| Attn: | Mr. Kevin Woody — Accounting Branch Chief Division of Corporation Finance Office of Real Estate and Business Services |
Re: | Equity Residential Form 10-K for the Fiscal Year Ended December 31, 2010 File No. 001-12252 | |
| ERP Operating Limited Partnership Form 10-K for the Fiscal Year Ended December 31, 2010 File No. 000-24920 |
| 1. | Please tell us the amount of payroll and associated costs of employees that have been capitalized for all periods presented. In your response, please discuss in significant variation in the amounts capitalized from year to year. | ||
| During the years ended December 31, 2010, 2009 and 2008, the Company capitalized $10.7 million, $13.7 million and $17.1 million, respectively, of payroll and associated costs of employees directly responsible for and who spend their time on the supervision of development activities as well as major capital and/or renovation projects. The decrease in amounts capitalized is primarily due to the Company’s decision over the past three years to reduce its development activities and the number of development projects the Company planned to undertake in the |
| future. This resulted in lower payroll-related costs due to headcount reductions as well as an increase in the amount of development payroll-related costs being expensed as incurred because the time was spent on deals the Company subsequently determined it would no longer pursue. The capitalization of payroll and associated costs is primarily related to the actual level of development activity occurring. |
| 2. | We note that you have adjusted cash flows for operating activities for acquisition expenses and included them within cash flows from investing activities. Please tell us your basis for this adjustment and the accounting literature relied upon. | ||
| While neither Section 230Statement of Cash Flowsnor Section 805Business Combinationsof the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) provides specific guidance on the appropriate classification of transaction costs incurred in a business combination within the statement of cash flows, ASC 230-10-45-13(c) states that the following is considered a cash outflow for investing activities: “Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets, including interest capitalized as part of the cost of those assets. Generally, only advance payments, the down payment, or other amounts paid at the time of purchase or soon before or after purchase of property, plant, and equipment and other productive assets are investing cash outflows.” ASC 230-10-45-22 recognizes that certain cash receipts and payments may have aspects of more than one class of cash flows and that the appropriate classification shall depend on the activity that is likely to be the predominant source of cash flows for the item. ASC 230-10-45-22 goes on to state that “the acquisition and sale of equipment to be used by the entity or rented to others generally are investing activities.” | |||
| Under FASB Statement No. 141, transaction costs incurred in a business combination (which generally are paid or incurred at the time of purchase or soon before or after purchase) were included in the cost of the acquired entity and companies recorded them as part of the investment on the balance sheet and classified these costs as investing cash outflows on the statement of cash flows as they were considered part of the investment. Although the treatment of transaction costs changed effective January 1, 2009 under FASB Statement No. 141 (R), which now requires companies to expense these costs as incurred on the statement of operations, the Company maintains that the costs themselves have not changed and their presentation on the statement of operations does not change their underlying nature as part of the investment activity. Such treatment is consistent with the Company’s classification of proceeds from asset sales, which are net of transaction costs, as |
| investing cash inflows on the statement of cash flows. As a result, the Company classifies transaction costs on acquisitions as cash outflows from investing activities. |
| 3. | We note on page F-33 that you have classified your assets and liabilities measured at fair value on a recurring and nonrecurring basis within the three-level valuation hierarchy. Tell us how you have complied with the disclosure requirements set forth in FASB ASC 820-10-50-8 as it requires you to present such information in a tabular format. | ||
| The Company will reorganize its disclosure in all future filings to incorporate additional tables to further comply with paragraph 820-10-50-8 of the FASB Accounting Standards Codification. In future filings, this footnote will be modified as follows: | |||
| Existing disclosure: |
| • | Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| • | Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| • | Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
| • | Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| • | Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| • | Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets/Liabilities | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Description | 12/31/2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets | ||||||||||||||||
| Derivatives | $ | 15,797 | $ | — | $ | 15,797 | $ | — | ||||||||
| Supplemental Executive Retirement Plan | 58,132 | 58,132 | — | — | ||||||||||||
| Available-for-Sale Investment Securities | 1,194 | 1,194 | — | — | ||||||||||||
| Total | $ | 75,123 | $ | 59,326 | $ | 15,797 | $ | — | ||||||||
Liabilities | ||||||||||||||||
| Derivatives | $ | 39,078 | $ | — | $ | 39,078 | $ | — | ||||||||
| Supplemental Executive Retirement Plan | 58,132 | 58,132 | — | — | ||||||||||||
| Total | $ | 97,210 | $ | 58,132 | $ | 39,078 | $ | — | ||||||||
| Redeemable Noncontrolling Interests — Operating Partnership | $ | 383,540 | $ | — | $ | 383,540 | $ | — | ||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets/Liabilities | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Description | 12/31/2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets | ||||||||||||||||
| Derivatives | $ | 28,816 | $ | — | $ | 28,816 | $ | — | ||||||||
| Supplemental Executive Retirement Plan | 61,090 | 61,090 | — | — | ||||||||||||
| Available-for-Sale Investment Securities | 26,138 | 1,045 | 25,093 | — | ||||||||||||
| Total | $ | 116,044 | $ | 62,135 | $ | 53,909 | $ | — | ||||||||
Liabilities | ||||||||||||||||
| Derivatives | $ | 3,577 | $ | — | $ | 3,577 | $ | — | ||||||||
| Supplemental Executive Retirement Plan | 61,090 | 61,090 | — | — | ||||||||||||
| Total | $ | 64,667 | $ | 61,090 | $ | 3,577 | $ | — | ||||||||
| Redeemable Noncontrolling Interests — Operating Partnership | $ | 258,280 | $ | — | $ | 258,280 | $ | — | ||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
| Quoted Prices in | ||||||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||||||
| Identical Assets/Liabilities | Observable Inputs | Unobservable Inputs | ||||||||||||||||||
| Description | 12/31/2010 | (Level 1) | (Level 2) | (Level 3) | Total Gains (Losses) | |||||||||||||||
Assets | ||||||||||||||||||||
| Long-lived assets | $ | 56,000 | $ | — | $ | — | $ | 56,000 | $ | (45,380 | ) | |||||||||
| Total | $ | 56,000 | $ | — | $ | — | $ | 56,000 | $ | (45,380 | ) | |||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
| Quoted Prices in | ||||||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||||||
| Identical Assets/Liabilities | Observable Inputs | Unobservable Inputs | ||||||||||||||||||
| Description | 12/31/2009 | (Level 1) | (Level 2) | (Level 3) | Total Gains (Losses) | |||||||||||||||
Assets | ||||||||||||||||||||
| Long-lived assets | $ | 18,876 | $ | — | $ | — | $ | 18,876 | $ | (11,124 | ) | |||||||||
| Total | $ | 18,876 | $ | — | $ | — | $ | 18,876 | $ | (11,124 | ) | |||||||||
| • | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | ||
| • | staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
| • | the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
| Sincerely, Equity Residential ERP Operating Limited Partnership By Equity Residential, its General Partner | ||||
| /s/ Mark J. Parrell | ||||
| Mark J. Parrell | ||||
| Executive Vice President and Chief Financial Officer | ||||
| /s/ Ian S. Kaufman | ||||
| Ian S. Kaufman | ||||
| Senior Vice President and Chief Accounting Officer | ||||
| cc: | Philip Childs, Ernst & Young LLP Gregory Hayes, DLA Piper LLP (US) |
