Interest Rate Protection Agreements

In the ordinary course of business, Gables is exposed to interest rate risks. Gables’ senior management periodically seeks input from third-party consultants regarding market interest rate and credit risk in order to evaluate its interest rate exposure. In certain situations, Gables may utilize derivative financial instruments in the form of rate caps, rate swaps or rate locks to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments and prospective financing transactions. Gables does not utilize such instruments for trading or speculative purposes. Derivatives used as hedges must be effective at reducing the risk associated with the exposure being hedged, correlate in nominal amount, rate, and term with the balance sheet instrument being hedged, and be designated as a hedge at the inception of the derivative contract.

Lump sum payments made or received at the inception or settlement of derivative instruments designated as hedges are capitalized and amortized as an adjustment to interest expense over the life of the associated balance sheet instrument. Monthly amounts paid or received under rate cap and rate swap hedge agreements are recognized as adjustments to interest expense as incurred. In the event that circumstances arise that indicate that an existing derivative instrument no longer meets the hedge criteria described above, the derivative is marked to market in the statement of operations.

In anticipation of a projected seven-year debt offering, Gables entered into two forward treasury lock agreements in late 1997. The timing and amount of the projected debt offering was modified several times as a result of unanticipated capital transactions, including the South Florida acquisition. The treasury lock agreements were extended to align with the projected timing of the debt offering. The treasury lock agreement in place in September, 1998 was terminated due to certain economic conditions affecting the unsecured debt market. For the years ended December 31, 1998 and 1997, Gables recognized mark to market losses of $5,637 and $1,178, respectively, upon the expiration of the original and extended terms of the treasury lock agreements since the required hedge criteria no longer existed at those dates.

Property Management Expenses

Gables manages its owned properties as well as properties owned by third parties for which Gables provides services for a fee. Property management expenses have been allocated between owned and third-party properties in the accompanying statements of operations based on the proportionate number of owned and third-party apartment homes managed by Gables during the applicable periods.

Income Taxes

Gables has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). In order to qualify as a REIT, Gables must distribute annually 95% of its REIT taxable income, as defined in the Code, to its shareowners and satisfy certain other requirements. As a result, Gables generally will not be subject to federal income taxation at the corporate level on the income it distributes to shareowners. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements for the years ended December 31, 1999, 1998 and 1997. Gables provides management and other services through its management company subsidiaries. The taxable income of these management company subsidiaries, if any, is subject to tax at regular corporate rates. The tax attributes of these subsidiaries are immaterial to the accompanying consolidated financial statements.

Recent Accounting Pronouncements

In June 1998, SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” was issued, establishing accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for Gables beginning January 1, 2001. The impact of SFAS No. 133 on Gables’ financial statements will depend on the extent, type and effectiveness of Gables’ hedging activities. SFAS No. 133 could increase volatility in net income and other comprehensive income.