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A reconciliation of net income to diluted FFO for the years ended December 31, 2004, 2003 and 2002 are as follows: 

<img src='content_image/4340.jpg'>

FFO for the years ended December 31, 2003 and 2002 previously included a reduction of $2.6 million and $0.4 million, respectively, from gains on sales of undepreciated property. We have adjusted FFO to include these types of gains as they do not meet NAREIT’s definition of gains that should be adjusted from net income in calculating FFO. 

##  INFLATION 

We lease apartments under lease terms generally ranging from 6 to 13 months. Management believes that such short-term lease contracts lessen the impact of inflation due to the ability to adjust rental rates to market levels as leases expire. 

##  CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES 

The Securities and Exchange Commission (“SEC”) has issued guidance for the disclosure of “critical accounting policies”. The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We follow financial accounting and reporting policies that are in accordance with generally accepted accounting principles. The more significant of these policies relate to cost capitalization and asset impairment, which are discussed in the “Business” section under “Property Update”, and income recognition, capital expenditures and notes receivable, which are discussed below. 

## Income Recognition 

Our rental and other property income is recorded when due from residents and is recognized monthly as it is earned. Other property income consists primarily of utility rebillings, and administrative, application and other transactional fees charged to our residents. Interest, fee and asset management and all other sources of income are recognized as earned. 

## Capital Expenditures 

We capitalize renovation and improvement costs that we believe extend the economic lives and enhance the earnings of the related assets. Capital expenditures, including carpet, appliances and HVAC unit replacements, subsequent to initial construction are capitalized and depreciated over their estimated useful lives, which range from 3 to 20 years. 

