12/04 3-30
  23,538     1,123,524 517,516 1,667,496 265,283 539,187 1,911,108 2,450,295 393,646      
                             
Other real estate assets
                            
Office Buildings                            
Derian    Irvine, CA    3,079 12,315 5,029 3,105 17,318 20,423 2,663 1983 07/00 3-30
925 East Meadow (12)    Palo Alto, CA  - 1,401 3,172 1,090 1,857 3,807 5,663 1,678 1984 11/97 3-30
22120 Clarendon (13)    Woodland Hills, CA  - 903 3,600 1,054 1,014 4,543 5,557 968 1982 03/01 3-30
                             
Recreational vehicle parks                           
Circle RV    El Cajon, CA  - 2,375 2,347 141 2,506 2,357 4,863 240 1977 12/02 3-30
Diamond Valley    Hemet, CA  - 650 636 44 688 642 1,330 69 1974 12/02 3-30
Vacationer    El Cajon, CA  - 1,975 1,951 137 2,099 1,964 4,063 202 1973 12/02 3-30
                             
Manufactured housing communities                          
Green Valley    Vista, CA  6,395 3,750 3,710 275 3,993 3,742 7,735 388 1973 12/02 3-30
                             
Total multifamily and other real estate assets $1,129,919$531,649$1,695,227$273,053$554,449$1,945,480$2,499,929$399,854     (Continued)
                             
F-34

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 2005
(Dollars in thousands)
                             
Costs
              
          
Initial cost
 
capitalized
 
Gross amount carried at close of period
        
            
Buildings and
 
subsequent to
 
Land and
 
Buildings and
   
Accumulated
 
Date of
 
Date
 
Lives
Property
 
Units
  
Location
 
Encumbrance
 
Land
 
improvements
 
acquisition
 
improvements
 
improvements
 
Total(1)
 
depreciation
 
construction
 
acquired
 
(years)
                             
Development communities (14)                           
Northwest Gateway275
 
 Los Angeles, CA
 
 
-
 
8,100
 
-
 
8,765
 
16,865
 
-
 
16,865
 
-
 
-
 
12/04
 
-
Moorpark 200
 
 Moorpark, CA
 
 
- 4,303
 
-
 
703
 
5,006
 
-
 
5,006
 
-
 
-
 
05/05
 
-
Tuscana
 
30
 
 Tracy, CA
 
 
-
 
2,679
 
-
 
1,642
 
4,321
 
-
 
4,321
 
-
 
-
 
05/05
 
-
Pre-development costs      - 2,683 - 8,268 10,951   10,951 - -   -
                             
Total development communities     $-$17,765$-$19,378$37,143$-$37,143$-     (Concluded)
                             
(1) The aggregate cost for federal income tax purposes is $1,962,478.           
(2) Phase I was built in 1969 and Phase II was built in 1977.              
(3) The Company has a leasehold interest in this land and receives a land lease payment over a 34-year-term.             
(4) The Company's initial 45% interest was obtained in 1999. The remaining 55% interest was acquired in 2004.             
(5) The Company sold a single family home built on the property for $336 in 2003.             
(6) The Company's initial 20% interest was obtained in 1998. The remaining 80% interest was acquired in 2004.             
(7) The Company's initial 20% interest was obtained in 2001. The remaining 80% interest was acquired in 2004.             
(8) The land is leased pursuant to a ground lease expiring 2027.             
(9) The land is leased pursuant to a ground lease expiring 2067.               
(10) A portion of land is leased pursuant to a ground lease expiring in 2028.             
(11) The Company's interest in the land is subordinate to a loan issued to the purchaser of the buildings and improvements, and therefore the carrying amount was written off in connection with the sale.  
(12) Total rentable square footage of 17,404.          
(13) Total rentable square footage of 38,940.               
(14) All construction costs are reflected as real estate under development in the Company's consolidated balance sheets until the project reaches stabilization.           

A summary of activity for real estate and accumulated depreciation is as follows:                 
                            
     
2005
  
2004
  
2003
         
2005
  
2004
  
2003
Real estate:           Accumulated depreciation:          
Balance at beginning of year  $2,371,194 $1,984,122 $1,762,221   Balance at beginning of year  $329,652 $265,763 $208,014
Improvements   24,000  28,380  30,895   Depreciation expense - Acquisitions   1,406  5,956  334
Acquisition of real estate   90,065  406,745  66,031   Depreciation expense - Development   -  630  2,344
Development of real estate   37,143  48,239  124,975   Depreciation expense - Discontinued operations   148  1,267   1,102 
Disposition of real estate  (22,473)  (81,351)  -   Depreciation expense   78,572  65,070   53,969
Real estate investment held for sale   -  (14,941)  -   Dispositions     (4,768)  (2,948)  -
Balance at the end of year  $2,499,929 $2,371,194 $1,984,122   FAS 141 adjustment   (5,156)  (5,590)  -
               Real estate investment held for sale   -  (496)  -
               Balance at the end of year  $399,854 $329,652 $265,763
                            
See accompanying Independent Registered Public Accounting Firm’s Report.
F-35

SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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.
Date: March 15, 2006
ESSEX PORTFOLIO, L.P. 
(Registrant)
By: ESSEX PROPERTY TRUST, INC.
Its: General Partner
    By:/S/ MICHAEL T. DANCE
Michael T. Dance
Executive Vice President, Chief Financial Officer
(Authorized Officer, Principal Financial Officer)
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith R. Guericke and Michael T. Dance, and each of them, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the date indicated.
Signature
Title
Date
/S/ KEITH R. GUERICKE
Keith R. Guericke
Chief Executive Officer and President, Director, and Vice Chairman of the Board
(Principal Executive Officer)
March 15, 2006
/S/ MICHAEL T. DANCE
Michael T. Dance
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
March 15, 2006
/S/ MICHAEL J. SCHALL
Michael J. Schall
Senior Executive Vice President, Director, and Chief Operating Officer
March 15, 2006
/S/ GEORGE M. MARCUS
George M. Marcus
Director and Chairman of the Board
March 15, 2006
/S/ WILLIAM A. MILLICHAP
William A. Millichap
Director
March 15, 2006
/S/ DAVID W. BRADY
David W. Brady
Director
March 15, 2006
/S/ ROBERT E. LARSON
Robert E. Larson
Director
March 15, 2006
/S/ GARY P. MARTIN
Gary P. Martin
Director
March 15, 2006
/S/ ISSIE N. RABINOVITCH
Issie N. Rabinovitch
Director
March 15, 2006
S-1

Signature
Title
Date
/S/ THOMAS E. RANDLETT
Thomas E. Randlett
Director
March 15, 2006
/S/ WILLARD H. SMITH, JR.
Willard H. Smith, Jr.
Director
March 15, 2006

S-2

EXHIBIT INDEX
 
Exhibit No.
 
Document
 
 
Note
 
2.2
 
 
Agreement of Purchase and Sale dated as of August 13, 2004, by and between United Dominion Realty, L.P., a Delaware limited partnership, as Buyer, and Essex The Crest, L.P., a California limited partnership, Essex El Encanto Apartments, L.P., a California limited partnership, Essex Hunt Club Apartments, L.P., a California limited partnership, and the other signatories named as Sellers therein. Attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed October 5, 2004, and incorporated herein by reference.
 
 
--
 
 
3.1
 
 
Articles of Amendment and Restatement of Essex dated June 22, 1995, attached as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference.
 
 
--
 
 
3.2
 
 
Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A, attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference.
 
 
--
 
 
3.3
 
 
First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc., attached as
Exhibit 3.1 to the Company’s 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference.
 
 
--
 
 
3.4
 
Certificate of Correction to Exhibit 3.2 dated December 20, 1996
 
 
(1)
 
3.5
 
 
Amended and Restated Bylaws of Essex Property Trust, Inc., attached as Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference.
 
 
--
 
 
3.6
 
Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996.
 
 
(1)
 
3.7
 
 
Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 7.875% Series B Cumulative Redeemable Preferred Stock, filed with the State of Maryland on February 10, 1998, attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference.
 
 
--
 
 
3.8
 
 
Articles Supplementary reclassifying 500,000 shares of Common Stock as 500,000 shares of 9 1/8% Series C Cumulative Redeemable Preferred Stock, filed with the State of Maryland on November 25, 1998.
 
 
(2)
 
 
3.9
 
Certificate of Correction to Exhibit 3.2 dated February 12, 1999.
 
 
(2)
 
3.10
 
 
Articles Supplementary reclassifying 6,617,822 shares of Common Stock as 6,617,822 shares of Series A Junior Participating Preferred Stock, filed with the State of Maryland on November 13, 1998, attached as Exhibit 4.0 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
 
 
--
 
 
3.11
 
 
Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock, filed with the State of Maryland on July 30, 1999, attached as Exhibit 3.1 to the Company’s 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
 
 
--
 
 
3.12
 
Articles Supplementary reclassifying 2,200,000 shares of Common Stock as 2,200,000 shares of 9.25% Series E Cumulative Redeemable Preferred Stock, filed with the State of Maryland on September 9, 1999, attached as Exhibit 3.1 to the Company’s 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference.
 
--
 
 
3.13
 
Certificate of Correction to Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock, attached as Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference.
 
 
 
--
 
3.14
 
 
Certificate of Amendment of the Bylaws of Essex Property Trust, Inc. dated February 14, 2000, attached as Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference.
 
 
--
 
 
3.15
 
 
Articles Supplementary relating to the 7.8125% Series F Cumulative Redeemable Preferred Stock, attached as Exhibit 3.1 to the Company's Form 8-K, dated September 19, 2003, and incorporated herein by reference.
 
 
--
 
 
3.16
 
 
Articles Supplementary reclassifying 2,000,000 shares of 7.875% Series B Cumulative Redeemable Preferred Stock as 2,000,000 shares of Series B Cumulative Redeemable Preferred Stock, filed with the State of Maryland on January 14, 2004
 
 
--
 
 
3.17
 
 
Articles Supplementary reclassifying 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock as 2,000,000 shares of Series D Cumulative Redeemable Preferred Stock, filed with the State of Maryland on January 14, 2004
 
 
--
 
 
4.1
 
 
Rights Agreement, dated as of November 11, 1998, between Essex Property Trust, Inc., and BankBoston, N.A., as Rights Agent, including all exhibits thereto, attached as Exhibit 1 to the Company’s Registration Statement filed on Form 8-A dated November 12, 1998, and incorporated herein by reference.
 
 
--
 
 
4.2
 
 
Amendment to Rights Agreement, dated as of December 13, 2000, attached as Exhibit 4.1 to the Company’s Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
 
 
--
 
 
4.3
 
 
Amendment to Rights Agreement, dated as of February 28, 2002 attached as Exhibit 4.3 to the Company’s Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
 
 
--
 
 
10.1
 
 
Essex Property Trust, Inc. 1994 Stock Incentive Plan, (amended and restated), attached as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.*
 
 
--
 
 
10.2
 
 
First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. attached as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference.
 
 
--
 
 
10.3
 
 
First Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated February 6, 1998, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference.
 
 
--
 
 
10.4
 
 
Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated April 20, 1998, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 23, 1998, and incorporated herein by reference.
 
 
--
 
 
10.5
 
Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated November 24, 1998.
 
 
(2)
 
10.6
 
 
Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated July 28, 1999, attached as Exhibit 10.1 to the Company’s 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
 
 
--
 
10.7
 
 
Fifth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated September 3, 1999, attached as Exhibit 10.1 to the Company’s 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference.
 
 
--
 
 
10.8
 
Form of Essex Property Trust, Inc. 1994 Non-Employee and Director Stock Incentive Plan, attached as Exhibit 10.3 to the Company’s Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.*
 
 
 
--
 
10.9
 
 
Form of Indemnification Agreement between Essex and its directors and officers, attached as Exhibit 10.7 to the Company’s Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.
 
 
--
 
 
10.10
 
 
First Amendment to Investor Rights Agreement dated July 1, 1996 by and between George M. Marcus and The Marcus & Millichap Company, attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference.
 
 
--
 
 
10.11
 
 
Co-Brokerage Agreement by and among Essex, the Operating Partnership, MM REIBC and Essex Management Corporation attached as Exhibit 10.15 to the Company’s Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.
 
 
--
 
 
10.12
 
 
General Partnership Agreement of Essex Washington Interest Partners attached as Exhibit 10.16 to the Company’s Registration Statement on Form S-11 (Registration No.33-76578), which became effective on June 6, 1994, and incorporated herein by reference.
 
 
--
 
 
10.13
 
 
Form of Investor Rights Agreement between Essex and the Limited Partner of the Operating Partnership attached as Exhibit 10.26 to the Company’s Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.
 
 
--
 
 
10.14
 
 
Phantom Stock Unit Agreement for Mr. Guericke, attached as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form was used for subsequent phantom stock agreements.)*
 
 
--
 
 
10.15
 
 
Phantom Stock Unit Agreement for Mr. Schall, attached as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form was used for subsequent phantom stock agreements.)*
 
 
--
 
 
10.16
 
 
Replacement Promissory Note (April 15, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.*
 
 
--
 
 
10.17
 
 
Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form of Promissory Note and Pledge Agreement used for subsequent loans.)*
 
 
--
 
 
10.18
 
 
Replacement Promissory Note (April 30, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.*
 
 
--
 
 
10.19
 
 
Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form of Promissory Note and Pledge Agreement used for subsequent loans.)*
 
 
--
 
 
10.20
 
 
First Amended and Restated Agreement of Limited Partnership of Western Highridge I Investors, effective as of May 13, 1997, attached as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.
 
 
--
 
 
10.21
 
 
Registration Rights Agreement, effective as of May 13, 1997, by and between the Company and the limited partners of Western-Highridge I Investors, Irvington Square Associates, Western-Palo Alto II Investors, Western Riviera Investors, and Western-San Jose III Investors, attached as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.
 
 
--
 
 
10.22
 
 
$100,000,000 Promissory Note between Essex Portfolio, L.P., and Essex Morgan Funding Corporation, attached as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference.
 
 
--
 
 
10.23
 
Sixth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of June 28, 2001, attached as Exhibit 10.1 to the Company’s 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference.*
 
 
 
--
 
10.24
 
 
Executive Severance Plan attached as Exhibit 10.31 to the Company’s Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.
 
 
--
 
 
10.25
 
 
Registration Rights Agreement by and among Essex and the Sachs shareholders, dated December 17, 2002, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 23, 2002, and incorporated herein by reference.
 
 
--
 
 
10.26
 
 
Agreement between Essex Property Trust, Inc. and George M. Marcus dated March 27, 2003 attached as Exhibit 10.32 to the Company’s Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
 
 
 
--
 
 
10.27
 
Seventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of June 26, 2003, attached as Exhibit 10.1 to the Company’s 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.*
 
 
 
--
 
10.28
 
 
Series F Cumulative Redeemable Preferred Stock Purchase Agreement, dated September 25, 2003, by and between Essex Property Trust, Inc. and Lend Lease Rosen Real Estate Securities, LLC, attached as Exhibit 10.1 to the Company's Form 8-K, dated September 19, 2003 and incorporated herein by reference.
 
 
--
 
 
10.29
 
 
Eighth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of September 23, 2003, attached as Exhibit 10.2 to the Company’s 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
 
 
--
 
 
10.30
 
 
Ninth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of January 8, 2004, attached as Exhibit 10.36 to the Company’s 10-K for the year ended December 31, 2003, and incorporated herein by reference.
 
 
--
 
 
10.31
 
 
Tenth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of January 8, 2004, attached as Exhibit 10.37 to the Company’s 10-K for the year ended December 31, 2003, and incorporated herein by reference.
 
 
--
 
 
10.32
 
 
Eleventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of March 29, 2004, attached as Exhibit 10.1 to the Company’s 10-Q for the quarter ended March 31, 2004, and incorporated herein by reference. *
 
 
--
 
 
10.33
 
 
Third Amended and Restated Revolving Credit Agreement, dated April 30, 2004, among Essex Portfolio L.P., Bank of America and other lenders as specified therein, attached as Exhibit 10.2 to the Company’s 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference.
 
 
--
 
 
10.34
 
 
Essex Property Trust, Inc. 2004 Stock Incentive Plan, attached as Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference. *
 
 
--
 
 
10.35
 
 
Offer Letter between Essex Property Trust, Inc. and Mr. Dance, filed as Exhibit 10.1 on the Company’s Form 8-K, filed on February 14, 2005, and incorporated herein by reference. *
 
 
--
 
 
10.36
 
 
Indenture, dated October 28, 2005, by and among Essex Property Trust, Inc., as Guarantor, Essex Portfolio, L.P., as the Issuer, and Wells Fargo Bank, N.A., attached as Exhibit 10.1 to the Company’s current report on Form 8-K, filed November 2, 2005, and incorporated herein by reference.
 
 
--
 
 
10.37
 
 
Registration Rights Agreement, dated October 28, 2005, by and among Essex Portfolio, L.P., Essex Property Trust, Inc., UBS Securities LLC and Bear Stearns & Co., attached as Exhibit 10.1 to the Company’s Registration Statement on Form S-3, filed January 26, 2006, and incorporated herein by reference.
 
 
--
 
12.1
 
Schedule of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
 
 
--
 
21.1
 
List of Subsidiaries of Essex Property Trust, Inc.
 
 
--
 
23.1
 
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
 
 
--
 
24.1
 
Power of Attorney (see signature page)
 
 
--
 
31.1
 
Certification of Keith R. Guericke, Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
--
 
31.2
 
Certification of Michael T. Dance, Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
--
 
32.1
 
Certification of Keith R. Guericke, Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
--
 
32.2
 
 
Certification of Michael T. Dance, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
--
 
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the identically numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996.
(2) Incorporated by reference to the identically numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.