dec0511k

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





[ x ] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ending December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 333-27429


THE AERC 401(K) SAVINGS PLAN AND TRUST
(Exact name of Plan)
001
Plan Number
ASSOCIATED ESTATES REALTY CORPORATION
(Exact name of registrant as specified in its charter)


Ohio
34-1747603
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
5025 Swetland Court, Cleveland, Ohio
44143-1467
(Address of principal executive offices)
(Zip Code)




(216) 261-5000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)


THE AERC 401(K) SAVINGS PLAN AND TRUST





December 31, 2005







TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm
3
Financial Statements:
Statements of Assets Available for Plan Benefits
4
Statement of Changes in Net Assets Available for Plan Benefits
5
Notes to the Financial Statements
6-10
Supplemental Information:
11
Schedule of Assets Held for Investment
12
Signatures
13




Table of Contents

Report of Reznick Group, P.C., Independent

Registered Public Accounting Firm











To Participants and Administrator of the AERC 401(K) Savings

Plan and Trust



We have audited the financial statements of the AERC 401(K) Savings Plan and Trust (the "Plan") as of December 31, 2005 and 2004 and for the year ended December 31, 2005 and the supplemental schedule as of December 31, 2005, as listed in the accompanying contents. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the AERC 401(K) Savings Plan and Trust as of December 31, 2005 and 2004, and the changes in net assets available for plan benefits for the year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.



Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets held for investment as of December 31, 2005, is presented for the purpose of additional analysis and is not a required part of the basic financial statements, but is supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.





/s/ Reznick Group, P.C.

Bethesda, Maryland

May 19, 2006

Table of Contents The AERC 401(K) Savings Plan and Trust



STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS



December 31, 2005 and December 31, 2004





2005
2004
ASSETS
Investments, participant directed (See Note C) $ 7,551,606 $ 7,202,693
Receivables:
Employer contribution - 5,109
Participant contributions - 31,962
Total receivables - 37,071
Total Assets $ 7,551,606 $ 7,239,764


























































The accompanying notes are an integral part of this statement.

Table of Contents The AERC 401(K) Savings Plan and Trust



STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS



Year ended December 31, 2005





Additions to net assets attributed to:
Investment income
Net appreciation in fair value of investments (Note C) $ 233,226
Interest and dividends 83,268
Contributions
Employer $ 134,247
Participants 963,055 1,097,302
Total additions 1,413,796
Deductions from net assets attributed to:
Benefits paid to participants 1,092,337
Expenses paid 9,617
Total deductions 1,101,954
NET INCREASE 311,842
Net assets available for plan benefits
Beginning of year 7,239,764
End of year $ 7,551,606




















The accompanying notes are an integral part of this statement.

Table of Contents The AERC 401(K) Savings Plan and Trust



NOTES TO FINANCIAL STATEMENTS



December 31, 2005



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The financial statements of the AERC 401(K) Savings Plan and Trust have been prepared in conformity with accounting principles generally accepted in the United States of America as applied to profit-sharing trusts and in accordance with the terms of the Trust Agreement. A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:



1. Investment Valuation and Income Recognition



Participant notes receivable are valued at cost, which approximates fair value. The Plan's investments are stated at fair value except for its benefit-responsive investment contract, which is valued at contract value which approximates fair value (Note D). Quoted market prices are used to value investments. Units of pooled separate accounts are valued at the net asset value of the units held by the Plan at year end.



Purchases and sales of investments are recorded on a trade date basis. Investment income is recorded as earned and reinvested in the Plan.



2. Federal Income Taxes



The Plan has received a favorable determination letter from the Internal Revenue Service ("IRS") which classified the Plan as a qualified employee benefit plan, exempt from income taxes, under the Employee Retirement Income Security Act of 1994 ("ERISA").



3. Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.



4. Payment of Benefits



Benefits are recorded when paid.



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The AERC 401(K) Savings Plan and Trust



NOTES TO FINANCIAL STATEMENTS (Continued)



December 31, 2005







NOTE B - DESCRIPTION OF PLAN



The following description of the AERC 401(K) Savings Plan and Trust provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions.



The Plan is a plan of a controlled group of corporations which became effective April 1, 1990. The Plan has been amended several times and restated for the purpose of modifying the benefits provided and complying with changes in applicable law. Effective May 1, 2004, the Plan was amended and restated and Prudential Retirement Insurance and Annuity Company ("Prudential") replaced Scudder, Stevens & Clark ("Scudder") as trustee, administrator, and custodian of the Plan ("Trustee"). Plan assets transferred to the new Trustee were transferred into investment options comparable to those offered by the previous custodian. The conversion initiated a "Black Out" period beginning April 19, 2004, and continued through May 14, 2004. During this period, funds could not be applied to the employee selected funds with the Trustee or withdrawn from the Plan until the Trustee had time to accurately complete the conversion. During this period employee contributions continued to be made through payroll deductions.



Employees are eligible to participate in the Plan with elective deferrals after six months of service provided that they have reached the age of 21. Twelve months of service is required for a participant to receive an employer matching contribution of 25% of the participant's contribution up to a maximum participant contribution of 6% of their gross wages. Participants may elect to contribute up to 25% of their gross wages and currently have the option of investing their accounts between twenty different investment options. The investment options include Associated Estates Realty Corporation ("AERC") common stock, an unallocated insurance contract and eighteen different pooled separate accounts. Participants are immediately vested in the portion of their investment account which includes participant contributions plus actual earnings thereon. Vesting in the employer matching contribution portion of their accounts is based on years of continuous service. A participant is 100% vested after three years of credited service.



At December 31, 2005 and 2004, forfeited non-vested accounts totaled $3,064 and $143, respectively. These accounts will be used to reduce future employer contributions. Also, in 2005 and 2004, employer contributions were reduced by $6,815 and $8,529, respectively and expenses were increased by $245 and $0, respectively from forfeited nonvested accounts.



On termination of service, a participant may elect to receive either a lump sum amount equal to the value of his or her account, installment payments, a distribution in kind, or any reasonable combination of the foregoing.

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The AERC 401(K) Savings Plan and Trust



NOTES TO FINANCIAL STATEMENTS (Continued)



December 31, 2005







NOTE C - INVESTMENTS



The Plan's investments are held by Prudential at December 31, 2005 and 2004, respectively. The following table presents the fair value of the investments. Investments that represent 5 percent or more of the Plan's net assets are separately identified.



Market Value of Investments
December 31,
December 31,
2005
2004
Fair Value
Fair Value
Investment at fair value as determined by Prudential
Guaranteed Income Fund $ 1,434,802 $ 1,279,521
Dryden S&P 500 Index Fund 1,802,876 -
Core Bond Fund 558,249 625,266
Balanced Fund 857,268 787,527
Large Cap Value Fund 1,538,047 1,495,688
Associated Estates Realty Corporation Stock Fund 465,137 472,899
Other 895,227 2,541,792
$ 7,551,606 $ 7,202,693




During the year ended December 31, 2005, the Plan's investments (including investments bought, sold and held during the year) appreciated in value by $233,226 as follows:



Pooled separate accounts $ 290,106
Common Stock (56,880)
$ 233,226




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The AERC 401(K) Savings Plan and Trust



NOTES TO FINANCIAL STATEMENTS (Continued)



December 31, 2005







NOTE D - INVESTMENT CONTRACT WITH INSURANCE COMPANY

In 2004, the Plan entered into a benefit-responsive contract with Prudential Retirement Insurance & Annuity Company ("PRIAC"). PRIAC maintains the contributions in a general account. The account is credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. The contract is included in the financial statements at contract value as reported to the Plan by PRIAC. Contract value represents contributions made under the contract, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value.



There are no reserves against contract value for credit risk of the contract issuer or otherwise. The average yield and crediting interest rates were approximately 2.5 percent for 2005. The crediting interest rate is based on a formula agreed upon with the issuer, but may not be less than zero percent. Such interest rates are reviewed on a semi-annual basis for resetting.



NOTE E - PARTICIPANT NOTES RECEIVABLE



During 2005, the Plan made loans to various employees from their respective interests in the Plan. These loans and loans made in prior years bear interest at rates varying from 5% to 9%, and are being amortized over the terms of the loans with bi-weekly payments of principal and interest. The notes have maturity dates equal to or less than five years (ten years if the loan funds are utilized to purchase a primary residence) from the date of the notes, face value equal or greater than $1,000, and do not exceed 50 percent of the present value of the borrowers' interest in the Plan.



NOTE F - PLAN TERMINATION



Although it has not expressed any intent to do so, the companies participating in the Plan have the right to discontinue their matching contributions at any time and to terminate the Plan subject to the provisions of ERISA.



NOTE G - PARTY-IN-INTEREST TRANSACTIONS



For the year ended December 31, 2005, the Plan purchased AERC common stock at a cost of $79,336. The fair value of AERC common stock included in investments at December 31, 2005 and 2004 was $465,137 and $472,899, respectively.



Certain Plan investments are units of pooled separate accounts managed by Prudential. Prudential is a trustee as defined by the Plan and, therefore, these transactions qualify as party-in-interest. Fees paid by the Plan to Prudential for the investment management services provided by Prudential amounted to $9,617 and $12,459, respectively for the years ended December 31, 2005 and 2004.

NOTE H - RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500



The following is a reconciliation of net assets available for plan benefits per the financial statements to the Form 5500:



December 31,
December 31,
2005
2004
Net assets available for plan benefits per the
financial statements $ 7,551,606 $ 7,239,764
Amounts allocated to withdrawing participants - (17,607)
Net assets available for plan benefits per Form 5500 $ 7,551,606 $ 7,222,157

The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 2005, to Form 5500:



Benefits paid to participants per the financial statements $ 1,092,337
Add: Amounts allocated to withdrawing participants at
December 31, 2005 -
Less: Amounts allocated to withdrawing participants
at December 31, 2004 (17,607)
Benefits paid to participants per Form 5500 $ 1,074,730


Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that have been processed and approved for payment prior to December 31, 2005, but have not yet been paid as of that date.

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SUPPLEMENTAL INFORMATION

Table of Contents

THE AERC 401(K) SAVINGS PLAN AND TRUST



FORM 5500 SCHEDULE H - ITEM IV(I)

SCHEDULE OF ASSETS HELD FOR INVESTMENT



DECEMBER 31, 2005



Identity of
Interest
Fair
Party Involved
Description
Maturity
Rate
Value
Prudential Guaranteed Income Fund N/A N/A $ 1,434,802
Prudential Core Bond Fund N/A N/A 558,249
Prudential LN AP N/A N/A 59
Prudential High Yield Bond/Caywood-Scholl Fund N/A N/A 30,620
Prudential Balanced Fund N/A N/A 857,268
Prudential CIGNA Lifetime20 N/A N/A 20,712
Prudential CIGNA Lifetime30 N/A N/A 9,363
Prudential CIGNA Lifetime40 N/A N/A 21,701
Prudential CIGNA Lifetime50 N/A N/A 21,117
Prudential CIGNA Lifetime60 N/A N/A 2,762
Prudential Large Cap Value Fund N/A N/A 1,538,047
Prudential Lord Abbett Affiliated Fund N/A N/A 95,412
Prudential S & P 500 Index Fund N/A N/A 1,802,876
Prudential American Century Ultra Account N/A N/A 33,449
Prudential American Century Equity Income Fund N/A N/A 8
Prudential Ivy Small Cap Growth Fund N/A N/A 184,508
Prudential International Growth/Artisan Partners Fund N/A N/A 175,260
Prudential Cohen & Steers Equity Realty Income N/A N/A 57,499
AERC Stock Fund N/A N/A 465,137
Prudential Mid Cap Value N/A N/A 52,941
Participant loans Participant loans Various 5%-9% 189,816


Table of Contents

SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the following individuals have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.







THE AERC 401(K) SAVINGS

PLAN AND TRUST



Signature
Title
Date
/s/ Jeffrey I. Friedman
Individual
June 28, 2006
Jeffrey I. Friedman
/s/ Lou Fatica
Lou Fatica
Individual
June 28, 2006
/s/ Kara Florack
Kara Florack
Individual
June 28 , 2006




















































































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