Acadia Realty Trust
Annual Report 2008

Plain-text annual report

2008 ANNUAL REPORT Focused. Disciplined. Value-Driven. Financial Highlights 2008 2007 2006 2005 2004 In thousands Total Revenues $ 140,739 $ 98,022 $ 92,232 $ 90,481 $ 76,829 Funds from Operations1 Real Estate Owned, at Cost Common Shares Outstanding Operating Partnership Units Outstanding $ 40,457 $ 44,018 $ 39,953 $ 35,842 $ 30,004 $1,106,873 $833,694 $629,902 $650,945 $ 541,772 32,358 32,184 31,773 31,543 31,341 648 642 642 653 392 1The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is pre- sented to assist investors in analyzing the performance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property and depreciation and amortization. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by generally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Company’s performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. To Our Shareholders: Focused. Disciplined. Value-Driven. 2008 was clearly one of the most challenging years in recent history for the financial and credit markets. Most significantly, during the fourth quarter of last year, we saw the subprime contagion spread from Wall Street to the global economy. The commercial real estate market was not spared by Kenneth F. Bernstein President and CEO what has become a worldwide crisis. Only time will tell when a bottom has been reached and what the rebound will look like. Many economists and historians will devote their entire careers to studying the causes and impact of this period, so I will limit my observations in this letter to our core areas of expertise. While the swiftness and severity of the credit crisis makes it seem as though its impact on the com- mercial real estate industry occurred overnight, to the careful observer, the symptoms of a correction had been forming for some time. In response to these warning signs, in recent years, as real estate prices ascended, Acadia began aggressively reposi- tioning its portfolio. We sold the bottom half of our portfolio and used the sale proceeds to swap into higher barrier-to-entry and supply-constrained markets such as New York City and Chicago. When we were unable to find suitable replacement assets, we chose to pay down debt or, as was the case this past year, return the profit to our shareholders in the form of a special dividend. Many of the actions that we took immediately inured to the benefit of our shareholders, while other efforts will only be recognized over time. And still others may be of little benefit as the magnitude and breadth of the correction has already exceeded our precautionary measures. Despite the awareness by some in the investment community that risk was being mispriced, leverage was being abused and a correction was inevitable, I am amazed at how many of us — individuals and institutions — were nevertheless caught off-guard by the severity of the current market collapse. A flight to safety meant very little unless it was cash invested in Treasuries or a mattress. The constant refrain of “there was nowhere to hide” was almost as ubiquitous as the use of the word “unprecedented” by CEOs justifying actions or inactions. As we are all too painfully aware, the U.S. consumer is facing a variety of serious issues, ranging from declines in home values to growing unemployment. The consumer pull-back will inevitably have an impact on many of our retailers. When the U.S. emerges from the recession, we will still have to confront the longer term issues of deleveraging and the risk of inflation. All in all, it is unlikely that we, as a nation, will see the financial crisis through to its end without it materially altering our lives and our businesses. With regard to the commercial real estate market specifically, the assumptions related to the acquisition, development, financing and valuation of real estate will be significantly different than in years past. In many ways, it will simply be a return to more rational investment principles. After the excesses of the past few years, this “back to basics” approach is both sound and welcomed. How we choose to navigate through these issues will be critical to our future success. In a post-bub- ble environment of compressed multiples, limited leverage and challenging operating fundamentals, Acadia is well positioned to take advantage of future opportunities as they begin to emerge. We will remain flexible and adjust our business strategy and tactics to reflect the new realities of the marketplace. At the same time, the core foundations upon which we built our business more than 10 years ago (on the heels of the last significant REIT market correction, no less) are as relevant as ever: create a high quality core Acadia Realty Trust 2008 Annual Report 11 portfolio of retail properties, a conservative capital structure, and an external growth platform fueled by both public and private institutional capital. Maintain a high-quality core portfolio of retail properties Notwithstanding one of the most difficult retailing environments in decades, our “same-store” net operating income increased 2.3% year-over-year and our occupancy held steady at 93.5%. While we expect there to be more softness in the retail environment before we experience a turnaround, our property-level performance speaks well for our portfolio. Its steady performance in an unsteady environment is a direct result of our deliberate pruning. We did so with the intention of main- taining high-quality, well-located properties with stable cash flow. Since 2000, we have executed on these intentions by selling those assets that were not consistent with our long-term growth outlook and by aggressively re-tenanting and redeveloping other assets. Today, our portfolio is nicely balanced and primarily anchored by retailers better-positioned to weather the recession. Nearly 60% of our properties are anchored by necessity-based retailers, such as supermarkets and drugstores, which draw con- sumers to their stores on a routine basis to satisfy “everyday” needs. An additional quarter of our properties are anchored by discount and value- oriented retailers, including Wal-Mart, Target and Marshalls. This category is also faring well on a relative basis now that every consumer is demanding more value for their dollar. The balance of our portfolio, approximately 15%, consists of high-quality street retail in high-quality locations ranging from Greenwich, Connecticut to Lincoln Park, Chicago. Despite the strong performance of our core port- folio, we were not immune to the repercussions of the credit crisis. In the fourth quarter of 2008, we recorded a $4.4 million impairment charge on a mezzanine loan investment originated in 2004. 2 Acadia Realty Trust 2008 Annual Report This contributed to an overall 8% decrease in Funds From Operations versus 2007. This charge was partially offset by a $2.0 million gain on our purchase of $8.0 million in principal of Acadia’s outstanding convertible debt at a discount. Not only does this purchase generate a 15% annual return through the December 2011 maturity, but it also helps address our only significant on-balance- sheet maturity exposure through 2011. Maintain a safe balance sheet with strong liquidity The events of the past 12 months have re-enforced, on the global stage, the importance of balance sheet strength, particularly now that the collapse of the subprime mortgage market and its aftermath have effectively frozen the lending environment. Today, debt is both scarce and expensive, and it is extremely difficult to obtain a loan in excess of $50 million. Furthermore, it is hard to foresee a rapid return, if ever, to the freewheeling days of 2005, 2006 and 2007. As a result, those compa- nies that operated under the assumption that an aggressive debt market was the norm are now facing extreme pressure. Additionally, as it relates to larger companies and larger properties, the lack of available debt to match their large size will begin to have unpleasant consequences in the not-too-distant future. Fortunately, our property-level and corporate needs are relatively small. Furthermore, our business model was never built on the use of significant leverage. Accordingly, as of year end and assuming that we rationally exercise our extension options, we have no debt maturing until December 2011. At that time, we will have maturing obligations totaling $107 million. As of year end, we had cash-on-hand of $75 million and credit line availability of $42 mil- lion. Thus, while the lack of a debt market is not something to be taken lightly — and we do not presume to venture a guess as to the banking landscape between now and 2011 — if we remain careful and disciplined, we will not have to resort to some of the more drastic measures of our peers. Moreover, with patience, high-quality companies with strong track records and high levels of transparency should be able to continue to conservatively leverage real estate at reason- able rates. This will likely work to our advantage — there will be fewer lenders, but there will also be fewer qualified borrowers. In light of the current market conditions, debt maturities and liquidity remain at the forefront of any discussion of balance sheet strength. How- ever, in 2008, we also maintained other important balance sheet metrics, including fixed-charge coverage of 2.9x and an FFO Payout Ratio of 70%. Additionally, we maintained our regular quarterly cash dividend. Furthermore, with 98% of our core portfolio debt locked in at an all-in cost of 5.1%, we have insulated ourselves from the unpredictable movements in LIBOR over the next few years. Maintain a disciplined growth strategy that enables opportunistic investing The fact that Acadia is well capitalized with a solid core portfolio has enabled our team to execute our growth strategy with limited distractions. At a time when the majority of the investment community is frozen either from legacy issues, lack of capital or sheer panic, we are well positioned for growth. A confluence of circumstances, including a growing pool of distressed sellers and limited liquidity in the capital markets, has created an opportunity for those companies with access to capital to acquire high-quality assets at attractive current yields. Cortlandt Towne Center Our recent 2009 acquisition of Cortlandt Towne Center, a 640,000 square foot regional shopping center located in Westchester County, New York, is a prime example. Well-situated within a high barriers-to-entry trade area and anchored by qual- ity national tenants including Wal-Mart, Marshalls and A&P Food Market, the property was acquired at an attractive 9% going-in unlevered yield. Furthermore, it is imbedded with significant upside potential, part of which we will realize as we re-lease the vacant space that resulted from the recent bankruptcies of two junior anchors. We recognize that a precipitous drop in values is neither an indicator nor an assurance that a recovery will promptly follow. While we may be acting ahead of the bottom of the real estate market’s trough, we think that we will be well-rewarded for buying proven and irreplaceable real estate at a great price. Fund III We are fortunate to have both adequate balance sheet capacity and a liquid discretionary invest- ment fund backed by astute institutional investors. This enables us to pursue future opportunities without being overly beholden to the public markets. Cortlandt was acquired through our third discre- tionary investment fund, which was launched in 2007 with $503 million of equity. Inclusive of the Cortlandt acquisition, we have deployed approxi- mately 30% of the fund’s total equity commitments. This leaves us with plenty of acquisition capital to deploy over the next several years at the right time for the right assets. Existing Fund Investments An acquisition in the same vein as Cortlandt was impossible as recently as a few years ago as the liquidity bubble reached its peak. At that time, it became starkly clear to us that pricing for stabi- lized real estate had outpaced intrinsic value. As a result, we stopped chasing overpriced, stabilized retail and refocused our attention on “value-add” investments where we felt our stakeholders could receive more attractive risk-adjusted returns. This strategic shift was responsible for the launching of two investment programs: our Retailer Controlled Property (“RCP”) Venture and our New York Urban/Infill Redevelopment Program. Retailer Controlled Property Venture: Our RCP Venture was launched in January 2004 with our partners Klaff Realty and Lubert-Adler. The goal of this highly successful venture has been to invest 3 Acadia Realty Trust 2008 Annual Report 3 in surplus or distressed properties owned or controlled by retailers. Our most significant RCP initiatives have been our participation in the acqui- sitions of Mervyns Department Stores and Albert- son’s Supermarkets. To date, Acadia, through Funds I and II, has received distributions of $114 million on initial investments of $59 million, already representing a 193% return on invested equity. New York Urban/Infill Redevelopment Program: Our other area of “value-add” focus has been bringing national retailers to the densely populated and under-retailed outer boroughs of New York City through our New York Urban/Infill Redevelopment Program. Launched in 2004 with our talented part- ners at P/A Associates, the program acquires prime properties throughout the five boroughs of New York City. Leveraging our long-standing and strong tenant relationships, we strive to bring the best retailers to urban locations previously perceived as too difficult for national tenants to penetrate. During the past year, we completed construction on five of the program’s 10 redevelopment projects, with construction well underway on the sixth project and the balance progressing in the design phase. For those projects that have been com- pleted, the retail is 84% leased and the office is 71% leased. Only a few moving pieces remain (the continued lease-up of the office component at Fordham Place, the retail component at Pelham Manor and the self-storage component at both Pel- ham Manor and Liberty Avenue) and the stabiliza- tion of these projects is one of our top priorities in 2009. As the year progresses, we will selectively decide to commence construction on our other projects currently in the design phase, the criteria for which includes significant pre-leasing and the ability to secure construction financing. Although we feel very comfortable with our exist- ing investments, it is hard to ignore the fact that almost all assets are worth less today than they were a few years ago. At the same time, we take comfort in the fact that we deliberately chose not to buy into the hysteria; as a result, our invest- 4 Acadia Realty Trust 2008 Annual Report ments should fare better than the investments of those who invested heavily at the peak. Further- more, we remained focused on properties located in prime, irreplaceable locations. Location has been the unifying element of our acquisition strategy, and in general, we’ve been well-rewarded by targeting properties in densely populated, high barrier-to-entry locations. Although news of store closures continues to make headlines, and retail- ers are proceeding with caution as it relates to new stores, before the recession fully recedes, those retailers focused on long-term growth will begin to refocus their efforts. We are of the opin- ion that these retailers will be more likely to sign leases in proven locations where the risk is less- ened and the reward is more certain. Storage Post Portfolio: Over the past few years, we have enhanced our New York Urban/Infill Redevelopment Platform by incorporating a self- storage component either on top of, or adjacent to, four of our urban redevelopments. Our strate- gic partner and the operator of the storage com- ponent at all four sites is the New York-based self-storage company Storage Post. In February 2008, we completed the acquisition and recapital- ization of an 11-property self-storage portfolio operated by Storage Post, containing approximately 920,000 net rentable square feet. The portfolio provided a unique opportunity to gain an even greater foothold in urban storage locations with dense populations and high barriers-to-entry. At acquisition, the 10 previously-developed storage properties had a collective occupancy of 70%, while one asset remained under construction, thus affording substantial lease-up opportunity. Preferred Equity Investments The majority of our investment activity is completed through our fund platform through which we can achieve greater scale by leveraging our skill set and our capital with the capital of our institutional partners. Nevertheless, we have periodically made investments “on balance sheet.” These types of investments are generally done in connection with asset and capital recycling, and we take care that these investments do not conflict with our fund investments. In 2008, we completed two key investments: a $40 million senior preferred equity investment collateralized by an 18-property retail portfolio in Georgetown, Washington, D.C. and a $34 million preferred equity investment collateralized by a mixed-use retail and residential development at 72nd Street and Broadway on the Upper West Side of Manhattan. While mezzanine and preferred equity investments have come under increased scrutiny as of late, it is important to appreciate that not all investments of this nature will perform in the same manner. Our observations, supplemented by our own experience this past year, have led us to conclude that the mezzanine and equity investments that run into problems are generally those with high levels of senior leverage, creating defaults that cannot be easily cured. With respect to the two investments that we made this year, both are secured by assets that we would welcome owning at our basis. We see meaningful value in excess of our investment, even at today’s compressed pricing. While we expect these investments to simply provide us with the 13% and 20% returns forecasted, if they convert into a permanent ownership stake, we do not consider this to be a negative outcome for our shareholders. Looking forward, it is unlikely that we will make additional investments like this on-balance sheet as liquidity has taken on such heightened importance. Looking forward As a community, we are experiencing unprece- dented market conditions, and it appears that the economy will continue to face headwinds through the balance of 2009 and likely thereafter. As we work our way through this very challenging period in our economy, we will be extremely respectful of the powerful forces that are impacting our industry and will remain true to our core foundations: We will monitor our tenants’ performance carefully and will work to see that our portfolio weathers the storm as successfully as possible. We will carefully maintain the strength of our balance sheet, recognizing that liquidity will remain of paramount importance. And finally, we will not let irrational fear drive our capital into the mattress. Instead, we will be extremely thoughtful and deliberate about each new investment, and at the same time, we will be prepared to utilize our external growth platform to pursue the investment opportunities that will be uniquely born out of the current market conditions. We appreciate your support of Acadia Realty Trust and, across all levels and functions within the organization, remain dedicated to its contin- ued success. Kenneth F. Bernstein President and CEO 5 Acadia Realty Trust 2008 Annual Report 5 Acadia Core and Opportunity Fund Properties STORAGE POST LOCATIONS Brooklyn, NY Bruckner, NY Fordham, NY Jersey City, NJ Lawrence, NY Linden, NJ Long Island City, NY New Rochelle, NY Ridgewood, NY Suffern, NY Webster, NY Yonkers, NY Route 202 Shopping Center, Wilmington, DE Blackman Plaza, Wilkes-Barre, PA Mark Plaza, Edwardsville, PA Plaza 422, Lebanon, PA Route 6 Mall, Honesdale, PA Chestnut Hill Shoppes, Philadelphia, PA Abington Towne Center, Abington, PA Opportunity Fund Portfolio FUND I PROPERTIES Granville Center, Columbus, OH Tarrytown Centre, Tarrytown, NY Sterling Heights Shopping Center, Sterling Heights, MI Kroger/Safeway Portfolio, various locations FUND II PROPERTIES Oakbrook, Oakbrook, IL 98th Street and Liberty Avenue, Queens, NY 216th Street, New York, NY 260 East 161st Street, Bronx, NY Fordham Place, Bronx, NY Pelham Manor Shopping Plaza, Pelham Manor, NY Sherman Plaza, New York, NY CityPoint, Brooklyn, NY Atlantic Avenue, Brooklyn, NY Canarsie Plaza, Brooklyn, NY FUND III PROPERTIES 125 Main Street, Westport, CT Sheepshead Bay Plaza, Brooklyn, NY RETAIL PROPERTIES Core Portfolio NEW YORK REGION 239 Greenwich Avenue, Greenwich, CT Elmwood Park Shopping Center, Elmwood Park, NJ A&P Shopping Plaza, Boonton, NJ Village Commons Shopping Center, Smithtown, NY The Branch Plaza, Smithtown, NY Amboy Shopping Center, Staten Island, NY Bartow Avenue, Bronx, NY Pacesetter Park Shopping Center, Pomona, NY 2914 Third Avenue, Bronx, NY LA Fitness, Staten Island, NY 200 West 54th Street, New York, NY East 17th Street, New York, NY Crossroads Shopping Center, White Plains, NY NEW ENGLAND REGION Town Line Plaza, Rocky Hill, CT Methuen Shopping Center, Methuen, MA Crescent Plaza, Brockton, MA New Loudon Center, Latham, NY Walnut Hill Plaza, Woonsocket, RI The Gateway, South Burlington, VT MIDWEST REGION Hobson West Plaza, Naperville, IL Clark and Diversey, Chicago, IL Merrillville Plaza, Hobart, IN Bloomfield Town Square, Bloomfield Hills, MI Mad River Station, Dayton, OH MID-ATLANTIC REGION Marketplace of Absecon, Absecon, NJ Ledgewood Mall, Ledgewood, NJ Brandywine Town Center, Wilmington, DE Market Square Shopping Center, Wilmington, DE 6 Acadia Realty Trust 2008 Annual Report 2008 FORM 10-K REPORT Focused. Disciplined. Value-Driven. United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K 4 o ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 1-12002 ACADIA REALTY TRUST (Exact name of registrant as specified in its charter) Maryland (State of incorporation) 23-2715194 (I.R.S. employer identification no.) 1311 Mamaroneck Avenue, Suite 260, White Plains, NY 10605 (Address of principal executive offices) (914) 288-8100 (Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act: Common Shares of Beneficial Interest, $.001 par value (Title of Class) New York Stock Exchange (Name of Exchange on which registered) 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 o 4 NO o Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. YES o 4 NO o 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. 4 YES o NO o 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 con- tained, 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. o Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). 4 Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer o Indicate by check mark whether the registrant ia a shell company (as defined in Rule 12b-2 of the Act). YES o 4 NO o The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $748.9 million, based on a price of $23.15 per share, the average sales price for the Registrant’s shares of beneficial interest on the New York Stock Exchange on that date. The number of shares of the Registrant’s Common Shares of Beneficial Interest outstanding on February 27, 2009 was 33,905,289. DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of the Registrant’s definitive proxy statement relating to its 2009 Annual Meeting of Shareholders presently scheduled to be held May 13, 2009 to be filed pursuant to Regulation 14A. Acadia Realty Trust 2008 Annual Report Acadia Realty Trust Form 10-K Report 2008 Table of Contents Item No. PART I Page 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 PART II 5. Market for Registrant’s Common Equity, Related Stock Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 33 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . 50 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 PART III 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . 53 13. Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . . 53 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 PART IV 15. Exhibits, Financial Statements, Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Acadia Realty Trust 2008 Annual Report Special Note Regarding Forward-Looking Statements Certain statements contained in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “esti- mate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminol- ogy. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to those set forth under the headings “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” in this Form 10-K. These risks and uncertainties should be considered in evaluating any forward-looking statements related opportunities including investments for which we provide operational support to the operating ventures in which we have a minority equity interest. All of our investments are held by, and all of our operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership”) and entities in which the Operating Partnership owns a controlling interest. As of December 31, 2008, the Trust controlled 98% of the Oper- ating Partnership as the sole general partner. As the gen- eral partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited part- ners generally represent entities or individuals, which con- tributed their interests in certain assets or entities to the Operating Partnership in exchange for common or pre- ferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for our common shares of beneficial interest (“Common Shares”). This structure is referred to as an umbrella partnership REIT or “UPREIT.” Business Objectives and Strategies Our primary business objective is to acquire, develop and contained or incorporated by reference herein. manage commercial retail properties that will provide cash PART I for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to ITEM 1. BUSINESSx achieve this objective: General Acadia Realty Trust (the “Trust”) was formed on March 4, 1993 as a Maryland real estate investment trust (“REIT”). All references to “Acadia,” “we,” “us,” ”our,” and “Com- pany” refer to Acadia Realty Trust and its consolidated subsidiaries. We are a fully integrated, self-managed and self-administered equity REIT focused primarily on the ownership, acquisition, redevelopment and management of retail properties, including neighborhood and commu- nity shopping centers and mixed-use properties with retail components. We currently operate 85 properties, which we own or have an ownership interest in. Twelve of these properties are self-storage locations. These assets are located primarily in the Northeast, Mid-Atlantic and Mid- western regions of the United States and, in total, com- prise approximately eight million square feet. We also have private equity investments in other retail real estate n Own and operate a Core Portfolio (as defined in Item 2 of this Form 10-K) of community and neighborhood shopping centers and main street retail located in markets with strong demographics. n Generate internal growth within the Core Portfolio through aggressive redevelopment, re-anchoring and or leasing activities. n Generate external growth through an opportunistic yet disciplined acquisition program. The emphasis is on targeting transactions with high inherent opportunity for the creation of additional value through redevelop- ment and leasing and/or transactions requiring creative capital structuring to facilitate the transactions. These transactions may include other types of commercial real estate besides those types we invest in through our Core Portfolio. Acadia Realty Trust 2008 Annual Report 1 n Partner with private equity investors for the purpose of (including the Operating Partnership) and 20% to the making investments in operating retailers with significant Operating Partnership as a Promote. The Operating Part- embedded value in their real estate assets. nership also earns fees and/or priority distributions for n Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth. Investment Strategy — External Growth through Opportunistic Acquisition Platforms The requirements that acquisitions be accretive on a long- term basis based on our cost of capital, as well as increase the overall portfolio quality and value, are core to our acquisition program. As such, we constantly evaluate the blended cost of equity and debt and adjust the amount of acquisition activity to align the level of investment activity with capital flows. We may also engage in discussions with public and private entities regarding business combi- nations. In addition to our direct investments in real estate asset management services equal to 1.5% of the allo- cated invested equity, as well as for property manage- ment, leasing, legal and construction services. All such fees and priority distributions are reflected as a reduction in the minority interest share in income from Opportunity Funds in the Consolidated Financial Statements beginning on page 59 of this Form 10-K. Our acquisition program was executed primarily through Fund I through June 2004. Fund I focused on targeting assets for acquisition that had superior in-fill locations, restricted competition due to high barriers to entry and in-place below-market anchor leases with the potential to create significant additional value through re-tenanting, timely capital improvements and property redevelopment. assets, we have also capitalized on our expertise in the On January 4, 2006, Fund I recapitalized a one million acquisition, redevelopment, leasing and management of square foot retail portfolio located in Wilmington Delaware retail real estate by establishing discretionary opportunity (“Brandywine Portfolio”) through a merger of interests fund joint ventures in which we earn, in addition to a return with affiliates of GDC Properties (“GDC”). The Brandywine on our equity interest and carried interest (“Promote”), Portfolio was recapitalized through a “cash-out” merger fees and priority distributions for our services. To date, of the 77.8% interest, which was previously held by the we have launched three opportunity fund joint ventures institutional investors in Fund I, to GDC at a valuation of (“Opportunity Funds”), Acadia Strategic Opportunity Fund, $164.0 million. The Operating Partnership, through a sub- LP (“Fund I”), Acadia Strategic Opportunity Fund II, LLC sidiary, retained its existing 22.2% interest and continues (“Fund II”) and Acadia Strategic Opportunity Fund III, LLC to operate the Brandywine Portfolio and earn fees for such (“Fund III”). Due to the level of our control, we consolidate services. At the closing of the merger, the Fund I investors these Opportunity Funds. Fund I During September of 2001, we and four of our institutional shareholders formed a joint venture, Fund I, and during August of 2004 formed a limited liability company, Acadia Mervyn Investors I, LLC (“Mervyns I”), whereby the investors committed $70.0 million for the purpose of acquiring real estate assets. The Operating Partnership committed an additional $20.0 million in the aggregate to received a return of all of their capital invested in Fund I and their unpaid preferred return, thus triggering the pay- ment to the Operating Partnership of its additional 20% Promote in all future Fund I distributions. During June 2006, the Fund I investors received $36.0 million of additional proceeds from this transaction following the replacement of bridge financing which they provided, with permanent mortgage financing, triggering $7.2 million in additional Promote due the Operating Partnership, which was paid from the Fund I investor’s share of the remaining assets Fund I and Mervyns I, as the general partner or managing in Fund I. member with a 22% interest. In addition to a pro-rata return on its invested equity, the Operating Partnership is entitled to a Promote based upon certain investment return thresholds. Cash flow was distributed pro-rata to the partners (including the Operating Partnership) until a 9% cumulative return was achieved (“Preferred Return”) on, and a return of all capital contributions. As of December 31, 2008, there were 27 assets compris- ing approximately 1.3 million square feet remaining in Fund I in which the Operating Partnership’s interest in cash flow and income is 37.8% as a result of the Promote. Fund II Following our success with Fund I, during June of 2004 Now that a 9% cumulative return has been achieved, we formed a second, larger acquisition joint venture, remaining cash flow is now distributed 80% to the partners Fund II, and during August of 2004, formed Acadia Mervyn 2 Acadia Realty Trust 2008 Annual Report Investors II, LLC (“Mervyns II”), with the investors from Fund I as well as two additional institutional investors, Retailer Controlled Property Venture (the “RCP Venture”) whereby the investors, including the Operating Partnership, On January 27, 2004, through Funds I and II, we entered committed capital totaling $300.0 million. The Operating into the RCP Venture with Klaff Realty, L.P. (“Klaff”) and Partnership is the managing member with a 20% interest Lubert-Adler Management, Inc. (“Lubert-Adler”) for the in Fund II and Mervyns II and can invest the committed purpose of making investments in surplus or underutilized equity on a discretionary basis within the parameters properties owned by retailers. The initial expected size of defined in the Fund II and Mervyns II operating agreements. the RCP Venture is approximately $300 million in equity, The terms and structure of Fund II and Mervyns II are of which our share is $60 million, based on anticipated substantially the same as Fund I and Mervyns I with the investments of approximately $1 billion. Each participant in exception that the Preferred Return is 8%. As of Decem- the RCP Venture has the right to opt out of any potential ber 31, 2008, $192.0 million of Fund II’s capital was investment. We, through Fund III, would consider expand- invested and the balance of $108.0 million is expected ing the size of the RCP Venture and our share thereof to be utilized for existing Fund II investments. In an effort to generate superior risk-adjusted returns for our shareholders and the Opportunity Fund investors, we have channeled our acquisition efforts through Fund II in two opportunistic strategies described below — the New York Urban Infill Redevelopment Initiative and the Retailer Controlled Property Venture. New York Urban/Infill Redevelopment Initiative During September of 2004, through Fund II, we launched our New York Urban Infill Redevelopment initiative. Despite the current economy, we believe that retailers continue to recognize that many of the nation’s urban markets are underserved from a retail standpoint, and we are poised to continue to capitalize on this trend by investing in redevel- opment projects in dense urban areas where retail tenant demand has effectively surpassed the supply of available sites. During 2004, Fund II, together with an unaffiliated partner, P/A Associates, LLC (“P/A”), formed Acadia-P/A Holding Company, LLC (“Acadia-P/A”) for the purpose of acquiring, constructing, developing, owning, operating, leasing and managing certain retail or mixed-use real estate properties in the New York City metropolitan area. P/A agreed to invest 10% of required capital up to a maximum of $2.2 million and Fund II, the managing member, agreed to invest the balance to acquire assets in which Acadia- P/A agrees to invest. See Item 7 of this Form 10K for further information on the Acadia P/A Joint Venture as based on investment opportunities. Investments under the RCP Venture are structured as separate joint ventures as there may be other investors participating in certain invest- ments in addition to Klaff, Lubert-Adler and us. Affiliates of Mervyns I and II and Fund II have invested $59.1 million in the RCP Venture to date on a non-recourse basis. While we are not required to invest any additional capital into any of these investments, should additional capital be required and we elect not to contribute our share, our proportionate share in the investment will be reduced. As Fund I is fully invested and Fund II is fully committed, Fund III will pro- vide the remaining portion of our original share of the equity in future RCP Venture investments. Cash flow from any RCP investments is to be distributed to the partici- pants until they have received a 10% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 20% to Klaff (“Klaff’s Pro- mote”) and 80% to the partners (including Klaff). The Operating Partnership may also earn market-rate fees for property management, leasing and construction services on behalf of the RCP Venture. While we are primarily a passive partner in the investments made through the RCP Venture, historically we have provided our support on reviewing potential acquisitions and operating and redevel- opment assistance in areas where we have both a pres- ence and expertise. We seek to invest opportunistically with the RCP Venture primarily in the following four ways: n Invest in operating retailers to control their real estate detailed in “Liquidity and Capital Resources — New York through private equity joint ventures. Urban/Infill Redevelopment Initiative.” To date, Fund II has invested in nine projects, eight of which are in con- junction with P/A, as discussed further in “PROPERTY ACQUISITIONS — New York Urban/Infill Redevelopment Initiative” in this Item 1 of this Form 10-K. n Work with financially healthy retailers to create value from their surplus real estate. Acadia Realty Trust 2008 Annual Report 3 n Acquire properties, designation rights or other control of real estate or leases associated with retailers in bankruptcy. n Complete sale leasebacks with retailers in need of capital. Capital Strategy — Balance Sheet Focus and Access to Capital Given the significant turmoil in the capital markets and the unprecedented disruption of the economy, our primary capital objective is to maintain a strong and flexible bal- During 2004, we made our first RCP Venture investment ance sheet through conservative financial practices while with our participation in the acquisition of Mervyns. During ensuring access to sufficient capital to fund future growth. 2006, 2007 and 2008, we made additional investments We intend to continue financing acquisitions and property as further discussed in “PROPERTY ACQUISITIONS — redevelopment with sources of capital determined by RCP Venture” below. Fund III Following the success of Fund I and the full commitment of Fund II, we formed a third discretionary Opportunity Fund (“Fund III”), during 2007, with 14 institutional investors, including a majority of the investors from Fund I and Fund II, whereby the investors, including the Operat- ing Partnership, committed capital totaling $503 million. The Operating Partnership’s share of the committed capi- tal is $100 million and it is the sole managing member management to be the most appropriate based on, among other factors, availability in the current capital markets, pricing and other commercial and financial terms. The sources of capital may include the issuance of public equity, unsecured debt, mortgage and construction loans, and other capital alternatives including the issuance of Operating Partnership Units. We manage our interest rate risk primarily through the use of fixed rate-debt and, where we use variable rate debt, we use certain deriva- tive instruments, including LIBOR swap agreements and interest rate caps as discussed further in Item 7A of this with a 19.9% interest in Fund III and can invest the com- Form 10-K. mitted equity on a discretionary basis within the parame- ters defined in the Fund III operating agreements. The terms and structure of Fund III are substantially the same as the previous Funds, including the Promote structure, with the exception that the Preferred Return is 6%. As of December 31, 2008, $96.5 million of Fund III’s capital was invested. To date, Fund III has invested in 13 projects as discussed further in “PROPERTY ACQUISITIONS” in this Item 1 of this Form 10-K. Preferred Equity, Notes Receivable and Other Real Estate Related Investments During December of 2006 and January of 2007, we issued $115.0 million of 3.75% unsecured Convertible Notes (the “Notes”). Interest on the Notes is payable semi-annually. The Notes had an initial conversion rate of 32.4002 of our Common Shares for each $1,000 principal amount, repre- senting a conversion price of approximately $30.86 per Common Share, or a conversion premium of approxi- mately 20.0% based upon our Common Share price on the date of the issuance of the Notes. Pursuant to the terms of the Notes, the conversion rate was adjusted to 32.7310 effective October 1, 2008 and 34.1708 effective We may also invest in preferred equity investments, mort- January 1, 2009. The Notes are redeemable for cash up to gage loans, other real estate interests and other invest- ments. The mortgage loans in which we invest may be either first or second mortgages, where we believe the their principal amount plus accrued interest and, at our option, cash, our Common Shares, or a combination thereof with respect to the remainder, if any, of the con- underlying value of the real estate collateral is in excess of version value in excess of the principal amount. The Notes its loan balance. As of December 31, 2008, our preferred mature December 15, 2026, although the holders of the equity investment and notes receivable aggregated $125.6 Notes may require the Company to repurchase their Notes, million, and were collateralized by the underlying properties, in whole or in part, on December 20, 2011, December 15, the borrower’s ownership interest in the properties and/or 2016, and December 15, 2021. After December 20, 2011, by the borrower’s personal guarantee. Interest rates on our preferred equity investment, mezzanine loan invest- ments and notes receivable ranged from 9.75% to in we have the right to redeem the Notes in whole or in part at any time. The $112.1 million in proceeds, net of related costs, were used to retire variable rate debt, provide for excess of 20% with maturities that range from demand future Opportunity Fund capital commitments and for notes to January 2017. 4 Acadia Realty Trust 2008 Annual Report general working capital purposes. During November and Operating functions such as leasing, property management, December of 2008, we purchased $8.0 million in princi- construction, finance and legal (collectively, the “Operating pal amount of the Notes and purchased an additional Departments”) are provided by our personnel, providing $13.5 million in principal amount during January 2009, all for fully integrated property management and development. at a discount of approximately 24%. By incorporating the Operating Departments in the acqui- During January 2007, we filed a shelf registration on Form S-3 providing for offerings of up to a total of $300.0 million of Common Shares, Preferred Shares and debt securities. As of December 31, 2008, we have remaining capacity under this registration statement to issue up to approximately $189 million of these securities. Common and Preferred OP Unit Transactions On January 27, 2004, we issued 4,000 Series B Preferred OP Units to Klaff in connection with the acquisition from Klaff of its rights to provide asset management, leasing, disposition, and construction services for an existing port- folio of retail properties. These units had a stated value of $1,000 each and are entitled to a quarterly preferred distribution of the greater of (i) $13.00 (5.2% annually) per Preferred OP Unit or (ii) the quarterly distribution attribu- table to a Preferred OP Unit if such unit were converted into a Common OP Unit. The Preferred OP Units are con- vertible into Common OP Units based on the stated value of $1,000 divided by 12.82 at any time. Klaff was entitled to redeem them at par for either cash or Common OP Units (at our option). During 2007, Klaff converted all 4,000 Series B Preferred OP Units into 312,013 Common OP Units and ultimately into Common Shares. Operating Strategy — Experienced Management Team with Proven Track Record Our senior management team has decades of experience in the real estate industry. We believe our management team has demonstrated the ability to create value inter- nally through anchor recycling, property redevelopment and strategic non-core dispositions. We have capitalized sition process, acquisitions are appropriately priced giving effect to each asset’s specific risks and returns. Also, because of the Operating Departments involvement with, and corresponding understanding of, the acquisition process, transition time is minimized and management can immediately execute on its strategic plan for each asset. We typically hold our Core Portfolio properties for long- term investment. As such, we continuously review the existing portfolio and implement programs to renovate and modernize targeted centers to enhance the property’s market position. This in turn strengthens the competitive position of the leasing program to attract and retain quality tenants, increasing cash flow and consequently property value. We also periodically identify certain properties for disposition and redeploy the capital to existing centers or acquisitions with greater potential for capital appreciation. Our Core Portfolio consists primarily of neighborhood and community shopping centers, which are generally domi- nant centers in high barrier-to-entry markets. The anchors at these centers typically pay market or below-market rents. Furthermore, supermarket and necessity-based retailers anchor the majority of our Core Portfolio. We believe these attributes enable our properties to better withstand the current recession. During 2008, 2007 and 2006 we sold seven non-core prop- erties and redeployed the capital to acquire seven retail properties as further discussed in “ASSET SALES AND CAPITAL/ASSET RECYCLING” below. Property Acquisitions on our expertise in the acquisition, redevelopment, leasing RCP Venture and management of retail real estate by establishing joint Albertson’s ventures, such as the Opportunity Funds, in which we In June 2006, the RCP Venture participated in the acquisi- earn, in addition to a return on our equity interest and Pro- tion of 699 stores from Albertson’s, the nation’s second mote, fees and priority distributions. In connection with largest grocery and drug chain and 26 Cub Food stores. these joint ventures we have launched several successful The total price paid by the investment consortium, which acquisition platforms including our New York Urban Infill included subsidiaries of Cerberus Capital Management, Redevelopment Initiative and RCP Venture. Schottenstein Stores Corp. and Kimco Realty Corporation, Acadia Realty Trust 2008 Annual Report 5 to Albertson’s for the portfolio was $1.9 billion, which REALCO properties were occupied by tenants other than was funded with $0.3 billion of equity and $1.6 billion of Mervyns. During 2008 and 2007, Mervyns I and Mervyns financing. Mervyns II’s share of equity invested totaled II made additional investments in Mervyns totaling $2.9 $20.7 million. The Operating Partnership’s share was million. The Operating Partnership’s share of the total $4.2 million. investment in Mervyns was $4.9 million. During February of 2007, Mervyns II received cash distri- Through December 31, 2008, Mervyns I and Mervyns II butions totaling approximately $44.4 million from its own- have also made add-on investments in Mervyns properties ership position in Albertson’s. The Operating Partnership’s totaling $3.0 million. The Operating Partnerships share of share of this distribution amounted to approximately $8.9 this amount was $0.3 million. million. The distributions primarily resulted from proceeds received by Albertsons in connection with its disposition of certain stores, refinancing of the remaining assets held in the entity and excess cash from operations. Mervyns II received additional distributions from this investment total- ing $8.8 million in 2007 and $10.6 million in 2008. The Operating Partnership’s share of these distributions was $2.9 million. During 2005, Mervyns made a distribution to the investors from the proceeds from the sale of a portion of the port- folio and the refinancing of existing debt, of which a total of $42.7 million was distributed to Mervyns I and Mervyns II. The Operating Partnership’s share of this distribution amounted to $10.2 million. In addition, during 2006, Mervyns distributed additional cash totaling $4.6 million. The Operating Partnership’s share of this distribution Through December 31, 2008, Mervyns II has made addi- totaled $1.4 million. tional add-on investments in Albertson’s, whereby Mervyns II, Klaff and Lubert-Adler have together acquired specific assets from the above investment consortium, totaling $2.8 million and received distributions totaling $0.8 million in the aggregate from these add-on investments. The Operating Partnership’s share of such amounts was $0.4 million and $0.1 million, respectively. Mervyns Department Stores In September 2004, we made our first RCP Venture invest- ment. Through Mervyns I and Mervyns II, we invested in a consortium along with subsidiaries of Sun Capital Part- ners, Inc. and Cerberus Capital Management to acquire the Mervyns Department Store chain (“Mervyns”) consist- ing of 262 stores (“REALCO”) and its retail operation (“OPCO”) from Target Corporation. The gross acquisition price of $1.2 billion was financed with $800 million of debt and $400 million of equity. Mervyns I and Mervyns II contributed in the aggregate $23.2 million of equity and received an approximate 5.2% interest in REALCO and an approximate 2.5% interest in OPCO. To date, REALCO has disposed of a significant portion of the portfolio. In addition, in November 2007, we sold our interest in OPCO and, as a result, have no further investment in OPCO. As of December 31, 2008, a majority of the Other RCP Venture Investments During 2006, Fund II invested $1.1 million in Shopko, a regional multi-department retailer that, at the time of the acquisition, operated 358 stores located throughout the Midwest, Mountain and Pacific Northwest and $0.7 million in Marsh, a regional supermarket chain which operated 271 stores in central Indiana, Illinois and western Ohio. The Operating Partnership’s share of these investments totaled $0.2 million. For the year ended December 31, 2007, Fund II received a $1.1 million distribution from the Shopko investment, of which the Operating Partnership’s share was $0.2 million. During 2008, Fund II made investments of $2.0 million in additional add-on investments in Marsh. The Operating Partnership’s share was $0.4 million. For the year ended December 31, 2008, Fund II received a $1.0 million distri- bution from the Marsh add-on investment, of which the Operating Partnership’s share was $0.2 million. During July 2007, Mervyns II invested $2.7 million in REX Stores Corporation, which is comprised of electronic retail stores located in 27 states. The Operating Partnership’s share was $0.5 million. 6 Acadia Realty Trust 2008 Annual Report The following table summarizes the RCP Venture investments from inception through December 31, 2008: (dollars in millions) Investor Investment Mervyns I and Mervyns II Mervyns Year acquired 2004 Mervyns I and Mervyns II Mervyns add-on investments 2005/2008 Mervyns II Mervyns II Fund II Fund II Fund II Mervyns II Total Albertson’s 2006 Albertson’s add-on investments 2006/2007 Shopko Marsh Marsh add-on investments Rex 2006 2006 2008 2007 Operating Partnership Share Invested capital $26.1 3.0 20.7 2.8 1.1 0.7 2.0 2.7 Distributions $ 46.0 1.3 63.8 0.8 1.1 — 1.0 — Invested capital $ 4.9 0.3 4.2 0.4 0.2 0.1 0.4 0.5 Distributions $ 11.3 0.3 11.8 0.1 0.2 — 0.2 — $59.1 $114.0 $11.0 $ 23.9 New York Urban/Infill Redevelopment Initiative Manhattan for $7.0 million. During 2007, we completed As of December 31, 2008, we had 10 New York Urban/ Infill projects. Construction is substantially complete at five of the projects, one is under construction and four are in the design phase as follows: Construction Substantially Complete the construction of a 60,000 square foot office building and we relocated an agency of the City of New York, which was a tenant at another of our Urban/Infill Redevelopment projects, to this location. Inclusive of acquisition costs, total costs to Acadia P/A for the project, which also includes a 100-space rooftop parking deck, was approximately Fordham Place — On September 29, 2004, Acadia-P/A $28.0 million. purchased 400 East Fordham Road, Bronx, New York. Construction of the four-level retail component is substan- tially complete. The total retail space is 98% leased and occupied by Best Buy, Sears, Walgreens, and by 24 Hour fitness, which is scheduled to open during the first half of 2009. Construction on the office component is also sub- stantially complete with 33% currently leased. The total cost of the project to Acadia P/A, including the acquisition cost of $30.0 million, is expected to be $125.0 million. Liberty Avenue — On December 20, 2005, Acadia-P/A acquired the remaining 40-year term of a leasehold inter- est in land located at Liberty Avenue and 98th Street in Queens (Ozone Park) New York. Development of this project has been completed and the property is currently operating. It includes approximately 30,000 square feet of retail anchored by a CVS drug store and a 95,000 square foot self-storage facility operated by Storage Post. The total cost to Acadia P/A of the redevelopment was approx- Pelham Manor — On October 1, 2004, Acadia-P/A entered imately $15.0 million. into a 95-year, inclusive of extension options, ground lease to redevelop a 16-acre site in Pelham Manor, Westchester County, New York. We have demolished the existing industrial and warehouse buildings, and are completing construction of a multi-anchor community retail center at a total estimated cost of $58.0 million. Home Depot was originally slated to anchor the project, but announced their decision to curtail plans for expansion. As part of our lease 161st Street — On August 5, 2005, Acadia-P/A purchased 244-268 161st Street located in the Bronx, New York for $49.3 million, inclusive of closing costs. The ultimate rede- velopment plan for this currently 88% occupied, 10-story office building, is to be determined. Additional redevelop- ment costs to Acadia P/A are anticipated to be approxi- mately $16.0 million. termination agreement with Home Depot, we purchased Under Construction the building that Home Depot had constructed on the site Atlantic Avenue — During May 2007, we, through Fund II for $10 million, representing approximately half of their and in partnership with Post Management, LLC (“Storage cost of construction. At the same time, we executed a Post”), acquired a property on Atlantic Avenue in Brooklyn, lease with BJ Wholesale Club (“BJ’s”) to anchor the site. New York for $5.0 million. Storage Post is our unaffiliated Construction on BJ’s space is underway. partner in our self storage portfolio (see below) and at 216th Street — On December 1, 2005, Acadia-P/A acquired a 65,000 square foot parking garage located at 10th Avenue and 216th Street in the Inwood section of several of our other New York urban projects with a self storage component. Redevelopment of the property has commenced with the demolition of the existing structure Acadia Realty Trust 2008 Annual Report 7 and the construction of an eight level state-of-the-art self component with MacFarlane, which is expected to include storage facility, which is expected to be completed in the at least 125,000 square feet of office space. MacFarlane second half of 2009. In Design Canarsie — During October of 2007, Acadia P/A acquired a 530,000 square foot warehouse building in Canarsie, Brooklyn for approximately $21.0 million. The development plan for this property includes the demolition of a portion of the warehouse and the construction of a 323,000 square foot mixed-use project consisting of retail, office, cold-stor- age and self-storage. The total cost of the redevelopment, including acquisition costs, is expected to be approximately $50.0 million. We had executed a lease with Home Deport to anchor the project. However, during 2008, we reached an agreement with Home Depot to terminate their lease as a result of Home Depot’s corporate decision to curtail plans for expansion. As we had negotiated a lease with terms favorable to us as landlord, including stringent open- ing covenants and limited assignment rights, Home Depot paid us $24.5 million to terminate this lease. Sherman Plaza — On April 6, 2005, Acadia-P/A acquired 4650 Broadway located in the Washington Heights/Inwood section of Manhattan. The property, a 140,000 square foot building, which was occupied by an agency of the City of New York and a commercial parking garage, was acquired for a purchase price of $25.0 million. During 2007 we relo- cated this tenant to Acadia P/A’s 216th St. redevelopment as discussed above. We are currently reviewing various alternatives to redevelop the site to include retail and office components totaling over 216,000 square feet. Expected costs for Acadia P/A to complete the redevelopment are estimated at $55.0 million. plans to develop and operate up to 1,000 residential units with underground parking. Acadia P/A does not plan on participating in the development of, or have an ownership interest in, the residential component of the project. The scope of the project remains under review and we may decide to revise our development plan. Sheepshead Bay — During November of 2007, Fund III acquired a property in Sheepshead Bay, Brooklyn for approximately $20.0 million. The project is currently in the design phase; however, we have demolished the existing site and expect to develop a multi-story retail center with approximately 240,000 square feet of gross leasable area (“GLA”). The total cost of the redevelopment, including acquisition costs, is expected to be approxi- mately $109.0 million. Given the current dislocation in the credit markets, we do not intend to proceed with significant development activi- ties with respect to the forgoing properties that are in the design phase until significant pre-leasing and the other components of the projects, including the availability of project financing, are in place. Self-Storage Portfolio On February 29, 2008, Fund III, in conjunction with Storage Post, acquired a portfolio of 11 self-storage properties from Storage Post’s existing institutional investors for approximately $174.0 million. The portfolio totals approxi- mately 920,000 net rentable square feet, of which 10 properties are operating at various stages of stabilization. The remaining property is currently under construction. The properties are located throughout New York and New CityPoint — On June 13, 2007, Acadia-P/A and MacFarlane Jersey. The portfolio continues to be operated by Storage Partners (“MacFarlane”) purchased the leasehold interest Post, which is a 5% equity partner. in The Gallery at Fulton Street in downtown Brooklyn for approximately $115.0 million, with an option to purchase the fee position, which is owned by the City of New York, at a later date. Redevelopment plans for the property, renamed as CityPoint, include the demolition of the exist- ing structure and the development of a 1.6 million square foot mixed-use complex. The proposed development calls for the construction of a combination of retail, office and residential components, all of which are currently allowed as of right. Acadia P/A, together with MacFarlane, will develop and operate the retail component, which is antici- Other Investments In addition to the RCP Venture, the New York Urban/ Infill and Self-Storage Portfolio investments as discussed above, through Fund II and Fund III, we have also acquired the following: During November 2007, Fund III acquired 125 Main Street, Westport, Connecticut for approximately $17.0 million. Our plan is to redevelop the existing building into 30,000 square feet of retail and office use. pated to total 475,000 square feet of retail space. Acadia Core Portfolio P/A will also participate in the development of the office See Item 2. PROPERTIES for the definition of our Core Portfolio. 8 Acadia Realty Trust 2008 Annual Report During April of 2008, the Operating Partnership acquired 18 properties located primarily in Georgetown, Washing- a 20,000 square foot single tenant retail property located ton D.C. The portfolio consists of 306,000 square feet of on 17th Street near 5th Avenue in Manhattan, New York principally retail space. The term of this investment is for for $9.7 million. two years, with two one-year extensions, and provides a During March of 2007, the Operating Partnership pur- 13% preferred return. chased a 52,000 square foot single-tenant building located During July 2008, the Operating Partnership made a $34.0 at 1545 East Service Road in Staten Island, New York for million mezzanine loan, which is collateralized by a mixed- $17.0 million. During March of 2007, the Operating Partnership pur- chased a retail commercial condominium at 200 West 54th Street located in Manhattan, New York. The 10,000 square foot property was acquired for $36.4 million. use retail and residential development at 72nd Street and Broadway on the Upper West Side of Manhattan. Upon completion, this project is expected to include approximately 50,000 square feet of retail on three levels and 196 luxury residential rental apartments. The term of the loan is for a period of three years, with a one year extension, and, During September of 2006, the Operating Partnership including the exit fee, provides an effective annual return purchased 2914 Third Avenue in the Bronx, New York for in excess of 20%. $18.5 million. The 41,305 square foot property is 100% leased and is located in a densely populated, high barrier- to-entry, infill area. During September 2008, Fund III made a $10.0 million first mortgage loan, which is collateralized by land located on Long Island, New York. The term of the loan is for a period During June of 2006, the Operating Partnership purchased of two years, and provides an effective annual return of 8400 and 8625 Germantown Road in Philadelphia, Penn- approximately 13%. sylvania for $16.0 million. During June 2006, the Operating Partnership converted its During January of 2006, the Operating Partnership closed $20.0 million preferred equity investment in Levitz SL, on a 20,000 square foot retail building in the Lincoln Park L.L.C (“Levitz SL”), the owner of fee and leasehold inter- district in Chicago. The property was acquired from an ests in former Levitz Furniture Store locations, to a first affiliate of Klaff for $9.9 million. mortgage loan and advanced additional proceeds bringing During January of 2006, the Operating Partnership acquired a 60% interest in the A&P Shopping Plaza located in Boonton, New Jersey. The property, located in northeast- ern New Jersey, is a 63,000 square foot shopping center anchored by a 49,000 square foot A&P Supermarket. The remaining 40% interest is owned by a principal of P/A. The interest was acquired for $3.2 million. the total outstanding amount to $31.3 million. Following the sale of two locations by Levitz SL during 2006 and 2007, $24.8 million of proceeds were used to repay our first mortgage loan, and the remaining balance of $6.5 million remained outstanding at December 31, 2008. The first mortgage loan matures in July 2009, with a one-year extension option and bears interest at a rate of 11.6%. Although the loan is collateralized by three former Levitz Preferred Equity, Notes Receivable and Other Real Estate Related Investments locations, totaling 402,266 square feet, which are currently vacant, we believe the underlying value of the real estate During June 2008, the Operating Partnership made a is sufficient to recover the principal and interest due under $40.0 million preferred equity investment in a portfolio of our mortgage loan. Acadia Realty Trust 2008 Annual Report 9 The following table sets forth our preferred equity and notes receivable investments as of December 31, 2008: Weighted Averages Notes Receivable (dollars in thousands) Investment Principal Accrued Interest Total Stated Interest Rate Effective Extension Interest Maturity Options Date Rate1 Underlying Third-Party First Mortgage Loan (Years) Amount2 Maturity Dates Georgetown A – 5 property portfolio Georgetown B – 18 property portfolio 72nd Street First mortgage notes Mezzanine notes $ 8,000 $ 810 $ 8,810 9.75% 10.25% 11/2010 2 x 1 year $8,576 2009 through 2012 40,000 35,941 25,443 16,203 2,092 1,137 1,964 1,476 42,092 13.00% 13.50% 6/2010 2 x 1 year 114,150 2011 through 2016 37,078 13.00% 20.85% 7/2011 1 year 185,000 2011 with one year extension 27,407 10.86% 11.43% 2009 0.2 years N/A N/A 17,679 13.30% 14.82% 2011 — — 2012 Total notes receivable $125,587 $7,479 $133,066 12.40% 15.15% 1The effective rate includes upfront points and exit fees. 2The first mortgage amount for 72nd Street represents the maximum availability under the loan. Asset Sales and Capital/Asset Recycling We periodically identify certain core properties for disposition and redeploy the capital to existing centers or acquisitions with greater potential for capital appreciation. Since January of 2006, we have sold the following Core Portfolio assets: Property Location Date Sold Village Apartments Colony and GHT Apartments Soundview Marketplace Bradford Towne Centre Greenridge Plaza Pittston Plaza Luzerne Street Shopping Center Winston-Salem, North Carolina April 2008 Columbia, Missouri Long Island, New York Towanda, Pennsylvania Scranton, Pennsylvania Pittston, Pennsylvania Scranton, Pennsylvania December 2007 December 2006 November 2006 November 2006 November 2006 November 2006 Total GLA 599,106 625,545 183,815 257,123 191,767 79,498 58,035 1,994,889 Sales price (dollars in thousands) $ 23,300 15,512 24,000 16,000 10,600 6,000 3,600 $ 99,012 Proceeds from these sales in part have been used to fund totaling approximately 3.0 million square feet. Following the Core Portfolio acquisitions as discussed in “PROPERTY the 2006 recapitalization of the Brandywine Portfolio as ACQUISITIONS” above. Fund I Liquidation As originally contemplated when Fund I was established as a finite life entity, we are currently engaged in the multi-year process of liquidating the fund’s investments. Historically, Fund I had purchased a total of 35 assets discussed further in “BUSINESS OBJECTIVES AND STRATEGIES” above and the sale of other properties as discussed below, there were 27 assets comprising 1.3 million square feet remaining in Fund I as of December 31, 2008 (in which the Operating Partnership’s interest in cash flow and income has increased from 22.2% to 37.8% as a result of the Promote) as follows: Location Year Acquired GLA Shopping Center New York Region New York Tarrytown Centre Midwest Region Ohio Granville Centre Michigan Westchester Columbus Sterling Heights Shopping Center Detroit Various Regions Kroger/Safeway Portfolio Various (24 properties) Total 10 Acadia Realty Trust 2008 Annual Report 2004 2002 2004 2003 35,291 134,997 154,835 987,100 1,312,223 During April 2008, Fund I sold Haygood Shopping Center regarding, among other things, revenues from external located in Virginia Beach, Virginia, for $24.9 million, result- customers, a measure of profit and loss and total assets ing in a $6.8 million gain. with respect to each of our segments. During November 2007, Fund I sold Amherst Marketplace and Sheffield Crossing, community shopping centers in Ohio, for $26.0 million, resulting in a $7.5 million gain. On February 2, 2009, The Kroger Co. purchased the fee at six locations in Fund I’s Kroger/Safeway Portfolio for Corporate Headquarters and Employees Our executive offices are located at 1311 Mamaroneck Avenue, Suite 260, White Plains, New York 10605, and our telephone number is (914) 288-8100. As of December 31, 2008, we had 135 employees, of which 108 were located $14.6 million. The Company’s share of the sales proceeds at our executive office and 27 were located at regional amounted to $8.1 million. Property Redevelopment and Expansion Our redevelopment program focuses on selecting well- located neighborhood and community shopping centers within our Core Portfolio and creating significant value through re-tenanting and property redevelopment. property management offices. None of our employees are covered by collective bargaining agreements. Management believes that its relationship with employees is good. Company Website All of our filings with the Securities and Exchange Com- mission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Competition There are numerous entities that compete with us in Form 8-K and amendments to those reports filed or fur- nished pursuant to Section 13(a) or 15(d) of the Securities seeking properties for acquisition and tenants that will Exchange Act of 1934, are available free of charge at our lease space in our properties. Our competitors include website at www.acadiarealty.com, as soon as reason- other REIT’s, financial institutions, insurance companies, ably practicable after we electronically file such material pension funds, private companies and individuals. Our with, or furnish it to, the Securities and Exchange Com- properties compete for tenants with similar properties mission. These filings can also be accessed through primarily on the basis of location, total occupancy costs the Securities and Exchange Commission’s website at (including base rent and operating expenses) and the www.sec.gov. Alternatively, we will provide paper copies design and condition of the improvements. of our filings free of charge upon request. If you wish to Financial Information About Market Segments We have four reportable segments: Core Portfolio, Oppor- receive a copy of the Form 10-K, you may contact Robert Masters, Corporate Secretary at Acadia Realty Trust, 1311 Mamaroneck Avenue, Suite 260, White Plains, NY 10605. You may also call (914) 288-8100 to request a copy of the tunity Funds, Self Storage Portfolio, and Other. During Form 10-K. Information included or referred to on our 2008, we acquired a portfolio of self storage properties and website is not incorporated by reference in or otherwise determined that it constitutes a new reportable segment. a part of this Form 10-K. “Other” primarily consists of management fees, interest income, preferred equity investment and notes receivable. The accounting policies of the segments are the same as those described in the summary of significant accounting Code Of Ethics and Whistleblower Policies The Board of Trustees adopted a Code of Ethics for Senior policies. We evaluate property performance primarily based Financial Officers that applies to our Chief Executive Officer, on net operating income before depreciation, amortization Senior Vice President–Chief Financial Officer, Senior Vice and certain nonrecurring items. Investments in our Core President–Chief Accounting Officer, Vice President–Con- Portfolio are typically held long-term. Given the contem- troller, Vice President–Financial Reporting, Director of plated finite life of our Opportunity Funds, these invest- Taxation and Assistant Controllers. The Board also adopted ments are typically held for shorter terms. Fees earned by a Code of Business Conduct and Ethics applicable to all us as general partner/member of the Opportunity Funds employees, as well as a “Whistleblower Policy.” Copies of are eliminated in our Consolidated Financial Statements. these documents are available in the Investor Information See Note 3 to our Consolidated Financial Statements, section of our website. which begin on page 59 of this Form 10-K for information Acadia Realty Trust 2008 Annual Report 11 ITEM 1A. RISK FACTORSx If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer. This section includes or refers to certain forward- looking statements. Refer to the explanation of the qualifi- cations and limitations on such forward-looking statements discussed in the beginning of this Form 10-K. We rely on revenues derived from major tenants. We derive significant revenues from certain anchor tenants that occupy space in more than one center. We could be adversely affected in the event of the bankruptcy or insol- vency of, or a downturn in the business of, any of our major tenants, or in the event that any such tenant does not renew its leases as they expire or renews at lower rental rates. Vacated anchor space not only would reduce rental revenues if not re-tenanted at the same rental rates but also could adversely affect the entire shopping center because of the loss of the departed anchor tenant’s cus- tomer drawing power. Loss of customer drawing power also can occur through the exercise of the right that most anchors have to vacate and prevent re-tenanting by paying rent for the balance of the lease term, or the departure of a “shadow” anchor tenant that owns its own property. In addition, in the event that certain major tenants cease to occupy a property, such an action may result in a signifi- cant number of other tenants having the right to terminate their leases, or pay a reduced rent based on a percentage of the tenant’s sales, at the affected property, which could adversely affect the future income from such property. See “Item 2. Properties — Major Tenants” for quantified information with respect the percentage of our minimum rents received from major tenants. We may not be able to renew current leases and the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms. Upon the expiration of current leases for space located in our properties, we may not be able to re-let all or a portion of that space, or the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms. If we are unable to re-let promptly all or a substantial portion of the space located in our prop- erties or if the rental rates we receive upon re-letting are significantly lower than current rates, our net income and ability to make expected distributions to our shareholders will be adversely affected due to the resulting reduction in rent receipts. There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases. See “Item 2. Properties — Lease Expirations” in this Annual Report on Form 10-K for additional information as to the scheduled lease expira- tions in our portfolio. The current global financial crisis may cause us to lose tenants and may impair our ability to borrow money to purchase properties, refinance existing debt or obtain the necessary financing to complete our current redevelopment. Our operations and performance depend on general eco- nomic conditions. The U.S. economy has recently experi- enced a financial downturn, with consumer spending on the decline, credit tightening and unemployment rising. Many financial and economic analysts are predicting that the world economy has entered a prolonged economic downturn characterized by high unemployment, limited availability of credit and decreased consumer and business spending. This economic downturn is expected to adversely affect the businesses of many of our tenants. We and the Opportunity Funds may experience higher vacancy rates as well as delays in re-leasing vacant space. The current downturn has had, and may continue to have, an unprecedented impact on the global credit markets. In general, credit is currently difficult to obtain. While we currently believe we have adequate sources of liquidity, there can be no assurance that we will be able to obtain mortgage loans to purchase additional properties, obtain financing to complete current redevelopment projects, or successfully refinance our properties as loans become due. To the extent that the availability of credit continues to be limited, it will also adversely impact our preferred equity and mezzanine investments as counterparties may not be able to obtain the financing required to repay the loans upon maturity. Additionally, if the current market conditions continue, it will make it more difficult for us to raise capital through the issuance of equity or debt securities. The bankruptcy of, or a downturn in the business of, any of our major tenants or a significant number of our smaller tenants may adversely affect our cash flows and property values. The bankruptcy of, or a downturn in the business of, any of our major tenants causing them to reject their leases, or not renew their leases as they expire, or renew at lower rental rates may adversely affect our cash flows and prop- erty values. Furthermore, the impact of vacated anchor space and the potential reduction in customer traffic may adversely impact the balance of tenants at the center. 12 Acadia Realty Trust 2008 Annual Report Certain of our tenants have experienced financial difficul- Bankruptcy. Tweeter is operating in one of our Core ties and have filed for bankruptcy under Chapter 11 of the Portfolio locations, leasing 12,799 square feet. Rental United States Bankruptcy Code (“Chapter 11 Bankruptcy”). revenues from Tweeter totaled $0.3 million, $0.3 million Pursuant to bankruptcy law, tenants have the right to and $0.4 million for the years ended December 31, 2008, reject their leases. In the event the tenant exercises this 2007 and 2006, respectively. A new entity, Tweeter right, the landlord generally has the right to file a claim Newco, LLC, and its operating subsidiary, Tweeter Opco, for lost rent equal to the greater of either one year’s rent LLC, (“Tweeter 2”) assumed the lease. On November 5, (including tenant expense reimbursements) for remaining 2008, Tweeter 2 filed for protection under Chapter 11 terms greater than one year, or 15% of the rent remaining Bankruptcy, which was subsequently converted to a Chap- under the balance of the lease term, but not to exceed ter 7 Bankruptcy. Tweeter 2 has rejected the lease. three years rent. Actual amounts to be received in satis- faction of those claims will be subject to the tenant’s final plan of reorganization and the availability of funds to pay its creditors. In addition, through our investment in Mervyns I and Mervyns II, as discussed in Item 1 under Property Acquisi- tions of this Form 10-K, we leased space to the Mervyns Department Store chain which declared bankruptcy and Since January 1, 2006, there have been four significant rejected the leases. This could adversely effect the Oper- tenant bankruptcies within our portfolio: ating Partnership’s revenues by less than $0.5 million. On December 11, 2008, KB Toys (“KB”) filed for protection under Chapter 11 Bankruptcy. KB operated in two locations in our Core Portfolio, totaling approximately 12,000 square feet. Rental revenues from KB at these locations aggregated $0.3 million for each of the years ended December 31, 2008, 2007 and 2006, respectively. KB has filed a Motion to Reject the lease at the two locations and a hearing on the matter is scheduled for March 10, 2009. On November 10, 2008, Circuit City Stores Inc. (“Circuit City”) filed for protection under Chapter 11 Bankruptcy. Circuit City operated at two of our Core Portfolio locations totaling approximately 59,278 square feet. Rental revenues from Circuit City at these locations totaled $1.0 million, $0.7 million and $0.5 million for the years ended Decem- ber 31, 2008, 2007 and 2006 respectively. Circuit City has rejected one lease and has neither assumed nor rejected one lease. In addition, Circuit City executed a lease at a property owned by Acadia-P/A Holding Company. Circuit City has rejected that lease. On January 16, 2009, Circuit City announced that it will seek Bankruptcy Court approval to liquidate the assets of the Company. On September 27, 2007, the Bombay Company, Inc. (“Bombay”) filed for protection under Chapter 11 Bank- ruptcy. Bombay operated in one of our Core Portfolio loca- tions, leasing 8,965 square feet. Rental revenues from Bombay totaled $0.04 million, $0.2 million and $0.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. Bombay has rejected the lease at this location. On June 11, 2007, Tweeter Home Entertainment Group, Inc. (“Tweeter 1”) filed for protection under Chapter 11 There are risks relating to investments in real estate. Real property investments are subject to varying degrees of risk. Real estate values are affected by a number of factors, including: changes in the general economic climate, local conditions (such as an oversupply of space or a reduction in demand for real estate in an area), the quality and philosophy of management, competition from other available space, the ability of the owner to provide ade- quate maintenance and insurance and to control variable operating costs. Shopping centers, in particular, may be affected by changing perceptions of retailers or shoppers regarding the safety, convenience and attractiveness of the shopping center and by the overall climate for the retail industry generally. Real estate values are also affected by such factors as government regulations, interest rate levels, the availability of financing and potential liability under, and changes in, environmental, zoning, tax and other laws. A significant portion of our income is derived from rental income from real property, our income and cash flow would be adversely affected if a significant num- ber of our tenants were unable to meet their obligations, or if we were unable to lease on economically favorable terms a significant amount of space in our properties. In the event of default by a tenant, we may experience delays in enforcing, and incur substantial costs to enforce, our rights as a landlord. In addition, certain significant expendi- tures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. Acadia Realty Trust 2008 Annual Report 13 Our ability to change our portfolio is limited because real estate investments are illiquid. Competition may adversely affect our ability to pur- chase properties and to attract and retain tenants. Equity investments in real estate are relatively illiquid and, There are numerous commercial developers, real estate therefore, our ability to change our portfolio promptly in companies, financial institutions and other investors with response to changed conditions will be limited. Our board greater financial resources than we have that compete of trustees may establish investment criteria or limitations with us in seeking properties for acquisition and tenants as it deems appropriate, but currently does not limit the who will lease space in our properties. Our competitors number of properties in which we may seek to invest or include other REIT’s, financial institutions, insurance com- on the concentration of investments in any one geographic panies, pension funds, private companies and individuals. region. We could change our investment, disposition and This competition may result in a higher cost for properties financing policies without a vote of our shareholders. that we wish to purchase. In addition, retailers at our We could become highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements, which could adversely affect our financial condition and results of operations and our ability to pay distributions. properties face increasing competition from outlet malls, discount shopping clubs, Internet commerce, direct mail and telemarketing, which could (i) reduce rents payable to us; (ii) reduce our ability to attract and retain tenants at our properties; and (iii) lead to increased vacancy rates We have incurred, and expect to continue to incur, indebt- at our properties. edness in furtherance of our activities. Neither our Decla- ration of Trust nor any policy statement formally adopted by our board of trustees limits either the total amount of indebtedness or the specified percentage of indebted- ness that we may incur. Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements, which could adversely affect our financial condition and results of operations and our ability to make distributions. Our loan agreements contain customary representations, covenants and events of default. Certain loan agreements require us to comply with certain affirmative and negative covenants, including the maintenance of certain debt serv- ice coverage and leverage ratios. Interest expense on our variable debt as of December 31, 2008 would increase by $2.5 million annually for a 100 basis point increase in interest rates. We may seek additional variable-rate financing if and when pricing and other com- mercial and financial terms warrant. As such, we would consider hedging against the interest rate risk related to such additional variable-rate debt through interest rate swaps and protection agreements, or other means. We could be adversely affected by poor market conditions where properties are geographically concentrated. Our performance depends on the economic conditions in markets in which our properties are concentrated. We have significant exposure to the greater New York region, from which we derive 34% of the annual base rents within our Core Portfolio. Our operating results could be adversely affected if market conditions, such as an over- supply of space or a reduction in demand for real estate, in this area become more competitive relative to other geographic areas. We have pursued, and may in the future continue to pursue extensive growth opportunities, which may result in significant demands on our opera- tional, administrative and financial resources. We have pursued extensive growth opportunities. This expansion has placed significant demands on our opera- tional, administrative and financial resources. The contin- ued growth of our real estate portfolio can be expected to continue to place a significant strain on our resources. Our future performance will depend in part on our ability to suc- cessfully attract and retain qualified management person- nel to manage the growth and operations of our business We enter into interest-rate hedging transactions, including and to finance such acquisitions. In addition, acquired prop- interest rate swaps and cap agreements, with counter- erties may fail to operate at expected levels due to the parties. There can be no guarantee that the financial con- numerous factors that may affect the value of real estate. dition of these counterparties will enable them to fulfill There can be no assurance that we will have sufficient their obligations under these agreements. resources to identify and manage acquired properties or otherwise be able to maintain our historic rate of growth. 14 Acadia Realty Trust 2008 Annual Report Our inability to carry out our growth strategy could adversely affect our financial condition and results of operations. Our earnings growth strategy is based on the acquisition and development of additional properties, including acqui- sitions through co-investment programs such as our Opportunity Funds. In the context of our business plan, “redevelopment” generally means an expansion or reno- tax consequences of our actions to any limited partner, there can be no assurance that the Operating Partnership will not acquire properties in the future subject to material restrictions designed to minimize the adverse tax conse- quences to the limited partners who contribute such properties. Such restrictions could result in significantly reduced flexibility to manage our assets. vation of an existing property. The consummation of any Limited control over joint venture investments. future acquisitions will be subject to satisfactory comple- Under the terms of our Fund III joint venture, which is tion of our extensive valuation analysis and due diligence similar to the terms of Fund I and Fund II, we are required review and to the negotiation of definitive documentation. to first offer to Fund III all of our opportunities to acquire We cannot be sure that we will be able to implement our retail shopping centers. Only if (i) our joint venture partner strategy because we may have difficulty finding new prop- elects not to approve Fund III’s pursuit of an acquisition erties, negotiating with new or existing tenants or secur- opportunity; (ii) the ownership of the acquisition opportu- ing acceptable financing. Acquisitions of additional properties entail the risk that investments will fail to perform in accordance with expec- tations, including operating and leasing expectations. Rede- velopment is subject to numerous risks, including risks of construction delays, cost overruns or uncontrollable events that may increase project costs, new project commence- ment risks such as the receipt of zoning, occupancy and nity by Fund III would create a material conflict of interest for us; (iii) we require the acquisition opportunity for a “like-kind” exchange; or (iv) the consideration payable for the acquisition opportunity is our Common Shares, OP Units or other securities, may we pursue the opportunity directly. As a result, we may not be able to make attrac- tive acquisitions directly and may only receive a minority interest in such acquisitions through Fund III. other required governmental approvals and permits, and Our joint venture investments, including our Opportunity the incurrence of development costs in connection with Fund investments may involve risks not otherwise present projects that are not pursued to completion. for investments made solely by us, including the possibility A component of our growth strategy is through private- equity type investments made through our RCP Venture. These include investments in operating retailers. The inability of the retailers to operate profitably would have an adverse impact on income realized from these investments. We operate through a partnership structure, which could have an adverse effect on our ability to manage our assets. Our primary property-owning vehicle is the Operating Partnership, of which we are the general partner. Our acquisition of properties through the Operating Partnership in exchange for interests in the Operating Partnership may permit certain tax deferral advantages to limited partners that our joint venture partner might have different interests or goals than we do. Other risks of joint venture invest- ments include impasse on decisions, such as a sale, because neither we nor a joint venture partner would have full control over the joint venture. Also, there is no limita- tion under our organizational documents as to the amount of funds that may be invested in joint ventures. Through our investments in joint ventures we have also invested in operating businesses that have operational risk in addition to the risks associated with real estate investments, including among other risks, human capital issues, adequate supply of product and material, and merchandising issues. who contribute properties to the Operating Partnership. During 2008, 2007 and 2006, our Fund I joint venture pro- Since properties contributed to the Operating Partnership vided Promote income. There can be no assurance that may have unrealized gain attributable to the difference the joint ventures will continue to operate profitably and between the fair market value and adjusted tax basis in thus provide additional Promote income in the future. such properties prior to contribution, the sale of such properties could cause adverse tax consequences to the limited partners who contributed such properties. Although we, as the general partner of the Operating Partnership, generally have no obligation to consider the Market factors could have an adverse effect on our share price. One of the factors that may influence the trading price of our Common Shares is the annual dividend rate on our Acadia Realty Trust 2008 Annual Report 15 Common Shares as a percentage of its market price. An damages and claims related to the leased premises, in increase in market interest rates may lead purchasers of the event of the bankruptcy or inability of any of our ten- our Common Shares to seek a higher annual dividend rate, ants to satisfy any obligations with respect to the property which could adversely affect the market price of our Com- leased to that tenant, we may be required to satisfy such mon Shares. A decline in our share price, as a result of obligations. In addition, we may be held directly liable for this or other market factors, could unfavorably impact our any such damages or claims irrespective of the provisions ability to raise additional equity in the public markets. of any lease. The loss of a key executive officer could have an adverse effect on us. From time to time, in connection with the conduct of our business, and prior to the acquisition of any property from Our success depends on the contribution of key manage- a third party or as required by our financing sources, we ment members. The loss of the services of Kenneth F. authorize the preparation of Phase I environmental reports Bernstein, President and Chief Executive Officer, or other and, when necessary, Phase II environmental reports, key executive-level employees could have a material with respect to our properties. Based upon these environ- adverse effect on our results of operations. We have mental reports and our ongoing review of our properties, obtained key-man life insurance for Mr. Bernstein. In addi- we are currently not aware of any environmental condition tion, we have entered into an employment agreement with respect to any of our properties that we believe would with Mr. Bernstein; however, it could be terminated by be reasonably likely to have a material adverse effect on Mr. Bernstein. We have not entered into employment us. There can be no assurance, however, that the environ- agreements with other key executive level employees. mental reports will reveal all environmental conditions at Possible liability relating to environmental matters. Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, as an owner of real property, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under our property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). These laws may impose liability without regard to whether we knew of, or were responsible for, the presence or disposal of those substances. This liability may be imposed on us in connection with the activities of an operator of, or tenant at, the property. The cost of any required remediation, removal, fines or personal or property damages and our liability therefore could exceed the value of the property and/or our aggregate assets. In addition, the presence of those substances, or the failure to properly dispose of or remove those substances, may adversely affect our ability to sell or rent that property or to borrow using that prop- erty as collateral, which, in turn, would reduce our rev- enues and ability to make distributions. A property can also be adversely affected either through physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties. Although our tenants are primarily responsible for any environmental our properties or that the following will not expose us to material liability in the future: n The discovery of previously unknown environmental conditions; n Changes in law; n Activities of tenants; and n Activities relating to properties in the vicinity of our properties. Changes in laws increasing the potential liability for envi- ronmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of our tenants, which could adversely affect our financial condition or results of operations. Uninsured losses or a loss in excess of insured lim- its could adversely affect our financial condition. We carry comprehensive general liability, fire, extended coverage, loss of rent insurance, and environmental liabil- ity on most of our properties, with policy specifications and insured limits customarily carried for similar properties. However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain loss of rent insurance. In addition, there are certain types of losses, such as losses resulting from wars, terrorism or acts of 16 Acadia Realty Trust 2008 Annual Report God that generally are not insured because they are shareholders to comply with the distribution requirements either uninsurable or not economically insurable. Should of the Internal Revenue Code and to minimize exposure to an uninsured loss or a loss in excess of insured limits occur, federal income and nondeductible excise taxes. Differences we could lose capital invested in a property, as well as the in timing between the receipt of income and the payment anticipated future revenues from a property, while remain- of expenses in determining our income as well as required ing obligated for any mortgage indebtedness or other finan- debt amortization payments and the capitalization of cer- cial obligations related to the property. Any loss of these tain expenses could require us to borrow funds on a short- types would adversely affect our financial condition. term basis to meet the distribution requirements that are Our Board of Trustees may change our investment policy without shareholder approval. Our board of trustees will determine our investment and financing policies, our growth strategy and our debt, capitalization, distribution, acquisition, disposition and operating policies. Our board of trustees may establish investment criteria or limitations as it deems appropriate, but currently does not limit the number of properties in which we may seek to invest or on the concentration of investments in any one geographic region. Although our board of trustees has no present intention to revise or amend our strategies and policies, it may do so at any time without a vote by our shareholders. Accordingly, our shareholders’ control over changes in our strategies and policies is limited to the election of trustees, and changes made by our board of trustees may not serve necessary to achieve the tax benefits associated with qualifying as a REIT. The distribution requirements also severely limit our ability to retain earnings to acquire and improve properties or retire outstanding debt. There can be no assurance we have qualified or will remain qualified as a REIT for federal income tax purposes. We believe that we have consistently met the require- ments for qualification as a REIT for federal income tax purposes beginning with our taxable year ended Decem- ber 31, 1993, and we intend to continue to meet these requirements in the future. However, qualification as a REIT involves the application of highly technical and com- plex provisions of the Internal Revenue Code, for which there are only limited judicial or administrative interpreta- tions. No assurance can be given that we have qualified or the interests of all of our shareholders and could adversely will remain qualified as a REIT. The Internal Revenue Code affect our financial condition or results of operations, including our ability to distribute cash to shareholders or qualify as a REIT. Distribution requirements imposed by law limit our operating flexibility. To maintain our status as a REIT for federal income tax purposes, we are generally required to distribute to our shareholders at least 90% of our taxable income for each calendar year. Pursuant to recent IRS pronouncements, up to 90% of such distribution may be made in Common Shares rather than cash. Our taxable income is determined without regard to any deduction for dividends paid and by excluding net capital gains. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corpo- rate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any year are less than the sum of (i) 85% of our ordinary income for that year; (ii) 95% of our capital gain net income for that year and; (iii) 100% of our undistributed taxable income from prior years. We intend to continue to make distributions to our provisions and income tax regulations applicable to REIT’s differ significantly from those applicable to other corpora- tions. The determination of various factual matters and cir- cumstances not entirely within our control can potentially affect our ability to continue to qualify as a REIT. In addi- tion, no assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements for qualification as a REIT or the federal income tax consequences of such qualification. Under current law, if we fail to qualify as a REIT, we would not be allowed a deduction for dividends paid to shareholders in computing our net taxable income. In addition, our income would be subject to tax at the reg- ular corporate rates. We also could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. Cash available for distribution to our shareholders would be significantly reduced for each year in which we do not qualify as a REIT. In that event, we would not be required to continue to make distributions. Although we currently intend to continue to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us, without the consent of the shareholders, to Acadia Realty Trust 2008 Annual Report 17 revoke the REIT election or to otherwise take action that Restrictions on a potential change of control. would result in disqualification. Limits on ownership of our capital shares. For the Company to qualify as a REIT for federal income tax purposes, among other requirements, not more than 50% of the value of our capital shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of each taxable year after 1993, and such capital shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (in each case, other than the first such year). Our Declaration of Trust includes certain restrictions regarding transfers of our capital shares and ownership limits that are intended to assist us in satisfying these limitations. These restrictions and limits may not be ade- quate in all cases, however, to prevent the transfer of our capital shares in violation of the ownership limitations. The ownership limit discussed above may have the effect of delaying, deferring or preventing someone from taking control of us. Our Board of Trustees is authorized by our Declaration of Trust to establish and issue one or more series of pre- ferred shares without shareholder approval. We have not established any series of preferred shares. However, the establishment and issuance of a series of preferred shares could make more difficult a change of control of us that could be in the best interest of the shareholders. In addition, we have entered into an employment agree- ment with our Chief Executive Officer and severance agreements are in place with our senior vice presidents which provide that, upon the occurrence of a change in control of us and either the termination of their employ- ment without cause (as defined) or their resignation for good reason (as defined), those executive officers would be entitled to certain termination or severance payments made by us (which may include a lump sum payment equal to defined percentages of annual salary and prior years’ average bonuses, paid in accordance with the terms and conditions of the respective agreement), which could deter a change of control of us that could be in our best interest. Actual or constructive ownership of our capital shares in excess of the share ownership limits contained in our Declaration of Trust would cause the violative transfer Legislative or regulatory tax changes could have an adverse effect on us. There are a number of issues associated with an invest- or ownership to be null and void from the beginning and ment in a REIT that are related to the federal income tax subject to purchase by us at a price equal to the lesser laws, including, but not limited to, the consequences of of (i) the price stipulated in the challenged transaction; a company’s failing to continue to qualify as a REIT. At and (ii) the fair market value of such shares (determined any time, the federal income tax laws governing REIT’s or in accordance with the rules set forth in our declaration of the administrative interpretations of those laws may be trust). As a result, if a violative transfer were made, the amended or modified. Any new laws or interpretations recipient of the shares would not acquire any economic may take effect retroactively and could adversely affect or voting rights attributable to the transferred shares. Addi- us or our shareholders. Reduced tax rates applicable to tionally, the constructive ownership rules for these limits certain corporate dividends paid to most domestic noncor- are complex and groups of related individuals or entities porate shareholders are not generally available to REIT may be deemed a single owner and consequently in viola- shareholders since a REIT’s income generally is not tion of the share ownership limits. Concentration of ownership by certain investors. Eight institutional shareholders own 5% or more individu- subject to corporate level tax. As a result, investment in non-REIT corporations may be viewed as relatively more attractive than investment in REIT’s by domestic noncor- porate investors. This could adversely affect the market ally, and 52.8% in the aggregate, of our Common Shares. price of the Company’s shares. A significant concentration of ownership may allow an investor or a group of investors to exert a greater influ- ITEM 1B. UNRESOLVED STAFF COMMENTSx ence over our management and affairs and may have the effect of delaying, deferring or preventing a change in None. control of us. 18 Acadia Realty Trust 2008 Annual Report ITEM 2. PROPERTIESx rental revenues were from national tenants. A majority of the income from the properties consists of rent received Shopping Center Properties The discussion and tables in this Item 2 include properties under long-term leases. These leases generally provide for the payment of fixed minimum rent monthly in advance held through our Core Portfolio and our Opportunity Funds. and for the payment by tenants of a pro-rata share of the We define our Core Portfolio as those properties either real estate taxes, insurance, utilities and common area 100% owned by, or partially owned through joint venture maintenance of the shopping centers. Minimum rents and interests by the Operating Partnership, or subsidiaries expense reimbursements accounted for approximately thereof, not including those properties owned through our 69% of our total revenues for the year ended December Opportunity Funds. The discussion of the Opportunity 31, 2008. Funds does not include Fund III’s investment in a portfolio of self storage properties, which are detailed separately within this Item 2. As of December 31, 2008, approximately 33% of our existing leases also provided for the payment of percent- age rents either in addition to, or in place of, minimum As of December 31, 2008, in our Core Portfolio we rents. These arrangements generally provide for payment owned and operated 35 properties totaling approximately to us of a certain percentage of a tenant’s gross sales in 5.5 million square feet of gross leasable area (“GLA”). The excess of a stipulated annual amount. Percentage rents Core Portfolio properties are located in 12 states and are accounted for approximately 0.4% of the total 2008 rev- generally well-established, community and neighborhood enues of the Company. shopping centers anchored by supermarkets or value-ori- ented retail. The properties are diverse in size, ranging from approximately 10,000 to 875,000 square feet with an average size of 158,000 square feet. As of December 31, 2008, our Core Portfolio was 93.5% occupied. Three of our Core Portfolio properties and four of our Opportunity Fund properties are subject to long-term ground leases in which a third party owns and has leased the underlying land to us. We pay rent for the use of the land at seven locations and are responsible for all costs As of December 31, 2008, we owned and operated 29 and expenses associated with the building and improve- properties totaling 1.4 million square feet of GLA, exclud- ments at all seven locations. ing properties under redevelopment, in our Opportunity Funds. In addition to shopping centers, the Opportunity Funds’ assets have invested in mixed-use properties, which generally include retail activities. The Opportunity Fund properties are located in 15 states. As of December 31, 2008, the properties owned by our Opportunity Funds were, in total, 93.3% occupied. No individual property contributed in excess of 10% of our total revenues for the years ended December 31, 2008, 2007 and 2006. Reference is made to Note 8 to our Con- solidated Financial Statements, which begin on page 59 of this Form 10-K, for information on the mortgage debt per- taining to our properties. The following sets forth more specific information with respect to each of our shopping Within our Core Portfolio and Opportunity Funds, we had centers at December 31, 2008: 502 leases as of December 31, 2008. A majority of our Acadia Realty Trust 2008 Annual Report 19 Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Occupancy %(1) 12/31/08 Anchor Tenants Current Lease Expiration/ Lease Option Expiration Core Portfolio NEW YORK REGION Connecticut 239 Greenwich Avenue New Jersey Elmwood Park Shopping Center Greenwich 1998 (A) Fee 16,834 (3) 100% Restoration Hardware 2014/2024 Coach 2016/2021 Elmwood Park 1998 (A) Fee 149,491 100% A&P 2017/2052 Walgreens 2022/2062 A&P Shopping Plaza Boonton 2006 (A) Fee 62,908 100% A&P 2024/2069 New York Village Commons Shopping Center Branch Shopping Plaza Smithtown Smithtown 1998 (A) 1998 (A) Fee LI (4) 87,237 125,751 87% 100% A&P 2013/2028 CVS 2010/— Amboy Road Staten Island 2005 (A) LI (4) 63,290 100% King Kullen 2028/— Bartow Avenue Pacesetter Park Shopping Center 2914 Third Avenue West Shore Expressway West 54th Street East 17th Street Crossroads Shopping Center Bronx Pomona Bronx Staten Island Manhattan Manhattan White Plains 2005 (C) 1999 (A) 2006 (A) 2007 (A) 2007 (A) 2008 (A) 1998 (A) Fee Fee Fee Fee Fee Fee 14,676 96,434 42,400 55,000 9,995 19,622 JV (7) 310,714 76% 93% 100% 100% 97% 100% 96% Duane Reade 2013/2018 Stop & Shop 2020/2040 Dr. J’s 2021/— LA Fitness 2021/— Stage Deli 2013/— Barnes & Noble 2011/2016 A&P/Waldbaum’s 2012/2032 Kmart 2012/2032 B. Dalton 2012/2022 Modell’s 2009/2019 Pier 1 2012/— Home Goods 2018/2033 Total New York Region NEW ENGLAND REGION Connecticut Town Line Plaza Massachusetts Methuen Shopping Center Crescent Plaza New York New Loudon Center Rhode Island Walnut Hill Plaza Vermont The Gateway Shopping Center Total New England Region 1,054,352 97% Rocky Hill 1998 (A) Fee 206,346 (2) 100% Stop & Shop 2024/2064 Wal-Mart (2) Methuen Brockton 1998 (A) LI/Fee (4) 130,021 100% DeMoulas Market 2010/2015 1984 (A) Fee 218,141 95% Supervalu 2012/2042 Wal-Mart 2012/2052 Home Depot 2021/2056 Latham 1982 (A) Fee 255,826 100% Price Chopper 2015/2035 Marshall’s 2014/2029 Bon Ton 2014/2034 Raymour and Flanigan 2019/2034 AC Moore 2009/2024 Woonsocket 1998 (A) Fee 284,717 95% Supervalu 2013/2028 Sears 2013/2033 CVS 2009/2014 South Burlington 1999 (A) Fee 101,784 1,196,835 96% 98% Supervalu 2024/2053 20 Acadia Realty Trust 2008 Annual Report Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Occupancy %(1) 12/31/08 Anchor Tenants Current Lease Expiration/ Lease Option Expiration MIDWEST REGION Illinois Hobson West Plaza Clark Diversey Indiana Merrillville Plaza Michigan Bloomfield Town Square Ohio Mad River Station Naperville Chicago 1998 (A) 2006 (A) Fee Fee 99,138 19,265 97% 100% Garden Fresh Markets 2012/2032 Merrillville 1998 (A) Fee 235,167 95% TJ Maxx 2009/— JC Penney 2013/2018 Office Max 2013/2028 K&G 2017/2027 Pier 1 2009/— David’s Bridal 2010/2020 Bloomfield Hills 1998 (A) Fee 232,181 87% TJ Maxx 2009/2014 Marshalls 2011/2026 Home Goods 2010/2020 Office Max 2010/2025 Dayton 1999 (A) Fee 155,840 (6) 82% Babies ‘R’ Us 2010/2020 Office Depot 2010/— Pier 1 2010/— Total Midwest Region 741,591 90% Acadia Realty Trust 2008 Annual Report 21 Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Occupancy %(1) 12/31/08 Anchor Tenants Current Lease Expiration/ Lease Option Expiration MID-ATLANTIC REGION New Jersey Marketplace of Absecon Absecon 1998 (A) Fee 104,718 99% Rite Aid 2020/2040 Supervalu 2015/— Ledgewood Mall Ledgewood 1983 (A) Fee 517,151 81% Wal-Mart 2019/2049 Macy’s 2010/2025 The Sports Authority 2012/2037 Marshalls 2014/2034 Ashley Furniture 2010/2020 Barnes and Noble 2010/2035 Delaware Brandywine Town Center Wilmington 2003 (A) JV (9) 874,908 97% Drexel Heritage 2016/2026 Michaels 2011/2026 Old Navy (The Gap) 2011/2016 PetSmart 2017/2042 Thomasville Furniture 2011/2021 Access Group 2015/2025 Bed, Bath & Beyond 2014/2029 Dick’s Sporting Goods 2013/2028 Lowe’s Home Centers 2018/2048 Regal Cinemas 2017/2037 Target 2018/2058 TransUnion Settlement 2013/2018 Lane Home Furnishings 2015/— MJM Designer 2015/2035 World Market 2015/— Christmas Tree Shops 2028/2048 Market Square Shopping Center Wilmington 2003 (A) JV (9) 102,786 93% TJ Maxx 2011/2016 Naamans Road Pennsylvania Blackman Plaza Mark Plaza Plaza 422 Wilmington 2006 (C) LI/JV (4) (9) 19,970 55% Trader Joe’s 2019/2034 Wilkes-Barre 1968 (C) Fee 125,264 93% Kmart 2009/2049 Eckerd 2016/— Edwardsville 1968 (C) LI/Fee (4) 216,401 86% Redner’s Markets 2018/2028 Lebanon 1972 (C) Fee 156,279 92% Home Depot 2028/2058 Dunham’s 2016/2031 Kmart 2009/2049 Route 6 Mall Honesdale 1994 (C) Fee 175,519 100% Kmart 2020/2070 Chestnut Hill Philadelphia 2006 (A) Fee (10) 40,570 100% Borders 2010/2020 Rite Aid 2011/2026 Fashion Bug 2016/— Abington Towne Center Abington 1998 (A) Fee 216,358 (5) Total Mid-Atlantic Region Total Core Properties 2,549,924 5,542,702 Express 2009/— TJ Maxx 2010/2020 Target (5) 99% 94% 94% 22 Acadia Realty Trust 2008 Annual Report Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Occupancy %(1) 12/31/08 Anchor Tenants Current Lease Expiration/ Lease Option Expiration Opportunity Fund Portfolio Fund I Properties Ohio Granville Centre New York Tarrytown Shopping Center VARIOUS REGIONS Kroger/Safeway Portfolio Total Fund I Properties Fund II Properties Illinois Oakbrook New York Liberty Avenue 216th Street Total Fund II Properties Columbus 2002 (A) Fee 134,997 38% Lifestyle Family Fitness 2017/2027 Westchester 2004 (A) Fee 35,291 90 % Walgreens 2080/— Various 2003 (A) JV 987,100 100% 24 Kroger/Safeway Supermarkets 1,157,388 92% 2009/Various Oakbrook 2005 (A) LI (4) 112,000 100% Neiman Marcus 2011/2036 New York New York 2005 (A) 2005 (A) JV/LI (4) JV 26,125 60,000 198,125 1,355,513 82% 100% 98% 93% CVS 2032/2052 City of New York 2027/2042 Total Opportunity Fund Operating Properties Properties Under Redevelopment Fund I Sterling Heights Shopping Center Fund II 161st Street Fordham Place Detroit 2004 (A) JV (8) 154,835 61% Burlington Coat Factory 2024/— Bronx Bronx 2005 (A) 2004 (A) JV (8) JV 223,521 — 87% — Rite-Aid 2026/2046 City of New York 2011/— Best Buy 2019/2039 Sears 2023/2033 Walgreens 2048/— 24 Hour Fitness 2023/2038 Bank of America 2019/2029 BJ’s Wholesale Club 2033/2053 Michaels 2013/2033 Target Pelham Manor Shopping Plaza Westchester 2004 (A) LI/JV (4) Sherman Avenue CityPoint Atlantic Avenue Canarsie Plaza Fund III Westport Sheepshead Bay Total Redevelopment Properties New York Brooklyn Brooklyn Brooklyn Westport Brooklyn 2005 (A) 2007 (A) 2007 (A) 2007 (A) 2007 (A) 2007 (A) JV JV JV JV JV JV — — — — — — — 378,356 — — — — — — — 76% Notes: (6) GLA for this property includes 28,205 square feet of office space. (1) Does not include space leased for which rent had not yet commenced as of (7) We have a 49% investment in this property. December 31, 2008. (2) Includes a 97,300 square foot Wal-Mart which is not owned by us. (3) In addition to the 16,834 square feet of retail GLA, this property also has 21 apartments comprising 14,434 square feet. (4) We are a ground lessee under a long-term ground lease. (5) Includes a 157,616 square foot Target Store that is not owned by us. (8) Partially operating. (9) We have a 22% investment in this property. (10) Property consists of two buildings. Acadia Realty Trust 2008 Annual Report 23 Major Tenants No individual retail tenant accounted for more than 6.4% of minimum rents for the year ended December 31, 2008 or occupied more than 8.7% of total leased GLA as of December 31, 2008. The following table sets forth certain information for the 20 largest retail tenants based upon minimum rents in place as of December 31, 2008. The amounts below include our pro-rata share of GLA and annualized base rent for the Operating Partnership’s partial ownership interest in properties, including the Opportunity Funds (GLA and rent in thousands): Retail Tenant A&P (Waldbaum’s, Pathmark) Supervalu (Shaw’s) TJX Companies (T.J. Maxx, Marshalls, Homegoods) Sears (Sears, Kmart) Wal-Mart Stage Deli Ahold (Stop & Shop) Kroger Safeway Home Depot Barnes & Noble Sleepy’s Price Chopper Restoration Hardware Federated (Macy’s) Walgreens JC Penney Payless Shoesource Rite Aid Express Total Notes: Number of Stores in Portfolio Total GLA Annualized Base Rent (1) Total Portfolio GLA (2) Annualized Base Rent (2) Percentage of Total Represented by Retail Tenant 5 4 9 5 2 1 2 12 12 2 3 5 1 1 1 2 1 8 3 1 216 221 250 440 210 4 118 156 124 211 38 40 77 9 73 21 50 28 32 13 $ 3,861 3,049 4.3% 4.4% 2,110 1,633 1,515 1,350 1,320 1,254 1,251 1,069 1,044 848 802 781 651 614 545 537 512 510 5.0% 8.7% 4.2% 0.1% 2.3% 3.1% 2.5% 4.2% 0.8% 0.8% 1.5% 0.2% 1.5% 0.4% 1.0% 0.6% 0.6% 0.3% 6.4% 5.0% 3.5% 2.7% 2.5% 2.2% 2.2% 2.1% 2.1% 1.8% 1.7% 1.4% 1.3% 1.3% 1.1% 1.0% 0.9% 0.9% 0.8% 0.8% 80 2,331 $ 25,256 46.5% 41.7% (1) Base rents do not include percentage rents (except where noted), additional rents for property expense reimbursements, and contrac- tual rent escalations due after December 31, 2008. (2) Represents total GLA and annualized base rent for our retail properties including the Operating Partnership’s pro-rata share of joint venture properties, including the Opportunity Funds. 24 Acadia Realty Trust 2008 Annual Report Lease Expirations The following table shows scheduled lease expirations for retail tenants in place as of December 31, 2008, assuming that none of the tenants exercise renewal options. (GLA and Annualized Base Rent in thousands): Core Portfolio: Leases maturing in 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Thereafter Total Number of Leases 101 65 52 52 55 23 23 11 20 25 35 462 Opportunity Funds: Leases maturing in 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Thereafter Total Note: Number of Leases 30 1 8 5 1 2 – – 1 2 8 58 Annualized Base Rent (1) GLA Percentage of Total Square Feet Percentage of Total Current Annual Rent $ 7,315 6,236 6,788 6,649 8,268 4,720 5,726 1,860 4,773 7,201 12,296 $ 71,832 10% 9% 9% 9% 12% 7% 8% 3% 7% 10% 16% 100% 616 515 354 564 519 288 336 114 212 410 1,032 4,960 Annualized Base Rent (1) GLA Current Annual Rent $ 8,995 84 4,826 635 168 145 – – 450 78 4,330 $19,711 Percentage of Total 46% 0% 24% 3% 1% 1% 0% 0% 2% 0% 23% 100% Square Feet 1,007 3 278 30 4 4 – – 35 4 188 1,553 13% 10% 7% 11% 11% 6% 7% 2% 4% 8% 21% 100% Percentage of Total 65% 0% 18% 2% 0% 0% 0% 0% 2% 0% 13% 100% (1) Base rents do not include percentage rents, additional rents for property expense reimbursements, nor contractual rent escalations due after December 31, 2008. Acadia Realty Trust 2008 Annual Report 25 Geographic Concentrations The following table summarizes our retail properties by region as of December 31, 2008. (GLA and Annualized Base Rent in thousands): Region Core Properties: New York Region New England Midwest Mid-Atlantic Total Core Properties Opportunity Fund Properties: Operating Properties: Midwest (3) New York Region (4) Various (Kroger/Safeway Portfolio) (5) Total Opportunity Fund 1,054 1,197 742 2,549 5,542 247 121 987 97% 98% 90% 92% 94% 66% 93% GLA (1) Occupied % (2) Annualized Base Rent (2) Annualized Base Rent Per Occupied Square Foot Percentage of Total Represented by Region GLA 19% 22% 13% 46% Annualized Base Rent 36% 14% 13% 37% $26,159 $ 25.67 10,225 8,964 26,484 9.56 13.44 12.06 $71,832 $ 14.51 100% 100% $ 1,438 4,324 $ 8.82 38.15 18% 9% 100% 8,843 8.96 73% 10% 30% 60% Operating Properties 1,355 93% $14,605 $11.56 100% 100% Redevelopment Properties: Midwest (6) New York Region (7) Total Opportunity Fund Redevelopment Properties 155 224 379 Notes: 61% 87% $ 575 4,531 $ 6.08 23.27 41% 59% 11% 89% 76% $ 5,106 $17.65 100% 100% (1) Property GLA includes a total of 255,000 square feet, which is not owned by us. This square footage has been excluded for calculating annualized base rent per square foot. (2) The above occupancy and rent amounts do not include space that is currently leased, but for which payment of rent had not commenced as of December 31, 2008. (3) We have a 37.78% interest in future earnings and distributions from Fund I, which owns one property, and a 20% interest in Fund II, which owns one property. (4) We have a 37.78% interest in future earnings and distributions from Fund I, which owns one property, and a 20% interest in Fund II, which has a 98.76% interest in two properties. (5) Fund I portfolio of 24 triple-net, anchor-only leases with Kroger and Safeway supermarkets. (6) We have a 37.78% interest in future earnings and distributions from Fund I, which has a 50% interest in one property. (7) We have a 20% interest in Fund II, which has a 98.76% interest in one property. 26 Acadia Realty Trust 2008 Annual Report Storage Post Portfolio During February 2008, through Fund III, we acquired a 95% controlling interest in a portfolio of eleven self-stor- age properties from Storage Post's existing institutional investors for approximately $174.0 million. The Portfolio totals 920,596 net rentable square feet, of which ten properties are operating at various stages of stabilization. The remaining property is currently under construction. The properties are located throughout New York and New Jersey. The portfolio continues to be operated by Storage Post, which is a 5% equity partner. Operating Properties Location Net Rentable Square Feet Occupancy as of December 31, 2008 Stabilized New Rochelle Suffern Yonkers Jersey City Subtotal Stabilized Currently in Lease-up Bruckner Blvd Fordham Road Webster Avenue Lawrence Long Island City Linden Subtotal in Lease-up Total Operating Properties Currently Under Development Westchester, New York Suffern, New York Westchester, New York Jersey City, New Jersey Bronx, New York Bronx, New York Bronx, New York Lawrence, New York Queens, New York Linden, New Jersey 42,182 79,000 100,811 76,695 298,688 90,129 84,405 36,931 97,743 138,765 84,035 532,008 830,696 84.7% 67.8% 73.9% Ridgewood Queens, New York 89,900 Total Storage Post Portfolio 920,596 Kroger/Safeway Portfolio As of December 31, 2008, Fund I, together with an unaffil- ground lease for a property thereafter, it will be obligated to pay an average ground rent of approximately $2.00 per iated joint venture partner (“Kroger/Safeway JV”), that square foot. owned interests, through master leases with an unaffili- ated entity (“Master Lessee”), in 24 triple-net Kroger and Safeway supermarket leases (“Operating Leases”) aggre- gating approximately 1.0 million square feet. The master leases, one for the Kroger and one for the Safeway loca- tions, expire in 2011 with the Master Lessee having the option of extending the term of either or both of the mas- ter leases. The Kroger/Safeway JV acquired its interest The initial Operating Leases expire during 2009. Options on these leases provide for extensions through 2049 at an average rent of approximately $5.00 per square foot upon the commencement of the initial option period during 2009. The Kroger Co. purchased six of these locations compris- ing 277,700 square feet, or 28% of the portfolio, during February of 2009 for $14.6 million, resulting in a gain of subject to long-term ground leases, which have a term in approximately $4.5 million. excess of 80 years inclusive of multiple renewal options. Although there is no obligation for the Kroger/Safeway JV to pay ground rent during the initial term of the master lease, to the extent it exercises an option to renew a Following these sales, there are six Kroger and 12 Safeway locations in eleven states averaging approxi- mately 39,000 square feet at rents ranging from approxi- mately $3.90 to $7.00 per square foot. Acadia Realty Trust 2008 Annual Report 27 ITEM 3. LEGAL PROCEEDINGSx We are involved in other various matters of litigation aris- ing in the normal course of business. While we are unable to predict with any certainty the amounts involved, man- agement is of the opinion that, when such litigation is resolved, our resulting net liability, if any, will not have a significant effect on our consolidated financial position or results of operations. In September 2008, we, and certain of our subsidiaries, and other unrelated entities were named as defendants in an adversary proceeding brought by Mervyn’s LLC Quarter Ended High Low Dividend Per Share 2008 March 31, 2008 June 30, 2008 September 30, 2008 December 31, 2008 2007 March 31, 2007 June 30, 2007 September 30, 2007 December 31, 2007 $26.09 $21.17 $0.2100 26.78 26.14 25.23 22.54 21.38 9.04 0.2100 0.2100 0.7600 $28.14 $24.12 $0.2000 28.75 27.93 29.00 25.43 21.19 24.03 0.2000 0.2000 0.4325 (“Mervyns”) in the United States Bankruptcy Court for At February 27, 2009, there were 337 holders of record of the District of Delaware. In an Amended Complaint filed our Common Shares. December 22, 2008, Mervyns asserts claims of fraudulent transfer and breach of fiduciary duty against the defendants based upon payments made by Mervyns in September 2004, in connection with its acquisition by an entity con- trolled by certain of the defendants. Mervyns seeks to recover from the defendants these allegedly fraudulent transfers, other unspecified damages, and attorney’s fees. The defendants’ response to the Amended Complaint is due April 3, 2009. We believe that we have meritorious defenses in connection with this action and that the ulti- mate resolution will not have a material adverse effect on our results of operations or consolidated financial condition. ITEM 4. SUBMISSION OF MATTERS TOx A VOTE OF SECURITY HOLDERSx No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 2008. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON x EQUITY, RELATED STOCK MATTERS ANDx ISSUER PURCHASES OF EQUITY SECURITIESx (a) Market Information The following table shows, for the period indicated, the high and low sales price for our Common Shares as reported on the New York Stock Exchange, and cash dividends declared during the two years ended December 31, 2008 and 2007: (b) Dividends We have determined that for income tax purposes that the composition of dividends for 2008 are as follows. 54% of the total dividends distributed to shareholders represented ordinary income, 20% represented unrecap- tured Section 1250 gain and 26% represented Section 1231 gain. Our cash flow is affected by a number of fac- tors, including the revenues received from rental proper- ties, our operating expenses, the interest expense on our borrowings, the ability of lessees to meet their obligations to us and unanticipated capital expenditures. Future divi- dends paid by us will be at the discretion of the Trustees and will depend on our actual cash flows, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Trustees deem relevant. In addition, we have the ability to pay dividends in cash, Common Shares or in any combination of cash and Common Shares. (c) Issuer purchases of equity securities We have an existing share repurchase program that authorizes management, at its discretion, to repurchase up to $20.0 million of our outstanding Common Shares. The program may be discontinued or extended at any time and there is no assurance that we will purchase the full amount authorized. There were no Common Shares repurchased by us during the fiscal year ended December 31, 2008. 28 Acadia Realty Trust 2008 Annual Report During November and December 2008, we purchased $8.0 million in principal amount of our outstanding 3.75% convert- ible notes (the “Notes”) payable at a discount of approximately 24%. The following sets forth the amount purchased during the quarter ended December 31, 2008: Period October 1, 2008– October 31, 2008 November 1, 2008– November 30, 2008 Total Number of Shares (or Units) Purchased None $2,000,000 in principal amount December 1, 2008– December 31, 2008 $6,000,000 in principal amount Note: Average Price Paid per Share (or Unit) (1) — $771.250 for each $1,000 principal amount of notes $750.00 for each $1,000 principal amount of notes Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs None None None None None None (1) At the time of purchase, the Notes had a conversion rate of 32.7310 Common Shares for each $1,000 in principal amount of the Notes, representing a conversion price of approximately $30.55 per share. During January 2009, we purchased an additional $13.5 million in principal amount of the Notes at a discount of approxi- mately 24%. (d) Securities authorized for issuance under equity compensation plans The following table provides information related to our 1999 Share Incentive Plan (the “1999 Plan”), 2003 Share Incentive Plan (the “2003 Plan”) and the 2006 Share Incentive Plan (the “2006 Plan”) as of December 31, 2008: Equity Compensation Plan Information (a) (b) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans [excluding securities reflected in Column (a)] 421,244 — 421,244 $10.65 — $10.65 407,207 (1) — 407,207 (1) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Notes: (1) The 1999 Plan authorizes the issuance of options equal to up to 8% of the total Common Shares outstanding from time to time on a fully diluted basis. However, not more than 4,000,000 of the Common Shares in the aggregate may be issued pursuant to the exer- cise of options and no participant may receive more than 5,000,000 Common Shares during the term of the 1999 Plan. The 2003 Plan authorizes the issuance of options equal to up to 4% of the total Common Shares outstanding from time to time on a fully diluted basis. However, no participant may receive more than 1,000,000 Common Shares during the term of the 2003 Plan. The 2006 Plan authorizes the issuance of a maximum number of 500,000 Common Shares. No participant may receive more than 500,000 Common Shares during the term of the 2006 Plan. Remaining Common Shares available is as follows: Outstanding Common Shares as of December 31, 2008 Outstanding OP Units as of December 31, 2008 Total Outstanding Common Shares and OP Units 12% of Common Shares pursuant to the 1999 and 2003 Plans Common Shares pursuant to the 2006 Plan Total Common Shares available under equity compensation plans Less: Issuance of Restricted Shares Granted Issuance of Options Granted Number of Common Shares remaining available 32,357,530 647,656 33,005,186 3,960,622 500,000 4,460,622 (1,274,835) (2,778,580) 407,207 Acadia Realty Trust 2008 Annual Report 29 (e) Share Price Performance Graph (1) The following graph compares the cumulative total shareholder return for our Common Shares for the period commenc- ing December 31, 2003 through December 31, 2008 with the cumulative total return on the Russell 2000 Index (“Russell 2000”), the NAREIT All Equity REIT Index (the “NAREIT”) and the SNL Shopping Center REITs (the “SNL”) over the same period. Total return values for the Russell 2000, the NAREIT, the SNL and the Common Shares were calculated based upon cumulative total return assuming the investment of $100.00 in each of the Russell 2000, the NAREIT, the SNL and our Common Shares on December 31, 2003, and assuming reinvestment of dividends. The shareholder return as set forth in the table below is not necessarily indicative of future performance. Comparison of Five-Year Cumulative Total Return among Acadia Realty Trust, the Russell 2000, the NAREIT and the SNL: Acadia Realty Trust Russell 2000 NAREIT All Equity REIT Index SNL REIT Retail Shopping Center Index 300 250 200 150 100 e u l a V x e d n I 50 12/31/03 Index Acadia Realty Trust Russell 2000 NAREIT All Equity REIT Index 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Period Ended 100.00 100.00 100.00 136.33 118.33 131.58 135.86 174.41 123.72 147.58 148.26 224.54 146.44 199.32 199.56 239.04 144.15 168.05 164.30 12/31/08 144.75 95.44 104.65 98.92 SNL REIT Retail Shopping Center Index 100.00 (1) The information is this section is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing of the Trust under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing. 30 Acadia Realty Trust 2008 Annual Report ITEM 6. SELECTED FINANCIAL DATAx The following table sets forth, on a historical basis, our selected financial data. This information should be read in conjunc- tion with our audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condi- tion and Results of Operations appearing elsewhere in this Form 10-K. Funds from operations (“FFO”) amounts for the year ended December 31, 2008 have been adjusted as set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reconciliation of Net Income to Funds from Operations and Adjusted Funds From Operations.” (dollars in thousands, except per share amounts) 2008 2007 2006 2005 2004 Years ended December 31, OPERATING DATA: Revenues Operating expenses Interest expense Depreciation and amortization Gain on sale of land Equity in earnings of unconsolidated partnerships Impairment of notes receivable Gain on extinguishment of debt Minority interest Income tax provision (benefit) Income from continuing operations Income from discontinued operations Income from extraordinary item (1) Net income Basic earnings per share: Income from continuing operations Income from discontinued operations Income from extraordinary item Basic earnings per share Diluted earnings per share: Income from continuing operations Income from discontinued operations Income from extraordinary item Diluted earnings per share $ 140,739 $ 98,022 $ 92,232 $ 90,481 $ 76,829 61,641 26,890 34,964 763 19,906 (4,392) 1,958 (12,217) 3,362 19,900 7,648 — 46,608 22,775 26,892 — 6,619 — — 9,082 297 17,151 6,442 3,677 40,810 20,134 24,729 — 2,559 — — 5,242 (508) 14,868 24,145 — 36,618 16,555 24,086 — 21,280 — — (13,928) 2,140 18,434 2,192 — 31,268 14,245 20,973 — 513 — — (1,444) — 9,412 10,173 — 27,548 $ 27,270 $ 39,013 $ 20,626 $ 19,585 0.59 0.22 — 0.81 0.58 0.22 — 0.80 $ $ $ $ 0.51 0.19 0.11 0.81 0.50 0.19 0.11 0.80 $ $ $ 0.44 0.71 — 1.15 0.43 0.70 — $ $ $ 0.55 0.07 — 0.62 0.55 0.07 — $ $ $ 0.31 0.33 — 0.64 0.30 0.33 — $ 1.13 $ 0.62 $ 0.63 $ $ $ $ $ Weighted average number of Common Shares outstanding – basic – diluted 33,813 34,267 33,600 34,282 33,789 34,440 33,236 33,501 30,628 31,199 Dividends declared per Common Share $ 1.39 $ 1.0325 $ 0.755 $ 0.7025 $ 0.6525 BALANCE SHEET DATA: Real estate before accumulated depreciation $1,106,873 $ 833,694 $ 629,902 $ 650,945 $541,772 Total assets Total mortgage indebtedness Total convertible notes payable Minority interest in Operating Partnership Minority interests in partially-owned affiliates Total equity OTHER: Funds from Operations, adjusted for 1,291,556 654,868 107,000 5,667 208,839 221,298 999,012 402,903 115,000 4,595 166,516 240,736 851,692 319,507 100,000 8,673 105,064 241,119 841,204 378,770 — 9,204 137,086 220,576 599,724 242,527 — 6,893 75,244 216,924 extraordinary item (1) (2) $ 40,457 $ 44,018 $ 39,953 $ 35,842 $ 30,004 Cash flows provided by (used in): Operating activities Investing activities Financing activities See Notes on following page. 65,887 (301,635) 199,096 105,165 (208,869) 87,476 39,627 (58,890) 68,359 50,239 (135,470) 159,425 33,885 (72,860) 40,050 Acadia Realty Trust 2008 Annual Report 31 Notes: (1) The extraordinary item only relates to 2007 and represents the Company’s share of an extraordinary gain from its private- equity investment in Albertson’s. The Company considers its private-equity investments to be investments in operating businesses as opposed to real estate. Accordingly, all gains and losses from private-equity investments are included in FFO, which management believes provides a more accurate reflection of the operating performance of the Company. (2) The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclo- sure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing the performance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property and depreciation and amortization. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REIT’s. FFO does not represent cash generated from operations as defined by gen- erally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Company’s per- formance or to cash flows as a measure of liquidity. Consis- tent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus depre- ciation and amortization, and after adjustments for unconsoli- dated partnerships and joint ventures. 32 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis ITEM 7. MANAGEMENT’S DISCUSSION ANDx ANALYSIS OF FINANCIAL CONDITIONx AND RESULTS OF OPERATIONS x Overview As of December 31, 2008, we operated 85 properties, which we own or have an ownership interest in, within our Core Portfolio or within our three Opportunity Funds. Our Core Portfolio consists of those properties either 100% owned by, or partially owned through joint venture interests by the Operating Partnership, or subsidiaries thereof, not including those properties owned through our Opportunity Funds. These properties consist of commer- n Generate internal growth within the Core Portfolio through aggressive redevelopment, re-anchoring and or leasing activities. n Generate external growth through an opportunistic yet disciplined acquisition program. The emphasis is on targeting transactions with high inherent opportunity for the creation of additional value through redevelop- ment and leasing and/or transactions requiring creative capital structuring to facilitate the transactions. These transactions may include other types of commercial real estate besides those types we invest in through our Core Portfolio. cial properties, primarily neighborhood and community n Partner with private equity investors for the purpose shopping centers, self-storage and mixed-use properties of making investments in operating retailers with sig- with a retail component. The properties we operate are nificant embedded value in their real estate assets. located primarily in the Northeast, Mid-Atlantic and Mid- western regions of the United States. Our Core Portfolio consists of 35 properties comprising approximately 5.5 million square feet. Fund I has 27 properties comprising approximately 1.3 million square feet. Fund II has 10 prop- erties, seven of which (representing 1.2 million square feet) are currently operating or near construction, and three of which are in design phase. The Fund II portfolio will approximate 2.3 million square feet upon completion of all current construction and anticipated redevelopment activities. Fund III has 13 properties totaling approximately 1.2 million square feet, of which 11 locations representing 0.9 million net rentable square feet are self storage facilities. The majority of our operating income derives from rental revenues from these properties, including recoveries from tenants, offset by operating and overhead expenses. As our RCP Venture invests in operating companies, we con- sider these investments to be private-equity style, as opposed to real estate, investments. Since these are not traditional investments in operating rental real estate, the Operating Partnership invests in these through a taxable REIT subsidiary (“TRS”). Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distri- butions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective: n Own and operate a Core Portfolio of community and neighborhood shopping centers and main street retail located in markets with strong demographics. n Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth. Business Outlook The U.S. economy has recently experienced a financial downturn, which has resulted in a significant decline in retail sales due to reduced consumer spending. Many financial and economic analysts are predicting that this business recession will extend through 2009 and perhaps beyond. Although the occupancy and net operating income within our portfolio has not been materially adversely affected through December 31, 2008, should retailers continue to experience deteriorating sales performance, the likelihood of tenant bankruptcy filings may increase which would negatively impact our results of operations. In addition to the impact on retailers, the current downturn has had an unprecedented impact on the U.S. credit mar- kets. Traditional sources of financing, such as the com- mercial-mortgage backed security market, have become severely curtailed. If these conditions continue, our ability to finance new acquisitions will be adversely affected. Accordingly, our ability to generate external growth in income could be limited. See the “Item 1A. Risk Factors,” including the discussions under the headings “The current global financial crisis may cause us to lose tenants and may impair our ability to borrow money to purchase properties, refinance existing debt or obtain the necessary financing to complete our current redevelopment” and “The bankruptcy of, or a Acadia Realty Trust 2008 Annual Report 33 Results of Operations Comparison of the year ended December 31, 2008 (“2008”) to the year ended December 31, 2007 (“2007”) (dollars in millions) 2008 Revenues: Minimum rents Percentage rents Expense reimbursements Lease termination income Other property income Management fee income Interest income Other income Core Portfolio $ 50.8 0.6 14.2 — 0.3 — — — Opportunity Storage Portfolio $ 4.8 — — — 0.8 — — — Funds $24.6 — 2.6 24.0 (0.5) — — — Other (1) $ — — — — 0.6 3.4 14.5 — Core Portfolio $ 48.9 0.6 12.4 — 0.8 — — 0.2 Total revenues $ 65.9 $50.7 $ 5.6 $18.5 $ 62.9 2007 Opportunity Storage Funds $ 19.5 — 0.9 — — — — — $ 20.4 Portfolio Other (1) $ 0.3 — — — — — — — $ — — — — — 4.1 10.3 — $ 0.3 $14.4 (1) For this and subsequent tables under “Results of operations,” this includes amounts eliminated in consolidation, which are adjusted in Minority Interest. Reference is made to Note 3 to our Consolidated Financial Statements, which begin on page 59 of this Form 10-K for an overview of the Company’s four reportable segments. downturn in the business of, any of our major tenants or adversely impacted by charges related to this settlement a significant number of our smaller tenants may adversely and the related accrual adjustments totaling $1.0 million. affect our cash flows and property values.” The increase in expense reimbursements in the Opportunity The increase in minimum rents in the Core Portfolio was attributable to additional rents following the acquisitions of 200 West 54th Street, 145 East Service Road and East 17th Street (“2007/2008 Core Acquisitions”) of $1.8 million. Funds relates primarily to the billing in 2008 of previous year’s operating expenses at 161st Street for $1.2 million and the billing of previous year’s utility charges to an anchor tenant for $0.3 million. The increase in rents in the Opportunity Funds primarily Lease termination income in the Opportunity Funds for relates to additional rents following the acquisition of 125 2008 relates to a termination fee earned, net of costs, Main Street (“2007 Fund Acquisitions”) of $0.5 million, from Home Depot at Canarsie Plaza. 216th Street being placed in service October 1, 2007 of $2.1 million, and Pelham Manor Shopping Plaza and Ford- ham Plaza being partially placed in service in 2008. The increase in minimum rents in the Storage Portfolio relates to the acquisition of the Storage Post Portfolio (“2008 Storage Acquisition”). Management fee income decreased as a result of lower management fees earned in connection with our invest- ments in unconsolidated affiliates, primarily as a result of higher leasing commissions earned during 2007, as well as lower fees from our Klaff management contracts (Reference is made to Note 11 in the Notes to Consolidated Expense reimbursements in the Core Portfolio increased Financial Statements) following the disposition of certain for both real estate taxes and common area maintenance managed assets in 2008 and 2007. These decreases were (“CAM”). Real estate tax reimbursements increased offset by fees totaling $1.0 million earned from the City $0.7 million in the Core Portfolio as a result of the 2007/2008 Point development project. Core Acquisitions as well as general increases in real estate taxes experienced across the Core Portfolio in 2008. CAM expense reimbursements in the Core Portfolio increased $1.1 million. As a result of the completion of a multi-year The increase in interest income was the result of higher interest earning assets in 2008, primarily from new notes/ mezzanine financing investments. review of CAM billings during 2007 and the resolution of The decrease in other income was primarily attributable the majority of all outstanding CAM billing issues with to the non recurrence of income related to the settlement our tenants, 2007 CAM expense reimbursements were of interest rate swap agreements in 2007. 34 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued (dollars in millions) 2008 2007 Operating Expenses: Property operating Real estate taxes General and administrative Depreciation and amortization Impairment of notes receivable Core Portfolio $ 12.4 8.8 26.0 20.4 — Opportunity Storage Portfolio $ 5.3 1.4 — 3.0 — Funds $ 7.2 2.0 16.5 11.6 — Other $ — — (18.0) — 4.4 Core Portfolio $ 10.6 8.2 25.2 17.5 — Opportunity Storage Portfolio $ 0.7 — — 0.3 — Funds $ 2.8 1.2 13.4 9.1 — Other $ — — (15.5) — — Total operating expenses $ 67.6 $37.3 $ 9.7 $(13.6) $ 61.5 $ 26.5 $ 1.0 $(15.5) The increase in property operating expenses in the Core increased activity in Opportunity Fund assets and asset Portfolio relates to additional reserves for tenant receivables, management services. The increase in general and admin- including straight line rent. The increase in property oper- istrative expense in the Opportunity Funds primarily related ating expenses in the Opportunity Funds was attributable to additional Fund III asset management fees of $2.8 million to 216th Street being placed in service October 1, 2007 of in 2008 as well as an increase in other professional fees. $0.6 million, allocated property operating expenses related These increases were offset by a $0.8 million decrease in to Pelham Manor Shopping Plaza and Fordham Plaza being Promote expense related to Fund I and Mervyns I. The partially placed in service in 2008 of $2.3 million as well as decrease in general and administrative in “Other” primarily additional reserves for tenant receivables, which was prima- relates to the elimination of the Fund III asset manage- rily for straight line rent receivables. The increase in prop- ment fees offset by the elimination of the Fund I and erty operating expenses in the Storage Portfolio relates to Mervyns I Promote expense for consolidated financial the 2008 Storage Acquisition. statement presentation. The increase in real estate taxes in the Core Portfolio was Depreciation expense in the Core Portfolio increased due to the 2007/2008 Core Acquisitions as well as general $2.9 million in 2008. This was principally a result of increases in real estate taxes experienced across the Core increased depreciation expense following the full depre- Portfolio. The increase in real estate taxes in the Opportu- ciation of tenant improvements at two properties following nity Funds was primarily attributable to allocated real estate the bankruptcy of Circuit City of $2.4 million and increased taxes related to Pelham Manor Shopping Plaza and Ford- depreciation expense resulting from the 2007/2008 Core ham being partially placed in service in 2008. The increase Acquisitions. The increase in depreciation and amortization in real estate taxes in the Storage Portfolio relates to the expense for the Opportunity Funds is primarily related to acquisition of the 2008 Storage Acquisition. 216th Street being placed in service October 1, 2007 as The increase in general and administrative expense in the Core Portfolio was primarily attributable to increased com- pensation expense of $1.1 million for additional personnel hired in the second half of 2007 and in 2008 as well as well as Pelham Manor Shopping Plaza and Fordham Plaza being partially placed in service in 2008. The increase in depreciation and amortization in the Storage Portfolio relates to the acquisition of the 2008 Storage Acquisition. increases in existing employee salaries. In addition, there The impairment of notes receivable of $4.4 million in 2008 was an increase of $0.3 million for other overhead expenses relates to the impairment of a mezzanine loan. following the expansion of our infrastructure related to Acadia Realty Trust 2008 Annual Report 35 (dollars in millions) 2008 2007 Other: Gain on sale of land Equity in earnings from unconsolidated affiliates Interest expense Gain on debt extinguishment Minority interest Income tax provision Income from discontinued operations Extraordinary item Core Portfolio $ 0.8 Opportunity Storage Portfolio $ — Funds $ — Other $ — Core Portfolio $ — Opportunity Storage Portfolio $ — Funds $ — Other $ — — (17.6) 2.0 0.2 2.7 — — 19.9 (5.6) — (16.4) — — — — (3.7) — 0.4 — — — — — — 3.6 — 7.6 — 0.6 (17.4) — — 0.3 — — 5.8 (5.5) — 6.1 — — 3.7 — (0.4) — — — — — 0.2 0.5 — 3.0 — 6.4 — The gain on sale of land in 2008 in the Core Portfolio 2008. Interest expense in the Storage Portfolio increased relates to a land parcel sale at Bloomfield Towne Square. $3.3 million as a result of the 2008 Storage Acquisition. Equity in earnings of unconsolidated affiliates in the The gain on extinguishment of debt of $2.0 million is Opportunity Funds increased primarily as a result of our attributable to the purchase of the Company’s convertible pro rata share of gains from the sale of Mervyns locations debt at a discount in 2008. in 2008 of $5.2 million, additional distributions in excess of basis from our Albertson’s investment of $7.9 million and our pro rata share of gain from the sale of the Hay- good Shopping Center of $3.3 million. These increases were partially offset by a decrease in our pro rata share of distributions in excess of basis from our investment in Hitchcock Plaza of $2.7 million as compared to 2007. The minority interest in the Opportunity Funds primarily represents the minority partners’ share of all Opportunity Fund activity and ranges from an effective 62.22% interest in Fund I, as a result of our Promote position, to an 80.1% interest in Fund III. The variance between 2008 and 2007 represents the minority partners’ share of all the Opportu- nity Funds variances discussed above. The minority inter- Interest expense in the Core Portfolio increased $0.2 million est in Other relates to the minority partners’ share of in 2008. This was the result of a $1.1 million increase capitalized construction, leasing and legal fees. attributable to higher average outstanding borrowings in 2008 and a $0.2 million increase related to higher average interest rates in 2008. This increase was offset by a $0.7 million FAS 141 (Reference is made to Note 1 in the Notes to Consolidated Financial Statements) adjustment related The variance in income tax provision in the Core Portfolio primarily relates to income taxes at the taxable REIT sub- sidiary (“TRS”) level for our share of gains from the sale of Mervyns locations in 2008. to the 2008 repayment of debt at less than recorded value Income from discontinued operations represents activity and a $0.4 million decrease resulting from costs associ- related to properties held for sale and sold in 2008 and 2007. ated with a loan payoff in 2007. Interest expense in the Opportunity Funds increased $0.1 million in 2008. This was the result of an increase of $3.2 million due to higher average outstanding borrowings in 2008 offset by a $3.1 million decrease related to lower average interest rates in The extraordinary item in 2007 in the Opportunity Funds relates to our share of the extraordinary gain, net of income taxes and minority interest, from our Albertson’s investment. 36 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued Comparison of the year ended December 31, 2007 (“2007”) to the year ended December 31, 2006 (“2006”) (dollars in millions) 2007 2006 Revenues: Minimum rents Percentage rents Expense reimbursements Lease termination income Other property income Management fee income Interest income Other income Core Portfolio $ 48.9 0.6 12.4 — 0.8 — — 0.2 Opportunity Storage Portfolio $ 0.3 — — — — — — — Funds $19.5 — 0.9 — — — — — Total revenues $ 62.9 $20.4 $ 0.3 Other $ — — — — — 4.1 10.3 — $14.4 Core Portfolio $ 43.2 0.6 12.9 — 0.7 — — 1.6 Opportunity Storage Portfolio $ — — — — — — — — Funds $ 17.1 0.6 1.6 — — — — — $ 59.0 $ 19.3 $ — Other $ — — — — — 5.6 8.3 — $13.9 The increase in minimum rents in the Core Portfolio was comparison of 2008 and 2007, partially offset by higher primarily attributable to additional rents following our CAM recovery resulting from increased snow removal acquisition of 200 West 54th Street, 145 East Service costs in 2007. The decrease in expense reimbursements Road, 2914 Third Avenue and Chestnut Hill (“2006/2007 in the Opportunity Funds relates primarily to the capital- Core Acquisitions”) as well as increased rents as a result ization of construction period operations in 2007 at two of re-tenanting activities throughout the Core Portfolio. properties that were operating in 2006. The increase in minimum rents in the Opportunity Funds was primarily related to Liberty Avenue and 216th Street being placed in service January 1, 2007 and October 1, 2007, respectively and increased rents following re-tenant- ing activities. Percentage rents in the Opportunity Funds decreased primarily as a result of the temporary closing of an anchor tenant at Fordham Place during the construction period in 2007. Real estate tax reimbursements in the Core Portfolio decreased $0.3 million as a result of a $0.4 million real estate tax charge to an anchor tenant for previous years billed in 2006. CAM reimbursements in the Core Portfolio decreased $0.2 million. This was a result of the 2007 CAM settlement related adjustments as discussed in the Management fee income decreased $1.5 million primarily as a result of lower fees earned in connection with Klaff management contracts following the disposition of certain assets in 2006 and 2007 and lower management fees from our investments in unconsolidated affiliates. The increase in interest income was attributable to interest income on notes and other advances receivable originated in the second half of 2006 and 2007 as well as higher balances in interest earning assets in 2007. The decrease in other income was primarily attributable to a $1.1 million reimbursement of certain fees by the institutional investors of Fund I for the Brandywine Port- folio in 2006 as well as $0.5 million of additional income related to the termination of interest rate swap agreements. Acadia Realty Trust 2008 Annual Report 37 (dollars in millions) 2007 2006 Operating Expenses: Property operating Real estate taxes General and administrative Depreciation and amortization Core Portfolio $ 10.6 8.2 25.2 17.5 Opportunity Storage Portfolio $ 0.7 — — 0.3 Funds $ 2.8 1.2 13.4 9.1 Other $ — — (15.5) — Core Portfolio $ 9.3 7.7 19.6 15.2 Opportunity Storage Portfolio $ — — — — Funds $ 1.8 2.2 6.7 9.5 Total operating expenses $ 61.5 $26.5 $ 1.0 $(15.5) $ 51.8 $ 20.2 $ — Other $ — — (6.5) — $ (6.5) The increase in property operating expenses in the Core The increase in general and administrative expense in the Portfolio was primarily the result of the 2006/2007 Core Opportunity Funds primarily related to Fund III asset man- Acquisitions and higher snow removal costs of $1.0 million agement fees of $4.7 million in 2008 as well as Promote in 2007. The increase in property operating expenses in expense related to Fund I and Mervyns I. The decrease in the Opportunity Funds was primarily attributable to Liberty general and administrative in Other primarily relates to the Avenue and 216th Street being placed in service January elimination of the Fund III asset management fees, the 1, 2007 and October 1, 2007. The increase in real estate taxes in the Core Portfolio was primarily due to the 2006/2007 Core Acquisitions of $0.8 million as well as general increases across the Core Port- elimination of the Fund I and Mervyns I Promote expense as well as an increase in the elimination of construction fees due to higher redevelopment activities for consolidated financial statement presentation. folio. These increases were offset by tax refunds of $0.6 Depreciation expense in the Core Portfolio increased million recorded in 2007. The decrease in real estate taxes $1.1 million in 2007. This was principally a result of in the Opportunity Funds principally related to the capital- increased depreciation expense following the 2006/2007 ization of construction period real estate taxes at a property Core Acquisitions. Amortization expense in the Core that was operating in 2006 and the adjustment of real Portfolio increased $1.2 million primarily as a result of estate tax estimates recorded in 2007. increased amortization of loan costs following our con- The variance in general and administrative expense in the Core Portfolio was attributable to increased compen- sation expense, including share based compensation of $4.7 million for additional personnel hired in the second half of 2006 and in 2007 as well as increases in existing employee salaries. In addition, there was an increase of $0.7 million for other overhead expenses following the expansion of our infrastructure related to increased fund investments and asset management services. vertible debt issuances in December 2006 and January 2007 as well as increased amortization of loan costs from financing activity in late 2006 and 2007. The decrease in depreciation and amortization expense for the Opportunity Funds is primarily related to a property that was under redevelopment in 2007 but was operating in 2006. This decrease was primarily offset by Liberty Avenue and 216th Street being placed in service during 2007. 38 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued (dollars in millions) 2007 2006 Other: Gain on sale of land Equity in earnings from unconsolidated affiliates Interest expense Impairment of notes receivable Gain on debt extinguishment Minority interest Income tax provision (benefit) Income from discontinued operations Extraordinary item Core Portfolio $ — Opportunity Storage Portfolio $ — Funds $ — Other $ — Core Portfolio $ — Opportunity Storage Portfolio $ — Funds $ — Other $ — 0.6 (17.4) — — — 0.3 — — 5.8 (5.5) — — 6.1 — — 3.7 — (0.4) — — — — — — 0.2 0.5 — — 3.0 — 6.4 — 1.2 (14.1) — — (0.5) 0.5 — — 1.9 (6.3) — — 4.4 — — — — — — — — — — — (0.5) 0.3 — — 1.3 — 24.1 — Equity in earnings of unconsolidated affiliates in the The minority interest in the Opportunity Funds primarily Opportunity Funds increased as a result of our distributions represents the minority partners’ share of all Opportunity in excess of our invested capital from both our Albertson’s Fund activity and ranges from a 77.8% interest in Fund I investment of $2.4 million and our investment in Hitchcock to an 80.1% interest in Fund III. The variance between Plaza of $2.4 million. These increases were offset by a 2007 and 2006 represents the minority partners’ share of decrease in our pro rata share of earnings from our Mervyns all the Opportunity Funds variances discussed above. The investment of $1.3 million. Interest expense in the Core Portfolio increased $3.3 mil- minority interest in “Other” relates to the minority partners’ share of capitalized construction, leasing and legal fees. lion in 2007. This was the result of a $4.2 million increase The variance in income tax provision in the Core Portfolio attributable to higher average outstanding borrowings in primarily relates to income taxes at the TRS level for our 2007 and a $0.4 million increase resulting from costs asso- share of income and losses from Albertson’s and Mervyns. ciated with a loan payoff in 2007. These increases were offset by a $1.3 million decrease related to lower average interest rates in 2007. Interest expense in the Opportunity Income from discontinued operations represents activity related to properties sold in 2008, 2007 and 2006. Funds decreased $0.8 million in 2007. This was the result The extraordinary item in 2007 in the Opportunity Funds of a decrease of $1.6 million due to lower average interest relates to our share of the extraordinary gain, net of income rates in 2007 offset by a $0.8 million increase related to taxes and minority interest, from our Albertson’s investment. higher average outstanding borrowings in 2007. Acadia Realty Trust 2008 Annual Report 39 Reconciliation of Net Income to Funds from Operations and Adjusted Funds from Operations (dollars in thousands) Net income Depreciation of real estate and amortization of leasing costs: Consolidated affiliates, net of minority interests’ share Unconsolidated affiliates Income attributable to minority interest in operating partnership (1) Gain on sale of properties (net of minority interests’ share) Consolidated affiliates Unconsolidated affiliates Extraordinary item (net of minority interests’ share and income taxes) (3) Funds from operations (2) Add back: Extraordinary item, net (3) Funds from operations, adjusted for extraordinary item Notes: For the years ended December 31, 2008 2007 2006 2005 2004 $ 27,548 $27,270 $39,013 $20,626 $ 19,585 18,519 1,688 19,669 1,736 20,206 1,806 16,676 746 16,026 714 449 614 803 416 375 (7,182) (565) — 40,457 — (5,271) — (3,677) 40,341 3,677 (20,974) (901) — 39,953 — 50 (2,672) — 35,842 — (6,696) — — 30,004 — $ 40,457 $44,018 $39,953 $35,842 $ 30,004 (1) Represents income attributable to Common Operating Partnership Units and does not include distributions paid to Series A and B Preferred OP Unitholders. (2) The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread accept- ance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing the performance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property and depreciation and amortization. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REIT’s. FFO does not represent cash generated from operations as defined by generally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Company’s performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. (3) The extraordinary item represents the Company’s share of estimated extraordinary gain related to its private-equity investment in Albertson’s. The Albertson’s entity has recorded an extraordinary gain in connection with the allocation of purchase price to assets acquired. The Company considers its private-equity investments to be investments in operating businesses as opposed to real estate. Accordingly, all gains and losses from private-equity investments are included in FFO, which management believes provides a more accurate reflection of the operating performance of the Company. Liquidity and Capital Resources Uses of Liquidity Our principal uses of liquidity are expected to be for we paid a quarterly dividend of $0.21 per Common Share and Common OP Unit. In addition, in December of 2008, our Board of Trustees approved a special dividend of approximately $0.55 per share, or $18.0 million in the (i) distributions to our shareholders and OP unit holders, aggregate, which was associated with taxable gains aris- (ii) investments which include the funding of our capital ing from property dispositions in 2008, which was paid committed to our Opportunity Funds and property acquisi- on January 30, 2009, to shareholders of record as of tions and redevelopment/re-tenanting activities within our December 31, 2008. 90% of the special dividend was Core Portfolio, and (iii) debt service and loan repayments. paid with the issuance of 1.3 million Common Shares and Distributions In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable 10%, or $1.8 million, was paid in cash. Fund I and Mervyns I In September 2001, the Operating Partnership committed income to our shareholders. For the four quarters of 2008, $20.0 million to a newly formed Opportunity Fund with 40 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued four of our institutional shareholders, who committed member with a 20% interest in the joint venture. The $70.0 million for the purpose of acquiring a total of terms and structure of Fund II are substantially the same approximately $300.0 million of community and neighbor- as Fund I with the exceptions that the preferred return is hood shopping centers on a leveraged basis. 8%. As of December 31, 2008, $192.0 million had been On January 4, 2006, we recapitalized a one million square foot retail portfolio located in Wilmington, Delaware contributed to Fund II, of which the Operating Partner- ship’s share is $38.4 million. (“Brandywine Portfolio”) through a merger of interests Fund II has invested in the New York Urban/Infill Redevel- with affiliates of GDC Properties (“GDC”). The Brandywine opment and the RCP Venture initiatives and other invest- Portfolio was recapitalized through a “cash out” merger ments as further discussed in “PROPERTY ACQUISITIONS” of the 77.8% interest, which was previously held by the in Item 1 of this Form 10-K. institutional investors in Fund I (the “Investors”) to affili- ates of GDC at a valuation of $164.0 million. The Operating Partnership, through a subsidiary, retained our existing 22.2% interest and continues to operate the Brandywine Portfolio and earn fees for such services. At the closing, the Investors, excluding the Operating Partnership, received a return of all their capital invested in Fund I and preferred return, thus triggering the Operating Partnership’s Promote distribution in all future Fund I distributions and increasing the Operating Partnership’s interest in cash flow and income from 22.2% to 37.8% as a result of the Promote. In June 2006, the Investors received $36.0 million of addi- tional proceeds from this transaction following the replace- ment of bridge financing provided by them with permanent mortgage financing. New York Urban/Infill Redevelopment Initiative In September 2004, we, through Fund II, launched our New York Urban Infill Redevelopment initiative. During 2004, Fund II, together with an unaffiliated partner, P/A, formed Acadia P/A (“Acadia P/A”) for the purpose of acquiring, constructing, developing, owning, operating, leasing and managing certain retail real estate properties in the New York City metropolitan area. P/A has agreed to invest 10% of required capital up to a maximum of $2.2 million and Fund II, the managing member, has agreed to invest the balance to acquire assets in which Acadia P/A agrees to invest. Operating cash flow is gener- ally to be distributed pro-rata to Fund II and P/A until each has received a 10% cumulative return and then 60% to Fund II and 40% to P/A. Distributions of net refinancing As of December 31, 2008, Fund I has a total of 27 proper- and net sales proceeds, as defined, follow the distribution ties totaling 1.3 million square feet as further discussed in of operating cash flow except that unpaid original capital “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K. is returned before the 60%/40% split between Fund II and Fund II and Mervyns II On June 15, 2004, we closed our second opportunity fund, Fund II, and during August 2004, formed Mervyns II with the investors from Fund I as well as two additional institutional investors, whereby the investors, including the Operating Partnership, committed capital totaling $300 million. The Operating Partnership is the managing P/A, respectively. Upon the liquidation of the last property investment of Acadia P/A, to the extent that Fund II has not received an 18% internal rate of return (“IRR”) on all of its capital contributions, P/A is obligated to return a portion of its previous distributions, as defined, until Fund II has received an 18% IRR. To date, Fund II has invested in nine projects, eight of which are in conjunction with P/A, as follows: Acadia Realty Trust 2008 Annual Report 41 Location Queens Manhattan Bronx Property Liberty Avenue (1) (2) 216th Street (3) Fordham Place Pelham Manor Shopping Center (1) Westchester 161st Street Canarsie Plaza Sherman Plaza CityPoint (1) Atlantic Avenue Bronx Brooklyn Manhattan Brooklyn Brooklyn Total Notes: Year Acquired 2005 2005 2004 2004 2005 2007 2005 2007 2007 Purchase Price $ 14.9 27.7 30.0 — 49.0 21.0 25.0 29.0 5.0 $201.6 Redevelopment (dollars in millions) Anticipated Additional Costs $ — — 95.0 57.8 16.0 29.0 30.0 199.8 18.0 $445.6 Estimated Completion Completed Completed First half 2009 Second half 2009 (4) (4) (4) (4) Second half 2009 Square Feet Upon Completion 125,000 60,000 285,000 320,000 232,000 323,000 216,000 419,000 110,000 2,090,000 (1) Fund II acquired a ground lease interest at this property. (2) Liberty Avenue redevelopment is complete. The purchase price includes redevelopment costs of $14.9 million. (3) 216th Street redevelopment is complete. The purchase price includes redevelopment costs of $20.7 million. (4) To be determined. RCP Venture The following table summarizes the RCP Venture investments from inception through December 31, 2008: (dollars in millions) Investor Mervyns I and Mervyns II Mervyns Mervyns I and Mervyns II Mervyns add-on Investment Year Acquired 2004 Invested Capital $ 26.1 Distributions $ 46.0 Invested Capital $ 4.9 Distributions $ 11.3 Operating Partnership Share Mervyns II Mervyns II Fund II Fund II Fund II Mervyns II Total investments Albertson’s Albertson’s add-on investments Shopko Marsh Marsh add-on Rex 2005/2008 2006 2006/2007 2006 2006 2008 2007 3.0 20.7 2.8 1.1 0.7 2.0 2.7 1.3 63.9 0.8 1.1 — 1.0 — 0.3 4.2 0.4 0.2 0.1 0.4 0.5 0.3 11.8 0.1 0.2 — 0.2 — $ 59.1 $114.1 $ 11.0 $ 23.9 Fund III In May 2007, we closed Fund III with 14 institutional with the exception that the Preferred Return is 6%. As of December 31, 2008, $96.5 million has been invested in investors, including a majority of the investors from Fund I Fund III, of which the Operating Partnership contributed and Fund II with a total of $503.0 million of committed dis- $19.2 million. cretionary capital. The Operating Partnership’s share of the committed capital is $100.0 million and it is the sole man- aging member with a 19.9% interest in Fund III. The terms and structure of Fund III are substantially the same as the previous Funds, including the Promote structure, Fund III has invested in the New York Urban/Infill Redevel- opment initiatives and other investments as further dis- cussed in “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K. The projects are as follows: 42 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued Location Brooklyn Westport, CT Year Acquired 2007 2007 Redevelopment (dollars in millions) Purchase Price $ 20.0 17.0 $ 37.0 Anticipated Additional Costs $ 89.0 6.0 $ 95.0 Estimated Completion (1) (1) Square Feet Upon Completion 240,000 30,000 270,000 Property Sheepshead Bay Main Street Total Note: (1) To be determined. During February 2008, Acadia, through Fund III, and in default under the first mortgage loan, but has entered into conjunction with an unaffiliated partner, Storage Post, a standstill agreement with the first mortgage lender, as acquired a portfolio of 11 self-storage properties from well as with us. While we had been engaged in discussions Storage Post’s existing institutional investors for approxi- with the owner and the first mortgage lender to restructure mately $174.0 million. The portfolio totals approximately the debt and provide a portion of the additional capital 920,000 net rentable square feet, of which 10 properties required to stabilize the Project, these discussions did are operating at various stages of stabilization. The remain- not result in a successful resolution. Accordingly, during ing property is currently under construction. The properties December 2008, we recorded an impairment charge equal are located throughout New York and New Jersey. The to 100% of our original mezzanine loan and the related portfolio continues to be operated by Storage Post, which accrued interest aggregating $4.4 million. is a 5% equity partner. During June 2008, we made a $40.0 million preferred During September 2008, Fund III made a $10 million first equity investment in a portfolio of 18 properties located mortgage loan, which is collateralized by land located on primarily in Georgetown, Washington D.C. The portfolio Long Island, New York. The term of the loan is for a period consists of 306,000 square feet of principally retail space. of two years, and provides an effective annual return of The term of this investment is for two years, with two approximately 13%. one-year extensions, and provides a 13% preferred return. Preferred Equity Investment, Mezzanine Loan Investments and Notes Receivable At December 31, 2008, our preferred equity investment, During July 2008, we made a $34.0 million mezzanine loan, which is collateralized by a mixed-use retail and residential development at 72nd Street and Broadway mezzanine loan investments and notes receivable aggre- on the Upper West Side of Manhattan. Upon completion, gated $125.6 million, and were collateralized by the under- this project is expected to include approximately 50,000 lying properties, the borrower’s ownership interest in the square feet of retail on three levels and 196 luxury resi- entities that own the properties and/or by the borrower’s dential rental apartments. The term of the loan is for a personal guarantee. Interest rates on our preferred equity period of three years, with a one year extension, and is investment, mezzanine loan investments and notes expected to yield in excess of 20%. receivable ranged from 3.41% to in excess of 20% with maturities that range from demand notes to January 2017. Other Investments Acquisitions made during 2006, 2007 and 2008 are During 2004, we provided a $3.0 million mezzanine loan discussed in “PROPERTY ACQUISITIONS” in Item 1 to help fund a redevelopment project of the retail com- of this Form 10-K. plexes associated with seven public rest stops along the toll roads in and around Chicago, Illinois (the “Project”). This investment included a right of first offer to acquire an ownership interest in the Project. As a result of economic conditions, including the current disruption in the credit markets, the owner has experienced difficulty in stabilizing and refinancing the Project. The owner is currently in Property Development, Redevelopment and Expansion Our redevelopment program focuses on selecting well- located neighborhood and community shopping centers and creating significant value through re-tenanting and property redevelopment. Acadia Realty Trust 2008 Annual Report 43 Purchase of Convertible Notes Repurchase of the Notes is another use of our liquidity. During November and December of 2008, we purchased $8.0 million in principal amount of our Notes and purchased an additional $13.5 million in principal amount during January 2009, all at a discount of approximately 24%. Share Repurchase Repurchases of our Common Shares is an additional use of liquidity as discussed in Item 5 of this Form 10-K. Shelf Registration Statements and Issuance of Equity During January 2007, we filed a shelf registration on Form S-3 providing for offerings of up to a total of $300.0 million of Common Shares, Preferred Shares and debt securities. As of December 31, 2008, we have remaining capacity under this registration statement to issue up to approxi- mately $189 million of these securities. Financing and Debt At December 31, 2008, mortgage and convertible notes Sources of Liquidity We intend on using Fund III as well as funds that we may payable aggregated $761.7 million, net of unamortized premium of $0.1 million, and were collateralized by 57 establish in the future, as the primary vehicles for our properties and related tenant leases. Interest rates on future growth. Additional sources of capital for funding our outstanding indebtedness ranged from 1.4% to 7.2% property acquisitions, property redevelopment and other with maturities that ranged from January 2009 to Novem- potential real estate related investments are expected ber 2032. Taking into consideration $73.4 million of notional to be obtained primarily from (i) the issuance of public principal under variable to fixed-rate swap agreements equity or debt instruments, (ii) cash on hand and cash flow currently in effect, as of December 31, 2008, $513.5 million from operating activities, (iii) additional debt financings, of the portfolio, or 67%, was fixed at a 5.3% weighted (iv) unrelated member capital contributions and (v) future average interest rate and $248.2 million, or 33% was float- sales of existing properties. During July 2008, Home Depot terminated its lease at a Fund II redevelopment project located in Canarsie, Brooklyn in exchange for its payment of $24.5 million, of which our share, net of minority interests’ share, was $20.6 million. ing at a 2.7% weighted average interest rate. There is $220.7 million of debt maturing in 2009 at weighted aver- age interest rates of 3.0%. Of this amount, $5.9 million represents scheduled annual amortization (of which $4.8 million has been paid during February 2009) and $19.0 mil- lion was extended for one year during January 2009. The loans relating to $121.9 million of the 2009 maturities pro- As of December 31, 2008, we had a total of approximately vide for extension options, which we believe we will be $125.4 million of additional capacity under existing debt able to exercise. If we are unable to extend these loans facilities, cash and cash equivalents on hand of $86.7 million, and refinance the balance of $73.9 million, we believe and twelve unencumbered properties available as potential we will be able to repay this debt with existing liquidity, collateral for future borrowings. Issuance of Convertible Notes During December of 2006 and January of 2007, we issued $115.0 million of 3.75% Convertible Notes. These notes were issued at par and are due in 2026. The $112.1 million in proceeds, net of related costs, were used to retire vari- able rate debt, fund capital commitments and general company purposes. including unfunded capital commitments from the Oppor- tunity Fund investors. As it relates to maturities after 2009, we may not have sufficient cash on hand to repay such indebtedness, we may have to refinance this indebted- ness or select other alternatives based on market condi- tions at that time. Given the current global financial crisis, refinancing this debt will be very difficult. See “Item 1A. Risk Factors — The current global financial crisis may cause us to lose tenants and may impair our ability to borrow money to purchase properties, refinance existing debt or obtain the necessary financing to complete our current redevelopment.” 44 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued The following table sets forth certain information pertaining to the Company’s secured credit facilities: (dollars in millions) Borrower Total available credit facilities Amount borrowed as of 12/31/07 2008 net borrowings (repayments) during the year ended 12/31/08 Amount borrowed as of 12/31/08 Letters of credit outstanding as of 12/31/08 Amount available under credit facilities as of 12/31/08 Acadia Realty, LP $ 72.3 $ — $ 48.9 $ 48.9 $ 11.4 $ 12.0 Acadia Realty, LP Fund II Fund III Total 30.0 70.0 125.0 $297.3 — 34.5 — $ 34.5 — 0.2 62.3 — 34.7 62.3 — 11.1 3.5 30.0 24.2 59.2 $111.4 $ 145.9 $ 26.0 $125.4 Reference is made to Note 8 and Note 9 to our Consolidated Financial Statements, which begin on Page 59 of this Form 10-K, for a summary of the financing and refinancing transactions since December 31, 2007. Asset Sales Asset sales are an additional source of liquidity for us. During April 2008, we sold a residential complex located Contractual Obligations and Other Commitments At December 31, 2008, maturities on our mortgage notes in Winston-Salem, North Carolina. During December of ranged from January 2009 to November 2032. In addition, 2007, we sold an apartment complex in Columbia Missouri we have non-cancelable ground leases at seven of our and during November and December of 2006, we sold shopping centers. We lease space for our White Plains cor- the Soundview Marketplace, Bradford Towne Center, porate office for a term expiring in 2015. The following Greenridge Plaza, Luzerne Street Shopping Center and table summarizes our debt maturities, obligations under Pittston Plaza. During 2005 we sold the Berlin Shopping non-cancelable operating leases and construction commit- Center. These sales are discussed in “ASSET SALES AND ments as of December 31, 2008: CAPITAL/ASSET RECYCLING” in Item 1 of this Form 10-K. (dollars in millions) Contractual obligation Future debt maturities Interest obligations on debt Operating lease obligations Construction commitments (1) Total Note: Payments due by period Total $ 761.7 150.8 121.5 24.6 Less than 1 year $220.7 29.1 5.1 24.6 1 to 3 years $ 287.8 48.3 10.2 — 3 to 5 years $ 22.1 29.2 10.5 — More than 5 years $ 231.1 44.2 95.7 — $ 1,058.6 $279.5 $ 346.3 $ 61.8 $ 371.0 (1) In conjunction with the redevelopment of our Core Portfolio and Opportunity Fund properties, we have entered into construction commitments with general contractors. We intend to fund these requirements with existing liquidity. Off Balance Sheet Arrangements We have investments in four joint ventures for the pur- pose of investing in operating properties. We account for these investments using the equity method of accounting as we have a non-controlling interest. As such, our finan- cial statements reflect our share of income from but not the assets and liabilities of these joint ventures. Reference is made to Note 4 to our Consolidated Financial Statements, which begin on page 59 of this Form 10-K, for a discussion of our unconsolidated investments. Our pro rata share of unconsolidated debt related to those investments is as follows: Acadia Realty Trust 2008 Annual Report 45 (dollars in millions) Investment Crossroads Brandywine CityPoint Sterling Heights Total Pro rata share of mortgage debt Interest rate at December 31, 2008 $31.0 36.9 7.8 3.2 $78.9 5.37% 5.99% 2.94% 2.29% Maturity date December 2014 July 2016 August 2009 August 2010 In addition, we have arranged for the provision of nine equity investment in 2008 and (iv) a decrease of $22.6 mil- separate letters of credit in connection with certain leases lion of return of capital distributions from our unconsolidated and investments. As of December 31, 2008, there were affiliates in 2008, primarily from the RCP Venture invest- no outstanding balances under any of the letters of credit. ment in Albertson’s. These additional uses of cash in 2008 If the letters of credit were fully drawn, the combined were offset by the following: (i) $31.8 million of additional maximum amount of exposure would be $26.0 million. investments in unconsolidated affiliates in 2007, primarily Historical Cash Flow The following table compares the historical cash flow for the year ended December 31, 2008 (“2008”) with the cash flow for the year ended December 31, 2007 (“2007”). CityPoint, (ii) an additional $8.9 million of additional collec- tions of notes receivable in 2008 and (iii) an additional $4.0 million of proceeds from the sale of a property in 2008. The $111.6 million increase in net cash provided by financ- ing activities resulted from the following increases in cash (dollars in millions) Net cash provided by operating activities Net cash used in Years Ended December 31, for 2008: (i) an additional $59.0 million of borrowings in 2008, 2008 2007 Variance (ii) a decrease of $48.3 million in distributions to partners and members in 2008, and (iii) an additional $97.0 million used for the repayment of debt in 2007. These 2008 cash $ 65.9 $105.2 $ (39.3) increases were offset by the following: (i) $15.0 million of additional proceeds received from the issuance of convert- investing activities (301.6) (208.9) (92.7) ible debt in 2007, (ii) $6.0 million of additional cash used Net cash provided by financing activities 199.1 87.5 111.6 of cash of $64.5 million in contributions from partners and for the purchase of convertible notes in 2008, (iii) a decrease Total $ (36.6) $ (16.2) $ (20.4) members and from minority interests in partially-owned A discussion of the significant changes in cash flow for 2008 versus 2007 is as follows: affiliates in 2008, and (iv) an increase of $8.7 million in dividends paid to Common Shareholders in 2008. A decrease of $39.3 million in net cash provided by oper- ating activities resulted from the following: (i) a decrease Critical Accounting Policies Management’s discussion and analysis of financial condi- of $22.2 million in distributions of operating income from tion and results of operations is based upon our Consoli- unconsolidated affiliates, primarily from the RCP Venture dated Financial Statements, which have been prepared in investment in Albertson’s and (ii) a net decrease in other accordance with U.S. GAAP. The preparation of these assets, which was the result of the repayment of notes Consolidated Financial Statements requires management receivable relating to our tax deferred transaction in 2007 to make estimates and judgments that affect the reported and additional cash used for short term financial instru- amounts of assets, liabilities, revenues and expenses. We ments in 2008. These net decreases in cash were offset base our estimates on historical experience and assump- by an increase in lease termination income of $24.0 million tions that are believed to be reasonable under the circum- from Home Depot at Canarsie Plaza in 2008. An additional $92.7 million of net cash used in investing activities resulted from the following additional uses of cash for 2008: (i) $38.5 million of additional expenditures for real estate acquisitions, development and tenant instal- lations in 2008, (ii) $36.3 million of additional notes receiv- able originated in 2008, (iii) $40.0 million for a preferred stances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following criti- cal accounting policies affect the significant judgments and estimates used by us in the preparation of our Con- solidated Financial Statements. 46 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued Valuation of Property Held for Use and Sale On a quarterly basis, we review the carrying value of market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance with both properties held for use and for sale. We perform Statement of Financial Accounting Standards (“SFAS”) the impairment analysis by calculating and reviewing net No. 141, “Business Combinations” and SFAS No. 142, operating income on a property-by-property basis, we “Goodwill and Other Intangible Assets,” and allocate pur- evaluate leasing projections and perform other analyses chase price based on these assessments. We assess fair to conclude whether an asset is impaired. We record value based on estimated cash flow projections that utilize impairment losses and reduce the carrying value of prop- appropriate discount and capitalization rates and available erties when indicators of impairment are present and the market information. Estimates of future cash flows are expected undiscounted cash flows related to those prop- based on a number of factors including the historical oper- erties are less than their carrying amounts. In cases where ating results, known trends, and market/economic condi- we do not expect to recover our carrying costs on proper- tions that may affect the property. ties held for use, we reduce our carrying cost to fair value. For properties held for sale, we reduce our carrying value to the fair value less costs to sell. For the years ended December 31, 2008 and 2007, no impairment losses were recognized. Management does not believe that the value of any properties in its portfolio was impaired as of December 31, 2008 or 2007. Bad Debts We maintain an allowance for doubtful accounts for esti- mated losses resulting from the inability of tenants to make payments on arrearages in billed rents, as well as the likeli- hood that tenants will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. For the years ended December 31, 2008 and 2007, we had recorded an allowance for doubtful accounts of $5.7 million and $3.1 million, respectively. If the financial condition of our tenants were to deteriorate, result- ing in an impairment of their ability to make payments, addi- tional allowances may be required. Real Estate Real estate assets are stated at cost less accumulated depreciation. Expenditures for acquisition, development, construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Con- struction in progress includes costs for significant property expansion and redevelopment. Depreciation is computed on the straight-line basis over estimated useful lives of 30 to 40 years for buildings, the shorter of the useful life or lease term for tenant improvements and five years for fur- niture, fixtures and equipment. Expenditures for mainte- nance and repairs are charged to operations as incurred. Upon acquisitions of real estate, we assess the fair value of acquired assets (including land, buildings and improve- ments, and identified intangibles such as above and below Revenue Recognition and Accounts and Notes Receivable Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the term of the respective leases, beginning when the tenant takes possession of the space. Certain of these leases also provide for percentage rents based upon the level of sales achieved by the tenant. Percentage rent is recognized in the period when the tenants’ sales breakpoint is met. In addition, leases typically provide for the reimbursement to us of real estate taxes, insurance and other property operating expenses. These reimburse- ments are recognized as revenue in the period the expenses are incurred. We make estimates of the uncollectability of our accounts receivable related to tenant revenues. An allowance for doubtful accounts has been provided against certain tenant accounts receivable that are estimated to be uncollectible. See “Bad Debts” above. Once the amount is ultimately deemed to be uncollectible, it is written off. Notes Receivable and Preferred Equity Investment Real estate notes receivable and preferred equity invest- ments are intended to be held to maturity and are carried at cost. Interest income from notes receivable and pre- ferred equity investments are recognized on the effective interest method over the expected life of the loan. Under the effective interest method, interest or fees to be col- lected at the origination of the loan or the payoff of the loan is recognized over the term of the loan as an adjust- ment to yield. Allowances for real estate notes receivable and preferred equity investments are established based upon manage- ment’s quarterly review of the investments. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, Acadia Realty Trust 2008 Annual Report 47 including the fair value of any collateral, the amount and are often related to increases in the consumer price index status of any senior debt, and the prospects for the bor- or similar inflation indexes. In addition, many of our leases rower. Because this determination is based upon projec- are for terms of less than 10 years, which permits us to tions of future economic events, which are inherently seek to increase rents upon re-rental at market rates if subjective, the amounts ultimately realized from the loans current rents are below the then existing market rates. Most may differ materially from the carrying value at the balance of our leases require the tenants to pay their share of sheet date. Interest income recognition is generally sus- operating expenses, including common area maintenance, pended for loans when, in the opinion of management, real estate taxes, insurance and utilities, thereby reducing a full recovery of income and principal becomes doubtful. our exposure to increases in costs and operating Income recognition is resumed when the suspended loan expenses resulting from inflation. becomes contractually current and performance is demon- strated to be resumed. During 2004, we provided a $3.0 million mezzanine loan to help fund a redevelopment project of the retail com- plexes associated with seven public rest stops along the toll roads in and around Chicago, Illinois (the “Project”). As a result of economic conditions, including the current disruption in the credit markets, the owner has experi- Recently Issued Accounting Pronouncements Reference is made to Notes to our Consolidated Financial Statements, which begin on page 59 of this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVEx DISCLOSURES ABOUT MARKET RISKx enced difficulty in stabilizing and refinancing the Project. Information as of December 31, 2008 The owner is currently in default under the first mortgage Our primary market risk exposure is to changes in interest loan, but has entered into a standstill agreement with the rates related to our mortgage debt. See Note 8 to our first mortgage lender, as well as with us. While we had Consolidated Financial Statements, which begin on page been engaged in discussions with the owner and the first 59 of this Form 10-K, for certain quantitative details related mortgage lender to restructure the debt and provide a por- to our mortgage debt. tion of the additional capital required to stabilize the Project, these discussions did not result in a successful resolution. Accordingly, during December 2008, we recorded an impairment charge equal to 100% of our original mezza- nine loan and the related accrued interest aggregating $4.4 million. Inflation Our long-term leases contain provisions designed to miti- gate the adverse impact of inflation on our net income. Such provisions include clauses enabling us to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise, and/or, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses Currently, we manage our exposure to fluctuations in interest rates primarily through the use of fixed-rate debt and interest rate swap agreements. As of December 31, 2008, we had total mortgage and convertible debt of $761.7 million of which $513.5 million, or 67%, was fixed- rate, inclusive of interest rate swaps, and $248.2 million, or 33%, was variable-rate based upon LIBOR or commer- cial paper rates plus certain spreads. As of December 31, 2008, we were a party to seven interest rate swap trans- actions and one interest rate cap transaction to hedge our exposure to changes in interest rates with respect to $73.4 million and $30.0 million of LIBOR-based variable- rate debt, respectively. 48 Acadia Realty Trust 2008 Annual Report Management’s Discussion and Analysis continued The following table sets forth information as of December 31, 2008 concerning our long-term debt obligations, including principal cash flows by scheduled maturity and weighted average interest rates of maturing amounts (dollars in millions): Consolidated mortgage debt: Year 2009 2010 2011 2012 2013 Thereafter Scheduled Amortization $ 6.5 1.6 1.9 2.1 2.2 11.4 $25.7 Maturities $ 214.2 58.7 225.6 9.0 8.8 219.7 $ 736.0 Mortgage debt in unconsolidated partnerships (at our pro-rata share): Year 2009 2010 2011 2012 2013 Thereafter Scheduled Amortization Maturities $0.4 0.5 0.5 0.5 0.5 0.6 $3.0 $ 1.6 1.0 — — — 64.9 $67.5 Total $ 220.7 60.3 227.5 11.1 11.0 231.1 $ 761.7 Total $ 2.0 1.5 0.5 0.5 0.5 65.5 $70.5 Weighted Average Interest Rate 2.7% 1.8% 3.0% 1.8 % 5.5% 5.8% Weighted Average Interest Rate 2.9% 2.3% N/A N/A N/A 5.7% Of our total consolidated and our pro-rata share of uncon- Based on our outstanding debt balances as of December solidated outstanding debt, $222.7 million and $61.8 mil- 31, 2008, the fair value of our total consolidated outstand- lion will become due in 2009 and 2010, respectively. As ing debt would decrease by approximately $18.1 million if we intend on refinancing some or all of such debt at the interest rates increase by 1%. Conversely, if interest rates then-existing market interest rates which may be greater decrease by 1%, the fair value of our total outstanding than the current interest rate, our interest expense would debt would increase by approximately $19.3 million. increase by approximately $2.8 million annually if the inter- est rate on the refinanced debt increased by 100 basis points. After giving effect to minority interest, the Com- pany’s share of this increase would be $1.0 million. Inter- est expense on our variable debt of $248.2 million, net of variable to fixed-rate swap agreements currently in effect, as of December 31, 2008 would increase $2.5 million if LIBOR increased by 100 basis points. After giving effect to minority interest, the Company’s share of this increase would be $0.6 million. We may seek additional variable- As of December 31, 2008 and 2007, we had preferred equity investments and notes receivable of $125.6 million and $57.7 million, respectively. We determined the esti- mated fair value of our preferred equity investment and notes receivable as of December 31, 2008 and 2007 were $122.3 million and $57.7 million, respectively, by discount- ing future cash receipts utilizing a discount rate equivalent to the rate at which similar notes receivable would be originated under conditions then existing. rate financing if and when pricing and other commercial Based on our outstanding preferred equity investments and financial terms warrant. As such, we would consider and notes receivable balances as of December 31, 2008, hedging against the interest rate risk related to such addi- the fair value of our total outstanding preferred equity tional variable-rate debt through interest rate swaps and investments and notes receivable would decrease by protection agreements, or other means. approximately $1.3 million if interest rates increase by 1%. Acadia Realty Trust 2008 Annual Report 49 Conversely, if interest rates decrease by 1%, the fair value of our total outstanding preferred equity invest- ments and notes receivable would increase by approxi- mately $1.3 million. Changes in Market Risk Exposures from 2007 to 2008 Our interest rate risk exposure from December 31, 2007 to December 31, 2008 has increased, as we had $115.6 million in variable-rate debt (or 22% of our total debt) at Summarized Information as of December 31, 2007 December 31, 2007, as compared to $248.2 million (or As of December 31, 2007, we had total mortgage debt of 33% of our total debt) in variable-rate debt at December $517.0 million of which $401.4 million, or 78%, was fixed- 31, 2008. In addition, the amount of our total debt increased rate, inclusive of interest rate swaps, and $115.6 million, from $517.0 million at December 31, 2008 to $761.7 mil- or 22%, was variable-rate based upon LIBOR plus certain lion at December 31, 2008. This increased amount of spreads. As of December 31, 2007, we were a party to debt could expose us to greater fluctuations in the fair four interest rate swap transactions and one interest rate value of our debt. cap transaction to hedge our exposure to changes in inter- est rates with respect to $34.3 million and $30.0 million of LIBOR-based variable-rate debt, respectively. Interest expense on our variable debt of $115.6 million as of December 31, 2007 would have increased $1.2 million if LIBOR increased by 100 basis points. Based on our out- standing debt balances as of December 31, 2007, the fair value of our total outstanding debt would have decreased by approximately $19.0 million if interest rates increased by 1%. Conversely, if interest rates decreased by 1%, the fair value of our total outstanding debt would have increased by approximately $20.4 million. ITEM 8. FINANCIAL STATEMENTS ANDx SUPPLEMENTARY DATAx The financial statements beginning on page 59 are incor- porated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTSx WITH ACCOUNTANTS ON ACCOUNTINGx AND FINANCIAL DISCLOSUREx None. 50 Acadia Realty Trust 2008 Annual Report ITEM 9A. CONTROLS AND PROCEDURESx the criteria set forth in the framework in Internal Control– Integrated Framework issued by the Committee of Spon- (i) Disclosure Controls and Procedures soring Organizations of the Treadway Commission (the We conducted an evaluation, under the supervision and “COSO criteria”). Based on our evaluation under the COSO with the participation of management including our Chief criteria, our management concluded that our internal con- Executive Officer and Chief Financial Officer, of the effec- trol over financial reporting was effective as of December tiveness of our disclosure controls and procedures. Based 31, 2008 to provide reasonable assurance regarding the on that evaluation, the Chief Executive Officer and Chief reliability of financial reporting and the preparation of finan- Financial Officer concluded that our disclosure controls cial statements for external reporting purposes in accor- and procedures were effective as of December 31, 2008 dance with U.S. generally accepted accounting principles. to provide reasonable assurance that information required In conducting our evaluation of the effectiveness of our to be disclosed by us in reports that we file or submit internal control, we excluded the 2008 acquisition of Stor- under the Exchange Act is recorded, processed, summa- age Post, a portfolio of 11 self-storage properties. The con- rized, and reported within the time periods specified in tribution from this acquisition represented approximately SEC rules and forms, and is accumulated and communi- 4% and 15% of total revenues and total assets, respec- cated to management, including our Chief Executive Offi- tively, as of and for the year ended December 31, 2008. cer and Chief Financial Officer, as appropriate to allow Reference is made to Note 2 to our Consolidated Financial timely decisions regarding required disclosure. Statements, which begin on page 59 of this Form 10-K for (ii) Internal Control Over Financial Reporting (a) Management’s Annual Report on Internal Control Over Financial Reporting Management of Acadia Realty Trust is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervi- sion and with the participation of our management, includ- ing our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used further discussion of our acquisition. BDO Seidman, LLP, an independent registered public accounting firm that audited our Financial Statements included in this Annual Report, has issued an attestation report on our internal control over financial reporting as of December 31, 2008, which appears in paragraph (b) of this Item 9A. Acadia Realty Trust White Plains, New York February 27, 2009 Acadia Realty Trust 2008 Annual Report 51 (b) Attestation report of the independent registered public accounting firm The Shareholders and Trustees of Acadia Realty Trust We have audited Acadia Realty Trust and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organiza- tions of the Treadway Commission (the “COSO criteria”). Acadia Realty Trust and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal con- trol over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Report- ing. Our responsibility is to express an opinion on company’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 effec- tive internal control over financial reporting was maintained in all material respects. Our audit included obtaining an under- standing of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk. Our audit also included 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 gener- ally accepted accounting principles. A company’s internal control over financial reporting includes those policies and proce- dures 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 neces- sary 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. As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Storage Post, which was acquired on February 29, 2008, and which is included in the consolidated balance sheets of Acadia Realty Trust and Subsidiaries as of December 31, 2008 and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended. Storage Post constituted 4% and 15% of total revenues and total assets, respectively, as of and for the year ended December 31, 2008. Management did not assess the effectiveness of internal control over financial reporting of Storage Post because of the timing of the acquisition which was completed on February 29, 2008. Our audit of internal control over financial reporting of Acadia Realty Trust and subsidiaries also did not include an evaluation of the internal control over financial reporting of Storage Post. In our opinion, Acadia Realty Trust and subsidiaries maintained in all material respects effective internal control over finan- cial reporting as of December 31, 2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Acadia Realty Trust and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 27, 2009 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP New York, New York February 27, 2009 52 Acadia Realty Trust 2008 Annual Report ITEM 9B. OTHER INFORMATIONx None (c) Changes in internal control over financial reporting There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over finan- cial reporting. PART III In accordance with the rules of the SEC, certain information required by Part III is omitted and is incorporated by refer- ence into this Form 10-K from our definitive proxy statement relating to our 2009 annual meeting of stockholders (our “2009 Proxy Statement”) that we intend to file with the SEC no later than April 30, 2009. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEx The information under the following headings in the 2009 Proxy Statement is incorporated herein by reference: n “PROPOSAL 1 — ELECTION OF TRUSTEES” n “MANAGEMENT” n “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” ITEM 11. EXECUTIVE COMPENSATIONx The information under the following headings in the 2009 Proxy Statement is incorporated herein by reference: n “ACADIA REALTY TRUST COMPENSATION COMMITTEE REPORT” n “COMPENSATION DISCUSSION AND ANALYSIS” n “EXECUTIVE AND TRUSTEE COMPENSATION” n “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTx The information under the heading “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in the 2009 Proxy Statement is incorporated herein by reference. The information under Item 5 of this Form 10-K under the heading “(d) Securities authorized for issuance under equity compensation plans” is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEx The information under the following headings in the 2009 Proxy Statement is incorporated herein by reference: n “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” n “PROPOSAL 1 — ELECTION OF TRUSTEES — Trustee Independence” ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESx The information under the heading “AUDIT COMMITTEE INFORMATION” in the 2009 Proxy Statement is incorporated herein by reference. Acadia Realty Trust 2008 Annual Report 53 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESx 1. Financial Statements: See “Index to Financial Statements” at page 59 below. 2. Financial Statement Schedule: See “Schedule III — Real Estate and Accumulated Depreciation” at page 99 below. 3. Exhibits: The index of exhibits below is incorporated herein by reference. SIGNATURES Pursuant to the requirements of Section 13 or 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, thereto duly authorized. ACADIA REALTY TRUST (Registrant) By: By: By: /s/ Kenneth F. Bernstein Kenneth F. Bernstein Chief Executive Officer, President and Trustee /s/ Michael Nelsen Michael Nelsen Senior Vice President and Chief Financial Officer /s/ Jonathan W. Grisham Jonathan W. Grisham Senior Vice President and Chief Accounting Officer Dated: February 27, 2009 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 capacities and on the dates indicated. Signature /s/ Kenneth F. Bernstein (Kenneth F. Bernstein) /s/ Michael Nelsen (Michael Nelsen) /s/ Jonathan W. Grisham (Jonathan W. Grisham) /s/ Douglas Crocker II (Douglas Crocker II) /s/ Suzanne Hopgood (Suzanne Hopgood) /s/ Lorrence T. Kellar (Lorrence T. Kellar) /s/ Wendy Luscombe (Wendy Luscombe) /s/ William T. Spitz (William T. Spitz) /s/ Lee S. Wielansky (Lee S. Wielansky) Title Chief Executive Officer, President and Trustee (Principal Executive Officer) Senior Vice President and Chief Financial Officer (Principal Financial Officer) Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) Trustee Trustee Trustee Trustee Trustee Trustee Date February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 54 Acadia Realty Trust 2008 Annual Report EXHIBIT INDEX The following is an index to all exhibits filed with the Annual Report on Form 10-K other than those incorporated by reference herein: Exhibit No. Description 3.1 3.2 3.3 4.1 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.11 10.12 10.14 10.15 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.33 10.34 10.44 10.45 10.46 10.47 Declaration of Trust of the Company, as amended (1) Fourth Amendment to Declaration of Trust (4) Amended and Restated By-Laws of the Company (22) Voting Trust Agreement between the Company and Yale University dated February 27, 2002 (14) 1999 Share Option Plan (8) (21) 2003 Share Option Plan (16) (21) Form of Share Award Agreement (17) (21) Form of Registration Rights Agreement and Lock-Up Agreement (18) Registration Rights and Lock-Up Agreement (RD Capital Transaction) (11) Registration Rights and Lock-Up Agreement (Pacesetter Transaction) (11) Contribution and Share Purchase Agreement dated as of April 15, 1998 among Mark Centers Trust, Mark Centers Limited Partnership, the Contributing Owners and Contributing Entities named therein, RD Properties, L.P. VI, RD Properties, L.P. VIA and RD Properties, L.P. VIB (9) Agreement of Contribution among Acadia Realty Limited Partnership, Acadia Realty Trust and Klaff Realty, LP and Klaff Realty, Limited (18) Employment agreement between the Company and Kenneth F. Bernstein dated October 1998 (6) (21) Amendment to employment agreement between the Company and Kenneth F. Bernstein dated January 19, 2007 (26) (21) First Amendment to Employment Agreement between the Company and Kenneth Bernstein dated as of January 1, 2001 (12) (21) Letter of employment offer between the Company and Michael Nelsen, Sr. Vice President and Chief Financial Officer dated February 19, 2003 (15) (21) Form of Amended and Restated Severance Agreement, dated June 12, 2008, that was entered into with each of Joel Braun, Executive Vice President and Chief Investment Officer; Michael Nelsen, Senior Vice President and Chief Financial Officer; Robert Masters, Senior Vice President, General Counsel, Chief Compliance Officer and Secretary; and Joseph Hogan, Senior Vice President and Director of Construction. (Incorporated by reference to the Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on June 12, 2008) (21) Secured Promissory Note between RD Absecon Associates, L.P. and Fleet Bank, N.A. dated February 8, 2000 (7) Promissory Note between 239 Greenwich Associates, L.P. and Greenwich Capital Financial Products, Inc. dated May 30, 2003 (18) Open-End Mortgage, Assignment of Leases and Rents, and Security Agreement between 239 Greenwich Associates, L.P. and Greenwich Capital Financial Products, Inc. dated May 30, 2003 (18) Promissory Note between Merrillville Realty, L.P. and Sun America Life Insurance Company dated July 7, 1999 (7) Secured Promissory Note between Acadia Town Line, LLC and Fleet Bank, N.A. dated March 21, 1999 (7) Promissory Note between RD Village Associates Limited Partnership and Sun America Life Insurance Company Dated September 21, 1999 (7) First Amendment to Severance Agreements between the Company and Joel Braun Executive Vice President and Chief Investment Officer, Michael Nelsen, Senior Vice President and Chief Financial Officer, Robert Masters, Senior Vice Presi- dent, General Counsel, Chief Compliance Officer and Secretary and Joseph Hogan, Senior Vice President and Director of Construction dated January 19, 2007 (21) (26) Term Loan Agreement between Acadia Realty L.P. and The Dime Savings Bank of New York, dated March 30, 2000 (10) Mortgage Agreement between Acadia Realty L.P. and The Dime Savings Bank of New York, dated March 30, 2000 (10) Prospectus Supplement Regarding Options Issued under the Acadia Realty Trust 1999 Share Incentive Plan and 2003 Share Incentive Plan (19) (21) Acadia Realty Trust 1999 Share Incentive Plan and 2003 Share Incentive Plan Deferral and Distribution Election Form (19) (21) Amended, Restated And Consolidated Promissory Note between Acadia New Loudon, LLC and Greenwich Capital Finan- cial Products, Inc. dated August 13, 2004 (19) Amended, Restated And Consolidated Mortgage, Assignment Of Leases And Rents And Security Agreement between Acadia New Loudon, LLC and Greenwich Capital Financial Products, Inc. dated August 13, 2004 (19) Acadia Realty Trust 2008 Annual Report 55 Exhibit No. Description 10.51 10.52 10.53 10.54 10.55 10.56 10.57 10.58 10.59 10.60 10.61 10.62 10.63 10.64 10.65 10.66 10.67 10.68 10.69 10.70 10.71 10.72 10.73 Mortgage, Assignment of Leases and Rents and Security Agreement between Acadia Crescent Plaza, LLC and Greenwich Capital Financial Products, Inc. dated August 31, 2005 (22) Mortgage, Assignment of Leases and Rents and Security Agreement between Pacesetter/Ramapo Associates and Greenwich Capital Financial Products, Inc. dated October 17, 2005 (22) Loan Agreement between RD Elmwood Associates, L.P. and Bear Stearns Commercial Finance Mortgage, Inc. dated December 9, 2005 (22) Mortgage and Security Agreement between RD Elmwood Associates, L.P. and Bear Stearns Commercial Finance Mortgage, Inc. dated December 9, 2005 (22) Agreement and Plan Of Merger Dated as of December 22, 2005 by and among Acadia Realty Acquisition I, LLC, Ara Btc LLC, ARA MS LLC, ARA BS LLC, ARA BC LLC and ARA BH LLC, Acadia Investors, Inc., AII BTC LLC, AII MS LLC, AII BS LLC, AII BC LLC And AII BH LLC, Samuel Ginsburg 2000 Trust Agreement #1, Martin Ginsburg 2000 Trust Agreement #1, Martin Ginsburg, Samuel Ginsburg and Adam Ginsburg, and GDC SMG, LLC, GDC Beechwood, LLC, Aspen Cove Apart- ments, LLC and SMG Celebration, LLC (23) Amended and Restated Loan Agreement between Acadia Realty Limited Partnership, as lender, and Levitz SL Woodbridge, L.L.C., Levitz SL St. Paul, L.L.C., Levitz SL La Puente, L.L.C., Levitz SL Oxnard, L.L.C., Levitz SL Willowbrook, L.L.C., Levitz SL Northridge, L.L.C., Levitz SL San Leandro, L.L.C., Levitz SL Sacramento, L.L.C., HL Brea, L.L.C., HL Deptford, L.L.C., HL Hayward, L.L.C., HL San Jose, L.L.C., HL Scottsdale, L.L.C., HL Torrance, L.L.C., HL Irvine 1, L.L.C., HL West Covina, L.L.C., HL Glendale, L.L.C. and HL Northridge, L.L.C., each a Delaware limited liability company, Levitz SL Lang- horne, L.P. and HL Fairless Hills, L.P., each a Delaware limited partnership (each, together with its permitted successors and assigns, a “Borrower,” and collectively, together with their respective permitted successors and assigns, “Borrowers”), dated June 1, 2006 (24) Consent and Assumption Agreement between Thor Chestnut Hill, LP, Thor Chestnut Hill II, LP, Acadia Chestnut, LLC, Aca- dia Realty Limited Partnership and Wells Fargo Bank, N.A. dated June 9, 2006, original Mortgage and Security Agreement between Thor Chestnut Hill, LP and Thor Chestnut Hill II, LP and Column Financial, Inc. dated June 5, 2003 and original Assignment of Leases and Rents from Thor Chestnut Hill, LP and Thor Chestnut Hill II, LP to Column Financial, Inc. dated June 2003. (24) Loan Agreement and Promissory Note between RD Woonsocket Associates, L.P. and Merrill Lynch Mortgage Lending, Inc. dated September 8, 2006 (25) Amended and Restated Revolving Loan Agreement dated as of December 19, 2006 by and among RD Abington Associ- ates LP, Acadia Town Line, LLC, RD Methuen Associates LP, RD Absecon Associates, LP, RD Bloomfield Associates, LP, RD Hobson Associates, LP, and RD Village Associates LP, and Bank of America, N.A. and the First Amendment to Amended and Restated Revolving Loan Agreement dated February, 2007. (26) Loan Agreement between Bank of America, N.A. and RD Branch Associates, LP dated December 19, 2006. (26) Loan Agreement between 239 Greenwich Associates Limited Partnership and Wachovia Bank, National Association dated January 25, 2007. (28) Revolving Credit Agreement between Acadia Realty Limited Partnership and Washington Mutual Bank dated March 29, 2007. (28) Loan Agreement between Acadia Merrillville Realty, L.P. and Bear Stearns Commercial Mortgage, Inc dated July 2, 2007. (29) Promissory Note between Acadia Merrillville Realty, L.P. and Bear Stearns Commercial Mortgage, Inc dated July 2, 2007. (29) Loan Agreement Note between APA 216th Street and Bank of America, N.A. dated September 11, 2007. (29) Promissory Note between APA 216th Street and Bank of America, N.A. dated September 11, 2007. (29) Acquisition and Project Loan agreement between Acadia – PA East Fordham Acquisitions, LLC and Eurohypo AG, New York Branch dated October 5, 2007 (30) Building Loan Agreement between Acadia – PA East Fordham Acquisitions, LLC and Eurohypo AG, New York Branch dated October 5, 2007 (30) Revolving credit agreement between Acadia Strategic Opportunity Fund III, LLC. and Bank of America, N.A. dated October 10, 2007 (30) Mortgage Consolidation and Modification Agreement between Acadia Tarrytown LLC and Anglo Irish Bank Corporation, PLC dated October 30, 2007 (30) Project Loan Agreement between P/A – Acadia Pelham Manor, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 10, 2007 (30) Building Loan Agreement P/A – Acadia Pelham Manor, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 10, 2007 (30) Project Loan Agreement between Acadia Atlantic Avenue, LLC and Bear Stearns Commercial Mortgage, Inc. dated Decem- ber 26, 2007 (30) 56 Acadia Realty Trust 2008 Annual Report Exhibit No. Description 10.74 10.75 10.76 10.77 10.78 10.79 10.80 10.81 10.82 21 23.1 31.1 31.2 32.1 32.2 99.1 99.2 Notes: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Building Loan Agreement between Acadia Atlantic Avenue, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 26, 2007 (30) Certain information regarding the compensation arrangements with certain officers of registrant (Incorporated by reference to Item 5.02 of the registrant’s Form 8-K filed with the SEC on February 4, 2008) Real Estate Purchase and Sale Agreement between Suffern Self Storage, L.L.C., Jersey City Self Storage, L.L.C., Linden Self Storage, L.L.C., Webster Self Storage, L.L.C., Bronx Self Storage, L.L.C., American Storage Properties North LLC, and The Storage Company LLC (collectively, as Seller) and Acadia Storage Post LLC, a Delaware limited liability company, as Buyer, for ten Properties and Storage Facilities located thereon (31) Real Estate Purchase and Sale Agreement between American Storage Properties North LLC , as Seller and Acadia Storage Post Metropolitan Avenue LLC, as Buyer for 4805 Metropolitan Avenue, Unit 2, Maspeth, Queens, New York (31) First Amendment to Real Estate Purchase and Sale Agreement between Suffern Self Storage, L.L.C., Jersey City Self Storage, L.L.C., Linden Self Storage, L.L.C., Webster Self Storage, L.L.C., Bronx Self Storage, L.L.C., American Storage Properties North LLC, and The Storage Company LLC (collectively, “Seller”) and Acadia Storage Post LLC (“Buyer”) (31) Amended and Restated Agreement of Limited Partnership of the Operating Partnership (11) First and Second Amendments to the Amended and Restated Agreement of Limited Partnership of the Operating Partner- ship (11) Third Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership (18) Fourth Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership (18) List of Subsidiaries of Acadia Realty Trust (32) Consent of Registered Public Accounting Firm to incorporation by reference its reports into Forms S-3 and Forms S-8 (32) Certification of Chief Executive Officer pursuant to rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32) Certification of Chief Financial Officer pursuant to rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32) Certificate of Designation of Series A Preferred Operating Partnership Units of Limited Partnership Interest of Acadia Realty Limited Partnership (2) Certificate of Designation of Series B Preferred Operating Partnership Units of Limited Partnership Interest of Acadia Realty Limited Partnership (18) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal Year ended December 31, 1994 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1997 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1998 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1998 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Registration Statement on Form S-11 (File No. 33-60008) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 1999 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Registration Statement on Form S-8 filed September 28, 1999 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Form 8-K filed on April 20, 1998 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Form 10-K filed for the fiscal year ended December 31, 2000 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Registration Statement on Form S-3 filed on March 3, 2000 Acadia Realty Trust 2008 Annual Report 57 (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2001 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001 Incorporated by reference to the copy thereof filed as an Exhibit to Yale University’s Schedule 13D filed on September 25, 2002 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2002 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Definitive Proxy Statement on Schedule 14A filed April 29, 2003. Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Current Report on Form 8-K filed on July 2, 2003 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2003 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004 Management contract or compensatory plan or arrangement. Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2005 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Current Report on Form 8-K filed on January 4, 2006 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2006 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2006 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Current Report on Form 8-K filed on January 19, 2007 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2006 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2007 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Quarterly Report on Form 10-K filed for the year ended December 31, 2007 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2008 Filed herewith 58 Acadia Realty Trust 2008 Annual Report ACADIA REALTY TRUST AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Consolidated Balance Sheets as of December 31, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006. . . . . . . . . . . . . . . . . . . 62 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006 . . . . . . . . 63 Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 . . . . . . . . . . . . . . . 64 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Schedule III – Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Acadia Realty Trust 2008 Annual Report 59 Report of Independent Registered Public Accounting Firm The Shareholders and Trustees of Acadia Realty Trust We have audited the accompanying consolidated balance sheets of Acadia Realty Trust and subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. In connection with our audits of the financial statements we have also audited the accompanying financial statement schedule listed on page 59. These financial state- ments and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 also includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. 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 Acadia Realty Trust and subsidiaries at December 31, 2008, and 2007 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with generally accepted accounting principles in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic 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), Acadia Realty Trust and subsidiaries' internal control over financial reporting as of December 31, 2008, 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 February 27, 2009 expressed an unqualified opinion thereon. BDO Seidman, LLP New York, New York February 27, 2009 60 Acadia Realty Trust 2008 Annual Report Consolidated Balance Sheets (dollars in thousands) Assets Real estate: Land Buildings and improvements Construction in progress Less: accumulated depreciation Net real estate Cash and cash equivalents Cash in escrow Investments in and advances to unconsolidated affiliates Rents receivable, net Notes receivable and preferred equity investment Deferred charges, net Acquired lease intangibles Prepaid expenses and other assets, net Assets of discontinued operations December 31, 2008 2007 $ 294,132 742,318 70,423 1,106,873 174,809 932,064 86,691 6,794 54,978 12,161 125,587 22,072 19,476 31,733 — $ 232,121 523,809 77,764 833,694 150,494 683,200 123,343 6,637 44,654 13,449 57,662 21,825 16,103 16,544 15,595 Total assets $ 1,291,556 $ 999,012 Liabilities and Shareholders’ Equity Mortgage notes payable Convertible notes payable Acquired lease and other intangibles, net Accounts payable and accrued expenses Dividends and distributions payable Distributions in excess of income from and investment in unconsolidated affiliates Other liabilities Liabilities of discontinued operations Total liabilities Minority interest in operating partnership Minority interests in partially-owned affiliates Total minority interests Shareholders’ equity: Common shares, $.001 par value, authorized 100,000,000 shares, issued and outstanding 32,357,530 and 32,184,462 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. $ 654,868 107,000 6,506 22,236 25,514 20,633 18,995 — 855,752 5,667 208,839 214,506 $ 402,903 115,000 5,651 15,205 14,420 20,007 13,750 229 587,165 4,595 166,516 171,111 32 212,007 (4,508) 13,767 221,298 32 227,890 (953) 13,767 240,736 $ 1,291,556 $ 999,012 Acadia Realty Trust 2008 Annual Report 61 Consolidated Statements of Income (dollars in thousands, except per share amounts) Revenues Minimum rents Percentage rents Expense reimbursements Lease termination income Other property income Management fee income Interest income Other income Total revenues Operating Expenses Property operating Real estate taxes General and administrative Depreciation and amortization Impairment of notes receivable Total operating expenses Operating Income Gain on sale of land Equity in earnings of unconsolidated affiliates Interest and other finance expense Gain on debt extinguishment Minority interest Income from continuing operations before income taxes Income tax provision (benefit) Income from continuing operations Discontinued operations Operating income from discontinued operations Gain on sale of properties, net Minority interest Income from discontinued operations Extraordinary item Share of extraordinary gain from investment in unconsolidated affiliate Minority interest Income tax provision Income from extraordinary item Net income Basic earnings per share Income from continuing operations Income from discontinued operations Income from extraordinary item Basic earnings per share Diluted earnings per share Income from continuing operations Income from discontinued operations Income from extraordinary item Diluted earnings per share Years Ended December 31, 2008 2007 2006 $ 80,166 598 16,855 23,961 1,191 3,434 14,534 — 140,739 24,945 12,151 24,545 34,964 4,392 100,997 39,742 763 19,906 (26,890) 1,958 (12,217) 23,262 3,362 19,900 618 7,182 (152) 7,648 — — — — $ 68,680 625 13,318 — 855 4,064 10,315 165 98,022 14,080 9,470 23,058 26,892 — 73,500 24,522 — 6,619 (22,775) — 9,082 17,448 297 17,151 1,301 5,271 (130) 6,442 30,200 (24,167) (2,356) 3,677 $ 60,255 1,192 14,538 — 663 5,625 8,311 1,648 92,232 11,126 9,902 19,782 24,729 — 65,539 26,693 — 2,559 (20,134) — 5,242 14,360 (508) 14,868 3,648 20,974 (477) 24,145 — — — — $ 27,548 $ 27,270 $ 39,013 $ $ $ 0.59 0.22 — 0.81 0.58 0.22 — $ 0.80 $ $ $ $ 0.51 0.19 0.11 0.81 0.50 0.19 0.11 0.80 0.44 0.71 — 1.15 0.43 0.70 — $ $ $ 1.13 The accompanying notes are an integral part of these consolidated financial statements. 62 Acadia Realty Trust 2008 Annual Report Consolidated Statements of Shareholders’ Equity Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings (Deficit) Total Shareholders’ Equity (dollars in thousands, except per share amounts) Balance at January 1, 2006 31,543 $31 $223,199 $ (12) $ (846) $222,372 Conversion of 696 Series A Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee Restricted Share awards Dividends declared ($0.755 per Common Share) Employee exercise of 7,500 options to purchase Common Shares Common Shares issued under Employee Share Purchase Plan 92 122 — 8 5 Redemption of 11,105 restricted Common OP Units — Issuance of Common Shares to Trustees Unrealized loss on valuation of swap agreements Amortization of derivative instrument Net income Total comprehensive income 3 — — — — Balance at December 31, 2006 31,773 Conversion of 4,000 Series B Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee Restricted Share awards Dividends declared ($1.0325 per Common Share) Employee exercise of 17,474 options to purchase Common Shares Common Shares issued under Employee Share Purchase Plan Issuance of Common Shares to Trustees Employee Restricted Shares cancelled Unrealized loss on valuation of swap agreements Amortization of derivative instrument Net income Total comprehensive income 312 103 — 17 7 13 (41) — — — — Balance at December 31, 2007 32,184 Employee Restricted Share awards Dividends declared ($1.39 per Common Share) Employee exercise of 110,245 options to purchase Common Shares Common Shares issued under Employee Share Purchase Plan Issuance of Common Shares to Trustees Employee Restricted Shares cancelled Unrealized loss on valuation of swap agreements Realized loss on settlement of swap agreements Net income Total comprehensive income 137 — 110 7 2 (83) — — — — — — — — — — — — — — — 31 — 1 — — — — — — — — — 32 — — — — — — — — — — 696 3,530 — 43 112 (101) 76 — — — — — — — — — — — (662) 440 — — — — 696 3,530 (24,400) (24,400) — — — — — — 43 112 (101) 76 (662) 440 39,013 — 39,013 38,791 227,555 (234) 13,767 241,119 4,000 3,151 (6,425) 174 183 346 (1,094) — — — — 227,890 2,917 (17,905) 841 180 81 (1,997) — — — — — — — (921) 202 — — — — 4,000 3,152 (27,270) (33,695) — — — — — — 27,270 — 174 183 346 (1,094) (921) 202 27,270 26,551 (953) 13,767 240,736 — — — — — — — 2,917 (27,548) (45,453) — — — — — — 27,548 — 841 180 81 (1,997) (2,820) (735) 27,548 23,993 — — — — (2,820) (735) — — Balance at December 31, 2008 32,357 $32 $212,007 $ (4,508) $ 13,767 $221,298 The accompanying notes are an integral part of these consolidated financial statements. Acadia Realty Trust 2008 Annual Report 63 Consolidated Statements of Cash Flows (dollars in thousands) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization Gain on sale of property Gain on debt extinguishment Minority interests Amortization of lease intangibles Amortization of mortgage note premium Share compensation expense Equity in earnings of unconsolidated affiliates Distributions of operating income from unconsolidated affiliates Amortization of derivative settlement included in interest expense Impairment of notes receivable Provision for bad debt Changes in assets and liabilities: Funding of escrows, net Rents receivable Prepaid expenses and other assets, net Accounts payable and accrued expenses Other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Investment in real estate and improvements Deferred acquisition and leasing costs Investments in and advances to unconsolidated affiliates Return of capital from unconsolidated affiliates Collections of notes receivable Advances on notes receivable and preferred equity investment Proceeds from sale of property Net cash used in investing activities Years Ended December 31, 2008 2007 2006 $ 27,548 $ 27,270 $ 39,013 34,964 (7,945) (1,958) 12,369 6,856 (782) 3,434 (19,906) 14,420 — 4,392 3,593 (157) (2,305) (18,232) 8,368 1,228 65,887 (244,403) (6,068) (7,918) 4,052 19,922 (90,847) 23,627 (301,635) 28,428 (5,271) — 15,215 722 (111) 3,285 (36,819) 36,666 202 — 881 667 (2,061) 23,926 4,962 7,203 27,178 (20,974) — (4,765) 1,080 (144) 3,531 (2,559) 3,277 440 — 1,395 (1,389) (1,135) 967 (5,200) (1,088) 105,165 39,627 (210,227) (1,746) (39,712) 26,625 11,071 (14,548) 19,668 (208,869) (87,009) (6,941) (27,626) 28,423 20,948 (25,162) 38,477 (58,890) The accompanying notes are an integral part of these consolidated financial statements. 64 Acadia Realty Trust 2008 Annual Report Consolidated Statements of Cash Flows continued (dollars in thousands) Cash Flows from Financing Activities Principal payments on mortgage notes Proceeds received on mortgage notes Repurchase of convertible notes Proceeds received on convertible notes Payment of deferred financing and other costs Capital contributions from partners and members and from minority interests in partially-owned affiliates Distributions to partners and members and to minority interests in partially-owned affiliates Dividends paid to Common Shareholders Distributions to minority interests in Operating Partnership Distributions on preferred Operating Partnership Units to minority interests Repurchase and cancellation of shares Redemption of Operating Partnership Units Common Shares issued under Employee Share Purchase Plan Exercise of options to purchase Common Shares Net cash provided by financing activities (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosure of cash flow information: Cash paid during the period for interest, including capitalized Years Ended December 31, 2008 2007 2006 (68,412) 281,192 (6,042) — (1,763) (165,451) 222,218 — 15,000 (4,128) (168,082) 159,617 — 100,000 (7,026) 46,014 110,542 44,781 (15,347) (34,710) (809) (27) (2,102) — 261 841 199,096 (36,652) 123,343 $ 86,691 (63,662) (26,039) (527) (86) (1,094) — 529 174 (36,352) (23,823) (487) (254) — (246) 188 43 87,476 68,359 (16,228) 139,571 $ 123,343 49,096 90,475 $ 139,571 interest of $6,779, $3,031, and $454, respectively $ 33,778 $ 26,705 $ 23,218 Cash paid for income taxes $ 6,633 Acquisition of real estate through assumption of debt $ 39,967 $ $ 348 $ 1,039 — $ 22,583 Issuance of notes receivable in connection with sale of real estate . $ — $ (18,000) $ — Acadia Realty Trust 2008 Annual Report 65 Consolidated Statements of Cash Flows continued (dollars in thousands) Recapitalization and deconsolidation of investment: Real estate, net Other assets and liabilities Mortgage debt Minority interests Investment in unconsolidated affiliates Cash included in investments and advances to unconsolidated affiliates Acquisition of interest in investment from unaffiliated investor: Real estate, net Other assets and liabilities Investment in unconsolidated affiliates Cash included in expenditures for real estate and improvements The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 2008 2007 2006 $ — — — — — $ — $ — — — $ — $ — — — — — $124,962 (11,413) (66,984) (36,504) (10,428) $ — $ (367) $ — — — $ — $ (9,260) 5,901 3,469 $ 110 66 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements Note 1i Organization, Basis of Presentation and Summary of Significant Accounting Policies Acadia Realty Trust (the “Trust”) and subsidiaries (collec- interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds (“Pro- mote”). Cash flow is distributed pro-rata to the partners and members (including the Operating Partnership) until they receive a 9% cumulative return (“Preferred Return”), tively, the “Company”) is a fully integrated, self-managed and the return of all capital contributions. Thereafter, and self-administered equity real estate investment trust remaining cash flow (which is net of distributions and (“REIT”) focused primarily on the ownership, acquisition, fees to the Operating Partnership for management, asset redevelopment and management of retail properties, management, leasing, construction and legal services) is including neighborhood and community shopping centers distributed 80% to the partners (including the Operating and mixed-use properties with retail components. As of December 31, 2008, the Company operated 85 properties, which it owns or has an ownership interest in, principally located in the Northeast, Mid-Atlantic and Mid- west regions of the United States. All of the Company’s assets are held by, and all of its oper- ations are conducted through, Acadia Realty Limited Part- nership (the “Operating Partnership”) and entities in which the Operating Partnership owns a controlling interest. As of December 31, 2008, the Trust controlled 98% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners represent entities or individuals who contributed their interests in certain properties or entities to the Oper- ating Partnership in exchange for common or preferred units of limited partnership interest (“Common or Pre- ferred OP Units”). Limited partners holding Common OP Units are generally entitled to exchange their units on a Partnership) and 20% to the Operating Partnership as a Promote. As all contributed capital and accumulated preferred return has been distributed to investors, the Operating Partnership is currently entitled to a Promote on all earnings and distributions. During June of 2004, the Company formed Acadia Strate- gic Opportunity Fund II, LLC (“Fund II”), and during August 2004 formed Acadia Mervyn Investors II, LLC (“Mervyns II”), with the investors from Fund I as well as two addi- tional institutional investors with a total of $300.0 million of committed discretionary capital. The Operating Partner- ship’s share of committed capital is $60.0 million. The Operating Partnership is the managing member with a 20% interest in both Fund II and Mervyns II. The terms and structure of Fund II and Mervyns II are substantially the same as Fund I and Mervyns I, including the Promote structure, with the exception that the Preferred Return is 8%. As of December 31, 2008, the Operating Partnership had contributed $30.8 million to Fund II and $7.6 million to Mervyns II. one-for-one basis for common shares of beneficial interest During May of 2007, the Company formed Acadia Strate- of the Trust (“Common Shares”). This structure is referred gic Opportunity Fund III LLC (“Fund III”) with 14 institu- to as an umbrella partnership REIT or “UPREIT.” tional investors, including a majority of the investors from During September of 2001, the Company formed a part- nership, Acadia Strategic Opportunity Fund I, LP (“Fund I”), and during August of 2004 formed a limited liability company, Acadia Mervyn Investors I, LLC (“Mervyns I”), with four institutional investors. The Operating Partnership committed a total of $20.0 million to Fund I and Mervyns I, and the four institutional shareholders committed a total of $70.0 million, for the purpose of acquiring approximately $300.0 million in investments. As of December 31, 2008, the Operating Partnership had contributed $16.5 million to Fund I and $2.7 million to Mervyns I. The Operating Partnership is the general partner of Fund I and sole managing member of Mervyns I, with a 22.2% Fund I and Fund II with a total of $503.0 million of com- mitted discretionary capital. The Operating Partnership’s share of the invested capital is $100.0 million and it is the managing member with a 19.9% interest in Fund III. The terms and structure of Fund III are substantially the same as the previous Funds I and II, including the Promote structure, with the exception that the Preferred Return is 6%. As of December 31, 2008, the Operating Partnership had contributed $19.2 million to Fund III. Principles of Consolidation The consolidated financial statements include the consoli- dated accounts of the Company and its controlling invest- ments in partnerships and limited liability companies in Acadia Realty Trust 2008 Annual Report 67 which the Company is presumed to have control in accor- Principles Board (“APB”) 18 “Equity Method of Account- dance with Emerging Issues Task Force (“EITF”) Issue No. ing for Investments in Common Stock.” 04-5. The ownership interests of other investors in these entities are recorded as minority interests. All significant intercompany balances and transactions have been elimi- nated in consolidation. Investments in entities for which the Company has the ability to exercise significant influ- ence over, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or loss) of these entities are included in consolidated net income. Variable interest entities within the scope of Financial Accounting Statements Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46- R”) are required to be consolidated by their primary bene- ficiary. The primary beneficiary of a variable interest entity is determined to be the party that bears a majority of the entity’s expected losses, receives a majority of its expected returns, or both. Management has evaluated the applicabil- ity of FIN 46-R to its investments in certain joint ventures and determined that these joint ventures do not meet the requirements of a variable interest entity or the Company is not the primary beneficiary and, therefore, consolidation of these ventures is not required. Accordingly, these investments are accounted for using the equity method. Investments in and Advances to Unconsolidated Joint Ventures The Company accounts for its investments in unconsoli- dated joint ventures using the equity method as it does The Company periodically reviews its investment in unconsolidated joint ventures for other than temporary declines in market value. Any decline that is not expected to be recovered in the next 12 months is considered other than temporary and an impairment charge is recorded as a reduction in the carrying value of the investment. No impairment charges related to the Company’s investment in unconsolidated joint ventures were recognized for the years ended December 31, 2008, 2007 and 2006. Use of Estimates Accounting principles generally accepted in the United States of America (“GAAP”) require the Company’s man- agement to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant assumptions and estimates relate to the valuation of real estate, depre- ciable lives, revenue recognition and the collectability of trade accounts receivable. Application of these assump- tions requires the exercise of judgment as to future uncer- tainties and, as a result, actual results could differ from these estimates. Real Estate Real estate assets are stated at cost less accumulated depreciation. Expenditures for acquisition, development, construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are not exercise control over significant asset decisions such capitalized until construction is substantially complete. as buying, selling or financing nor is it the primary benefici- Construction in progress includes costs for significant ary under FIN 46R, as discussed above. Under the equity property expansion and redevelopment. Depreciation is method, the Company increases its investment for its pro- computed on the straight-line basis over estimated useful portionate share of net income and contributions to the joint venture and decreases its investment balance by lives of 30 to 40 years for buildings, the shorter of the useful life or lease term for tenant improvements and five recording its proportionate share of net loss and distribu- years for furniture, fixtures and equipment. Expenditures tions. The Company recognizes income for distributions in for maintenance and repairs are charged to operations excess of its investment where there is no recourse to as incurred. the Company. For investments in which there is recourse to the Company, distributions in excess of the investment are recorded as a liability. Although the Company accounts for its investment in Albertson’s (Note 4), under the equity method of accounting, the Company adopted the policy of not recording its equity in earnings or losses of this uncon- solidated affiliate until it receives the audited financial statements of Albertson’s to support the equity earnings or losses in accordance with paragraph 19 of Accounting Upon acquisitions of real estate, the Company assesses the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets,” and allocates purchase price based on these assessments. 68 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued The Company assesses fair value based on estimated executed with no contingencies and the prospective buyer cash flow projections that utilize appropriate discount has funds at risk to ensure performance. and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. The Company reviews its long-lived assets used in opera- tions for impairment when there is an event, or change in circumstances that indicates impairment in value. The Deferred Costs Fees and costs paid in the successful negotiation of leases have been deferred and are being amortized on a straight- line basis over the terms of the respective leases. Fees and costs incurred in connection with obtaining financing have been deferred and are being amortized over the term of the related debt obligation. Company records impairment losses and reduces the car- rying value of properties when indicators of impairment Management Contracts Income from management contracts is recognized on an are present and the expected undiscounted cash flows accrual basis as such fees are earned. The initial acquisi- related to those properties are less than their carrying tion cost of the management contracts is being amortized amounts. In cases where the Company does not expect over the estimated lives of the contracts acquired. to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Company reduces its car- rying value to the fair value less costs to sell. During the years ended December 31, 2008, 2007 and 2006, no impairment losses were recognized. Management does not believe that the values of its properties within the portfolio are impaired as of December 31, 2008. Revenue Recognition and Accounts Receivable Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the term of the respective leases, beginning when the tenant takes possession of the space. As of December 31, 2008 and 2007, included in rents receivable, net on the accompanying consolidated balance sheet, unbilled rents receivable relating to straight-lining of rents Sale of Real Estate The Company recognizes property sales in accordance were $11.1 million and $8.4 million, respectively. Certain of these leases also provide for percentage rents based with SFAS No. 66, “Accounting for Sales of Real Estate.” upon the level of sales achieved by the tenant. Percentage The Company generally records the sales of operating rent is recognized in the period when the tenants’ sales properties and outparcels using the full accrual method breakpoint is met. In addition, leases typically provide for at closing when the earnings process is deemed to be the reimbursement to the Company of real estate taxes, complete. Sales not qualifying for full recognition at the insurance and other property operating expenses. These time of sale are accounted for under other appropriate reimbursements are recognized as revenue in the period deferral methods. the expenses are incurred. Real Estate Held-for-Sale The Company evaluates the held-for-sale classification of its real estate each quarter. Assets that are classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are generally classified as held-for-sale once management has initiated an active program to market them for sale and has received a firm purchase commitment. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported. On occasion, the Company will receive unsolicited offers from third parties to buy individual Company properties. Under these circumstances, the Company will classify the properties as held-for-sale when a sales contract is The Company makes estimates of the uncollectability of its accounts receivable related to tenant revenues. An allowance for doubtful accounts has been provided against certain tenant accounts receivable that are esti- mated to be uncollectible. Once the amount is ultimately deemed to be uncollectible, it is written off. Rents receiv- able at December 31, 2008 and 2007 are shown net of an allowance for doubtful accounts of $5.7 million and $3.1 million, respectively. Notes Receivable and Preferred Equity Investments Real estate notes receivable and preferred equity invest- ments are intended to be held to maturity and are carried at cost. Interest income from notes receivable and preferred Acadia Realty Trust 2008 Annual Report 69 equity investments are recognized on the effective inter- est method over the expected life of the loan. Under the Restricted Cash and Cash in Escrow Restricted cash and cash in escrow consist principally effective interest method, interest or fees to be collected of cash held for real estate taxes, property maintenance, at the origination of the loan or the payoff of the loan are insurance, minimum occupancy and property operating recognized over the term of the loan as an adjustment income requirements at specific properties as required by to yield. certain loan agreements. Allowances for real estate notes receivable and preferred equity investments are established based upon manage- ment’s quarterly review of the investments. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair value of any collateral, the amount and status of any senior debt, and the prospects for the bor- rower. Because this determination is based upon projec- tions of future economic events, which are inherently subjective, the amounts ultimately realized from the loans may differ materially from the carrying value at the balance sheet date. Interest income recognition is generally sus- pended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the suspended loan becomes contractually current and performance is demon- strated to be resumed. During 2004, the Company provided a $3.0 million mezza- nine loan to help fund a redevelopment project of the retail complexes associated with seven public rest stops along the toll roads in and around Chicago, Illinois (the “Project”). As a result of economic conditions, including the current disruption in the credit markets, the owner has experienced difficulty in stabilizing and refinancing the Project. The owner is currently in default under the first mortgage loan, but has entered into a standstill agreement with the first mortgage lender, as well as with us. While the Company had been engaged in discussions with the owner and the first mortgage lender to restructure the debt and provide a portion of the additional capital required to stabilize the Project, these discussions did not result in a successful resolution. Accordingly, in December 2008, the Company recorded an impairment charge equal to 100% of its original mezzanine loan and the related accrued interest aggregating $4.4 million. Management believes that the balance of notes receivable are collectable as of December 31, 2008. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Income Taxes The Company has made an election to be taxed, and believes it qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To maintain REIT status for Federal income tax purposes, the Company is generally required to distrib- ute at least 90% of its REIT taxable income to its stock- holders as well as comply with certain other income, asset and organizational requirements as defined in the Code. Accordingly, the Company is generally not subject to fed- eral corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. Although it may qualify for REIT status for Federal income tax purposes, the Company is subject to state income or franchise taxes in certain states in which some of its prop- erties are located. In addition, taxable income from non- REIT activities managed through the Company’s taxable REIT subsidiaries (“TRS”) is fully subject to Federal, state and local income taxes. TRS income taxes are accounted for under the liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Under the liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and the tax basis of the TRS assets and liabilities. In accordance with FASB financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an inter- pretation of SFAS No. 109” the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that result in a material impact on the Company’s financial position or results of operation. The prior three years income tax returns are subject to review by the Internal Revenue Service. The Company’s policy relating to inter- est and penalties is to recognize them as a component of the provision for income taxes. Stock-based Compensation The Company accounts for stock options pursuant to SFAS No. 123R “Accounting for Stock-Based Compensation.” As such, all stock options are reflected as compensation 70 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued expense in the Company’s consolidated financial state- retrospectively to all periods presented. Early adoption ments over their vesting period based on the fair value of FSP 14-1 is not permitted. FSP 14-1 will change the at the date the stock option was granted. accounting treatment of the Company’s $107.0 million Recent Accounting Pronouncements During September of 2006, the Financial Accounting Statements Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Mea- surements.” This SFAS defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This state- ment applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS No. 123R. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, except for non-finan- cial assets and liabilities, for which this statement will be effective for fiscal years beginning after November 15, 2008. SFAS No. 157 does not require any new fair value meas- urements or remeasurements of previously computed fair values. On January 1, 2008, the Company adopted SFAS No. 157 and it did not have a material impact to the Com- pany’s financial statements or results of operations. During February of 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits companies and not- for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS 159 is effective for fiscal years begin- ning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008 with no impact to the Company’s financial statements or results of operations. During May of 2008, the FASB issued a FASB Staff Position 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP 14-1”). FSP 14-1 requires the proceeds from the issuance of convertible debt be allocated 3.75% Convertible Notes Payable which were issued during December 2006 and January 2007. The Company estimates that the adoption of FSP 14-1 beginning in fiscal year 2009 will result in an increase in non-cash interest expense of approximately $2.0 million and will reduce annual diluted earnings per share by approximately $0.06 per share. Additionally, the Company estimates that the adoption of FSP 14-1 will decrease the Company’s Decem- ber 31, 2008 debt balance by approximately $6.6 million, with a corresponding increase to shareholders’ equity. The Company estimates that the retrospective adjustment of the adoption of FSP 14-1 will increase non-cash interest expense by approximately $2.1 million and $2.0 million for the fiscal years ended 2008 and 2007, respectively, and reduce annual diluted earnings per share by approximately $0.06 per share for each year. During December of 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which, among other things, provides guid- ance and establishes amended accounting and reporting standards for a parent company’s noncontrolling or minor- ity interest in a subsidiary. The adoption of SFAS No. 160, which is effective for fiscal years beginning on or after December 15, 2008, will result in an increase to the Com- pany’s shareholders’ equity. During December of 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces SFAS No. 141 Business Combinations. SFAS No. 141R and, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity. The Company is currently evaluating the impact of adopting SFAS No. 141R, which is effective for fiscal years beginning on or after December between a debt component and an equity component. The debt component will be measured based on the fair 15, 2008. value of similar debt without an equity conversion feature, and the equity component will be determined as the resid- ual of the fair value of the debt deducted from the original proceeds received. The resulting discount on the debt component will be amortized over the period the convert- ible debt is expected to be outstanding as additional non- cash interest expense. FSP 14-1 is effective for fiscal years beginning after December 15, 2008, and is applied During March of 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133.” SFAS No. 161 amends SFAS No. 133 to provide additional informa- tion about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. It requires enhanced disclosures about an entity’s derivatives and hedging activities. SFAS No. 161 is Acadia Realty Trust 2008 Annual Report 71 effective for financial statements issued for fiscal years Accumulated other comprehensive loss beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to have an impact on the Com- pany’s financial condition or results of operations. During June of 2008, the FASB ratified EITF Issue 07-5 “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Paragraph 11(a) of SFAS 133 specifies that a con- tract that would otherwise meet the definition of a deriva- (dollars in thousands) Beginning balance Unrealized loss on valuation of derivative instruments and amortization of derivative tive but is both (a) indexed to the Company’s own stock Realized loss on settlement of Years Ended December 31, 2008 2007 $ (953) $ (234) (2,820) (719) and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAF 133 paragraph 11(a) scope exception. EITF 07-5 is effec- tive on January 1, 2009. The Company is currently evaluat- ing the impact of the adoption of this standard on its consolidated financial statements. Comprehensive Income The following table sets forth comprehensive income for the years ended December 31, 2008, 2007 and 2006: Years Ended December 31, derivative instruments (735) — Ending balance $(4,508) $ (953) Note 2i Acquisition and Disposition of Properties and Discontinued Operations A. Acquisition and Disposition of Properties Although Fund III has been the primary vehicle for the Company’s acquisitions since its formation in 2007, the Company has also made certain acquisitions through the Operating Partnership, primarily for the deferral of 2008 2007 2006 income taxes. (dollars in thousands) Net income $27,548 $27,270 $39,013 Other comprehensive loss (3,555) (719) (222) Acquisitions On February 29, 2008, the Company acquired a portfolio of 11 self-storage properties located throughout New York Comprehensive income $23,993 $26,551 $38,791 and New Jersey for approximately $174.0 million. The Other comprehensive income relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges and amortization, which is included in portfolio totals approximately 920,000 net rentable square feet. Ten properties are operating and one is currently under construction. interest expense, of derivative instruments. On April 22, 2008, the Company acquired a 20,000 square The following table sets forth the change in accumulated other comprehensive loss for the years ended December 31, 2008 and 2007: foot single tenant retail property located in Manhattan, New York for $9.7 million. On March 20, 2007, the Company purchased a retail com- mercial condominium at 200 West 54th Street located in Manhattan, New York. The 10,000 square foot property was acquired for $36.4 million. 72 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued Additionally, on March 20, 2007, the Company purchased On November 5, 2007, the Company, through Acadia P/A, a single-tenant building located at 1545 East Service Road acquired a property in Sheepshead Bay, Brooklyn for in Staten Island, New York for $17.0 million. approximately $20.0 million. The redevelopment plan On May 31, 2007, the Company purchased a property located on Atlantic Avenue in Brooklyn, New York for includes the demolition of the existing structures and the construction of a 240,000 square foot shopping center. $5.0 million. The existing property has been demolished On January 12, 2006, the Company closed on a 19,265 and construction is underway for an 110,000 square foot square foot retail building in the Lincoln Park district in self-storage facility. On June 13, 2007, the Company (approximately 25%), along with an unaffiliated partner (approximately 75%), acquired a leasehold interest in The Gallery at Fulton Chicago. The property was acquired from an affiliate of Klaff (Note 4) for a purchase price of $9.9 million, including the assumption of existing mortgage debt in the principal amount of $3.8 million. Street and adjacent parking garage located in downtown On January 24, 2006, the Company acquired a 60% inter- Brooklyn, New York for $115.0 million. The property has est in the entity which owns the A&P Shopping Plaza been demolished and redevelopment plans include the located in Boonton, New Jersey. The property is a 63,000 construction of a mixed-use project to be called CityPoint. square foot shopping center anchored by a 49,000 square On October 31, 2007, the Company, in conjunction with an unaffiliated partner, P/A Associates, LLC (“Acadia P/A”) acquired a 530,000 square foot warehouse building in foot A&P Supermarket. A portion of the remaining 40% interest is owned by a principal of P/A Associates, LLC. The interest was acquired for $3.2 million. Canarsie, Brooklyn for approximately $21.0 million. The On June 16, 2006, the Company purchased 8400 and development plan for this property includes the demolition 8625 Germantown Road, totaling 40,570 square feet, in of a portion of the warehouse and the construction of a Philadelphia, Pennsylvania for $16.0 million. The Company 323,000 square foot mixed-use project consisting of retail, assumed a $10.1 million first mortgage loan which has a office, cold-storage and self-storage. maturity date of June 11, 2013. On November 1, 2007, the Company, and an unaffiliated On September 21, 2006, the Company purchased 2914 partner acquired a property in Westport, Connecticut for Third Avenue, a 41,305 square foot building located in the approximately $17.0 million. The plan is to redevelop the Bronx, New York for $18.5 million. existing building into 30,000 square feet of retail and resi- dential use. Dispositions During 2008, 2007 and 2006, the Company disposed of the following properties: (dollars in thousands) Property 2008 Village Apartments 2007 Amherst Marketplace and Sheffield Crossing Colony and GHT Apartments 2006 Bradford Towne Centre Soundview Marketplace Greenridge Plaza Luzerne Street Center Pittston Plaza Total Sales Price Gain/(Loss) GLA $ 23,300 $ 7,200 599,106 26,000 15,500 16,000 24,000 10,600 3,600 6,000 7,500 (2,000) 5,600 7,900 4,753 2,521 487 192,479 625,545 257,123 183,815 191,767 58,035 79,498 $125,000 $ 33,961 2,187,368 Acadia Realty Trust 2008 Annual Report 73 B. Discontinued Operations SFAS No. 144 requires discontinued operations presenta- tion for disposals of a “component” of an entity. In accor- dance with SFAS No. 144, for all periods presented, the Company has reclassified its consolidated statements of income to reflect income and expenses for sold properties (Note 2A), as discontinued operations and reclassified its consolidated balance sheets to reflect assets and liabilities related to such properties as assets and liabilities related to discontinued operations. Interest expense specific to a discontinued operation property is reflected in discontin- ued operations. The combined assets and liabilities as of December 31, 2007 and results of operations of the properties classified as discontinued operations for the years ended December 31, 2008, 2007 and 2006 are summarized as follows: (dollars in thousands) Assets Net real estate Prepaid expenses Other assets Total assets of discontinued operations Liabilities December 31, 2007 $15,394 132 69 $15,595 Note 3i Segment Reporting The Company has four reportable segments: Core Port- folio, Opportunity Funds, Storage Portfolio, and Other. Dur- ing 2008, the Company acquired a portfolio of self storage properties and later determined that it constitutes, as of year end, a new reportable segment. “Other” primarily consists of management fees, interest income, preferred equity investment and notes receivable. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. Investments in the Core Portfolio are typically held long-term. Given the contem- plated finite life of the Opportunity Funds, these invest- ments are typically held for shorter terms. Fees earned by the Company as general partner/member of the Oppor- tunity Funds are eliminated in the Company’s consolidated financial statements. The following table sets forth certain segment information for the Company, reclassified for discontinued operations, as of and for the years ended December 31, 2008, 2007, and 2006 (does not include unconsolidated affiliates): Accounts payable and accrued expenses $ Other liabilities Total liabilities of discontinued operations 84 145 $ 229 Statement of Operations 2008 2007 2006 Years Ended December 31, (dollars in thousands) Total revenues Total expenses Operating income $ 1,333 $10,018 $18,927 715 618 8,717 15,279 1,301 3,648 Gain on sale of properties 7,182 5,271 20,974 Minority interest (152) (130) (477) Income from discontinued operations $ 7,648 $ 6,442 $24,145 74 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued (dollars in thousands) Revenues Property operating expenses and real estate taxes Impairment of notes receivable Other expenses Net income (loss) before depreciation 2008 Core Portfolio Opportunity Funds Storage Portfolio Other Elimination Total $ 65,782 $ 50,738 $ 5,615 $ 41,839 $ (23,235) $ 140,739 21,187 — 9,240 — 26,007 16,502 6,669 — 68 — 4,392 — — — (18,032) 37,096 4,392 24,545 and amortization $ 18,588 $ 24,996 $ (1,122) $ 37,447 $ (5,203) $ 74,706 Depreciation and amortization $ 20,402 $ 11,560 Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Reconciliation to net income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Gain on sale of land Gain on debt extinguishment Income tax provision Minority interest Income from discontinued operations Net income $ 17,694 $ 5,550 $ 494,524 $ 433,298 $186,529 $ $ 3,002 3,650 $ $ $ — $ — $ 34,964 — $ (4) $ 26,890 — $ (7,478) $1,106,873 $ 571,698 $ 483,539 $194,992 $125,587 $ (84,260) $1,291,556 $ 18,424 $ 90,588 $135,391 $ — $ — $ 244,403 $ 74,706 (34,964) 19,906 (26,890) 763 1,958 (3,362) (12,217) 7,648 $ 27,548 Acadia Realty Trust 2008 Annual Report 75 (dollars in thousands) Revenues Property operating expenses and real estate taxes Other expenses Net income before depreciation and amortization Depreciation and amortization Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Reconciliation to net income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Income tax provision Minority interest Income from discontinued operations Extraordinary item Net income 2007 Core Portfolio Opportunity Funds Storage Portfolio Other Elimination Total $ 62,819 $ 20,381 $ 291 $ 34,899 $ (20,368) $ 98,022 18,761 25,217 4,033 13,312 756 — — — — (15,471) 23,550 23,058 $ 18,841 $ 17,511 $ 17,439 $ $ $ 3,036 9,070 5,493 $ 483,768 $ 346,546 $ 574,216 $ 407,830 $ 58,575 $ 151,652 $ $ $ $ $ $ (465) $ 34,899 $ (4,897) $ 51,414 311 359 6,908 $ $ $ — $ — $ 26,892 — $ (516) $ 22,775 — $ (3,528) $ 833,694 7,173 $ 57,662 $ (47,869) $ 999,012 — $ — $ — $ 210,227 $ 51,414 (26,892) 6,619 (22,775) (297) 9,082 6,442 3,677 $ 27,270 76 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued (dollars in thousands) Revenues Property operating expenses and real estate taxes Other expenses Net income before depreciation and amortization Depreciation and amortization Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Reconciliation to net income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Income tax benefit Minority interest Income from discontinued operations Net income Note 4i Investments A. Investments in and Advances to Unconsolidated Affiliates Retailer Controlled Property Venture ("RCP Venture”) During January of 2004, the Company commenced the RCP Venture with Klaff Realty, LP (“Klaff”) and Lubert- Adler Management, Inc., through a limited liability com- pany (“KLA”), for the purpose of making investments in surplus or underutilized properties owned by retailers. As of December 31, 2008, the Company has invested $59.1 million through the RCP Venture on a non-recourse basis. The expected size of the RCP Venture is approximately $300 million, of which the Company’s share is $60 million. Cash flow from any investment in which the RCP Venture 2006 Core Portfolio Opportunity Funds Storage Portfolio Other Elimination Total $ 58,990 $ 19,291 $ — $ 22,638 $ (8,687) $ 92,232 16,939 19,596 $ 22,455 $ 15,212 $ 14,161 $ $ $ 4,089 6,662 8,540 9,517 6,298 $ 418,909 $ 211,333 $ 596,363 $ 259,755 $ 62,917 $ 24,092 $ $ $ $ $ $ — — — — — (6,476) 21,028 19,782 — $ 22,638 $ (2,211) $ 51,422 — $ — $ — $ 24,729 — $ — $ (325) $ 20,134 — $ — $ (340) $ 629,902 — $ 36,038 $ (40,464) $ 851,692 — $ — $ — $ 87,009 $ 51,422 (24,729) 2,559 (20,134) 508 5,242 24,145 $ 39,013 participants elect to invest, is to be distributed to the par- ticipants until they have received a 10% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 20% to Klaff and 80% to the partners (including Klaff). Mervyns Department Stores During September of 2004, the RCP Venture invested in a consortium to acquire the Mervyns Department Store chain (“Mervyns”) consisting of 262 stores (“REALCO”) and its retail operation (“OPCO”) from Target Corporation. The gross acquisition price of $1.2 billion was financed with $800 million of debt and $400 million of equity. The Company contributed $23.2 million of equity and received an approximate 5.2% interest in REALCO and an approxi- mate 2.5% interest in OPCO. To date, REALCO has dis- posed of a significant portion of the portfolio. In addition, in November 2007, the Company sold its interest in OPCO Acadia Realty Trust 2008 Annual Report 77 and, as a result, has no further investment in OPCO. As of minor ownership interest and the inability to exert influ- December 31, 2008, a majority of the REALCO properties ence over KLA’s operating and financial policies. were occupied by tenants other than Mervyns. For the years ended December 31, 2008 and 2007, the Company made additional investments of $0.7 million and $2.2 mil- The table below summarizes the Company’s invested capital and distributions received from its Albertson’s investment. lion, respectively, in Mervyns. Other Investments Through December 31, 2008, the Company made add-on investments in Mervyns totaling $3.1 million. The Com- pany accounts for these add-on investments using the cost method due to the minor ownership interest and the inability to exert influence over KLA’s operating and finan- cial policies. During 2006, the Company made investments of $1.1 million in Shopko, a regional multi-department retailer that, at the time of acquisition, had 358 stores located throughout the Midwest, Mountain and Pacific Northwest, and $0.7 million in Marsh, a regional supermarket chain, that at the time of acquisition, operated 271 stores in cen- tral Indiana, Illinois and western Ohio, through the RCP The table below summarizes the Company’s invested capi- Venture. During 2007, the Company received a $1.1 million tal and distributions received from its Mervyns investment. cash distribution from the Shopko investment representing Albertson’s During June of 2006, the RCP Venture made its second investment as part of an investment consortium, acquiring Albertson’s and Cub Foods, of which the Company’s share was $20.7 million. During February of 2007, the Company 100% of its invested capital. The Company made invest- ments of $2.0 million in additional add-on investments in Marsh during the year ended December 31, 2008. In addi- tion, in July 2008, the Company received distributions of $1.0 million from Marsh. received a cash distribution of $44.4 million from this During July of 2007, the RCP Venture acquired a portfolio investment, which was sourced from the disposition of of 87 retail properties from Rex Stores Corporation, which certain operating stores and a refinancing of the remaining was comprised of electronic retail stores located in 27 assets held by Albertson’s. The Company recognized states. The Company’s share of this investment was distributions in excess of its invested capital in income, $2.7 million. including $30.2 million characterized as extraordinary consistent with the accounting treatment by Albertson’s. The Company received additional distributions from this investment of $8.8 million and $10.6 million in the years ended December 31, 2007 and 2008. During 2007, the Company made add-on investments in Albertson’s totaling $2.8 million and received distributions totaling $0.8 million. The Company accounts for these add-on investments using the cost method due to the The Company accounts for these other investments using the cost method due to its minor ownership interest and the inability to exert influence over KLA’s operating and financial policies. The following table summarizes the Company’s RCP Venture investments from inception through December 31, 2008: Operating Partnership Share (dollars in thousands) Investor Investment Mervyns I and Mervyns II Mervyns Year Acquired 2004 Invested Capital and Advances Distributions Invested Capital and Advances Distributions $26,061 $ 45,966 $ 4,901 $ 11,251 Mervyns I and Mervyns II Mervyns add-on investments 2005/2008 Mervyns II Mervyns II Fund II Fund II Fund II Mervyns II Total Albertson’s 2006 Albertson’s add-on investments 2006/2007 Shopko Marsh Marsh add-on investments Rex Stores 2006 2006 2008 2007 3,086 20,717 2,765 1,100 667 2,000 2,701 1,342 63,833 827 1,100 — 1,010 — 283 4,239 386 220 133 400 535 283 11,847 93 220 — 202 — $59,097 $114,078 $11,097 $ 23,896 78 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued Brandywine Portfolio The Company owns a 22.2% interest in a one million square foot retail portfolio located in Wilmington, Delaware (the “Brandywine Portfolio”) that is accounted for using the equity method. Crossroads The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II (collectively, “Cross- roads”), which collectively own a 311,000 square foot shopping center located in White Plains, New York that is accounted for using the equity method. Other Investments Fund I Investments Fund I owns a 50% interest in the Sterling Heights Shop- ping Center which is accounted for using the equity method of accounting. Fund II Investments Fund II’s approximately 25% investment in CityPoint is accounted for using the equity method. The Company has determined that CityPoint is a variable interest entity, and the Company is not the primary beneficiary. The Com- pany’s maximum exposure is its current investment bal- ance of $33.4 million. The following tables summarize the Company’s invest- ment in unconsolidated subsidiaries as of December 31, 2008, December 31, 2007 and December 31, 2006. Acadia Realty Trust 2008 Annual Report 79 (dollars in thousands) Balance Sheets Assets Rental property, net Investment in unconsolidated affiliates Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity (deficit) December 31, 2008 RCP Venture CityPoint Brandywine Portfolio Crossroads Investments Total Other $ — $159,922 $129,679 $ 5,143 $11,481 $306,225 295,168 — — 3,983 — 8,769 — 5,283 — 2,770 295,168 20,805 $ 295,168 $163,905 $138,448 $ 10,426 $14,251 $622,198 $ — — $ 34,000 $166,200 $ 63,176 $ 5,173 $268,549 2,307 7,895 2,072 295,168 127,598 (35,647) (54,822) 1,083 7,995 13,357 340,292 Total liabilities and partners’ equity $ 295,168 $163,905 $138,448 $ 10,426 $14,251 $622,198 Company’s investment in and advances to unconsolidated affiliates $ 18,066 $ 33,445 $ — $ — $ 3,467 $ 54,978 Share of distributions in excess of share of income and investment in unconsolidated affiliates $ — $ — $ (8,236) $(12,397) $ — $ (20,633) (dollars in thousands) Balance Sheets Assets Rental property, net Investment in unconsolidated affiliates Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity (deficit) December 31, 2007 RCP Venture CityPoint Brandywine Portfolio Crossroads Investments Total Other $ — $145,775 $136,942 $ 5,552 $ 38,137 $ 326,406 195,672 — — 3,046 — 10,631 — 4,372 — 6,650 195,672 24,699 $195,672 $148,821 $147,573 $ 9,924 $ 44,787 $ 546,777 $ — — $ 34,000 $166,200 $ 64,000 $ 33,084 $ 297,284 2,213 9,629 1,112 195,672 112,608 (28,256) (55,188) 2,307 9,396 15,261 234,232 Total liabilities and partners’ equity $195,672 $148,821 $147,573 $ 9,924 $ 44,787 $ 546,777 Company’s investment in and advances to unconsolidated affiliates $ 9,813 $ 28,890 $ — $ — $ 5,951 $ 44,654 Share of distributions in excess of share of income and investment in unconsolidated affiliates $ — $ — $ (7,822) $ (12,185) $ — $ (20,007) 80 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued Year Ended December 31, 2008 RCP Venture Brandywine Portfolio Crossroads Other Investments Total (dollars in thousands) Statement of Operations Total revenue Operating and other expenses Interest expense $ — — — Equity in earnings of unconsolidated affiliates 177,775 Depreciation and amortization Gain on sale of property, net Net income (loss) Company’s share of net income Amortization of excess investment Company’s share of net income (loss) — — $177,775 $ 16,784 — $ 16,784 $ 19,782 6,535 10,130 — 3,799 — (682) (151) — (151) $ $ $ $ 7,894 3,116 3,461 — 650 — $ 667 $ 326 (391) $ (65) $ 2,781 1,909 542 — 884 6,838 $ 6,284 $ 3,338 — $ 30,457 11,560 14,133 177,775 5,333 6,838 $184,044 $ 20,297 (391) $ 3,338 $ 19,906 Year Ended December 31, 2007 RCP Venture Brandywine Portfolio Crossroads Other Investments Total (dollars in thousands) Statement of Operations Total revenue Operating and other expenses Interest expense $ — — — Equity in earnings of unconsolidated affiliates 46,416 Equity in earning of unconsolidated affiliates extraordinary gain Depreciation and amortization Net income (loss) Company’s share of net income Amortization of excess investment Company’s share of net income before extraordinary gain Company’s share of extraordinary gain 151,000 — $197,416 $ 3,312 — $ 3,312 $ 30,200 $ 20,252 $ 8,518 $ 5,862 $ 34,632 5,620 10,102 — — 3,269 $ 1,261 $ $ $ 232 — 232 — 3,095 3,485 — — 475 $ 1,463 $ 717 392 $ 325 $ — 1,396 2,333 — — 4,439 $(2,306) $ 2,750 — $ 2,750 $ — 10,111 15,920 46,416 151,000 8,183 $197,834 $ 7,011 392 $ 6,619 $ 30,200 Year Ended December 31, 2006 RCP Venture Brandywine Portfolio Crossroads Other Investments Total $ 18,324 $ 9,208 $ 3,707 $ 31,239 (dollars in thousands) Statement of Operations Total revenue Operating and other expenses Interest expense Equity in (losses) of unconsolidated affiliates Depreciation and amortization Net (loss) income Company’s share of net income Amortization of excess investment Company’s share of net income (loss) $ — — — (4,554) — 4,800 12,066 — 2,947 $ (4,554) $ (1,489) $ $ 2,212 — 2,212 $ $ (31) — (31) 3,121 3,485 — 580 $ 2,022 $ 991 392 $ 599 2,295 1,448 — 1,416 $(1,452) $ (221) — 10,216 16,999 (4,554) 4,943 $ (5,473) $ 2,951 392 $ (221) $ 2,559 Acadia Realty Trust 2008 Annual Report 81 Note 5i Notes Receivable and Preferred Equity Investment At December 31, 2008, the Company’s preferred equity the borrower’s ownership interest in the entities that own the properties and/or by the borrower’s personal guaran- tee. Interest rates on the Company’s preferred equity investment and notes receivable ranged from 3.41% to in excess of 20% with maturities that range from demand investment and notes receivable aggregated $125.6 mil- notes to January 2017. Notes receivable and preferred lion, and were collateralized by the underlying properties, equity investments are as follows: (dollars in thousands) Description Borrower Mezzanine Loans: Hitchcock Plaza 72nd Street Georgetown A Georgetown B Individually less than 3% Total Mezzanine Loans First Mortgages: East Shore Rd. Fairchild Levitz Individually less than 3% Total First Mortgages Total Notes: Effective Final Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount of Mortgages of Mortgages Carrying Amount 15.00% 20.85% 10.25% 13.50% 3.41%– 21.46% (1) 7/18/2011 11/12/2010 6/27/2010 Demand note – 1/1/2017 10.00% Demand note 12.75% 11.60% 9.50% 9/11/2010 7/17/2009 4/15/2009 (1) (2) (4) (3) (4) (4) (4) $ 16,400 185,000 8,576 114,150 $ 5,648 47,000 8,000 40,000 $ 4,286 35,941 8,000 40,000 — — — 14,066 114,714 11,917 100,144 6,150 10,000 7,134 5,438 28,722 6,150 10,000 6,463 2,830 25,443 $143,436 $125,587 (1) Principal and interest due upon capital event. (2) Principal and interest, including a $7.5 million exit fee, are due upon maturity. (3) Payable upon maturity. (4) Interest only payable monthly, principal due on maturity During June 2008, the Company made a $40.0 million pre- this project is expected to include approximately 50,000 ferred equity investment in an entity that owns a portfolio square feet of retail on three levels and 196 luxury resi- of 18 properties located primarily in Georgetown, Wash- dential rental apartments. The term of the loan is for a ington D.C. The portfolio consists of 306,000 square feet period of three years, with a one year extension, and is of principally retail space. The term of this investment is expected to yield in excess of 20%. for two years, with two one-year extensions, and provides a 13% preferred return. During September 2008, the Company, through Fund III, made a $10 million first mortgage loan, which is collateral- During July 2008, the Company made a $34.0 million mez- ized by land located on Long Island, New York. The term zanine loan, which is collateralized by a mixed-use retail of the loan is for a period of two years, and provides an and residential development at 72nd Street and Broadway effective annual return of approximately 13%. on the Upper West Side of Manhattan. Upon completion, 82 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued The following table reconciles notes receivable and The scheduled amortization of acquired lease intangible preferred equity investments from January 1, 2006 to assets as of December 31, 2008 is as follows: December 31, 2008: (dollars in thousands) Years Ended December 31, 2008 2007 2006 (dollars in thousands) Balance at beginning of period $ 57,662 $ 36,038 $ 34,733 Additions during period: New mortgage loans 88,480 32,548 44,013 Deductions during period: 2009 2010 2011 2012 2013 Thereafter $ 7,758 1,961 1,436 956 802 6,563 $19,476 Collections of principal (19,923) (11,071) (39,948) Amortization of premium 2,368 147 149 The scheduled amortization of acquired lease intangible liabilities as of December 31, 2008 is as follows: (3,000) — (2,909) (dollars in thousands) Other Balance at close of period Note 6i $125,587 $ 57,662 $ 36,038 Deferred Charges Deferred charges consist of the following as of December 31, 2008 and 2007: 2009 2010 2011 2012 2013 Thereafter $ 1,060 1,036 1,039 993 657 1,721 $ 6,506 December 31, 2008 2007 Note 8i (dollars in thousands) Deferred financing costs $ 23,044 $ 18,756 Mortgage Loans At December 31, 2008 and 2007, mortgage notes payable, Deferred leasing and other costs 22,117 20,399 excluding the net valuation premium on the assumption 45,161 39,155 of debt, aggregated $654.7 million and $402.0 million, Accumulated amortization (23,089) (17,330) $ 22,072 $ 21,825 Note 7i Acquired Lease Intangibles Upon acquisitions of real estate, the Company assesses the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below market leases, acquired in-place leases and customer relationships) and acquired liabilities in accordance with SFAS No. 141. The intangibles are amortized over the remaining non-cancelable terms of the respective leases. respectively, and were collateralized by 57 and 49 proper- ties and related tenant leases, respectively. Interest rates on the Company’s outstanding mortgage indebtedness ranged from 1.4% to 7.18% with maturities that ranged from January 2009 to November 2032. Certain loans are cross-collateralized and cross-defaulted. The loan agree- ments contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios. The following reflects mortgage loan activity for the year ended December 31, 2008: Acadia Realty Trust 2008 Annual Report 83 During the year ended December 31, 2008, the Company During July 2008, the Company paid off $3.7 million of borrowed $73.2 million on four existing construction loans. mortgage debt, which was secured by a property. During February 2008, in conjunction with the purchase During September 2008, the Company extended a $19.0 of a portfolio of self-storage properties, the Company million loan to a new maturity date of January 15, 2009 assumed a loan of $34.9 million, which bears interest at and converted the interest rate from a fixed rate of 5.83% a fixed rate of 5.9% and matures on June 11, 2009, and to a variable rate of LIBOR plus 185 basis points. a loan of $5.0 million, which bears interest at a fixed rate of 5.4% and matures on December 1, 2009. During March 2008, the Company closed on a $41.5 million mortgage loan secured by five properties, which bears inter- est at a fixed rate of 5.3% and matures on March 16, 2011. During October 2008, the Company paid off a $2.7 mil- lion loan. The following table sets forth certain information pertain- ing to the Company’s secured credit facilities: (dollars in thousands) Borrower Total available credit facilities Amount borrowed as of 12/31/07 2008 net borrowings (repayments) during the year ended 12/31/08 Amount borrowed as of 12/31/08 Letters of credit outstanding as of 12/31/08 Amount available under credit facilities as of 12/31/08 Acadia Realty, LP $ 72,250 $ Acadia Realty, LP Fund II Fund III 30,000 70,000 125,000 — — 34,500 — $ 48,900 $ 48,900 $ 11,405 $ 11,945 — 181 62,250 — 34,681 62,250 — 11,073 3,500 30,000 24,246 59,250 Total $ 297,250 $ 34,500 $111,331 $145,831 $ 25,978 $125,441 84 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued The following table summarizes our mortgage indebtedness as of December 31, 2008 and December 31, 2007: December 31, Interest Rate at Properties 2008 2007 December 31, 2008 Maturity Encumbered Payment Terms (dollars in thousands) Mortgage notes payable — variable-rate Bank of America, N.A. RBS Greenwich Capital PNC Bank, National Association Bank One, N.A. Bank of America, N.A. Anglo Irish Bank Corporation Eurohypo AG Bank of China $ 9,624 $ 9,781 1.84% (LIBOR + 1.40%) 6/29/2012 30,000 11,423 — 15,526 9,800 80,443 19,000 30,000 1.84% (LIBOR + 1.40%) 4/1/2009 9,990 2,818 2.09% (LIBOR + 1.65%) 5/18/2009 2.43% (LIBOR + 2.00%) 10/5/2008 15,773 1.74% (LIBOR + 1.30%) 12/1/2011 9,800 2.09% (LIBOR + 1.65%) 10/30/2010 37,263 2.19% (LIBOR + 1.75%) 10/4/2009 – 2.29% (LIBOR + 1.85%) 1/15/2009 Sub-total mortgage notes payable 175,816 115,425 Secured credit facilities Bank of America, N.A. Washington Mutual Bank, F.A. Bank of America, N.A./Bank of New York Bank of America, N.A 48,900 — 34,681 62,250 — 1.69% (LIBOR + 1.25%) — 1.69% (LIBOR + 1.25%) 12/1/2010 3/29/2010 34,500 1.44% (LIBOR + 1.00%) 3/1/2009 — 2.76% (Commercial (1) (2) (4) (5) (7) (11) (6) (23) (8) (31) (9) Paper + 0.45%) 10/9/2011 (10) Sub-total secured credit facilities Interest rate swaps (44) Total variable-rate debt 145,831 34,500 (73,415) (34,284) 248,232 115,641 Mortgage notes payable – fixed-rate RBS Greenwich Capital RBS Greenwich Capital RBS Greenwich Capital Bear Stearns Commercial Bear Stearns Commercial LaSalle Bank, N.A. J.P. Morgan Chase Column Financial, Inc. Merrill Lynch Mortgage Lending, Inc. Bank of China Cortlandt Deposit Corp Cortlandt Deposit Corp Bank of America N.A. Bear Stearns Commercial Wachovia Bear Stearns Commercial GEMSA Loan Services, L.P. Wachovia GEMSA Loan Services, L.P. Bear Stearns Commercial Interest rate swaps (44) Total fixed-rate debt Total fixed and variable debt Valuation premium on assumption of debt net of amortization (45) Total See notes on following page. 14,554 17,600 12,485 34,600 20,500 — 8,322 9,663 23,500 — 2,475 2,318 25,500 26,250 26,000 25,284 4,944 34,322 41,500 3,265 73,415 14,752 17,600 12,500 34,600 20,500 3,727 8,451 9,834 23,500 19,000 4,950 4,893 25,500 26,250 26,000 — — — — — 34,284 406,497 286,341 654,729 401,982 139 921 $654,868 $402,903 5.64% 4.98% 5.12% 5.53% 5.44% 8.50% 6.40% 5.45% 6.06% 5.83% 6.62% 6.51% 5.80% 5.88% 5.42% 7.18% 5.37% 5.86% 5.30% 7.14% 5.35% 9/6/2014 9/6/2015 11/6/2015 1/1/2016 3/1/2016 7/11/2008 11/1/2032 6/11/2013 10/1/2016 3/1/2008 2/1/2009 1/15/2009 10/1/2017 8/1/2017 2/11/2017 1/1/2020 12/1/2009 6/11/2009 3/16/2011 1/1/2020 (46) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (3) (12) (13) (29) (26) (27) (28) (30) (32) (33) (43) (32) (32) (33) (43) (33) (34) (33) (33) (33) (32) (35) (36) (37) (33) (32) (32) (32) (38) (33) (42) (42) (33) (39) (33) (43) (32) (32) (33) (41) Acadia Realty Trust 2008 Annual Report 85 Notes: (15) Crescent Plaza (1) Village Commons Shopping Center (16) Pacesetter Park Shopping Center (2) 161st Street (3) 216th Street (4) Liberty Avenue (5) Granville Center (6) Fordham Place (7) Branch Shopping Center (17) Elmwood Park Shopping Center (18) Gateway Shopping Center (19) Clark Diversey (20) Boonton Shopping Center (21) Chestnut Hill (22) Walnut Hill (8) Line of credit secured by the (23) Sherman Avenue following properties: Marketplace of Absecon Bloomfield Town Square Hobson West Plaza Town Line Plaza Methuen Shopping Center Abington Towne Center (9) Acadia Strategic Opportunity Fund II, LLC line of credit secured by unfunded investor capital commitments (24) Kroger Portfolio (25) Safeway Portfolio (26) Acadia Suffern (27) Acadia Storage Company, LLC (28) Acadia Storage Post Portfolio Co., LLC (29) Pelham Manor (30) Atlantic Avenue (31) Line of credit secured by Ledgewood Mall (10) Acadia Strategic Opportunity Fund III, (32) Monthly principal and interest. LLC line of credit secured by unfunded investor capital commitments (11) Tarrytown Center (12) Merrillville Plaza (13) 239 Greenwich Avenue (14) New Loudon Center Note 9i (33) Interest only monthly. (34) Annual principal and monthly interest. (35) Interest only monthly until 9/10; monthly principal and interest thereafter. (36) Interest only monthly until 12/08; monthly principal and interest thereafter. (37) Interest only monthly until 1/10; monthly principal and interest thereafter. (38) Interest only monthly until 10/11; monthly principal and interest thereafter. (39) Interest only monthly until 7/12; monthly principal and interest thereafter. (40) Interest only monthly until 11/12; monthly principal and interest thereafter. (41) Interest only monthly until 12/1/14; monthly principal and interest thereafter (42) Annual principal and semi-annual interest payments. (43) Interest only upon draw-down on construction loan. (44) Maturing between 1/1/10 and 11/30/2012. (45) In connection with the assumption of debt in accordance with the requirements so SFAS no. 141, the Company has recorded valuation premium that is being amortized to interest expense over the remaining terms of the underlying mort- gage loans. (46) Represents the amount of the Company’s variable-rate debt that has been fixed through certain cash flow hedge trans- actions (Note 20). Convertible Notes Payable In December 2006 and January 2007, the Company issued a total of $115.0 million in principal of convertible notes with a fixed interest rate of 3.75% due 2026 (the “Con- vertible Notes”). The Convertible Notes were issued at par and require interest payments semi-annually in arrears on June 15th and December 15th of each year. The Con- vertible Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordi- nated indebtedness. The Convertible Notes had an initial conversion price of $30.86 per share. Upon conversion of the Convertible Notes, the Company will deliver cash and, in some circumstances, Common Shares, as specified in the indenture relating to the Convertible Notes. The Con- vertible Notes may only be converted prior to maturity: (i) during any calendar quarter beginning after December 31, 2006 (and only during such calendar quarter), if, and only if, the closing sale price of the Company’s Common Shares for at least 20 trading days (whether consecutive or not) in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than 130% of the conversion price per common share in effect on the applicable trading day; or (ii) during the five consecutive trading-day period following any five 86 Acadia Realty Trust 2008 Annual Report consecutive trading-day period in which the trading price of the notes was less than 98% of the product of the closing sale price of the Company’s Common Shares multiplied by the applicable conversion rate; or (iii) if those notes have been called for redemption, at any time prior to the close of business on the second business day prior to the redemption date; or (iv) if the Company’s Common Shares are not listed on a United States national or regional securities exchange for 30 consecutive trading days. Prior to December 20, 2011, the Company will not have the right to redeem Convertible Notes, except to preserve its status as a REIT. After December 20, 2011, the Company will have the right to redeem the notes, in whole or in part, at any time and from time to time, for cash equal to 100% of the principal amount of the notes plus any accrued and unpaid interest to, but not including, the redemption date. The Holders of notes may require the Company to repurchase their notes, in whole or in part, on December 20, 2011, December 15, 2016, and December 15, 2021 for cash equal to 100% of the principal amount of the notes to be repurchased plus any accrued and unpaid interest to, but not including, the repurchase date. If certain change of control transactions occur prior to December 20, 2011 and a holder elects to convert the Convertible Notes in connection with any such transaction, Notes to Consolidated Financial Statements continued the Company will increase the conversion rate in connec- tion with such conversion by a number of additional com- mon shares based on the date such transaction becomes effective and the price paid per common share in such transaction. The conversion rate may also be adjusted under certain other circumstances, including the payment of cash dividends in excess of our current regular quarterly cash dividend of $0.21 per Common Share, but will be not adjusted for accrued and unpaid interest on the notes. Upon a conversion of notes, the Company will deliver cash and, at the Company’s election, its Common Shares, with an aggregate value, which the Company refers to as the “conversion value,” equal to the conversion rate multiplied by the average price of the Company’s Common Shares as follows: (i) an amount in cash which the Company refers to as the “principal return,” equal to the lesser of (a) the principal amount of the converted notes and (b) the con- version value; and (ii) if the conversion value is greater than the principal return, an amount with a value equal to the difference between the conversion value and the prin- cipal return, which the Company refers to as the “new amount.” The net amount may be paid, at the Company’s option, in cash, its Common Shares or a combination of cash and its Common Shares. During the fourth quarter of 2008, the Company purchased $8.0 million in principal amount of the outstanding $115.0 million in principal amount of its convertible debt at a dis- count of approximately 24%. The transaction resulted in a $2.0 million gain. The outstanding balance as of December 31, 2008 was $107.0 million. Subsequent to December 31, 2008, the Company purchased an additional $13.5 mil- lion in principal amount of the outstanding convertible debt, also at a discount of approximately 24%. The scheduled principal repayments of all indebtedness as of December 31, 2008 are as follows: (dollars in thousands) 2009 2010 2011 2012 2013 Thereafter $220,724 60,323 227,494 11,122 10,931 231,135 $761,729(1) Note: (1) Does not include $139 net valuation premium on assumption of debt. Note 10i Fair Value Measurements Effective January 1, 2008, the Company adopted SFAS No. 157 for its financial assets and liabilities. SFAS No. 157 establishes a new framework for measuring fair value and expands disclosure requirements. SFAS No. 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. SFAS No. 157’s valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: n Level 1: Quoted prices for identical instruments in active markets n Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valua- tions in which significant value drivers are observable n Level 3: Valuations derived from valuation techniques in which significant value drivers are unobservable The following describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value: Derivative Instruments — The Company’s derivative finan- cial liabilities primarily represent interest rate swaps and a cap and are valued using Level 2 inputs. The fair value of these instruments is based upon the estimated amounts the Company would to sell an asset or pay to transfer a liability in an orderly transaction between market partici- pants at the reporting date and is determined using inter- est rate market pricing models. With the adoption of SFAS No. 157, the Company has amended the techniques used in measuring the fair value of its derivative positions. This amendment includes the impact of credit valuation adjust- ments on derivatives measured at fair value. The implemen- tation of this amendment did not have a material impact on the Company’s consolidated financial position or results of operations. Acadia Realty Trust 2008 Annual Report 87 The following table presents the Company’s liabilities Note 11i measured at fair value based on level of inputs at Decem- ber 31, 2008: (dollars in thousands) Level 1 Level 2 Level 3 Shareholders’ Equity and Minority Interests Liabilities Derivatives $ — $ 4,962 $ — Total liabilities measured at fair value $ — $ 4,962 $ — Common Shares During the first quarter of 2008, 83,042 employee Restricted Shares were cancelled to pay the employees’ income taxes due on the value of the portion of the Restricted Shares that vested. During the year ended December 31, 2008, the Company recognized accrued Common Share and Common OP Unit-based compensation totaling $3.4 million in connection with the vesting of Restricted Shares and Units (Note 15). Minority Interests The following table summarizes the change in the minority interests since December 31, 2007: Minority Interest in Operating Partnership Minority Interest in Partially-Owned Affiliates (dollars in thousands) Balance at December 31, 2007 Distributions declared of $1.39 per Common OP Unit Net income for the period January 1 through December 31, 2008 Distributions paid Other comprehensive income — unrealized loss on valuation of swap agreements Minority Interest contributions Employee Long-term Incentive Plan Unit Awards Balance at December 31, 2008 $4,595 (1,192) 471 — (70) — 1,863 $5,667 $166,516 — 11,898 (15,347) (242) 46,014 — $208,839 Minority interest in the Operating Partnership represents Contributions Distributions (i) the limited partners’ 642,272 Common OP Units at both (dollars in thousands) December 31, 2008 and 2007, (ii) 188 Series A Preferred OP Units at both December 31, 2008 and 2007, with a stated value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $22.50 (9% annually) per Series A Preferred OP Unit or (b) the quarterly distribution attributable to a Series A Preferred OP Unit if such unit were converted into a Common OP Unit, and (iii) 186,951 and 21,536 LTIP units as of Decem- ber 31, 2008 and December 31, 2007 respectively, as dis- cussed in Share Incentive Plan (Note 15). Partially-owned affiliates $ Fund I Fund II Mervyns II Fund III — — 8,305 — 37,709 $ 144 5,439 1,740 8,000 24 $46,014 $ 15,347 In 2004 and 2005, the Company issued 4,000 Series B Preferred OP Units and 250,000 Restricted Common OP Units, respectively, to Klaff in consideration for interest in Minority interests in partially-owned affiliates include third- certain management contract rights. The Preferred OP party interests in Fund I, II and III, and Mervyns I and II Units were convertible into Common OP Units based on and three other entities. The following table summarizes the minority interest con- tributions and distributions in 2008: the stated value of $1,000 divided by $12.82 at any time. The Restricted Common OP Units are convertible into the Company’s Common Shares on a one-for-one basis after a five-year lock-up period. During 2007, Klaff converted all 88 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued 4,000 Series B Preferred Units into 312,013 Common OP Note 13i Units and ultimately into Common Shares. The Series A Preferred OP Units were issued on Novem- ber 16, 1999 in connection with the acquisition of the Pace- setter Park Shopping Center. Through December 31, 2008, 696 Series A Preferred OP Units were converted into 92,800 Common OP Units and then into Common Shares. The 188 remaining Series A Preferred OP Units are cur- rently convertible into Common OP Units based on the stated value divided by $7.50. Either the Company or the holders can currently call for the conversion of the Series Tenant Leases Space in the shopping centers and other retail properties is leased to various tenants under operating leases that usually grant tenants renewal options and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volume. Minimum future rentals to be received under non-cance- lable leases for shopping centers and other retail proper- ties as of December 31, 2008 are summarized as follows: A Preferred OP Units at the lesser of $7.50 or the market (dollars in thousands) price of the Common Shares as of the conversion date. Note 12i Related Party Transactions During 2007, Klaff converted 4,000 Series B Preferred OP units into 312,013 Common Shares (Note 11). During 2005, the Operating Partnership issued $4.0 million of Restricted Common OP Units to Klaff (Note 11). During March 2005, the Company completed $20.0 million Preferred Equity Investment with Levitz SL, of which Klaff is the managing member. In June 2006, the Company con- verted its Preferred Equity Investment with Levitz SL, into a mortgage loan. 2009 2010 2011 2012 2013 Thereafter $ 85,935 77,642 65,501 57,400 51,383 300,292 $ 638,153 Minimum future rentals above include a total of $10.8 million for three tenants, totaling three leases, which have filed for bankruptcy protection. The three tenant’s leases have not been rejected nor affirmed. During the years ended December 31, 2008, 2007 and 2006, no single tenant collectively accounted for more than 10% of the Company’s total revenues. The Company earns asset management, leasing, dispo- Note 14i sition, development and construction fees for providing services to an existing portfolio of retail properties and/or leasehold interests in which Klaff has an interest. Fees earned by the Company in connection with this portfolio were $1.1 million, $2.1 million and $3.5 million for the years ended December 31, 2008, 2007 and 2006 respectively. Lease Obligations The Company leases land at seven of its shopping centers, which are accounted for as operating leases and generally provide the Company with renewal options. Ground rent expense was $2.7 million, $4.1 million, and $4.5 million (including capitalized ground rent at properties under The Company earns fees from two of its investments in development of $1.1 million, $2.7 million and $3.4 million) unconsolidated partnerships (Note 4). The Company earned for the years ended December 31, 2008, 2007 and 2006, property management, construction, legal and leasing fees respectively. The leases terminate at various dates from the Brandywine Portfolio totaling $0.9 million, $1.7 between 2015 and 2066. These leases provide the Com- million and $1.4 million for the years ended December 31, pany with options to renew for additional terms aggregating 2008, 2007 and 2006, respectively. In addition, the Com- from 20 to 60 years. The Company leases space for its pany earned property management and development fees White Plains corporate office for a term expiring in 2015. from CityPoint totaling $1.0 million, $0.2 million and $0.0 Office rent expense under this lease was $1.2 million, million for the years ended December 31, 2008, 2007 and $0.8 million and $0.6 million for the years ended Decem- 2006, respectively. Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $0.1 million for each of the years ended December 31, 2008, 2007, and 2006. ber 31, 2008, 2007 and 2006, respectively. Future minimum rental payments required for leases having remaining non- cancelable lease terms are as follows: Acadia Realty Trust 2008 Annual Report 89 (dollars in thousands) 2009 2010 2011 2012 2013 Thereafter Note 15i $ 5,088 5,107 5,144 5,212 5,289 95,674 $121,514 Share Incentive Plan During 2003, the Company adopted the 2003 Share Incen- tive Plan (the “2003 Plan”). The 2003 Plan authorizes the issuance of options, share appreciation rights, restricted shares (“Restricted Shares”), restricted OP units (“LTIP Units”) and performance units (collectively, “Awards”) to On January 31, 2008, the Company issued 4,722 Restricted Shares and 156,058 LTIP Units to officers of the Company. On February 1, 2008, and March 27, 2008, the Company also issued 1,050 and 11,672 LTIP Units, respectively, to an officer of the Company. Vesting with respect to these awards is recognized over a range of the next seven to 10 years. The vesting on 50% of these awards is also gener- ally subject to achieving certain total shareholder returns on the Company’s Common Shares or certain annual earnings growth. LTIP Units are similar to Restricted Shares but provide for a quarterly partnership distribution in a like amount as paid to Common OP Units. This distri- bution is paid on both unvested and vested LTIP Units. The LTIP Units are convertible into Common OP Units and Common Shares upon vesting and a revaluation of the book capital accounts. officers, employees and trustees of the Company and Also on January 31, 2008, the Company issued 26,999 consultants to the Company equal to up to four percent Restricted Shares to employees of the Company. Vesting of the total Common Shares of the Company outstanding with respect to these awards is recognized ratably over from time to time on a fully diluted basis. However, no the next four anniversaries of the issuance date. The vest- participant may receive more than the equivalent of ing on 25% of these awards is also subject to achieving 1,000,000 Common Shares during the term of the 2003 certain total shareholder returns on the Company’s Com- Plan with respect to Awards. Options are granted by the mon Shares or certain annual earnings growth. In addition, Compensation Committee (the “Committee”), which cur- on June 23, 2008, the Company issued 406 LTIP Units to rently consists of three non-employee Trustees, and will employees of the Company. Vesting with respect to these not have an exercise price less than 100% of the fair mar- LTIP Units is recognized ratably over the next five anniver- ket value of the Common Shares and a term of greater saries of the issuance date. than 10 years at the grant date. Vesting of options is at the discretion of the Committee. Share appreciation rights provide for the participant to receive, upon exercise, cash and/or Common Shares, at the discretion of the Committee, equal to the excess of the market value of the Common Shares at the exercise date over the market value of the Common Shares at the grant date. The Committee deter- mines the restrictions placed on Awards, including the dividends or distributions thereon and the term of such restrictions. The Committee also determines the award The total value of the above Restricted Shares and LTIP Units issued was $4.9 million, of which $1.4 million was recognized in compensation expense in 2007 and repre- sented executive cash bonuses used to purchase a portion of the Restricted Shares, and $3.5 million will be recognized in compensation expense over the vesting period. The weighted average fair value for Restricted Shares and LTIP Units granted for the years ended December 31, 2008, 2007 and 2006 were $24.51, $24.91 and $20.46, respectively. and vesting of performance units and performance shares For the years ended December 31, 2008, 2007 and 2006, based on the attainment of specified performance objectives $3.4 million, $3.3 million, and $2.7 million, respectively, of the Company within a specified performance period. were recognized in compensation expense related to Through December 31, 2008, no share appreciation rights Restricted Share and LTIP Unit grants. or performance units/shares had been awarded. On May 14, 2008, the Company issued 1,878 unrestricted During 2006, the Company adopted the 2006 Share Incen- Common Shares and 4,000 Restricted Shares to Trustees tive Plan (the “2006 Plan”). The 2006 Plan is substantially of the Company in connection with Trustee fees. The similar to the 2003 Plan, except that the maximum num- Restricted Shares vest over three years with 33% vesting ber of Common Share equivalents that the Company may on each of the next three anniversaries of the issuance issue pursuant to the 2006 Plan is 500,000. date. The Restricted Shares do not carry voting rights or 90 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued other rights of Common Shares until vesting and may The Company has used the Binomial method for purposes not be transferred, assigned or pledged until the recipi- of estimating the fair value in determining compensation ents have a vested non-forfeitable right to such shares. expense for options granted for the year ended December Dividends are not paid currently on unvested Restricted 31, 2006. No options were issued during 2008 and 2007. Shares, but are paid cumulatively, from the issuance date The fair value for the options issued by the Company was through the applicable vesting date of such Restricted estimated at the date of the grant using the following Shares vesting. Trustee fee expense of $81,000 for the weighted-average assumptions resulting in: year ended December 31, 2008 has been recognized in the accompanying consolidated financial statements related to this issuance. As of December 31, 2008, the Company had 363,244 options outstanding to officers and employees of which all have vested. These options are for 10-year terms from the grant date and vested in three equal annual install- ments, which began on the Grant Date. In addition, 58,000 options have been issued, of which all have vested, to non-employee Trustees as of December 31, 2008. Weighted-average volatility Expected dividends Expected life (in years) Risk-free interest rate Year ended December 31, 2006 18.0% 3.6% 7.5 4.4% Fair value at date of grant (per option) $3.03 A summary of option activity under all option arrangements as of December 31, 2008, and changes during the year then ended is presented below: Options Outstanding at January 1, 2008 Granted Exercised Forfeited or Expired Outstanding at December 31, 2008 Exercisable at December 31, 2008 Shares 531,738 — (110,245) (249) 421,244 421,244 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (dollars in thousands) $ 9.99 — 7.47 20.65 $10.65 $10.65 3.7 3.7 $ 1,527 $ 1,527 The weighted average Grant Date fair value of options granted during the year 2006 was $3.03. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $0.8 million, $0.3 million and $0.1 million, respectively. A summary of the status of the Company’s unvested Restricted Shares and LTIP Units as of December 31, 2008 and changes during the year ended December 31, 2008, is presented below: Unvested Shares and LTIP Units Unvested at January 1, 2008 Granted Vested Forfeited Unvested at December 31, 2008 Restricted Shares (in thousands) 595 32 (143) (5) 479 Weighted Grant-Date Fair Value $20.51 24.50 18.63 24.59 $21.29 LTIP Units (in thousands) 22 169 (6) (4) 181 Weighted Grant-Date Fair Value $ 24.91 24.51 24.91 24.50 $ 24.55 Acadia Realty Trust 2008 Annual Report 91 As of December 31, 2008, there was $8.6 million of total the agreement. As of December 31, 2008, 190,487 Share unrecognized compensation cost related to unvested Units have been contributed to the plan, all of which were share-based compensation arrangements granted under contributed prior to January 1, 2006. share incentive plans. That cost is expected to be recog- nized over a weighted-average period of 2.5 years. The total fair value of Restricted Shares that vested during the years ended December 31, 2008, 2007 and 2006, was $2.7 million, $1.6 million and $2.5 million, respectively. Note 16i Employee Share Purchase and Deferred Share Plan The Acadia Realty Trust Employee Share Purchase Plan (the “Purchase Plan”), allows eligible employees of the Company to purchase Common Shares through payroll deductions. The Purchase Plan provides for employees to purchase Common Shares on a quarterly basis at a 15% discount to the closing price of the Company’s Common Shares on either the first day or the last day of the quarter, whichever is lower. The amount of the payroll deductions will not exceed a percentage of the participant’s annual During May of 2006, the Company adopted a Trustee Deferral and Distribution Election whereby the participating Trustees have deferred compensation of $0.4 million, $.02 million and $0.1 million for 2008, 2007 and 2006, respectively. Note 17i Employee 401(k) Plan The Company maintains a 401(k) plan for employees under which the Company currently matches 50% of a plan participant’s contribution up to 6% of the employee’s annual salary. A plan participant may contribute up to a maximum of 15% of their compensation but not in excess of $15,500 for the year ended December 31, 2008. The Company contributed $0.3 million, $0.2 million and $0.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. compensation that the Committee establishes from time Note 18i to time, and a participant may not purchase more than 1,000 Common Shares per quarter. Compensation expense will be recognized by the Company to the extent of the above discount to the average closing price of the Com- Dividends and Distributions Payable On December 3, 2008, the Board of Trustees declared a mon Shares with respect to the applicable quarter. During cash dividend for the quarter ended December 31, 2008, 2008, 2007 and 2006, 7,499, 7,123 and 5,307 Common of $0.21 per Common Share, which was paid on January Shares, respectively, were purchased by Employees under 15, 2009 to holders of record as of December 31, 2008. the Purchase Plan. Associated compensation expense of In addition, on December 22, 2008, the Board of Trustees $0.03 million was recorded in each of 2008 and 2007 and declared a special dividend payable to holders of its Com- $0.02 million was recorded in 2006. During August of 2004, the Company adopted a Deferral and Distribution Election pursuant to the 1999 Share Incentive Plan and 2003 Share Incentive Plan, whereby the participants elected to defer receipt of 190,487 Com- mon Shares (“Share Units”) that otherwise would have been issued upon the exercise of certain options. The pay- ment of the option exercise price was made by tendering Common Shares that the participants owned for at least six months prior to the option exercise date. The Share Units are equivalent to a Common Share on a one-for-one basis and carry a dividend equivalent right equal to the dividend rate for the Company’s Common shares. The deferral period is determined by each of the participants and generally terminates after the cessation of the partici- pants continuous service with the Company, as defined in mon Shares of approximately $0.55 per share, or $18.0 million in the aggregate. The special dividend, which is associated with taxable gains for 2008 arising from prop- erty dispositions, was paid on January 30, 2009, to share- holders of record as of December 31, 2008. 90% of the special dividend was paid with the issuance of 1.3 million Common Shares and 10%, or $1.8 million, was paid in cash. All previously reported Common Shares used to calculate EPS and earnings per share amounts have been adjusted to reflect the inclusion of the 1.3 million special dividend Common Shares. Note 19i Federal Income Taxes The Company has elected to qualify as a REIT in accor- dance with the Internal Revenue Code (the “Code”) and intends at all times to qualify as a REIT under Sections 92 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued 856 through 860 of the Code of 1986, as amended. To Even though the Company qualifies for taxation as a REIT, qualify as a REIT, the Company must meet a number of the Company is subject to certain state and local taxes on organizational and operational requirements, including a its income and property and Federal income and excise requirement that it currently distribute at least 90% of its taxes on any undistributed taxable income. In addition, annual REIT taxable income to its shareholders. As a REIT, taxable income from non-REIT activities managed through the Company generally will not be subject to corporate the Company’s TRS is subject to Federal, state and local Federal income tax, provided that distributions to its share- income taxes. holders equal at least the amount of its REIT taxable income as defined under the Code. As the Company distributed sufficient taxable income for the years ended December 31, 2008, 2007 and 2006, no U.S. Federal income or excise taxes were incurred. If the Company fails to qualify as a REIT in any taxable year, it will be subject to Federal income taxes at the regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. The difference between the GAAP and tax reported amounts of the Company’s assets and liabilities is due largely to the higher GAAP basis in the Company’s real estate properties. This is primarily the result of assets acquired as a result of property contributions in exchange for OP Units and the utilization of Code Section 1031 tax- deferred exchanges. Reconciliation between GAAP net income and Federal taxable income The following unaudited table reconciles GAAP net income to taxable income for the years ended December 31, 2008, 2007 and 2006: (dollars in thousands) Net Income Net income attributable to TRS Net income attributable to REIT Book/tax difference in depreciation and amortization (1) Book/tax difference on exercise of stock options and vesting of restricted shares Book/tax difference on capital transactions (2) Impairment loss not recognized for tax (3) Other book/tax differences, net 2008 (Estimated) $27,548 1,155 26,393 (1,010) 82 11,573 4,306 2,200 2007 (Actual) $ 27,270 2,514 24,756 4,155 (689) 8,300 — 467 REIT taxable income before dividends paid deduction $43,544 $ 36,989 2006 (Actual) $ 39,013 405 38,608 4,906 (397) (16,709) — 2,963 $ 29,371 Note: (1)Includes one-time deduction of $4,907 in 2008, resulting from reclassification of certain fixed assets for income tax purposes. (2) Principally the result of the deferral of the gain from the sale of properties for income tax purposes. (3) 100% of mezzanine loans for redevelopment of the retail complexes associated with seven public rest stops along the toll roads in and around Chicago, Illinois. See Note 1. Characterization of Distributions The Company has determined that the cash distributed to the shareholders is characterized as follows for Federal income tax purposes: Ordinary income Capital gain Years Ended December 31, 2008 2007 2006 54% 46% 51% 49% 100% —% 100% 100% 100% Acadia Realty Trust 2008 Annual Report 93 Taxable REIT Subsidiaries (“TRS”) Income taxes have been provided for using the liability method as required by SFAS No. 109. The Company’s combined TRS income (loss) and provision (benefit) for income taxes for the years ended December 31, 2008, 2007 and 2006 are summarized as follows: 2008 (Estimated) 2007 (Actual) 2006 (Actual) (dollars in thousands) TRS income (loss) before income taxes $ 4,359 $5,077 $ (296) Provision (benefit) for income taxes: Federal State and local 2,441 763 2,097 466 (590) (111) TRS net income $ 1,155 2,514 $ 405 The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to taxable income (loss) before income taxes as follows: 2008 2007 2006 (dollars in thousands) Federal provision (benefit) at statutory tax rate $ 1,996 $1,726 $(100) State and local taxes, net of federal benefit 277 255 (15) and liabilities approximates fair value due to the short-term nature of such accounts. Notes Receivable and Preferred Equity Investments — as of December 31, 2008 and 2007, the Company has determined the estimated fair values of its preferred equity investments and notes receivable were $122.3 million and $57.7 million, respectively, by discounting future cash receipts utilizing a discount rate equivalent to the rate at which similar notes receivable would be originated at the reporting date. Derivative Instruments — the fair value of these instru- ments is based upon the estimated amounts the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date and is determined using interest rate market pricing models. Mortgage Notes Payable and Notes Payable — As of December 31, 2008 and 2007, the Company has deter- mined the estimated fair values of its mortgage notes payable, including those relating to discontinued operations, were $731.8 million and $519.4 million, respectively, by discounting future cash payments utilizing a discount rate equivalent to the rate at which similar mortgage notes payable would be originated at the reporting date. Tax effect of: Change in estimate REIT state, local and franchise taxes Total provision (benefit) 931 158 605 (586) Derivative Financial Instruments: SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, 67 193 establishes accounting and reporting standards for deriv- for income taxes $ 3,362 $2,653 $(508) Note 20i Financial Instruments Fair Value of Financial Instruments: SFAS No. 107, “Disclosures about Fair Value of Financial ative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all deriv- atives 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 attrib- Instruments” requires disclosure on the fair value of finan- utable to a particular risk, such as interest rate risk, are cial instruments. Certain of the Company’s assets and considered fair value hedges. Derivatives used to hedge liabilities are considered financial instruments. Fair value the exposure to variability in expected future cash flows, estimates, methods and assumptions are set forth below. or other types of forecasted transactions, are considered Cash and Cash Equivalents, Restricted Cash, Cash in cash flow hedges. Escrow, Rents Receivable, Prepaid Expenses, Other For derivatives designated as fair value hedges, changes Assets, Accounts Payable and Accrued Expenses, Divi- in the fair value of the derivative and the hedged item dends and Distributions Payable, Due to Related Parties related to the hedged risk are recognized in earnings. For and Other Liabilities. The carrying amount of these assets derivatives designated as cash flow hedges, the effective 94 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued portion of changes in the fair value of the derivative is ini- As of December 31, 2008 and 2007, no derivatives were tially reported in other comprehensive income (outside of designated as fair value hedges or hedges of net invest- earnings) and subsequently reclassified to earnings when ments in foreign operations. Additionally, the Company the hedged transaction affects earnings, and the ineffec- does not use derivatives for trading or speculative purposes tive portion of changes in the fair value of the derivative is and currently does not have any derivatives that are not recognized directly in earnings. The Company assesses designated as hedges. As of December 31, 2008, none the effectiveness of each hedging relationship by compar- of the Company’s hedges were ineffective. ing the changes in fair value or cash flows of the deriva- tive 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. The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of December 31, 2008. The notional value does not represent exposure to credit, interest rate or market risks: Hedge Type Notional Value Rate Maturity Fair Value (dollars in thousands) Interest Rate Swaps LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap Interest rate swaps Interest Rate LIBOR Cap Net Derivative instrument liability $ 4,469 10,952 8,194 9,800 15,000 15,000 10,000 $73,415 $30,000 4.71% 4.90% 5.14% 4.47% 3.79% 3.41% 2.65% 01/01/10 10/01/11 03/01/12 10/29/10 11/30/12 11/30/12 11/30/12 6.00% 04/01/09 $ (171) (975) (856) (585) (1,116) (907) (324) (4,934) (28) $ (4,962) The above derivative instruments have been designated as Note 21i cash flow hedges and hedge the future cash outflows on mortgage debt. Such instruments are reported at the fair values reflected above. As of December 31, 2008 and 2007, unrealized losses totaling $4.9 and $1.1 million, respectively were reflected in accumulated other compre- hensive loss. It is estimated that approximately $2.2 million included in accumulated other comprehensive income related to derivatives will be reclassified to interest expense in 2009 results of operations. Earnings Per Common Share Basic earnings per share was determined by dividing the applicable net income to common shareholders for the year by the weighted average number of Common Shares outstanding during each year consistent with SFAS No. 128. Diluted earnings per share reflects the potential dilu- tion that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company. In accordance with GAAP, all Common Shares used to cal- culate EPS have been adjusted to reflect a special dividend paid on January 30, 2009, which resulted in the issuance of approximately 1.3 million additional Common Shares. The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated: Acadia Realty Trust 2008 Annual Report 95 Years Ended December 31, 2008 2007 2006 (dollars in thousands, except per share amounts) Numerator: Income from continuing operations — basic earnings per share $19,900 $17,151 $14,868 Effect of dilutive securities: Preferred OP Unit distributions — 23 254 Numerator for diluted earnings per share 19,900 17,174 15,122 Denominator: Weighted average shares — basic earnings per share 33,813 33,600 33,789 Effect of dilutive securities: Employee share options Convertible Preferred OP Units Dilutive potential Common Shares 454 — 454 616 66 682 314 337 651 Denominator for diluted earnings per share 34,267 34,282 34,440 Basic earnings per share from continuing operations Diluted earnings per share from continuing operations $ $ 0.59 0.58 $ $ 0.51 0.50 $ $ 0.44 0.43 The weighted average shares used in the computation of The conversion of the convertible notes payable (Note 9) basic earnings per share include unvested Restricted Shares is not reflected in the table above as such conversion and LTIP Units (Note 15) that are entitled to receive divi- based on the market price of the Common Shares would dend equivalent payments. The effect of the conversion be effected with only cash. The effect of the assumed of Common OP Units is not reflected in the above table, conversion of 25,067 and 41,696 Series A and B Preferred as they are exchangeable for Common Shares on a one- OP Units for the year ended December 31, 2007 would be for-one basis. The income allocable to such units is allocated dilutive and they are included in the table. The effect of the on this same basis and reflected as minority interest in the assumed conversion of 25,067 and 312,012 Series A and accompanying consolidated financial statements. As such, B Preferred OP Units for the year ended December 31, the assumed conversion of these units would have no net 2006 would be dilutive and they are included in the table. impact on the determination of diluted earnings per share. 96 Acadia Realty Trust 2008 Annual Report Notes to Consolidated Financial Statements continued Note 22i Summary of Quarterly Financial Information (unaudited) The quarterly results of operations of the Company for the years ended December 31, 2008 and 2007 are as follows: (dollars in thousands, except per share amounts) Revenue Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) Net income per Common Share — basic: Income (loss) from continuing operations Income from discontinued operations Net income (loss) Net income per Common Share — diluted: March 31 $ 28,682 $ 8,232 $ 512 $ 8,744 $ 0.24 0.01 $ 0.25 2008 September 30 December 31 $ 28,739 $ 4,987 $ (1) $ 4,986 $ 0.15 — $ 0.15 $ 31,110 $ (4,107) $ 14 $ (4,093) $ (0.12) — $ (0.12) June 30 $52,208 $10,788 $ 7,123 $17,911 $ 0.32 0.21 $ 0.53 Income (loss) from continuing operations $ 0.24 $ 0.31 $ 0.15 $ (0.12) Income (loss) from discontinued operations Net income (loss) Cash dividends declared per Common Share Weighted average Common Shares outstanding: 0.01 0.25 0.21 $ $ 0.21 0.52 0.21 $ $ — 0.15 0.21 $ $ — $ (0.12) $ 0.76 Basic Diluted 33,747,797 34,244,449 33,806,747 34,376,530 33,845,368 34,366,002 33,850,271 33,850,271 (dollars in thousands, except per share amounts) Revenue Income from continuing operations Income (loss) from discontinued operations Income from extraordinary item Net income Net income per Common Share — basic: March 31 $24,115 $ 3,378 $ 458 $ 2,883 $ 6,719 June 30 $ 22,631 $ 2,825 $ $ 210 — $ 3,035 2007 September 30 December 31 $25,400 $ 7,941 $ $ (246) 794 $ 8,489 $25,876 $ 3,007 $ 6,020 $ — $ 9,027 Income from continuing operations $ 0.10 $ 0.08 $ 0.24 $ 0.09 Income (loss) from discontinued operations Income from extraordinary item 0.01 0.09 0.01 — (0.01) 0.02 0.18 — Net income $ 0.20 $ 0.09 $ 0.25 $ 0.27 Net income per Common Share — diluted: Income from continuing operations $ 0.10 $ 0.08 $ 0.24 $ 0.09 Income (loss) from discontinued operations Income from extraordinary item Net income Cash dividends declared per Common Share Weighted average Common Shares outstanding: 0.01 0.09 0.20 0.20 $ $ 0.01 — 0.09 0.20 $ $ (0.01) 0.02 0.25 0.20 $ $ 0.17 — $ 0.26 $0.4325 Basic Diluted 33,441,973 34,328,847 33,626,566 34,220,728 33,659,684 34,244,063 33,666,979 34,307,038 Acadia Realty Trust 2008 Annual Report 97 Note 23i Commitments and Contingencies Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environ- ment, a current or previous owner or operator of real estate may be liable for the cost of removal or remedia- tion of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Com- pany may be potentially liable for costs associated with any potential environmental remediation at any of its formerly or currently owned properties. The Company conducts Phase I environmental reviews with respect to properties it acquires. These reviews include an investigation for the presence of asbestos, underground storage tanks and polychlorinated biphenyls (PCBs). Although such reviews are intended to evaluate the environmental condition of the subject property as well as surrounding properties, there can be no assurance that the review conducted by the Company will be ade- quate to identify environmental or other problems that may exist. Where a Phase II assessment is so recom- mended, a Phase II assessment is conducted to further determine the extent of possible environmental contami- nation. In all instances where a Phase I or II assessment has resulted in specific recommendations for remedial actions, the Company has either taken or scheduled the recommended remedial action. To mitigate unknown risks, the Company has obtained environmental insurance for most of its properties, which covers only unknown envi- ronmental risks. The Company believes that it is in compliance in all mate- rial respects with all Federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on involved, the Company’s management and counsel are of the opinion that, when such litigation is resolved, the Company’s resulting liability, if any, will not have a sig- nificant effect on the Company’s consolidated financial position or results of operations. In September 2008, the Company, certain of its subsidi- aries, and other unrelated entities were named as defen- dants in an adversary proceeding brought by Mervyn’s LLC (“Mervyns”) in the United States Bankruptcy Court for the District of Delaware. In an Amended Complaint filed December 22, 2008, Mervyns asserts claims of fraudulent transfer and breach of fiduciary duty against the defendants based upon payments made by Mervyns in September 2004, in connection with its acquisition by an entity controlled by certain of the defendants. Mervyns seeks to recover from the defendants these allegedly fraudulent transfers, other unspecified damages, and attorney’s fees. The defendants’ response to the Amended Complaint is due April 3, 2009. The Company believes that it has meritorious defenses in connection with this action and that the ultimate resolution will not have a material adverse effect on the Company’s results of operations or consolidated financial condition. The Company has arranged for the provision of nine sep- arate letters of credit in connection with certain leases and investments. As of December 31, 2008, there were no outstanding balances under any of the letters of credit. If the letters of credit were fully drawn, the combined maximum amount of exposure would be $26.0 million. Note 24i Subsequent Events During January 2009, the Company, through Fund III, pur- chased Cortlandt Towne Center for approximately $78.0 million. The property is a 640,000 square foot shopping center located in Westchester County, NY. the Company’s financial position or results of operations. During January 2009, the Company purchased an addi- Management is unaware of any instances in which the tional $13.5 million in principal amount of its outstanding Company would incur significant environmental costs if convertible debt, at a discount of approximately 24%. any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such non- compliance, liability, claim or expenditure will not arise in the future. The Company is involved in various matters of litigation arising in the normal course of business. While the Com- pany is unable to predict with certainty the amounts 98 Acadia Realty Trust 2008 Annual Report During February 2009, The Kroger Co. purchased the fee at six locations in the Company’s Fund I Kroger/Safeway Portfolio for $14.6 million, resulting in a gain of approxi- mately $4.5 million. Schedule III: Real Estate and Accumulated Depreciation December 31, 2008 Encum- brances Land Buildings and Improvements Costs Capitalized Subsequent to Acquisition Land Buildings and Improvements Accumulated Acquisition (a) Depreciation Construction (c) Total Date of $17,600 $ 1,147 $ 7,425 $ 1,205 $ 1,147 $ 8,630 $ 9,777 $ 5,265 1984(a) Description Shopping Centers Crescent Plaza Brockton, MA New Loudon Center 14,554 Latham, NY 505 4,161 10,879 505 15,040 15,545 9,745 1982(a) Ledgewood Mall Ledgewood, NJ Mark Plaza Edwardsville, PA Blackman Plaza Wilkes-Barre, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Bartow Avenue Bronx, NY Amboy Road Shopping Center Staten Island, NY Abington Towne Center3 Abington, PA Bloomfield Town Square3 Bloomfield Hills, MI Walnut Hill Plaza Woonsocket, RI — — — — — — — — — 619 5,434 33,200 619 38,634 39,253 31,526 1983(a) — 4,268 4,690 — 8,958 8,958 6,336 1968(c) 120 — 1,599 120 1,599 1,719 736 1968(c) 190 3,004 1,714 190 4,718 4,908 3,106 1972(c) — — 12,695 1,664 11,031 12,695 5,315 1995(c) 1,691 5,803 574 1,691 6,377 8,068 950 2002(c) — 11,909 1,496 — 13,405 13,405 1,166 2005(a) 799 3,197 1,994 799 5,191 5,990 1,897 1998(a) 3,207 13,774 9,202 3,207 22,976 26,183 6,799 1998(a) 23,500 3,122 12,488 1,840 3,122 14,328 17,450 4,139 1998(a) Elmwood Park Plaza 34,600 Elmwood Park, NJ 3,248 12,992 14,764 3,798 27,206 31,004 8,682 1998(a) 26,250 4,288 17,152 1,587 4,288 18,739 23,027 5,416 1998(a) — — — — Merrillville Plaza Hobart, IN Marketplace of Absecon3 Absecon, NJ Clark Diversey Chicago, IL Boonton Boonton, NJ Chestnut Hill Philadelphia, PA Third Avenue Bronx, NY Hobson West Plaza3 Naperville, IL Village Commons/ Smithtown Shopping Center Smithtown, NY Town Line Plaza3 Rocky Hill, CT Branch Shopping Center Village of the Branch, NY 2,573 10,294 2,502 2,577 12,792 15,369 3,576 1998(a) 10,061 2,773 8,322 1,328 7,188 — — 10,061 2,773 12,834 1,328 7,188 8,516 9,663 8,289 5,691 43 8,289 5,734 14,023 11,108 8,038 1,013 11,855 8,304 20,159 208 524 360 468 2006(a) 2006(a) 2006(a) 2006(a) 1,793 7,172 726 1,793 7,898 9,691 2,342 1998(a) 9,624 3,229 12,917 2,438 3,229 15,355 18,584 4,609 1998(a) — 878 3,510 7,269 907 10,750 11,657 7,129 1998(a) 15,526 3,156 12,545 777 3,156 13,322 16,478 3,646 1998(a) Acadia Realty Trust 2008 Annual Report 99 December 31, 2008 Description Encum- brances Land Buildings and Improvements Costs Capitalized Subsequent to Acquisition Land Buildings and Improvements Accumulated Acquisition (a) Depreciation Construction (c) Total Date of Shopping Centers, cont’d The Methuen Shopping Center3 Methuen, MA $ — $ 956 $ 3,826 $ 594 $ 961 $ 4,415 $ 5,376 $ 1,152 1998(a) Gateway Shopping Center Burlington, VT Mad River Station Dayton, OH Pacesetter Park Shopping Center Ramapo, NY 239 Greenwich Greenwich, CT West Shore Expressway Staten Island, NY West 54th Street Manhattan, NY Acadia 5–7 East 17th Street Manhattan, NY Fund I: Tarrytown Centre Westchester, NY Granville Center Columbus, OH Kroger/Safeway Various Fund II: Liberty Avenue New York, NY Pelham Manor Westchester, NY 20,500 1,273 5,091 11,536 1,273 16,627 17,900 3,723 1999(a) — 2,350 9,404 598 2,350 10,002 12,352 2,620 1999(a) 12,485 1,475 5,899 1,121 1,475 7,020 8,495 2,102 1999(a) 26,000 1,817 15,846 502 1,817 16,348 18,165 4,009 1999(c) — — — 3,380 13,554 16,699 18,704 — 28 3,380 13,554 16,934 16,699 18,732 35,431 653 810 2007(a) 2007(a) 3,212 7,671 — 3,212 7,671 10,883 142 2008(a) 9,800 2,323 7,396 329 2,323 7,725 10,048 894 2004(a) — 2,186 8,744 4,793 — 47,745 59 — 2,186 8,803 10,989 1,425 2002(a) — 47,745 47,745 33,024 2003(a) 11,423 — 12,627 673 — 13,300 13,300 25,284 905 — 33,437 905 33,437 34,342 649 594 2005(a) 2004(a) 400 E. Fordham Road 80,443 Bronx, NY 11,144 18,010 69,703 16,254 82,603 98,857 1,881 2004(a) 4650 Broadway/ Sherman Ave New York, NY 216th Street New York, NY 161st Street Bronx, NY Oakbrook Oakbrook, IL Atlantic Avenue Brooklyn, NY Canarsie Plaza Brooklyn, NY Pelham Manor Westchester, NY ASOF II, LLC 34,681 19,000 25,267 25,500 7,261 — — — 25,267 — 25,267 — 2005(a) 20,237 7,261 20,237 27,498 762 2005(a) 30,000 16,679 28,410 261 16,679 28,671 45,350 2,459 2005(a) — — 6,906 3,265 5,322 32,543 — — — — — — 10,161 — 17 — — 240 — — 6,923 6,923 1,853 2005(a) 5,322 32,543 — — — — 5,322 32,543 — — 2007(a) 2007(a) 10,401 10,401 127 2004(a) — — — 100 Acadia Realty Trust 2008 Annual Report Schedule III: Real Estate and Accumulated Depreciation continued December 31, 2008 Description Encum- brances Land Buildings and Improvements Shopping Centers, cont’d Costs Capitalized Subsequent to Acquisition Land Buildings and Improvements Accumulated Acquisition (a) Depreciation Construction (c) Total Date of Fund III: 125 Main Street Associations Westport, CT Sheepshead Bay Brooklyn, NY Suffern Self Storage Suffern, NY Linden Self Storage1 Linden, NJ Webster Self Storage1 Bronx, NY Jersey City Self Storage1 Jersey City, NJ Bronx Self Storage1 Bronx, NY Lawrence Self Storage1 Lawrence, NY Starr Avenue Self Storage2 Queens, NY New Rochelle Self Storage2 Westchester, NY Yonkers Self Storage2 Westchester, NY Bruckner Boulevard Self Storage2 Bronx, NY Ridgewood Self Storage Queens, NY — — — — — — — — — — ASOF III, LLC 62,250 Underdeveloped land Properties under development — — $— $ 12,994 $ 4,316 $ 265 $ 12,994 $ 4,581 $ 17,575 — 20,391 — 4,944 4,561 7,484 3,515 6,139 1,041 5,506 2,377 9,654 10,835 5,936 20,391 — 20,391 4,561 7,484 12,045 3,515 6,139 9,654 1,041 5,506 6,547 33 — 157 136 111 2007(a) 2007(a) 2008(a) 2008(a) 2008(a) 2,377 9,654 12,031 205 2008(a) 10,835 5,936 16,771 13 2008(a) — — — — — — 6,977 12,688 — 6,977 12,688 19,665 248 2008(a) 7,597 22,391 — 7,597 22,391 29,988 450 2008(a) 1,977 4,769 3,121 17,457 — — 1,977 4,769 6,746 94 2008(a) 3,121 17,457 20,578 337 2008(a) 6,244 10,551 — 6,244 10,551 16,795 206 2008(a) 8,000 — 250 — — — — — — — — 8,000 — 250 — — — 8,000 — 250 — — — 2008(c) 70,423 70,423 70,423 $654,729 $286,023 $498,620 $322,230 $294,132 $ 812,741 $1,106,873 $174,809 Notes: (1) These properties serve as collateral for the financing with GEMSA, in the amount of $41,500. (2) These properties serve as collateral for the financing with Wachovia, in the amount of $34,322. (3) These properties serve as collateral for the financing with Bank of America, N.A. in the amount of $48,900. Acadia Realty Trust 2008 Annual Report 101 Notes: 1. Depreciation and investments in buildings and improvements reflected in the statements of income are calculated over the estimated useful life of the assets as follows: Buildings: 30 to 40 years Improvements: shorter of lease term or useful life. 2. The aggregate gross cost of property included above for Federal income tax purposes was $416.9 million as of December 31, 2008. 3. (a) Reconciliation of Real Estate Properties: The following table reconciles the real estate properties from January 1, 2006 to December 31, 2008: Years Ended December 31, 2008 2007 2006 (dollars in thousands) Balance at beginning of year $ 833,694 $ 629,902 Transfers(1) Other improvements Property acquired Balance at end of year — 103,476 169,703 — 75,776 128,016 $ 650,945 (131,341) 40,523 69,775 $1,106,873 $ 833,694 $ 629,902 (1) Reflects the change in accounting for the Brandywine Portfolio following the recapitalization of the investment in January 2006 (Note 1). 3. (b) Reconciliation of Accumulated Depreciation: The following table reconciles accumulated depreciation from January 1, 2006 to December 31, 2008: (dollars in thousands) Balance at beginning of year Depreciation related to real estate Balance at end of year Years Ended December 31, 2008 2007 2006 $ 150,494 24,315 $ 174,809 $130,708 19,786 $150,494 $118,308 12,400 $130,708 102 Acadia Realty Trust 2008 Annual Report Trustees and Officers Shareholder Information Trustees Kenneth F. Bernstein President and Chief Executive Officer Lee S. Wielansky (Lead Trustee) Chairman of the Board and Chief Executive Officer Midland Development Group Inc. Douglas Crocker II Former Chief Executive Officer Equity Residential Suzanne M. Hopgood President and Chief Executive Officer The Hopgood Group, LLC Lorrence T. Kellar Vice President, Retail Development Continental Properties Wendy Luscombe President and CEO WKL Associates, Inc. William T. Spitz Former Vice Chancellor for Investments and Treasurer Vanderbilt University Senior Officers Kenneth F. Bernstein President and Chief Executive Officer Joel Braun Executive Vice President, Chief Investment Officer Christopher Conlon Sr. Vice President, Acquisitions and Leasing Jon Grisham Sr. Vice President, Chief Accounting Officer Joseph Hogan Sr. Vice President, Director of Construction Robert Masters, Esq. Sr. Vice President, General Counsel and Chief Compliance Officer Joseph M. Napolitano Sr. Vice President, Chief Administrative Officer Michael Nelsen Sr. Vice President, Chief Financial Officer David Robinov Sr. Vice President, Investments Robert Scholem Sr. Vice President, Director of Property Management Investor Relations Jon Grisham Sr. Vice President, Chief Accounting Officer Tel: 914.288.8100 email: jgrisham@acadiarealty.com A copy of the Company’s Form 10-K filed with the Securities and Exchange Commission may be obtained without charge by contacting Investor Relations. Dividend Reinvestment Acadia Realty Trust offers a dividend reinvestment plan that enables its shareholders to automatically reinvest dividends as well as make voluntary cash payments toward the purchase of additional shares. To participate, contact Acadia Realty Trust’s dividend reinvest- ment agent at 800.937.5449 ext.6820 or write to: American Stock Transfer & Trust Company Attn: Dividend Reinvestment Dept. 59 Maiden Lane Plaza Level New York, NY 10038 For further information contact Investor Relations. Internet Address Visit us online at www.acadiarealty.com for more information. The 2008 Annual Report, current news and quarterly financial and operational supplementary information can be found on the Company’s website. Corporate Headquarters Acadia Realty Trust 1311 Mamaroneck Avenue, Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Legal Counsel Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Annual Meeting Acadia’s Board of Trustees has sched- uled the Annual Shareholder Meeting for Wednesday, May 13, 2009, at 10 a.m., local time, to be held at the Company’s corporate headquarters at 1311 Mamaroneck Avenue, Suite 260, White Plains, NY 10605. The record date for determination of shareholders entitled to vote is March 31, 2009. Independent Auditors BDO Seidman, LLP 330 Madison Avenue New York, NY 10017 Stock Exchange NYSE: AKR The Company has filed the Section 302 certifications as an exhibit to its Form 10-K, and the Chief Executive Officer has provided the annual certification to the NYSE. Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 59 Maiden Lane Plaza Level New York, NY 10038 Tel: 877.777.0800 website: www.amstock.com email: info@amstock.com 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Printed on recycled paper. 

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