AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1996
FILE NO. 333-10635
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in governing instruments)
306 East Main Street, Richmond, Virginia 23219
(Address of principal executive offices)
Glade M. Knight
306 East Main Street
Richmond, Virginia 23219
(Name and address of agent for service)
Copy to:
Leslie A. Grandis, McGuire, Woods, Battle & Boothe, L.L.P.
One James Center, Richmond, Virginia 23219
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]_______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------------ -------------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Forepart of Registration Statement and Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of Summary of the Offering; Risk Factors; Summary of
Earnings to Fixed Charges..................... Organizational Documents -- Shareholder Liability
4. Determination of Offering Price............... Risk Factors -- Arbitrary Share Offering Prices
5. Dilution...................................... Risk Factors -- Potential Dilution; Summary of
Organizational Documents -- Issuance of Securities
6. Selling Security Holders...................... Not Applicable
7. Plan of Distribution.......................... Plan of Distribution
8. Use of Proceeds............................... Estimated Use of Proceeds
9. Selected Financial Data....................... Not Applicable
10. Management's Discussion and Analysis of
Financial Condition and Results of Operations. Management's Discussion and Analysis of Financial
Condition
11. General Information as to Registrant.......... Summary of the Offering; Business and Properties;
Management
12. Policy with Respect to Certain Activities..... Summary of the Offering; Investment Objectives and
Policies; Summary of Organizational Documents; Reports
to Shareholders
13. Investment Policies of Registrant............. Summary of the Offering; Investment Objectives and
Policies
14. Description of Real Estate.................... Business and Properties
15. Operating Data................................ Business and Properties
16. Tax Treatment of Registrant and its Security
Holders....................................... Summary of the Offering; Federal Income Tax
Considerations; Investment by Tax-Exempt Entities
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters........................... Distribution Policy
18. Description of Registrant's Securities........ Summary of the Offering; Description of Capital Stock
19. Legal Proceedings............................. Business and Properties -- Legal Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management......................... Principal and Management Stockholders
<PAGE>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------------ -------------------------------------------------------
21. Directors and Executive Officers.............. Management
22. Executive Compensation........................ Compensation; Management
23. Certain Relationships and Related Transactions Summary of the Offering; Compensation; Conflicts of
Interest; Management; The Advisor and Affiliates
24. Selection, Management and Custody of
Registrant's Investments...................... Summary of the Offering; Compensation; Conflicts of
Interest; Investment Objectives and Policies;
Management; The Advisor and Affiliates
25. Policies with Respect to Certain Transactions Investment Objectives and Policies; Conflicts of
Interest
26. Limitation of Liability ...................... Risk Factors; Summary of Organizational Documents
27. Financial Statements and Information ......... Index to Financial Statements
28. Interests of Named Experts and Counsel........ Legal Opinions
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Risk Factors; Summary of Organizational Documents
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1996
APPLE RESIDENTIAL INCOME TRUST, INC.
COMMON SHARES (THE "SHARES")
$9 PER SHARE
($10 PER SHARE AFTER MINIMUM OFFERING OF $15,000,000 IS ACHIEVED)
MINIMUM INVESTMENT--$5,000
Apple Residential Income Trust, Inc. (the "Company") is a Virginia
corporation which will elect to be treated as a real estate investment trust
("REIT") for federal income tax purposes. The Company will invest primarily in
existing residential apartment communities in Texas and the southwestern region
of the United States. The Company intends to hold its properties on an all-cash
(unleveraged) basis, and to hold its properties for an indefinite length of
time. Apple Residential Advisors, Inc. (the "Advisor") and Apple Residential
Management Group, Inc., will provide the day-to-day management for the Company
and its properties, respectively. Glade M. Knight, the sole holder of common
shares of the Advisor and Apple Residential Management Group, Inc., is the
Chairman of the Board and President of the Company. Accordingly, the Advisor and
Apple Residential Management Group, Inc. may be deemed to be Affiliates of the
Company. A minimum offering of $15,000,000 in Shares must be sold no later than
one year after the date of this Prospectus, or the offering will terminate and
investors' subscription payments, with interest, will be promptly refunded to
investors. Pending sale of such minimum offering amount, investors' subscription
payments will be placed in an escrow account with First Union National Bank of
North Carolina as escrow agent. See "Plan of Distribution."
THESE ARE SPECULATIVE SECURITIES. The offering involves certain risks and
investment considerations (see "Risk Factors" beginning on page 10), including:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Thus, investors may be unable to resell their Shares,
or may be able to resell them only at a substantial discount from the purchase
price.
o Because the Company has no obligation and no specific plan to list the
Shares or sell its properties at any particular time, investors may not receive
a return of their investment for an indefinite period, if ever.
o Another company originally organized by Glade M. Knight will have a right
of first refusal to acquire Company assets, which may decrease the return the
Company is able to obtain upon sales of its properties.
o The Advisor and persons related to it will receive substantial compensation
from the Company. The payment of such compensation may tend to reduce investment
return by reducing funds available for investment and reducing cash flow from
operations. The compensation is generally payable before distributions to
Shareholders and regardless of Company profitability.
See "Compensation."
o The Advisor and persons related to it will be subject to various conflicts
of interest with the Company, including non-arms-length transactions and
competition for management services. See "Conflicts of Interest." As a result,
such persons could have an incentive to favor their interests to those of the
Company.
o Certain private partnerships sponsored by persons related to the Advisor
have experienced adverse business developments, including bankruptcy
reorganizations. See "The Advisor -- Prior Performance of Programs Sponsored by
Affiliates of the Advisor."
o Shareholders' interests are subject to dilution through the conversion of
Class B Convertible Shares held by Glade M. Knight.
o The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and property operating expenses, which in
turn will be affected by property selection, property and Company management,
property location and local and general economic conditions. The Company may not
operate profitably.
o There can be no assurance that the Company will generate sufficient cash
from operations to make distributions at any particular rate.
o Neither the Company nor the Advisor has any operating history, and there is
no assurance that the Company will operate successfully or achieve its
objectives.
o The Company has not identified any properties to be acquired with the
proceeds of this offering, and prospective investors may receive no information
regarding property acquisitions before buying Shares. Furthermore, the Company
may not achieve diversification in its property holdings.
o Company borrowing is permitted within limits set forth in the Company's
Bylaws, and would entail additional risks such as reduction of cash available
for distribution and risk of default. See "Risk Factors -- Possible Borrowing;
Debt Financing May Reduce Cash Flow and Increase Risk of Default."
All of the Shares offered hereby are being sold by the Company. It is
expected that approximately 84.5% of the gross offering proceeds will be
available for investment in properties and 0.5% allocated to a working capital
reserve. The balance of proceeds will pay expenses and fees of the Advisor and
others. See "Estimated Use of Proceeds."
THE OFFERING WILL TERMINATE WHEN ALL SHARES HAVE BEEN SOLD OR ONE YEAR FROM
THE DATE HEREOF, UNLESS SOONER TERMINATED BY THE COMPANY OR EXTENDED FOR UP TO
AN ADDITIONAL YEAR. SEE "SUMMARY OF THE OFFERING -- THE OFFERING" AND "PLAN OF
DISTRIBUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
================================================================================
Price to Selling Proceeds to
the Public Commissions(1)(2) the Company(3)
- --------------------------------------------------------------------------------
Per Share (4)............. $ 9 $ 0.675 $ 8.325
Total Minimum Offering ... $ 15,000,000 $ 1,125,000 $ 13,875,000
Total Maximum Offering(5). $250,000,000 $ 18,750,000 $231,250,000
================================================================================
(1) The Shares are being offered on a "best-efforts" basis exclusively through
David Lerner Associates, Inc. (the "Managing Dealer") pursuant to an Agency
Agreement. Under the Agency Agreement, the Managing Dealer may engage other
broker-dealers. The Company has agreed to indemnify the Managing Dealer and
such other broker-dealers against certain liabilities, including
liabilities under the Securities Act of 1933.
(2) Payable to David Lerner Associates, Inc., the Managing Dealer, which will
also receive a Marketing Expense Allowance equal to 2.5% of the purchase
price of the Shares.
(3) Before deducting other expenses payable by the Company in connection with
the offering. Such expenses are estimated at $825,000 for the minimum
offering and $7,250,000 for the maximum offering (including the Marketing
Expense Allowance referred to in (2)). See "Estimated Use of Proceeds."
(4) At such time as the Minimum Offering of $15,000,000 is achieved, the per
Share offering price will become $10. At $10 per Share, the Selling
Commission per Share will be $0.75 and the Proceeds to the Company per
Share (before deducting other expenses) will be $9.25.
(5) The Company estimates that approximately 400,000 Shares ($4,000,000 at $10
per Share) will be purchased through Shareholders' reinvestment of
distributions during the offering period. See "Plan of Distribution."
DAVID LERNER ASSOCIATES, INC.
477 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791
The date of this Prospectus is November , 1996
<PAGE>
<PAGE>
Each purchaser of Shares must certify that he has either (i) a minimum annual
gross income of $50,000 and a net worth of at least $50,000 (exclusive of equity
in home, home furnishings and personal automobiles), or (ii) a net worth
(similarly defined) of at least $100,000, or $150,000 in the case of Kentucky
and North Carolina purchasers. No purchaser of Shares may purchase Shares
costing more than 10% of the purchaser's net worth (similarly defined).
Until February , 1997, all dealers effecting transactions in the Shares,
whether or not participating in this distribution, may be required to deliver a
copy of this Prospectus. This is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offering made by this Prospectus, and, if
given or made, such other information or representations must not be relied
upon. This Prospectus does not constitute an offer in any state in which such
offer may not legally be made. The delivery of this Prospectus at any time does
not imply that information herein has not changed as of any time subsequent to
its date.
AVAILABLE INFORMATION
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission, Washington, D.C., with respect to the
Shares. This Prospectus does not contain all the information set forth in the
registration statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the Shares, reference is made to the registration statement,
including the exhibits filed as part thereof.
Apple Residential Income Trust, Inc., with principal executive offices at 306
East Main Street, Richmond, Virginia 23219, telephone number (804) 643-1761, is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, files
reports, proxy and information statements and other information with the
Commission. The reports, proxy and information statements and other information
and the Registration Statement and the exhibits and financial statement
schedules thereto filed by the Company with the Commission can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 13th Floor, 7 World Trade Center, New York,
New York 10048, and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the material can be obtained from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company files reports, proxy and
information statements and other information with the Commission electronically.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Web site is http.//www.sec.gov.
i
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION .............................................. i
SUMMARY OF THE OFFERING ............................................ 1
RISK FACTORS ....................................................... 10
Absence of Public Trading Market ................................... 10
Uncertainty Regarding Return of Investment ......................... 11
Right of Refusal May Affect Sales .................................. 11
Compensation to Affiliates is Payable Before
Distributions and Will Reduce Investors'
Return ............................................................. 11
Acquisition, Management and Other Fees and
Expenses Will Reduce Return ........................................ 11
Conflicts of Interest .............................................. 12
Prior Performance Difficulties of Certain
Affiliates ......................................................... 12
Potential Dilution of Shareholders' Interests ...................... 13
Uncertainty Regarding Revenues and Expenses ........................ 13
Environmental Problems and Liabilities ............................. 14
Competition for Properties and Tenants ............................. 14
Uninsured Losses ................................................... 15
Risk of Insufficient Cash Available for
Distribution ...................................................... 15
Lack of Operating History; No Assurance of
Success ........................................................... 15
Size of Offering -- Possible Lack of
Diversification and Lower Return .................................. 15
Delay in Investment in Real Property ............................... 15
No Specified Properties ............................................ 15
Possible Borrowing; Debt Financing May Reduce Cash
Flow and Increase Risk of Default ................................. 16
Federal Income Tax Risks ........................................... 17
Failure to Achieve or Maintain REIT Status ....................... 17
Uncertainties in and Possible Changes to the Tax
Law ............................................................. 17
Required Reliance on Management .................................... 18
Possible Changes in Investment Objectives and
Policies May Not Serve the Interests of Certain
Shareholders ...................................................... 18
Responsibilities of Directors, Advisor and
Affiliates -- Possible Inadequacy of Remedies;
Directors, Advisor and Affiliates benefit from
Exculpation and Indemnification Provisions ........................ 18
Arbitrary Share Offering Prices .................................... 19
Advisor and Affiliates May Purchase and Vote
Shares ............................................................ 19
Accumulation Restrictions .......................................... 19
Joint Venture Investments -- Risks of Conflicting
Interests and Impasse ............................................. 19
ESTIMATED USE OF PROCEEDS .......................................... 20
COMPENSATION ....................................................... 21
CONFLICTS OF INTEREST .............................................. 24
General ........................................................... 24
Transactions with Affiliates and Related Parties .................. 25
Competition by the Company with Affiliates ........................ 25
Competition for Management Services ............................... 25
Lack of Separate Representation ................................... 26
INVESTMENT OBJECTIVES AND POLICIES ................................. 26
General ........................................................... 26
Investment Criteria ............................................... 28
Types of Investments .............................................. 28
Diversification ................................................... 29
Joint Venture Investments ......................................... 29
Borrowing Policies ................................................ 30
Management of Properties .......................................... 31
Reserves .......................................................... 31
Sale and Refinancing Policies ..................................... 31
Changes in Objectives and Policies ................................ 33
DISTRIBUTION POLICY ................................................ 34
BUSINESS AND PROPERTIES ............................................ 34
Business .......................................................... 35
Legal Proceedings ................................................. 36
Regulation ........................................................ 36
Properties Owned by The Company ................................... 36
Property Acquisition and Management
Compensation ..................................................... 37
MANAGEMENT ......................................................... 37
Directors and Officers ............................................ 37
Committees of Directors ........................................... 39
Director Compensation ............................................. 39
Indemnification and Insurance ..................................... 40
Officer Compensation .............................................. 40
Stock Incentive Plans ............................................. 40
The Incentive Plan ................................................ 40
Directors' Plan ................................................... 42
Stock Option Grants ............................................... 43
THE ADVISOR AND AFFILIATES ......................................... 43
General ........................................................... 43
The Advisory Agreement ............................................ 43
Apple Realty Group, Inc. .......................................... 44
Apple Residential Management Group, Inc. .......................... 45
Price Performance of Programs Sponsored by
Affiliates of the Advisor ........................................ 45
ii
<PAGE>
PAGE
------
PRINCIPAL AND MANAGEMENT STOCKHOLDERS ............................... 47
FEDERAL INCOME TAX
CONSEQUENCES ....................................................... 48
Federal Income Taxation of the
Company ........................................................... 48
Requirements for Qualification as a REIT ........................... 49
Organizational Requirements ....................................... 49
Income Tests ...................................................... 49
Asset Tests ....................................................... 51
Annual Distribution Requirement ................................... 51
Failure to Qualify as a REIT ...................................... 52
Federal Income Taxation of the Shareholders ........................ 52
Investment by Tax-Exempt Entities .................................. 53
Foreign Investors .................................................. 54
Foreign Shareholders .............................................. 54
Backup Withholding ................................................ 55
State and Local Taxes .............................................. 55
INVESTMENT BY TAX-EXEMPT ENTITIES ................................... 55
Unrelated Business Taxable Income .................................. 55
ERISA Considerations ............................................... 55
CAPITALIZATION ...................................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION .......................................................... 57
PLAN OF DISTRIBUTION ................................................ 57
DESCRIPTION OF CAPITAL STOCK ........................................ 59
General ............................................................ 59
Repurchase of Shares and Restrictions on
Transfer .......................................................... 59
Facilities for Transferring Shares ................................. 61
Transfer Agent and Registrar ....................................... 61
SUMMARY OF ORGANIZATIONAL DOCUMENTS ................................. 61
Board of Directors ................................................. 61
Responsibility of Board of Directors, Advisor,
Officers and Employees ............................................ 62
Issuance of Securities ............................................. 63
Redemption and Restrictions on Transfer ............................ 63
Amendment .......................................................... 64
Shareholder Liability .............................................. 64
SALES LITERATURE .................................................... 64
REPORTS TO SHAREHOLDERS ............................................. 64
LEGAL OPINIONS ...................................................... 65
EXPERTS ............................................................. 65
EXPERIENCE OF PRIOR PROGRAMS ........................................ 66
GLOSSARY ............................................................ 72
INDEX TO FINANCIAL STATEMENTS OF
THE COMPANY ........................................................ F-1
SUBSCRIPTION AGREEMENT ........................................ Exhibit A
iii
<PAGE>
SUMMARY OF THE OFFERING
The following is a summary of important information contained in this
Prospectus, but is not complete and is qualified in its entirety by reference to
the entire Prospectus. Certain capitalized terms used in this Prospectus are
defined, or are defined with more particularity, under "Glossary."
The Company. Apple Residential Income Trust, Inc. (the "Company") is a
Virginia corporation which will elect to be treated for federal income tax
purposes, and intends to qualify on a continuing basis, as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). The principal executive offices of the Company are located at 306
East Main Street, Richmond, Virginia 23219 (telephone: 804-643-1761). The
Company is newly-organized and has no significant assets.
The Advisor and Affiliates. Apple Residential Advisors, Inc. (the "Advisor")
is the advisor to the Company and will provide its day-to-day management under
an agreement (the "Advisory Agreement") between the Company and the Advisor. The
advisor is newly organized and has no significant assets. The property manager
for the Company will be Apple Residential Management Group, Inc. ("ARM").
Property acquisition and disposition services will be provided to the Company by
Apple Realty Group, Inc. ("ARG"). ARM and ARG are also newly-organized and have
no significant assets.
All of the common stock of the Advisor, ARM and ARG is owned by Glade M.
Knight. However, each of the Advisor and ARM has a class of preferred stock, all
of which will be owned by Cornerstone Realty Income Trust, Inc. ("Cornerstone").
Cornerstone is a real estate investment trust, originally organized by Mr.
Knight and certain of his Affiliates, engaged in the business of acquisition and
ownership of apartment communities in the mid-Atlantic and southeastern regions
of the United States.
Each of the Advisor, ARM and ARG will have its own officers and/or employees
to provide some of the services agreed to be provided by such companies to the
Company. In addition, however, Cornerstone has agreed to make available to the
Advisor and ARM its officers and employees to consult with and assist the
officers and employees of the Advisor and ARM in providing services to the
Company.
In addition to the foregoing, and as discussed under "Investment Objectives
and Policies -- Sale and Refinancing Policies," the Company has granted to
Cornerstone a right of first refusal to purchase properties owned by the Company
and proposed for sale, and a right of first refusal to become the acquiring
party if the Company proposes any disposition or transfer of the Company or
substantially all of its assets, stock or business (whether through sale,
exchange, merger, consolidation, lease, share exchange or otherwise).
Risk Factors. An investment in Shares involves certain risks (described more
fully under "Risk Factors"), including the following:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Accordingly, Shareholders may be required to hold their
Shares for an indefinite length of time. Shareholders may be unable to resell
their shares at all, or may be able to resell them only at a substantial
discount from the purchase price.
o Because the Company has no obligation and no specific plan to list the
Shares or sell its properties at any particular time, investors may not receive
a return of their investment for an indefinite period, if ever.
o Cornerstone's right of first refusal to purchase properties or other assets
of the Company may tend to decrease the price the Company is able to obtain for
its assets, since third parties may be reluctant to negotiate a purchase
transaction knowing that Cornerstone can substitute itself as purchaser. The
presence of the right of first refusal may, as a practical matter, result in the
Company selling assets to Cornerstone at a price below that which it could
obtain in a freely-negotiated sale to a third party.
1
<PAGE>
o The Advisor and its Affiliates will receive substantial compensation from
the Company. Such compensation has been established without the benefit of
arm's-length negotiation. See "Compensation." The payment of compensation to the
Advisor, its Affiliates and others from proceeds of the offering and property
revenues will reduce the amount of proceeds available for investment in
properties, or the cash available for distributions, and will therefore tend to
reduce the return on Shareholders' investments. In particular, the payment of
such compensation means that the investment return to Shareholders from the
Company will likely be less than could be obtained by a Shareholder's direct
acquisition and ownership of the same properties. The compensation is generally
payable regardless of Company profitability, and is generally payable prior to,
and without regard to whether the Company has sufficient cash for,
distributions.
o The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. Generally, such conflicts arise
because certain Directors and officers of the Company (i) are also principals in
or have relationships with other companies which will enter into contracts with
the Company, and (ii) are, and will in the future be, principals in other
programs which may compete with the Company. While certain policies and
procedures, described under "Conflicts of Interest," will be implemented to
ameliorate potential conflicts of interest, certain conflicts of interest cannot
be completely ameliorated. To the extent there are conflicts of interest, the
Advisor or its Affiliates may be inclined to favor there own interests over
those of the Company. The principal conflict of interest currently involving the
Company is that Glade M. Knight, who is a Director, Chairman of the Board and
the President of the Company, also owns the Advisor, Apple Residential
Management Group, Inc. and Apple Realty Group, Inc., all of which provide
services to the Company in exchange for compensation. The business and affairs
of the Company are controlled by the Company's Board of Directors, a majority of
whom are not Affiliated with the Advisor and its Affiliates. Prospective
Shareholders must rely upon the Board of Directors to supervise the relationship
between the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, to ensure that any adverse effect of any potential conflict of
interest is minimized. Prospective Shareholders should note, however, that Mr.
Knight could have influence on the Board of Directors disproportionate to his
voting power because he is engaged on a full-time basis in the operation of the
Company and its properties.
o Certain private partnerships sponsored by Affiliates of the Advisor have
experienced certain adverse business developments (bankruptcy reorganizations
and/or property foreclosures). See "The Advisor -- Prior Performance of Programs
Sponsored by Affiliates of the Advisor."
o Purchasers of the Shares offered hereby may experience dilution in the net
tangible book value of the Shares from the public offering price. In particular,
Shareholders will experience dilution if Glade M. Knight converts his Class B
Convertible Shares into Common Shares. See "Principal and Management
Stockholders."
o The investment in residential apartment communities (and other real
property, if any) involves many potential risks, including high vacancy rates,
competition for tenants, expenses (including those related to taxes, insurance
and property maintenance) exceeding income (which could necessitate borrowing to
fund deficits), on-site environmental problems, and possible uninsurable losses.
There can be no assurance that the Company's properties will operate profitably,
appreciate in value or generate cash for distribution.
o If the Company were to incur significant unanticipated cash expenditures,
the amount of cash available for distribution would decline. There can be no
assurance that the Company will maintain any specific level of distributions to
Shareholders.
o Neither the Company nor the Advisor has any operating history. The Company
may not operate successfully or achieve its objectives.
o There can be no assurance the Company will achieve significant
diversification in the properties it acquires. The fewer properties purchased,
the greater the risk that the Company's profitability will be affected by a
single unproductive property.
2
<PAGE>
o The Company may experience delays in finding suitable properties to
acquire, which could adversely impact the Company's profitability.
o The Company has not identified any properties to be acquired with the
proceeds from this offering of the Shares. Accordingly, prospective investors
may not have the opportunity to evaluate the assets to be acquired with the
proceeds of the offering before purchasing Shares.
o Although not anticipated, except on the limited interim basis described
under "Business and Properties-Properties Owned by the Company," borrowing by
the Company is permitted, subject to certain limitations. Company borrowing
would entail additional risks, including the risks that required principal and
interest payments would reduce distributions to Shareholders, and that the
Company could lose properties securing borrowings through foreclosure.
o The ability of the Company to operate as planned will depend upon its
continuing to qualify as a "real estate investment trust" for federal income tax
purposes. If the Internal Revenue Service (the "Service") were to determine that
the Company failed to meet the requirements for REIT status or if the Company
fails to maintain REIT status on a continuing basis, it will not be able to
achieve its investment objectives.
o Shareholders will not have any active participation in the management of
the Company and must rely on the management expertise provided by the Board of
Directors, the Advisor and its Affiliates. In such regard, the Board of
Directors has significant discretion to modify the investment objectives and
policies of the Company. Further, the Directors and officers of the Company and
the Advisor will benefit from certain provisions limiting their liability and
providing them with certain rights to indemnification with respect to actions
taken by them on behalf of the Company.
o The per-Share offering prices have been established arbitrarily and may
bear no relation to the actual value of the Company or the Shares.
o In order to help assure continued REIT qualification, the Company's Bylaws
generally prohibit ownership of more than 9.8% of the Company's outstanding
Shares by one investor. This provision may have the effect of precluding or
making more difficult changes in control of the Company, even if such changes
might otherwise be beneficial.
The Offering. The Shares are offered at $9 per Share until the Minimum
Offering of $15,000,000 in Shares is achieved. Thereafter, the Shares will be
offered at $10 per Share.
The offering made by this Prospectus will continue until all Common Shares of
the Company (the "Shares" or "Common Shares") offered under this Prospectus have
been sold or until one year from the date of this Prospectus, unless the Company
terminates the offering at an earlier date or extends it beyond such date for up
to an additional year. In some states, extension of the offering may not be
allowed or may be allowed only upon certain conditions. Closings will occur from
time to time during the offering period. The Shares are being offered through
David Lerner Associates, Inc. and other selected broker-dealers. All of the
Shares offered hereby are being sold by the Company.
If at least $15,000,000 in Shares (the "Minimum Offering") have not been sold
no later than one year after the date of this Prospectus, the offering will
terminate and all funds theretofore deposited by investors into the escrow
account (the "Escrow Account"), with First Union National Bank of North Carolina
as escrow agent, will be refunded promptly to investors, with any interest
earned thereon (less withholding of taxes in respect to payment of interest, if
applicable). A closing will occur after the Minimum Offering is achieved (the
"Initial Closing"). Thereafter, closings will occur from time to time during the
offering period. After the Minimum Offering amount is sold, there is no
requirement for an Escrow Account, and if there is an Escrow Account, there is
no limitation on the party which may act as escrow agent.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been
3
<PAGE>
accepted by a duly authorized representative of the Company. The Company will
either accept or reject each subscription within four business days from the
receipt of the subscription by the Managing Dealer or a Selected Dealer. The
Company intends to cause to be paid from any escrow account each investor's
share of net interest on escrowed funds, whether or not the investor's
subscription for Shares is accepted. The Company reserves the right to adopt
reasonable simplifying conventions or assumptions in determining each investor's
share of such net interest. Investors' subscriptions will be revocable by
written notice delivered to the escrow agent at least five days before the
applicable closing. Subject to the foregoing, an investor's subscription funds
may remain in escrow for an indefinite period of time.
The minimum investment for investors is $5,000 (approximately 555.56 Shares
at $9 per Share, and 500 Shares at $10 per Share), except that Qualified Plans
(defined as qualified employee pension or profit-sharing trusts, Keogh Plan
trusts and IRAs) may purchase a minimum of $2,000 (approximately 222.22 Shares
at $9 per Share and 200 Shares at $10 per Share). The record holders of the
Company's Shares will be the "Shareholders" of the Company.
As described under "Plan of Distribution," it is expected that investors
purchasing Shares in this offering will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." The Company estimates that approximately 400,000
Shares ($4,000,000 at $10 per Share) offered through this Prospectus will be
purchased through Shareholders' reinvestment of distributions in Shares pursuant
to the Additional Share Option, but the number of Shares which will be so
purchased cannot be determined at this time. Shares purchased pursuant to the
Additional Share Option will be at the same price per Share and on the same
terms applicable generally to subscriptions in this offering effective at the
time of reinvestment. Shareholders electing the Additional Share Option will be
taxed as if they received the reinvested distributions. See "Plan of
Distribution."
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or other equity or debt securities of the Company, on such
terms and for such consideration as it may deem advisable. Without limiting the
generality of the foregoing, the Board of Directors may, in its sole discretion,
issue Shares or other equity or debt securities of the Company, (1) to persons
from whom the Company purchases property, as part or all of the purchase price
of the property, or (2) to the Advisor or its Affiliates in lieu of cash
payments required under the Advisory Agreement or other contract or obligation.
The Board of Directors, in its sole discretion, may determine the value of any
Shares or other equity or debt securities issued in consideration of property or
services provided, or to be provided, to the Company, except that while Shares
are offered by the Company to the public, the public offering price of such
Shares shall be deemed to be their value. See "Summary of Organizational
Documents -- Issuance of Securities."
Affiliates of the Advisor. The term "Affiliate" used in this Prospectus,
which term is defined in the Glossary, refers generally to a person or entity
which is related to another specified person or entity through common control,
through significant (10% or more) equity ownership, or by serving as an officer
or director of (or in a similar capacity with) such specified entity. Affiliates
of the Advisor include Apple Realty Group, Inc., Apple Residential Management
Group, Inc. and Glade M. Knight, who owns all of the outstanding common stock of
the Advisor, Apple Realty Group, Inc. and Apple Residential Management Group,
Inc.
Glade M. Knight is a Director, Chairman of the Board and President of the
Company. Mr. Knight was also principally responsible for organizing Cornerstone
Realty Income Trust, Inc., and is a Director, Chairman of the Board, President
and shareholder of Cornerstone Realty Income Trust, Inc.
4
<PAGE>
The following diagram shows the relationship between the Company, on the one
hand, and the Advisor, certain Affiliates of the Advisor, and Cornerstorne
Realty Income Trust, Inc., on the other hand.
Shareholders
Common
Shares
The Company
(1) (2) (3)
Apple Residential Apple Residential Apple Realty
Advisors, Inc. Management Group, Inc. Group, Inc.
common preferred common preferred common
stock stock stock stock stock
Glade M. Cornerstone Glade M. Cornerstone Glade M.
Knight Realty Income Knight Realty Income Knight
Trust, Inc. Trust, Inc.
(1) Apple Residential Advisors, Inc. will be the Advisor to the Company under
an Advisory Agreement. See "The Advisor and Affiliates--The Advisory
Agreement."
(2) Apple Residential Management Group, Inc. will provide property management
services to the Company. See "Investment Objectives and
Policies--Management of Properties."
(3) Apple Realty Group, Inc. will provide to the Company services pertaining to
property acquisition and disposition. See "The Advisor and
Affiliates--Apple Realty Group, Inc."
5
<PAGE>
Estimated Use of Proceeds. The proceeds of the offering will be used (i) to
pay expenses and fees of selling the Shares; (ii) to invest in properties; (iii)
to pay expenses and fees associated with acquiring properties; and (iv) to
establish a working capital reserve. It is estimated that, if the Minimum
Offering is sold, the expenses and fees described in clauses (i) and (iii) of
the preceding sentence will aggregate 15% of the gross offering proceeds, that
the amount available to invest in properties will be 84.5% of the gross offering
proceeds, after establishing a working capital reserve equal to 0.5% of gross
offering proceeds. See "Estimated Use of Proceeds."
Compensation. The officers of the Company are not paid salaries by the
Company. Such officers are officers of the Advisor and its Affiliates, which
entities are entitled to certain fees for services rendered by them to the
Company. Thus, the officers of the Company are, in essence, compensated by the
Advisor or its Affiliates. Compensation and reimbursements payable to the
Advisor and its Affiliates are listed below. See "Compensation." Except as
indicated, the maximum dollar amount of such compensation and reimbursements is
not now determinable.
o The Advisor is entitled to receive an annual Asset Management Fee, based
upon the ratio of Funds from Operations to Total Contributions (such ratio is
called the "Return Ratio"), of between 0.1% and 0.25% of Total Contributions.
The percentage used to determine the Asset Management Fee will be 0.1% if the
Return Ratio for the preceding calendar quarter is 6% or less, 0.15% if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%, and 0.25% if the Return Ratio for the preceding calendar quarter is
more than 8%. ("Funds from Operations" is defined as net income (computed in
accordance with generally accepted accounting principles) excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation of real
property, and after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any. "Total Contributions" is
defined as the gross proceeds from the sale of the Shares.) See "The Advisor and
Affiliates -- The Advisory Agreement."
o Assuming the Minimum Offering amount ($15,000,000) is sold, the annual
Asset Management Fee would be between $15,000 and $37,500. Assuming the Maximum
Offering amount ($250,000,000) is sold, the annual Asset Management Fee would be
between $250,000 and $625,000. The Company believes that Funds from Operations
is an appropriate measure to use in determining the fees to be paid to the
Advisor because it ties compensation to an indicator of performance, namely an
industry-recognized measure of funds available from operations. "Funds from
Operations" is not the same as cash generated from operating activities in
accordance with generally accepted accounting principles, and, therefore, should
not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity.
o Apple Residential Management Group, Inc., an Affiliate of the Advisor, will
manage the Company's properties and will receive a property management fee equal
to 5% of the monthly gross revenues of the properties. In addition, the Company
will reimburse Apple Residential Management Group, Inc. for its expenses,
including salaries and related overhead expenses, associated with accounting and
financial reporting services rendered by Apple Residential Management Group,
Inc. under the property management agreements.
o Apple Realty Group, Inc., an Affiliate of the Advisor, will serve as the
real estate broker in connection with the Company's purchases and sales of
properties, and will receive fees from the Company of up to 2% of the gross
purchase price of each property and up to 2% of the gross sale prices. If the
person from whom the Company purchases or to whom the Company sells a property
pays any fee to Apple Realty Group, Inc., such amount will decrease the amount
of the Company's obligation to Apple Realty Group Inc. Apple Realty Group, Inc.
will not be entitled to any disposition fee in connection with a sale of a
property by the Company to Cornerstone Realty Income Trust, Inc. or any
Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs in
marketing such property. See "Investment Objectives and Policies - Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
o The Advisor and its Affiliates will be entitled to reimbursement for actual
costs incurred by them in connection with the offering of the Shares and the
operation of the Company.
6
<PAGE>
o The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to payment therefor.
Such conditions generally include the requirement that the transaction be
approved by the affirmative vote of a majority of the "Independent Directors,"
who are those Directors who are not Affiliated with the Advisor. There are
currently no plans for the providing of material services or property of the
type described in this paragraph.
Investment Objectives and Policies; Liquidity. The principal investment
objectives of the Company are to: (i) preserve and protect the capital of the
Company; (ii) provide quarterly distributions to the Shareholders, a portion of
which may constitute a nontaxable return of capital (rather than current taxable
income); and (iii) provide long-term capital appreciation in the value of the
Company's investments. The Company does not intend to make distributions from
borrowings or refinancings.
The Company anticipates that achievement of these objectives will enable it
to provide Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve these objectives. Attainment
of the objectives is contingent in part upon the Company's ability to acquire
suitable properties. See "Investment Objectives and Policies -- General."
The Company plans to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. Diversity in
geographic location will be a consideration for investment. See "Investment
Objectives and Policies -- Diversification."
The Company's management believes there is substantial opportunity for growth
from acquisitions of multi-family properties in Texas and the southwestern
region of the United States. Management believes that the current real estate
environment is conducive to advantageous acquisitions of existing multi-family
properties that meet the Company's investment criteria. In many instances, such
acquisitions may be made for less than the cost of new construction.
Prior to this offering there has been no public market for the Shares, and
initially such a market is not expected to develop. The Company does not plan to
cause the Shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While the Company, acting through its Board of Directors, may cause the
Shares to be so listed or quoted if the Board of Directors determines such
action to be prudent, there can be no assurance that such event will ever occur.
Prospective Shareholders should view the Shares as illiquid and must be prepared
to hold their investment for an indefinite length of time. Currently, the
Company expects that within approximately three (3) years from Initial Closing,
it will use its best efforts either (i) to cause the Shares to be listed on a
national securities exchange or quoted on the NASDAQ National Market System or
(ii) to cause the Company to dispose of substantially all of its properties in a
manner which will permit distributions to Shareholders of cash or marketable
securities. The taking of either type of action would be conditioned on the
Board of Directors determining such action to be prudent and in the best
interests of the Shareholders, and would be intended to provide Shareholders
with liquidity either by initiating the development of a market for the Shares
or by disposing of properties and distributing to Shareholders cash or other
securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period. See " Risk Factors --
Absence of Public Trading Market."
The Company intends to purchase its properties either on an all-cash basis or
using the limited interim borrowing described under "Business and Properties -
Properties Owned by the Company." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Shares and thereafter to hold its
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, the Company has the right, subject to the approval of the Board of
Directors, to borrow. See "Investment Objectives and Policies -- Borrowing
Policies." Subject to this limitation, the investment policies of the Company do
not restrict the Company to any one method
7
<PAGE>
of financing its operations. Therefore, it may purchase investment properties
subject to financing or mortgages existing before the date of purchase, use
either seller or new institutional financing or borrow from the Advisor or its
Affiliates. The Company's Bylaws prohibit the Company from incurring debt
(secured or unsecured) if such debt would result in aggregate debt exceeding
100% of "Net Assets" (defined generally to mean assets at cost), before
subtracting liabilities, unless the excess borrowing is approved by a majority
of the Independent Directors and disclosed to the Shareholders as required by
the Bylaws. The Bylaws also prohibit the Company from allowing aggregate
borrowings to exceed 50% of the Company's "Adjusted Net Asset Value" (defined
generally to mean assets at fair market value), before subtracting liabilities,
subject to the same exception. In addition, the Bylaws provide that the
aggregate borrowings of the Company must be reasonable in relation to the Net
Assets of the Company and must be reviewed quarterly by the Directors.
The investment return to Shareholders from the Company will likely be less
than could be obtained by a Shareholder's direct acquisition and ownership of
the same properties because (i) the Company will pay, partly to Affiliates of
Directors, substantial "front-end" fees (that is, fees paid directly from funds
received from sales of the Shares) to sell the Shares and acquire properties,
which will reduce the net proceeds available for investment in properties; and
(ii) the Company will likely pay, principally to the Advisor and its Affiliates,
substantial management and related compensation (which might be greater than the
fees for property management which a direct owner would incur), which will
reduce funds available for distribution to Shareholders. Thus, for example, if
only 84.5% of the gross proceeds of the offering are available for investment in
properties, revenues may be reduced by 15.5% compared to revenues in the absence
of such front-end fees. Similarly, any profit from appreciation in values of
properties could be commensurately reduced to the extent gross offering proceeds
are used to pay front-end fees.
Distribution Policy. The Company's policy and objective will be to pay to
Shareholders regular distributions. The timing and amounts of distributions will
be determined by the Board of Directors, acting in its sole discretion.
Business and Properties. The Company has been established to provide
Shareholders with a professionally managed portfolio of real estate equity
interests consisting primarily of existing residential apartment communities in
Texas and the southwestern region of the United States which have the potential
for current cash flow and capital appreciation.
Federal Income Tax Consequences. The Company will elect to be treated, and
intends to qualify on a continuing basis, as a REIT. The Company anticipates
that it will qualify as a REIT throughout its existence, but there can be no
assurance that the Company will so qualify. As a REIT, the Company will be
allowed a deduction for the amount of distributions paid to its Shareholders,
thereby subjecting the distributed net income of the Company to taxation only at
the Shareholder level. The Company's continued qualification as a REIT will
depend upon its compliance with numerous requirements, including requirements as
to the nature of its income. For a discussion of the risk that the Company may
fail to meet one or more of the requirements for REIT status, see "Risk Factors
- -- Federal Income Tax Risks." Each year, the Company will send to each
Shareholder a Form 1099 that will report the amount of income taxable to such
Shareholder for the preceding year.
As a REIT, the Company will deduct from its taxable income amounts
distributed to Shareholders and, therefore, will pay no tax on amounts
distributed to Shareholders. Distributions generally will be considered taxable
dividends to Shareholders to the extent of the Company's earnings and profits,
and, to such extent, will be considered portfolio rather than passive income for
purposes of Shareholders' use of investment expense deductions and passive
losses. Any distributions in excess of the Company's earnings and profits will
first reduce a Shareholder's basis in his or her Shares and, to the extent of
such reduction, will not be taxable to such Shareholder. Any distributions in
excess of both the Company's earnings and profits and the Shareholder's basis
will generally be treated as capital gain. Shareholders who are corporations
will not be eligible to claim the dividends-received deduction with respect to
any distributions paid by the Company. See "Federal Income Tax Consequences."
8
<PAGE>
Description of Capital Stock. The authorized capital stock of the Company
consists of 50,000,000 Common Shares, no par value and 200,000 Class B
Convertible Shares, no par value. As of the date of this Prospectus, there were
10 Common Shares of the Company issued and outstanding. All 200,000 authorized
Class B Convertible Shares are held by Glade M. Knight. See "Principal and
Management Stockholders."
The Common Shares will have the sole voting power to elect Directors. Holders
of the outstanding Common Shares will be entitled to one vote per Share on all
matters submitted to a vote of the Shareholders. In addition, the holders of the
Common Shares will be entitled to participate equally in distributions paid in
respect of the Shares if, when and as declared by the Board of Directors and in
distributions of the net assets of the Company upon its liquidation, dissolution
or winding up.
9
<PAGE>
RISK FACTORS
Investment in the Shares involves various risks. No assurance can be given
that the investment objectives of the Company will be achieved. In addition to
the information set forth elsewhere in this Prospectus, investors should
consider the following risks before making a decision to purchase the Shares.
ABSENCE OF PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Shares, and
initially such a market is not expected to develop. The Company does not plan to
cause the Shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While the Company, acting through its Board of Directors, may cause the
Shares to be so listed or quoted if the Board of Directors determines such
action to be prudent, there can be no assurance that such event will ever occur.
Prospective Shareholders should view the Shares as illiquid and must be prepared
to hold their investment for an indefinite length of time. Shareholders may be
unable to resell their Shares at all, or may be able to resell them only at a
substantial discount from the purchase price. Thus, the purchase of Shares
should be considered a long-term investment.
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
Many factors will bear on whether any such actions are prudent and feasible.
The feasibility of causing the Shares to be listed or quoted will depend upon
many factors, many of which are not presently determinable or are not within the
control of the Company. Such factors would include general economic and market
conditions, the Company's satisfaction of the legal listing or quotation
requirements in effect at such time, the economic performance of the Company
during the interim period, and the Company's financial condition at the time
listing or quotation is considered. In addition, the size of the Company (in
terms of its total assets and the diversification of its property portfolio),
which will reflect the number of Shares sold in this offering, will bear upon
the feasibility of listing or quoting the Shares for trading. In general, a
smaller Company size may make it less feasible to cause the listing or quotation
of the Shares.
Cornerstone Realty Income Trust, Inc., a REIT organized by Affiliates of the
Advisor, completed the initial closing of the public sale of its common shares
in May, 1993. As of October 1, 1996, such common shares had not been listed or
quoted on any national securities exchange, NASDAQ, or on any other established
market, although it is expected that such common shares will be listed on an
exchange by the end of 1996.
The feasibility of disposing of the Company's properties will also depend on
many factors, many of which are not presently determinable or are not within
control of the Company. General economic and market conditions will affect the
demand, if any, for the Company's properties and the prices which might be
offered for them. Adverse developments affecting a market or a Company property
after the Company's acquisition of a property may materially affect its market
value. Even if some properties are attractive to prospective purchasers, the
Company may determine that it is imprudent to dispose of only a portion of its
portfolio. Conversely, the larger the Company is, the less likely it is that it
will be able to dispose of substantially all of its properties within a
relatively short period of time. If the Company receives marketable securities
or other property, rather than cash, for the sale of its properties, it and any
subsequent holders of such property will bear the risk of decrease in the value
of such property.
10
<PAGE>
UNCERTAINTY REGARDING RETURN OF INVESTMENT
The Company is under no obligation and has no specific plans to list the
Shares on any exchange or in any market or to sell its properties at any
particular time. Since a Shareholder would generally recoup his original
investment, if at all, only through a sale of his Shares or receipt of
distributions from the Company's sale of its properties, a Shareholder may not
receive a return of his investment for an indefinite period, if ever.
As discussed below, under "Risk of Insufficient Cash Available for
Distribution," there is also no assurance that the Company will maintain any
specific level of distributions from operations to Shareholders.
RIGHT OF REFUSAL MAY AFFECT SALES
The Company has granted to Cornerstone Realty Income Trust, Inc. a right of
first refusal to purchase any property proposed for sale by the Company and a
right of first refusal to become the acquiring party in any transaction proposed
by the Company which would involve the sale or disposition of the Company or
substantially all of its assets, business or stock (whether such transaction is
structured as a sale, exchange, merger, consolidation, lease, share exchange or
otherwise). See "Investment Objectives and Policies -- Sale and Refinancing
Policies." Further, under its agreement with Cornerstone Realty Income Trust,
Inc., if the Company defaults on its obligation to grant to Cornerstone Realty
Income Trust, Inc. its right of first refusal to acquire a property or to become
the acquiring party in any such proposed transaction, the Company will be
obligated to pay to Cornerstone Realty Income Trust, Inc. as liquidated and
agreed-upon damages cash in the amount of 3% of the aggregate consideration
agreed to be paid for the property, assets, stock or business by any third party
in the transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price.
The presence of the right of first refusal held by Cornerstone Realty Income
Trust, Inc. with respect to various sale or disposition transactions which may
be sought or proposed by the Company may materially hamper the Company's ability
to obtain the highest possible price for its properties, assets, stock or
business from a third party. A third party may be reluctant to engage in
negotiations and due diligence with respect to a possible purchase or
acquisition transaction knowing that Cornerstone Realty Income Trust, Inc. can
substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although any sale of assets by the Company to
Cornerstone Realty Income Trust, Inc. will require the approval of a majority of
the Independent Directors of the Company, and such requirement is intended to
overcome any potential conflict of interest which might be involved in any such
transaction, there can be no assurance that a sale by the Company to Cornerstone
Realty Income Trust, Inc. would be on terms as favorable as a sale by the
Company to a third party, since there may be no alternative to selling assets to
Cornerstone Realty Income Trust, Inc.
COMPENSATION TO AFFILIATES IS PAYABLE BEFORE DISTRIBUTIONS AND WILL REDUCE
INVESTORS' RETURN
The Advisor and its Affiliates will receive substantial compensation from the
Company in exchange for various services they have agreed to render to the
Company. See "Compensation." This compensation has been established without the
benefit of arms-length negotiation, and the payment of such compensation from
proceeds of the offering and property revenues will reduce the amount of
proceeds available for investment in properties, or the cash available for
distribution, and will therefore tend to reduce the return on Shareholders'
investments. In addition, the compensation is generally payable regardless of
Company profitability, and is generally payable prior to, and without regard to
whether the Company has sufficient cash for distributions.
ACQUISITION, MANAGEMENT AND OTHER FEES AND EXPENSES WILL REDUCE RETURN
The investment return to Shareholders likely will be less than could be
obtained by a Shareholder's direct acquisition and ownership of the same
properties because (i) the Company will pay, principally to Affiliates of
Directors, substantial "front-end" fees and expenses to sell the Shares, and
acquire properties,
11
<PAGE>
which will reduce the net proceeds available for investment in properties; and
(ii) the Company will pay, principally to the Advisor and its Affiliates,
substantial management and related compensation (which might be greater than the
fees for property management that a direct owner would incur), which will reduce
cash available for distribution to Shareholder. Thus, for example, if only 84.5%
of the gross proceeds of the offering are available for investment in properties
revenues may be reduced by 15.5% compared to revenues in the absence of such
front-end fees. Similarly, any profit from appreciation in values of properties
could be commensurately reduced to the extent gross offering proceeds are used
to pay front-end fees.
CONFLICTS OF INTEREST
The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. See "Conflicts of Interest."
Generally, such conflicts of interest arise because certain Directors and
officers of the Company (i) are also principals in other companies which will
enter into contracts with the Company (principally for asset management and
property management, acquisition and disposition services), and (ii) are, and
will in the future be, principals in other real estate investment transactions
or programs which may compete with the Company. Other possible transactions
involving conflicts of interest would include the Company's acquisition of
properties from the Advisor or an Affiliate (which is permitted under the
conditions summarized in "Investment Objectives and Policies -- Investment
Criteria"), and the Company borrowing from the Advisor or an Affiliate (which is
permitted under the conditions summarized in "Investment Objectives and Policies
- -- Borrowing Policies").
The differing types of compensation payable to the Advisor and its Affiliates
present different potential conflicts of interest for such entities. Apple
Realty Group, Inc. is paid an acquisition fee in connection with each
acquisition of a property by the Company, and a disposition fee in connection
with certain property dispositions. As a consequence, Apple Realty Group, Inc.
may have an incentive to recommend the purchase or disposition of a property, in
order to receive a fee, rather than based upon the best interests of the
Company. Apple Residential Management Group, Inc. receives a property management
fee which is a percentage of gross revenues from each property owned by the
Company. This entity could, therefore, have an incentive to recommend that the
Company retain a property, rather than dispose of it, so that Apple Residential
Management Group, Inc. can continue to receive its property management
compensation. Apple Residential Advisors, Inc. receives a fee which is a
percentage of the total consideration received by the company with sale of
Shares and therefore could have an incentive, from a compensation standpoint, to
close the sales of Shares as rapidly as possible.
As discussed under "Conflicts of Interest," the Company has implemented
certain policies and procedures designed to eliminate or ameliorate the effects
of potential conflicts of interest. For example, the business and affairs of the
Company, including, without limitation, all of the relationships between the
Company, on the one hand, and the Advisor and its Affiliates, on the other hand,
are under the supervision and control of the Company's Board of Directors, a
majority of whom is not Affiliated with the Advisor or its Affiliates. In
evaluating the significance of a majority of the Board of Directors being
unaffiliated, prospective Shareholders should bear in mind that Mr. Knight may
have an influence on the Board of Directors disproportionate in relation to his
voting power, since he is engaged day-to-day in the management of the Company
and its properties. In general, if a person with responsibilities both to the
Company and to an entity contracting with the Company, or both to the Company
and to a program in competition with the Company, were to resolve a potential
conflict of interest in such dual capacity against the interest of the Company,
the operation of the Company could be adversely affected. However, in light of
the policies and procedures implemented to ameliorate the effects of potential
conflicts of interest, the Advisor and its Affiliates do not believe that the
potential conflicts of interest will have a material adverse effect upon the
Company's ability to realize its investment objectives, although there can be no
assurance to this effect.
PRIOR PERFORMANCE DIFFICULTIES OF CERTAIN AFFILIATES
Certain private partnerships previously organized by Affiliates of the
Advisor have experienced certain operating difficulties. These operating
difficulties led to (i) filings by certain partnerships for reorganization under
Chapter 11 of the United States Bankruptcy Code, some of which filings ended in
12
<PAGE>
foreclosures on partnership property, and (ii) certain other partnerships
consenting to negotiated foreclosures on their properties. Each such partnership
owned a single property, and the adverse business development affecting the
partnership therefore resulted in such partnership ceasing all cash
distributions to investors. See "The Advisor and Affiliates -- Prior Performance
of Programs Sponsored by Affiliates of the Advisor." The Advisor believes that
all of the investment vehicles experiencing such difficulties had investment
objectives and policies dissimilar to those of the Company, and that their
difficulties are attributable to a combination of factors (principally high
leverage, changes in tax laws, a general downturn in economic conditions and the
unavailability of favorable financing) which are not expected to be applicable
to the Company. In particular, the Company expects to acquire its properties on
an all-cash basis. However, prospective investors should consider the experience
of the Advisor and its Affiliates in evaluating an investment in the Company.
POTENTIAL DILUTION OF SHAREHOLDERS' INTERESTS
Glade M. Knight, who is a Director, Chairman of the Board and President of
the Company, holds certain Class B Convertible Shares which are convertible into
Common Shares, as described under "Principal and Management Stockholders." The
conversion by Mr. Knight of such Class B Convertible Shares into Common Shares
will result in dilution of the Shareholders' interests.
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or to raise capital through the issuance of options, warrants
and other rights, on such terms and for such consideration as the Board of
Directors in its sole discretion may determine. See "Summary of Organizational
Documents -- Issuance of Securities." Any such issuance could result in dilution
of the equity of the Shareholders. Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases property, as part or all of the purchase price of the
property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans." The effect of the
exercise of such options could be to dilute the value of the Shareholders'
investments to the extent of any difference between the exercise price of an
option and the value of the Shares purchased at the time of the exercise of the
option.
In addition, the Company expressly reserves the right to implement a dividend
reinvestment plan involving the issuance of additional Shares by the Company, at
an issue price determined by the Board of Directors.
UNCERTAINTY REGARDING REVENUES AND EXPENSES
The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and property operating expenses, which in
turn will be affected by property selection, property and Company management,
property location, and local and general economic conditions. The Company's
investment in residential apartment communities involves many potential risks
bearing on potential revenues and expenses, including high vacancy rates,
competition for tenants, expenses (including those related to taxes, insurance
and property maintenance) exceeding income (which could necessitate borrowing to
fund deficits), on-site environmental problems, and possible uninsurable losses.
Although the Company and the Advisor and its Affiliates will seek to minimize
the effect of factors such as these, some of such factors are beyond the control
of such persons. In addition, to the extent such factors are within the control
of such persons, the skill and ability of such persons to select, maintain and
operate such properties will largely determine whether the Company will operate
profitably. There can be no assurance that the Company's properties will operate
profitably, appreciate in value or generate cash for distribution.
13
<PAGE>
Equity real estate investments tend to limit the ability of the Company to
vary its portfolio promptly in response to changing economic, financial and
investment conditions. These investments will be subject to risks such as
adverse changes in general economic conditions or local conditions (for example,
excessive building resulting in an oversupply of available space, or a decrease
in employment, reducing the demand for real estate) as well as other factors
affecting real estate values (for example, increasing labor, materials and
energy costs, the attractiveness of the properties to tenants and the
attractiveness of the surrounding area). Investments will also be subject to
such risks as the inability of the Company to provide for adequate maintenance
of its properties. If the Company found it necessary to borrow, its operations
could be affected adversely by factors such as increased interest rates and
reduced availability of debt financing. However, to the extent that the
Company's investments are made on an all-cash basis, the risks relating to
interest rates and availability of long-term financing are not present.
The Company's investments will be primarily in existing residential apartment
communities. Some of the proceeds may be allocated to the repair and renovation
of such apartment communities. The Company's real estate equity investments will
be subject to the risk of inability to attract or retain tenants, and to the
risk of a decline in rental income as a result of adverse changes in economic
conditions, local real estate markets, or other factors. Also, certain
expenditures associated with equity investments (such as real estate taxes, the
costs of maintenance, renovations or improvements, insurance and utility costs)
are not necessarily decreased by events adversely affecting the Company's income
from those investments. Should any such events occur, the Company's cash
distributions to Shareholders may be impaired.
While it is the policy of the Company primarily to buy income-producing
properties at a price equal to or below their appraised values and below the
replacement cost of similar structures, there is no assurance that any Company
properties will operate at a profit, will appreciate in value, or will ever be
sold at a profit, or that distributions will be paid by the Company. The
marketability and value of any such properties will depend upon many factors
beyond the control of the Board of Directors and the Advisor.
If the Company does not operate profitably and exhausts its reserves, it
might be required to borrow funds or liquidate some of its investments to pay
fixed expenses of the Company which are not reduced by events which reduce
income.
ENVIRONMENTAL PROBLEMS AND LIABILITIES
While the Company intends to exercise due diligence by securing a report from
a qualified environmental engineer prior to the acquisition of any property,
there can be no assurance that hazardous substances or wastes will not be
discovered on investment properties subsequent to acquisition by the Company.
Federal law imposes liability on any owner of property or predecessor in title
for the presence on the premises of improperly disposed hazardous substances.
This liability is without regard to fault for or knowledge of the presence of
such substances and may be imposed jointly and severally upon all succeeding
landowners from the date of the first improper disposal. The laws of the states
in which the Company may acquire properties may have additional requirements. If
it is ever determined that hazardous substances are present on a property, the
Company could be required to pay all costs of any necessary cleanup work,
although under certain circumstances claims against other responsible parties
could be made by the Company.
COMPETITION FOR PROPERTIES AND TENANTS
The results of operations of the Company will depend upon the availability of
suitable opportunities for investment of its funds, which in turn depends to a
large extent on the type of investment involved, the condition of the financial
markets, the nature and geographical location of the property, and other
factors, none of which can be predicted with certainty. The Company will be
competing for acceptable investments with other financial institutions,
including insurance companies, pension funds and other institutions, real estate
investment trusts, and limited partnerships that have investment objectives
similar to those of the Company. Many of these competitors have greater
resources than the Company, and may have greater experience than the Board of
Directors, the Advisor and its Affiliates.
14
<PAGE>
In addition, when the Company owns a particular property it will be competing
for tenants with many other properties in the same market. Various competing
properties may be newer than the Company's property, or may offer superior
amenities, a superior location, perceived superior management or other
advantages over the Company's property. The adverse impact of competition may be
greater during times of local or general economic downturns. The general effect
of such competition may be a decrease in the occupancy rate at Company
properties, a decrease in rental rates at Company properties, or both, which in
turn will mean a decrease in Company income and lower, if any, distributions by
the Company to Shareholders.
UNINSURED LOSSES
The Advisor will arrange for comprehensive insurance, including fire,
liability, and extended coverage on all investment properties. However, there
are certain types of losses (generally of a catastrophic nature) which may be
either uninsurable or not economically insurable. These losses generally include
those resulting from war, earthquakes and floods, as well as punitive damages.
If any such loss occurs and is not covered by insurance, the Company might
suffer a loss of capital invested and any profits which might be anticipated
from the property in question. The Company from time to time will consider
whether to obtain earthquake and flood insurance for its properties to the
extent that it is economically available.
RISK OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION
If the Company were to incur significant unanticipated cash expenditures, the
amount of cash available for distribution would be affected. Furthermore, there
can be no assurance that the Company will in the future be able to acquire
properties that will generate sufficient cash from operations to enable the
Company to maintain distributions at a specific or any particular rate. See the
other risk factors in this section entitled "Risk Factors" for a discussion of
factors which could result in unanticipated cash expenditures, or which could
otherwise affect the Company's ability to make cash distributions to
Shareholders. There can be no assurance that the Company will maintain any
specific level of distributions to Shareholders.
LACK OF OPERATING HISTORY; NO ASSURANCE OF SUCCESS
Neither the Company nor the Advisor has any operating history. There is no
assurance that the Company will operate successfully or achieve its objectives.
SIZE OF OFFERING -- POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN
The Company initially will be funded with contributions of not less than
$15,000,000. The profitability of the Company could be affected by the number of
Shares sold. In the event the Company receives only the Minimum Offering, it
will invest in fewer properties. The fewer properties purchased, the greater the
potential adverse effect of a single unproductive property upon the Company's
profitability since a reduced degree of diversification will exist among the
Company's properties. In addition, the returns on those Shares sold will be
reduced as a result of allocating all Company expenses among the smaller number
of Shares. There is no limit on the amount or percentage of net proceeds from
the sale of Shares which may be invested in any single property.
DELAY IN INVESTMENT IN REAL PROPERTY
The Company may experience delays in finding suitable properties to acquire.
Pending investment of the proceeds of this offering in real estate, and to the
extent such proceeds are not invested in real estate as described herein, the
proceeds may be invested in certain permitted temporary investments. See
"Investment Objectives and Policies -- General." The rate of return on such
investments has fluctuated in recent years and may be different from the return
obtainable from real property.
NO SPECIFIED PROPERTIES
The specific properties in which the proceeds of this offering are to be
invested have not been identified as of the date of this Prospectus. A
prospective Shareholder will, therefore, have no information as to the
identification or location of specific properties to be purchased by the
Company, or as to
15
<PAGE>
the financing terms (if any) or other relevant economic and financial date
affecting those properties. However, when at any time during the offering period
the Company believes that there is a reasonable probability that any specific
property will be acquired, this Prospectus will be supplemented to provide a
description of the property and the anticipated terms of its purchase, financing
and management.
POSSIBLE BORROWING; DEBT FINANCING MAY REDUCE CASH FLOW AND INCREASE RISK OF
DEFAULT.
The Company intends to purchase its properties either on an all-cash basis or
using the limited interim borrowing described under "Business and Properties -
Properties Owned by the Company." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Shares and thereafter to hold its
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, the Company will have the right, subject to the approval of the
Board of Directors, to borrow. See "Investment Objectives and Policies --
Borrowing Policies."
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits of properties already owned. There can
be no assurance that the Company would be able to borrow on favorable terms, if
at all, if borrowing became necessary or desirable. Furthermore, the incurrence
of debt would entail certain additional risks for the Company, some of which are
summarized below. If the Company defaulted on secured indebtedness, the lender
could foreclose, and the Company could lose its investment in the property or
properties used as collateral.
The Company might obtain financing with variable rates and varying
maturities. Such rates normally provide cash flow benefits in an environment of
relatively low or declining interest rates, and a corresponding cash flow
detriment when interest rate increase. Alternatively, financings obtained by the
Company could have fixed rates and prepayment penalties.
The Company might obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or sale of the properties could cause the
maturity dates of the mortgages to be accelerated and the financing to become
due immediately. Thus, the Company could be required to sell its properties on
an all-cash basis or the purchaser might be required to obtain new financing in
connection with the sale. It cannot be predicted whether the holders of
mortgages encumbering the Company's investment properties will require such
acceleration, or whether other mortgage financing will be available. The
resolution of this issue would depend on the mortgage market, and on financial
and economic conditions existing at the time of the sale or refinancing. The
Company might obtain mortgages that involve balloon payments. Such mortgages
involve greater risks than mortgages with principal amounts amortized over the
term of the loan since the ability of the Company to repay the outstanding
principal amount at maturity may depend on the Company's ability to obtain
adequate refinancing or to sell the property, which will in turn depend on
economic conditions in general and the value of the underlying properties in
particular. There can be no assurance that the Company would be able to
refinance or repay any such mortgages at maturity. Further, a significant
decline in the value of the underlying property could result in a loss of the
property by the Company through foreclosure.
The Company does not intend to make distributions from borrowings or
refinancings. However, it is possible that the Company might, under certain
circumstances, find it necessary to borrow and distribute the borrowed funds to
comply with the distribution requirements for REITs under the Code. However, the
obligation to make principal payments on any such borrowings might adversely
affect the Company's ability to make the required distributions to maintain its
REIT status. See "Federal Income Tax Consequences -- Requirements for
Qualification as a REIT -- Annual Distribution Requirement." Since the REIT
distribution requirement is based on the Company's taxable income (with various
adjustments) rather than cash flow, the Company expects to be able to satisfy
the requirement without any borrowing. However, if such a borrowing were
necessary, the resulting distribution would not reflect a return on the
Shareholders' investments.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
16
<PAGE>
Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Except as set forth
in this paragraph, the Company is not limited in the amount of debt it can
incur.
Subject to the foregoing limitations on the permitted maximum amount of debt,
there is no limitation on the number of mortgages or deeds of trust which may be
placed against any particular property.
FEDERAL INCOME TAX RISKS
Failure to Achieve or Maintain REIT Status. The Company intends to conduct
its operations in a manner that will permit it to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service (the "Service") that it
will qualify as a REIT, it has received an opinion of its counsel, McGuire,
Woods, Battle & Boothe, L.L.P., that, based upon certain representations made by
the Company and assumptions described in "Federal Income Tax Consequences," it
will so qualify. However, investors should be aware that opinions of counsel are
not binding upon the Service. Furthermore, both the validity of the opinion and
the continued qualification of the Company for treatment as a REIT will depend
on its continuing ability to meet various requirements concerning, among other
things, the ownership of its Shares, the nature of i
ts assets, the sources of
its income and the amount of its distributions to Shareholders. Failure to meet
any of such requirements with respect to a particular taxable year could result
in termination of the Company's election to be a REIT, effective for the year of
such failure and the four succeeding taxable years.
To qualify as a REIT, the Company must distribute to the Shareholders an
amount equal to at least 95% of its "REIT taxable income" (plus certain other
items). In the event any Company expenditure, including a fee paid to the
Advisor, is disallowed for any reason, the asserted deductions could be
deferred, reduced or eliminated. Any retroactive increase in the Company's
taxable income resulting from the disallowance of a Company deduction could
result in (i) a failure of the Company to meet the income distribution
requirement, (ii) the imposition of Company-level taxation on additional amounts
of undistributed REIT income, or (iii) an increase in the amount of REIT income
on which an excise tax is imposed. However, if the Company makes distributions
in accordance with its stated policy, it does not expect that a
recharacterization of its expenses would have the effects described. See
"Federal Income Tax Consequences -- Requirements for Qualification as a REIT --
Annual Distribution Requirements."
In any year for which the Company failed to qualify as a REIT, it generally
would be subject to federal income taxation in the same manner as a regular
corporation. In such event, the Company would not be allowed a deduction for
earnings distributed to the Shareholders, thereby subjecting such earnings
(including gains from sales of properties) to taxation at both the Company and
Shareholder levels. The resulting tax liability to the Company would reduce
substantially the amount of Company cash available for distribution to the
Shareholders. Although the Company would be eligible to re-elect REIT status
after five years, the burden of double taxation might cause the Company to
liquidate before that time. See "Federal Income Tax Consequences -- Federal
Income Taxation of the Company," "-- Requirements for Qualification as a REIT"
and "-- Federal Income Taxation of the Shareholders."
Uncertainties in and Possible Changes to the Tax Law. The absence of Treasury
Regulations and other administrative interpretations with respect to many
provisions of the Code, combined with the highly technical and complex nature of
the rules governing REITs, gives rise to uncertainty concerning various tax
aspects of REITs generally and the tax consequences of an investment in the
Company in particular. Furthermore, the Company cannot predict whether or what
legislative, administrative, or judicial changes or developments may take place
in the future, any of which might impact the Company adversely, and perhaps
retroactively. Potential investors should consult their tax advisors concerning
the potential impact of any such changes or developments.
17
<PAGE>
REQUIRED RELIANCE ON MANAGEMENT
Shareholders will not have any active participation in management of the
Company or the investment of offering proceeds; rather, they must rely on the
management and acquisition expertise provided by the Board of Directors, the
Advisor and its Affiliates. Thus, no person should purchase any of the Shares
offered hereby unless he is willing to entrust all aspects of the management of
the Company to the Board of Directors, the Advisor and its Affiliates.
POSSIBLE CHANGES IN INVESTMENT OBJECTIVES AND POLICIES MAY NOT SERVE THE
INTERESTS OF CERTAIN SHAREHOLDERS
Subject to limited restrictions in the Company's Bylaws, the Articles of
Incorporation and applicable law, the Board of Directors has significant
discretion to modify the investment objectives and policies of the Company, as
stated in this Prospectus. See "Investment Objectives and Policies -- Changes in
Objectives and Policies." The Advisor believes that, since any such action by
the Board of Directors would be based upon the perceived best interests of the
Company and the Shareholders, the existence of such discretion to modify the
investment objectives and policies would generally be beneficial to the
Shareholders. However, the exercise of such discretion could result in the
Company adopting new investment objectives and policies which differ materially
from those described in this Prospectus.
RESPONSIBILITIES OF DIRECTORS, ADVISOR AND AFFILIATES -- POSSIBLE INADEQUACY
OF REMEDIES; DIRECTORS, ADVISOR AND AFFILIATES BENEFIT FROM EXCULPATION AND
INDEMNIFICATION PROVISIONS
The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries and consequently must exercise good faith and
integrity in handling the Company's affairs. This is a rapidly developing and
changing area of the law, and Shareholders who have questions concerning the
duties of the Directors and the Advisor should consult with their own counsel.
The Articles of Incorporation of the Company exculpate each Director and officer
in certain actions by or in the right of the Company from liability unless the
Director or officer has engaged in willful misconduct or a knowing violation of
the criminal law or of any federal or state securities laws. Further, the
Advisory Agreement exculpates the Advisor from liability unless the Advisor has
engaged in gross negligence or willful misconduct. The Articles of Incorporation
and the Advisory Agreement, respectively, also provide that the Company shall
indemnify a present or former Director or officer and the Advisor (and certain
Affiliates) against expense or liability in an action if the Directors (other
than the indemnified party) determine in good faith that the person to be
indemnified was acting in good faith within what he or it reasonably believed to
be the scope of his or its authority and for a purpose which he or it reasonably
believed to be in the best interests of the Company or its Shareholders and that
such liability was not the result of willful misconduct, bad faith, reckless
disregard of duties or knowing violation of the criminal law on the part of the
person to be indemnified. See "Summary of Organizational Documents."
As a result of the exculpation and indemnification provisions of the
Company's Articles of Incorporation and the Advisory Agreement, a Shareholder
may have a more limited right of action than such Shareholder would otherwise
have had in the absence of such provisions. The exculpation and indemnification
provisions in the Articles of Incorporation and the Advisory Agreement have been
adopted to help induce the beneficiaries of such provisions to agree to serve on
behalf of the Company or the Advisor by providing a degree of protection from
liability for alleged mistakes in making decisions and taking actions. Such
exculpation and indemnification provisions have been adopted, in part, in
response to a perceived increase generally in shareholders' litigation alleging
director and officer misconduct.
In the opinion of the Securities and Exchange Commission, indemnification for
liabilities arising out of the Securities Act is against public policy and,
therefore, unenforceable.
The Company intends to purchase insurance policies under which Directors,
officers and (if feasible) other agents of the Company will be insured against
liability or loss arising out of actual or asserted misfeasance or nonfeasance
in the performance of their duties, to the extent such insurance is available at
reasonable rates.
18
<PAGE>
ARBITRARY SHARE OFFERING PRICES
The per-Share offering prices ($9 until the Minimum Offering is achieved and
thereafter $10) have been established arbitrarily by the Company. Neither
prospective investors nor Shareholders should assume that the per-Share prices
reflect the intrinsic or realizable value of the Shares or otherwise reflects
the Company's value, earnings or other objective measures of worth. The increase
in the per- Share offering price from $9 to $10 once the Minimum Offering is
achieved is also not based upon or reflective of any objective indicia of
increased Company or Share value.
ADVISOR AND AFFILIATES MAY PURCHASE AND VOTE SHARES
The Advisor and Affiliates of the Advisor may purchase in this offering up to
2.5% of the total number of Shares of the Company sold in this offering, subject
to the restrictions on accumulation of Shares contained in the Company's Bylaws,
which generally prohibit accumulation by any person or entity of more than 9.8%
of all the Company's outstanding Shares. Any purchase of Shares in this offering
by the Advisor or its Affiliates must be for investment, and not for resale or
distribution.
In addition to the foregoing, the Company has adopted two stock incentive
plans for the benefit of the Directors of the Company and certain employees of
the Company and of the Advisor and Affiliates of the Advisor. See "Management --
Stock Incentive Plans."
Any such purchaser would possess the same voting power per Share as any other
purchaser. While it is not expected that the Advisor and its Affiliates will
purchase a substantial number of Shares, they will be permitted to vote any
Shares purchased by them in the same manner as other Shareholders.
ACCUMULATION RESTRICTIONS
The Company's Bylaws generally prohibit ownership of more than 9.8% of the
Company's outstanding Shares by one investor. See "Summary of Organizational
Documents -- Redemption and Restrictions on Transfer." That restriction is
designed to ensure that the Company does not violate certain share accumulation
restrictions imposed by the Code on REITs. The provisions restricting
concentrations of Share ownership also may have the effect of deterring the
acquisition of, or a change in, control of the Company. In addition, certain
states may impose investor suitability standards on the transfer of Shares.
JOINT VENTURE INVESTMENTS -- RISKS OF CONFLICTING INTERESTS AND IMPASSE
Under certain circumstances, the Company might participate with an entity
(including Affiliates of the Advisor) in jointly acquiring an investment
property. Any joint venture investment of the Company would be subject to the
same conditions, limitations and restrictions applicable to a Company investment
not undertaken as a joint venture, and the use of a joint venture structure
would not itself be designed to alter or expand the investment objectives and
policies of the Company. Investment through a joint venture could, for example,
permit the Company to invest in a property which is too large for the Company to
acquire by itself.
The investment by the Company through a joint venture could subject the
Company to risks not otherwise present, although the Company will endeavor to
structure any joint venture investment so as to minimize the number and
magnitude of risks not generally associated with a Company investment. Risks not
otherwise present could, however, include the possibility that the joint venture
participant will have economic interests different from the Company and that the
participant might be in a position to take actions contrary to the instructions
of the Company or contrary to the interests of the Company. In addition, in
joint venture investments there is a potential risk of impasse on decisions if
neither joint venture participant controls the venture. Conversely, if the
Company has a right of first refusal to purchase a joint venture participant's
interest, there is a potential risk that it may not have the resources to do so.
19
<PAGE>
ESTIMATED USE OF PROCEEDS
The Company intends to invest the net proceeds of this offering in equity
ownership interests in existing residential apartment communities in Texas and
the southwestern region of the United States. Pending such investment and to the
extent the proceeds are not invested in real estate as described herein, the
proceeds may be invested in certain permitted types of temporary investments.
See "Investment Objectives and Policies -- General." All proceeds of this
offering received by the Company must be invested or committed for investment in
properties or allocated to working capital reserves or used for other proper
Company purposes within the later of two years after commencement of the
offering or one year after termination of the offering; any proceeds not
invested or committed for investment or allocated to working capital reserves or
used for other proper Company purposes by the end of such time period shall be
returned to investors within 30 days after the expiration of such period, but
the Company may elect to return such proceeds earlier if, and to the extent,
required by applicable law (including to the extent necessary to avoid
characterization as an "investment company"). The proceeds of this offering will
be received and held in trust for the benefit of investors in compliance with
applicable securities laws, to be used only for the purposes set forth herein.
As described under "Compensation," the Company's Bylaws prohibit total
Organizational and Offering Expenses from exceeding 15% of Total Contributions.
"Organizational and Offering Expenses" means, generally, all expenses incurred
in organizing the Company and offering and selling the Shares, including selling
commissions and fees, legal fees and accounting fees, and federal, state and
other regulatory filing fees. The Bylaws also prohibit the total of all
Acquisition Fees (defined generally as all fees and commissions paid by any
party in connection with the Company's purchase of real property) and
Acquisition Expenses (defined generally as all expenses related to the selection
or acquisition of properties by the Company) paid in connection with an
acquisition of a property from exceeding 6% of the contract price for the
property (unless such excess is approved by the Board of Directors, as described
therein). Any Organizational and Offering Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
shall be payable by the Advisor immediately upon demand of the Company.
As indicated below, if the Minimum Offering is sold, the Company expects that
84.5% of the gross offering proceeds will be available for investment in
properties and 0.5% will be allocated to the Company's working capital reserve.
As indicated below, the Company expects that Organizational and Offering
Expenses will increase in dollar amount if more than the Minimum Offering amount
is sold. This reflects the Company's belief that the sale of Shares in excess of
the Minimum Offering amount will correspond to a relatively longer offering
period. The Company expects a relatively longer offering period to result in the
need for additional supplements and amendments to this Prospectus (including
possibly also post-effective amendments to the Company's registration statement)
and additional closings on the sale of Shares, which will result in increased
legal, accounting, printing and other fees and costs associated with the
offering of the Shares. However, the Company expects that the percentage which
Organizational and Offering Expenses comprise of gross proceeds will decrease if
and when more than the Minimum Offering amount is sold. The Advisor will pay
(without the right of reimbursement from the Company) any Organizational and
Offering Expenses which, exclusive of the Selling Commissions and Marketing
Expense Allowance, exceed 3% of gross offering proceeds.
As discussed under "Compensation," the Advisor and its Affiliates will be
entitled to reimbursement for expenses incurred by them in the operation of the
Company as well as, among other fees, a Real Estate Commission equal to 2% of
the proceeds of the offering used to pay each property's gross purchase price
(which does not include amounts budgeted for repairs and improvements), which
constitutes an "Acquisition Fee."
20
<PAGE>
The following table reflects the intended application of the proceeds from
the sale of the Common Shares.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
---------------------------- -----------------------------
% OF GROSS % OF GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Gross Proceeds (1)................................... $15,000,000 100.00% $250,000,000 100.00%
Less: ...............................................
Organizational and Offering Expenses (2)............ 450,000 3.00% 1,000,000 0.40%
Selling Commissions (3)............................. 1,125,000 7.50% 18,750,000 7.50%
Marketing Expense Allowance (3) .................... 375,000 2.50% 6,250,000 2.50%
-------------- ------------- --------------- -------------
Net Proceeds after Offering Costs.................... $13,000,000 87.00% $224,000,000 89.60%
Less Acquisition Fees and Expenses (4) .............. 300,000 2.00% 5,000,000 2.00%
-------------- ------------- --------------- -------------
Proceeds Available for Investment and Working
Capital............................................. $12,750,000 85.00% $219,000,000 87.60%
Less Working Capital Reserve (5) .................... 75,000 0.50% 1,250,000 0.50%
-------------- ------------- --------------- -------------
Net Amount Available for Investment in Properties
(6)................................................. $12,675,000 84.50% $217,750,000 87.10%
-------------- ------------- --------------- -------------
- ----------
</TABLE>
(1) The Shares are being offered on a "best-efforts" basis.
(2) These amounts reflect the Company's estimate of Organizational and Offering
Expenses, exclusive of the Selling Commissions and the Marketing Expense
Allowance payable to the Managing Dealer or the Selected Dealers. If such
expenses are greater than 3% of gross offering proceeds, the excess over 3%
will be paid by the Advisor (without the right of reimbursement from the
Company).
(3) Payable to the Managing Dealer or the Selected Dealers.
(4) These amounts include a Real Estate Commission payable to an Affiliate of
the Advisor in an amount equal to 2% of the proceeds of the offering used
to pay the purchase price of each property acquired (which does not include
amounts budgeted for repairs and improvements) plus the Company's estimates
of other expenses and fees which will be incurred in connection with
property acquisitions.
(5) Until used, amounts in the Company's working capital reserve, together with
any other proceeds not invested in properties or used for other Company
purposes, will be invested in certain permitted temporary investments, such
as U.S. Government securities or similar highly liquid instruments. See
"Investment Objectives and Policies -- General."
(6) The investment properties are expected to be existing residential apartment
communities in Texas and the southwestern regions of the United States. See
"Investment Objectives and Policies." In connection with each proposed
property acquisition, the Company expects to allocate a portion of proceeds
to repairs and improvements known to be needed at the property.
COMPENSATION
The table below describes the compensation and reimbursement which will be
paid to the Advisor and its Affiliates by the Company. The officers of the
Company are not paid salaries by the Company. Such officers are officers of the
Advisor and its Affiliates, which entities are entitled to certain fees for
services rendered by them to the Company. Thus, the officers of the Company are,
in essence, compensated by the Advisor or its Affiliates.
The Company will pay David Lerner Associates, Inc. Selling Commissions equal
to 7.5% of the purchase price of the Shares and a Marketing Expense Allowance
equal to 2.5% of the purchase price of the Shares. If the Minimum Offering is
sold, the Selling Commissions would be $1,125,000 and the Marketing Expense
Allowance would be $375,000. If the Maximum Offering is sold, the Selling
Commissions would be $18,750,000 and the Marketing Expense Allowance would be
$6,250,000. The Managing Dealer and the Advisor are not related and are not
Affiliates. See "Plan of Distribution."
21
<PAGE>
<TABLE>
<CAPTION>
PERSON
RECEIVING TYPE OF AMOUNT OF
COMPENSATION (1) COMPENSATION COMPENSATION (2)
---------------- ------------ ----------------
<S> <C> <C>
ACQUISITION PHASE
2% of the proceeds of the offering used to
Apple Realty Real Estate Commission for acquiring the pay the purchase prices of the properties
Group, Inc. ("ARG")............ Company's properties purchased by the Company. (3)
OPERATIONAL PHASE
The Advisor ................... Asset Management Fee for managing the Annual fee ranging from 0.1% of Total Contributions
Company's day-to-day operations to 0.25% of Total Contributions (payable quarterly)
-- a maximum of $37,500 per year if the Minimum
Offering is sold; a maximum of $625,000 per year if
the Maximum Offering is sold. (4)
Apple Residential Management Property Management Fee and expense 5% of the monthly gross revenues of the
Group, Inc. ("AMG") ........... reimbursement for managing the Company's properties plus expense reimbursement. (5)
properties
The Advisor, ARG and Reimbursement for costs and expenses Amount is indeterminate.
AMG ........................... incurred on behalf of the Company, as
described in Note (6)
DISPOSITION PHASE
ARG ........................... Real Estate Commission for selling the Up to 2% of the gross sales prices of the
Company's properties properties sold by the Company. (7)
ALL PHASES
The Advisor, ARG and
AMG............................ Payment for Services and Property (8) Amount is indeterminate.
</TABLE>
(1) As discussed in this Section and under "Conflicts of Interest," the Advisor
and its Affiliates will receive different types of compensation for
services rendered in connection with the acquisition, management and
disposition of properties, as well as the management of the day-to-day
operations of the Company. As discussed under "Conflicts of Interest," the
receipt of such fees could result in potential conflicts of interest for
persons who participate in decision making on behalf of both the Company
and such other entities.
(2) Except as otherwise indicated in this table (including these notes), the
specific amounts of compensation or reimbursement payable to the Advisor
and its Affiliates are not now known and generally will depend upon factors
determinable only at the time of payment. Compensation payable to the
Advisor and its Affiliates may be shared or reallocated among such
Affiliates in their sole discretion as they may agree. However,
compensation and reimbursements which would exceed specified limits or
ceilings cannot be recovered by the Advisor or its Affiliates through
reclassification into a different category.
(3) Under a Property Acquisition/Disposition Agreement with the Company, Apple
Realty Group, Inc. has agreed to serve as the real estate broker in
connection with both the Company's purchases and sales of properties. In
exchange for such services, such corporation will be entitled to a fee from
the Company of 2% of the gross purchase price (which does not include
amounts budgeted for repairs and improvements) of each property purchased
by the Company. If the person from whom the Company purchases or to whom
the Company sells a property pays any fee to Apple Realty Group, Inc., such
amount will decrease the amount of the Company's obligation to Apple Realty
Group, Inc. See "The Advisor and Affiliates -- Apple Realty Group, Inc."
(4) "Total Contributions" means the gross offering proceeds which have been
received from time to time from the sale of the Shares. Under its Advisory
Agreement with Apple Residential Advisors, Inc., the Company is obligated
to pay to the Advisor an Asset Management Fee which is a percentage of
Total Contributions. The applicable percentage used to calculate the Asset
Management Fee is based on the ratio of Funds from Oper
22
<PAGE>
ations to Total Contributions (such ratio being referred to as the "Return
Ratio") for the preceding calendar quarter. The per annum Asset Management
Fee is initially equal to the following with respect to each calendar
quarter: 0.1% of Total Contributions if the Return Ratio for the preceding
calendar quarter is 6% or less; 0.15% of Total Contributions if the Return
Ratio for the preceding calendar quarter is more than 6% but not more than
8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. Assuming the Minimum Offering ($15,000,000)
is sold, the annual Asset Management Fee would be between $15,000 and
$37,500. Assuming the Maximum Offering ($250,000,000) is sold, the annual
Asset Management Fee would be between $250,000 and $625,000. See "The
Advisor and Affiliates."
(5) Apple Residential Management Group, Inc., an Affiliate of the Advisor, is
expected to provide property management services for each of the Company's
properties and in exchange therefor will receive a monthly fee equal to 5%
of the monthly gross revenues of the properties. Apple Residential
Management Group, Inc. is also expected to be responsible for the
accounting and financial reporting responsibilities for each of the
separate properties acquired by the Company. The Company will reimburse
Apple Residential Management Group, Inc. for its expenses, including
salaries and related overhead expenses, associated with providing such
accounting and financial reporting services. See "Investment Objectives and
Policies -- Management of Properties."
(6) The Advisor and its Affiliates will be reimbursed for all direct costs of
acquiring and operating the properties and of goods and materials used for
or by the Company and obtained from entities that are not Affiliated with
the Advisor. These costs and expenses include, but are not limited to,
legal fees and expenses, travel and communication expenses, expenses
relating to Shareholder communications, costs of appraisals, nonrefundable
option payments on property not acquired, accounting fees and expenses,
title insurance, compensation of on-site management personnel and leasing
agents (including any incentive compensation), maintenance and repair
expenses, advertising and promotional expenses, and all other fees, costs
and expenses directly attributable to the acquisition, ownership and
operation of the properties. In addition, Apple Residential Management
Group, Inc. will be reimbursed for salaries and related expenses and
overhead expenses associated with bookkeeping, accounting and financial
reporting services related to the properties. Operating Expenses
reimbursable to the Advisor or its Affiliates are subject to the overall
limitation on Operating Expenses discussed under "The Advisor and
Affiliates -- The Advisory Agreement," but the amount of reimbursement is
not otherwise limited.
(7) Under the Property Acquisition/Disposition Agreement described in note (3),
Apple Realty Group, Inc. also will be entitled to a fee from the Company in
connection with the Company's sale of each property equal to 2% of the
gross sales price of the property if, and only if, the sales price exceeds
the sum of (1) the Company's cost basis in the property (consisting of the
original purchase price plus any and all capitalized costs and expenditures
connected with the property) plus (2) 10% of such cost basis. For purposes
of such calculation, the Company's cost basis will not be reduced by
depreciation. See "The Advisor and Affiliates -- Apple Realty Group, Inc."
(8) The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to compensation
or payment therefor. The conditions, which are summarized under "Conflicts
of Interest -- Transactions with Affiliates and Related Parties," include
the requirement that each such transaction be approved by the affirmative
vote of a majority of the Independent Directors. Currently, there are no
arrangements or proposed arrangements between the Company, on the one hand,
and the Advisor or its Affiliates, on the other hand, for the provision of
such other services or property to the Company or the payment of
compensation or reimbursement therefor. If any such other arrangements
arise in the future, the terms of such arrangements, including the
compensation or reimbursement payable thereunder, will be subject to the
restrictions in the Company's Bylaws. Such compensation, reimbursement or
payment could take the form of cash or property, including Shares.
23
<PAGE>
CONFLICTS OF INTEREST
GENERAL
The Company may be subject to various conflicts of interest arising from its
relationship with the Advisor and its Affiliates and with certain Directors. The
Advisor and its Affiliates and the Directors are not restricted from engaging
for their own account in business activities of the type conducted by the
Company, and occasions may arise when the interests of the Company would be in
conflict with those of one or more of the Directors, the Advisor or their
Affiliates. The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling the Company's affairs.
The Advisor and its Affiliates will assist the Company in the acquisition,
organization, servicing, management and disposition of investments. At this
time, the Advisor will provide services exclusively to the Company, but the
Advisor may perform similar services for other parties, both affiliated and
unaffiliated, in the future.
The receipt of various fees from the Company by the Advisor and its
Affiliates may result in potential conflicts of interest for persons who
participate in decision making on behalf of both the Company and such other
entities. Thus, for example, because Apple Realty Group, Inc., an Affiliate of
the Advisor, will receive a 2% commission upon each purchase by the Company of a
property, and a commission of 2% upon each sale by the Company of a property if
certain conditions are met, its compensation will increase in proportion to the
number of properties purchased and sold by the Company and the properties'
purchase and sale prices. On the other hand, Apple Residential Management Group,
Inc., also an Affiliate of the Advisor, will receive a management fee equal to
5% of the monthly gross revenues of each property owned by the Company, plus an
expense reimbursement for accounting and financial reporting services rendered.
The management fee and expense reimbursement would cease to be payable if the
property being managed were sold. Since these entities receiving compensation
are Affiliates of the Advisor, which in turn will provide advice to the Company
concerning the acquisition, holding and disposition of properties, the Advisor
and its principals could have a conflict of interest in presenting investment
advice to the Company. The Advisor's Asset Management Fee is a percentage of
total Contributions (that is, total proceeds received from time to time by the
Company from the sales of its Shares). Accordingly, the Advisor has an incentive
to see that sales of Shares are closed as quickly as possible by the Company.
Affiliates of the Advisor who participate in decision making on behalf of the
Company will attempt to resolve or eliminate such conflicts of interest by
determining what is in the best interests of the Company and the Shareholders.
The Advisor and its Affiliates do not intend to take any action or make any
decision on behalf of the Company which is based, wholly or in part, upon a
consideration of the compensation payable to them as a consequence of such
action or decision. In addition, the presence on the Board of Directors of
Independent Directors is intended to ameliorate or eliminate the potential
impact of conflicts of interest for persons who participate in decision making
on behalf of both the Company and the Advisor or its Affiliates.
The Directors, the Advisor and its Affiliates will also be subject to the
various conflicts of interest described below. As described below, certain
policies and procedures will be implemented to eliminate or ameliorate the
effect of potential conflicts of interest. By way of illustration, the Bylaws
place certain limitations on the terms of contracts between the Company and the
Advisor or its Affiliates designed to ensure that such contracts are not less
favorable to the Company than would be available from an unaffiliated party.
However, certain potential conflicts of interest (such as the potential conflict
of interest experienced by an individual who has executive or management
responsibilities with respect to multiple entities) are not easily susceptible
to resolution. Prospective Shareholders are entitled to rely on the general
fiduciary duties of the Directors and the Advisor, as well as the specific
policies and procedures designed to eliminate or ameliorate potential conflicts
of interest described below. The Advisor and its Affiliates believe that general
legal principles dealing with fiduciary and similar duties of corporate officers
and directors, combined with specific contractual provisions in the agreements
between the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, will provide
24
<PAGE>
substantial protection for the interests of the Shareholders. Thus, the Advisor
and its Affiliates do not believe that the potential conflicts of interest
described herein will have a material adverse effect upon the Company's ability
to realize its investment objectives.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At the time of Initial Closing, the Board of Directors will consist of five
members, three of whom are Independent Directors and two of whom are not
Independent Directors. At all times on and after Initial Closing, a majority of
the Board of Directors must be Independent Directors. The Directors who are not
Independent Directors are Affiliated with the Advisor. Under the Company's
Bylaws, any transaction (whether a sale or acquisition of assets, any borrowing
or lending, any agreement for the provision of property or services, or
otherwise) between the Company, on the one hand, and the Advisor or any
Affiliate of the Advisor, on the other hand (excluding only the entering into,
and the initial term under, the Advisory Agreement, the Property
Acquisition/Disposition Agreement, and the Property Management Agreement for
each property, each of which agreement is described in this Prospectus) is
permitted only if such transaction has been approved by the affirmative vote of
a majority in number of all of the Independent Directors. In addition, under the
Bylaws, any such transaction must meet certain conditions, including that the
transaction be in all respects fair and reasonable to the Shareholders of the
Company. If any such proposed transaction involves the purchase of property, the
purchase must be on terms not less favorable to the Company than those
prevailing for arm's-length transactions concerning comparable property, and at
a price to the Company no greater than the cost of the asset to the seller
unless a majority of the Independent Directors determines that substantial
justification for such excess exists. Examples of substantial justification
might include, without limitation, an extended holding period or capital
improvements by the seller which would support a higher purchase price.
The Advisor and its Affiliates will receive compensation from the Company for
providing many different services. The fees payable and expenses reimbursable
are subject to the general limitation on Operating Expenses. See "Compensation."
The Board of Directors will have oversight responsibility with respect to any
such relationships and will attempt to ensure that they are structured to be no
less favorable to the Company than the Company's relationships with unrelated
persons or entities and are consistent with the Company's objectives and
policies.
COMPETITION BY THE COMPANY WITH AFFILIATES
Affiliates of the Advisor may form additional REITs, limited partnerships and
other entities to engage in activities similar to those of the Company, although
the Advisor and its Affiliates have no present intention of organizing any
additional REITs. However, until such time as more than 95% of the proceeds of
this offering are invested, the Advisor and its Affiliates shall present to the
Company any suitable investment opportunity before offering it to any other
Affiliated entity. The competing activities of the Advisor and its Affiliates
may involve certain conflicts of interest. For example, Affiliates of the
Advisor are interested in the continuing success of previously formed ventures
because they have fiduciary responsibilities to investors in those ventures,
they may be personally liable on certain obligations of those ventures and they
have equity and incentive interests in those ventures. Conflicts of interest
would also exist if properties acquired by the Company compete with properties
owned or managed by Affiliates of the Advisor. Conflicts of interest may also
arise in the future if the Company and other ventures developed by Affiliates of
the Advisor seek to sell, finance or refinance properties at the same time.
COMPETITION FOR MANAGEMENT SERVICES
Certain officers and directors of the Advisor are also officers or directors
of one or more entities Affiliated with the Advisor which engage in the
brokerage, sale, operation, or management of real estate. Affiliates of the
Advisor presently are acting as general partners in a number of limited
partnerships engaged in real estate investments. Accordingly, certain Directors
and the officers and directors of
25
<PAGE>
the Advisor may have conflicts of interest in allocating management time and
services between the Company and other entities. Also, employees of Cornerstone
Realty Income Trust, Inc., some of whom may assist officers of the Advisor and
Apple Residential Management Group, Inc., may have conflicts in allocating their
time.
LACK OF SEPARATE REPRESENTATION
The Company may retain the same independent accountants as are retained by
the Advisor and Affiliates of the Advisor. The law firm of McGuire, Woods,
Battle & Boothe, L.L.P., which is passing on the legality of the Shares for the
Company and is advising it as to the Company's status as a REIT for federal
income tax purposes, may act as counsel to the Company in other matters.
McGuire, Woods, Battle & Boothe, L.L.P. also renders and may continue to render
legal services to the Advisor and its Affiliates; however, such counsel would
recommend the engagement of independent counsel for the Company, the Advisor or
such Affiliates in circumstances in which the applicable canons of ethics would
so require.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. Pending such
investment, the proceeds of this offering may be invested in U.S. Government
securities, certificates of deposit from banks located in the United States
having a net worth of at least $50,000,000, bank repurchase agreements covering
the securities of the U.S. Government or U.S. governmental agencies issued by
banks located in the U.S. having a net worth of at least $50,000,000, bankers'
acceptances, prime commercial paper or similar highly liquid investments (such
as money market funds selected by the Company) or evidences of indebtedness. In
addition, to the extent the proceeds are not invested in real estate as
described herein, the Company has the ability to invest in such securities. All
proceeds of this offering received by the Company must be invested or committed
for investment in properties or allocated to working capital reserves or used
for other proper Company purposes within the later of two years after
commencement of the offering or one year after termination of the offering; any
proceeds not invested or committed for investment or allocated to working
capital reserves or used for other proper Company purposes by the end of such
time period shall be returned to investors, within 30 days after the expiration
of such period, but the Company may elect to return such proceeds earlier if,
and to the extent, required by applicable law (including to the extent necessary
to avoid characterization as an "investment company").
The principal investment objectives of the Company are:
(i) to preserve and protect the capital of the Company;
(ii) to provide quarterly distributions to Shareholders, a portion of which
may constitute a nontaxable return of capital (rather than current taxable
income); and
(iii) to provide long-term capital appreciation in the value of the
Company's investments.
The Company anticipates that achievement of such objectives will enable it to
provide the Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve such objectives. Attainment of
the objectives is contingent in part upon the Company's ability to acquire
suitable properties. To the extent such objectives cannot simultaneously be
pursued or achieved, the Company plans to pursue the objective of regular
quarterly distributions to Shareholders in preference to the objective of
long-term capital appreciation in the value of Company investments and in the
value of Shares.
The Company's primary business objectives are to increase distributions per
Share and the value of its properties by:
(i) increasing occupancy rates and rental income at properties;
(ii) implementing expense controls; and
26
<PAGE>
(iii) emphasizing regular maintenance and periodic renovations, including
additions to amenities.
The Company may make acquisitions of established apartment communities
involved in foreclosure proceedings when the Advisor and the Company believe the
property may have below market-rate leases, correctable vacancy problems or
other cash flow growth potential. In suitable situations, the Company also may
make acquisitions of properties from over-leveraged owners of such properties
and from governmental regulatory authorities and lending institutions which have
taken control of such properties, as well as mortgagees-in-possession and,
possibly, through bankruptcy reorganization proceedings.
In connection with the acquisition of Properties, the Company sets aside an
amount determined by it to be necessary to fund repairs and improvements which
the Company believes should be made at the Property, to make it competitive in
its market and, where appropriate, to permit rental increases.
The Company will seek to assure that its Properties remain attractive
residences for their tenants and are desirable locations for prospective
tenants. The maintenance, custodial and groundskeeping staff of Apple
Residential Management Group, Inc. performs regular maintenance and upkeep on
the properties to preserve and enhance their practical and aesthetic attributes.
The physical appearance of, and tenant satisfaction with, each Property are
evaluated on a regular basis by the Company's executive officers.
The Company's management places strong emphasis on the marketing and
promotion of its Properties. Marketing plans focus on each Property's specific
needs for maximizing occupancy. Marketing programs include television, radio and
newspaper advertising, all designed to attract tenants in each market.
The Board of Directors may, in its sole discretion, issue Shares, or other
equity or debt securities of the Company, to sellers of properties, as part or
all of the purchase price of the property. Shares or such other equity or debt
securities of the Company may also be issued, at the election of the Board of
Directors, to the Advisor or its Affiliates in lieu of cash payments required
under the Advisory Agreement or other contract or obligation. See "Summary of
Organizational Documents -- Issuance of Securities."
The Company will not issue any equity securities senior to the Shares unless
the holders of a majority of the outstanding Shares authorize such issuance by
an appropriate amendment to the Company's Articles of Incorporation.
The Company has no present intention of making any loans to other persons or
investing in the securities of other issuers for the purpose of exercising
control of such issuers. As described below, under "Types of Investments," the
Company is subject to certain limitations on its ability to make mortgage loans
or invest its assets in the securities of other issuers. Such limitations can
only be changed with the consent of the holders of a majority of the outstanding
Shares. Within such limitations, however, the Board of Directors, acting without
Shareholder approval, may set and change the Company's policy regarding the
making of loans and the investment in securities of other issuers.
Except with respect to the permitted temporary investment of proceeds from
the sales of Shares pending investments in properties (see "General" above), the
Company has no present intention of investing in the securities of or interests
in other persons, or engaging in the purchase and sale (or turnover) of
investments other than its real property investments. The Company may engage in
certain joint venture investments (see "Joint Venture Investments" below) and
may invest up to 20% of its total assets in the equity securities of other
issuers, although the Company has no present intention to engage in any such
activities. The Company has no plans to invest in the securities of other
issuers for the purpose of exercising control.
Although the Company has no present intention to do so, the Board of
Directors might cause the Company to invest a portion of its assets (subject to
the limitations set forth in the By-Laws, as described below under "Types of
Investments") in common stock or other equity securities of other REITs or
limited partnerships holding real estate. Such an investment, if undertaken,
would be based on a determination by the Board of Directors that investment in
such common stock or equity securities furthered the overall investment
objectives and policies of the Company in a way not furthered by the Company's
direct investment in real property. For example, although not presently
anticipated, the Company could decide to further its diversification objective
by acquiring an equity interest in a REIT owning properties in other regions of
the United States, rather than seeking to invest directly in real
27
<PAGE>
properties located in such other region. Any such decision would be based upon
the perceived best interests of the Company and the Shareholders at the time.
Furthermore, any such investment would be based upon a determination by the
Board of Directors, based upon advice of counsel to the Company, that such
investment would not adversely impact the Company's continued qualification as a
REIT for Federal income tax purposes. If the Company undertook any such
investment, such investment could be made in listed or publicly-traded equity
securities or, alternatively, in securities of a private issuer.
If undertaken at all, the Company would expect to invest only in a Company
engaged principally in the ownership and operation of multi-family apartment
communities. Subject to that limitation, the Company would not necessarily limit
itself to investments in other companies of any specific size or with any
specific period of prior operations.
INVESTMENT CRITERIA
The Advisor is charged with identifying and recommending to the Company
suitable investments. The Advisor will make such recommendations based upon such
relevant factors as (i) the potential for realizing capital appreciation; (ii)
current and projected cash flow and the ability to increase rental income
through capable management; (iii) neighborhood location, condition and design of
the property; (iv) historical and projected occupancy rates; (v) prospects for
liquidity through sale, financing or refinancing; (vi) economic conditions in
the community; (vii) geographic location and type of property in light of the
Company's diversification objectives; and (viii) the purchase price of the
property as it relates to prices of comparable properties in comparable
locations.
The Company's management believes there is substantial opportunity for growth
from acquisitions of multi-family properties in Texas and the southwestern
region of the United States. Management believes that the current real estate
environment is conducive to advantageous acquisitions of existing multi-family
properties that meet the Company's investment criteria. In many instances, such
acquisitions may be made for less than the cost of new construction.
Generally, the Advisor is not required to, and will not, advise the Company
on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
will make its own decisions with respect to such temporary securities
investments.
Apple Realty Group, Inc., an Affiliate of the Advisor, will receive a 2% real
estate commission upon each purchase by the Company of a property. See "The
Advisor and Affiliates -- Apple Realty Group, Inc."
Any property acquisition made with proceeds representing the Minimum Offering
amount ($15 million) will require the approval of the Executive Committee of the
Board of Directors. Otherwise the acquisition of any property with a contract
purchase price not greater than $15,000,000 may be undertaken by the President
acting alone (unless it is an acquisition from an Affiliate of the Advisor). Any
property acquisition with a contract purchase price exceeding $15,000,000 will
require the consent of the Executive Committee of the Board of Directors. Any
acquisition from an Affiliate of the Advisor will require the consent of a
majority of all Independent Directors and of the entire Board.
TYPES OF INVESTMENTS
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. The Company does not
intend to invest in undeveloped land except in connection with the acquisition
of an existing apartment community. The Company does not intend to make or
invest in any mortgage loans (except that the Company may hold purchase money
obligations secured by mortgages on properties sold by it). Except in connection
with permitted joint venture investments (see "Joint Venture Investments,"
below) and except with respect to permitted temporary investments (see "General"
above), the Company will not invest more than 20 percent of its total assets in
equity securities of or interests in other issuers for a period in excess of 18
months. Within certain limitations, the Board of Directors can change the
investment objectives and policies of the Company. See "Changes in Objectives
and Policies," below.
28
<PAGE>
In addition, the Company's Bylaws prohibit it from engaging in certain
investment and other activities, including: (i) investing more than 10 percent
of the total assets of the Company in unimproved real property or mortgage loans
on unimproved real property; (ii) investing in commodities or commodity future
contracts or effecting short sales of commodities or securities, except when
done solely for hedging purposes; (iii) investing in or making mortgage loans on
property unless the Company obtains a mortgagee's or owner's title insurance
policy or commitment as to the priority of the mortgage or the condition of the
title; (iv) investing in contracts for the sale of real estate unless they are
recordable in the chain of title; (v) making or investing in mortgage loans,
including construction loans, on any property if the aggregate amount of all
mortgage loans outstanding on the property (at the time the Company makes or
invests in its mortgage loan), including the loans of the Company, would exceed
85 percent of the appraised value of the property; (vi) investing in junior
mortgage loans (provided that this and the foregoing limitations shall not apply
to the Company taking back secured debt in connection with the sale of any
property); (vii) issuing securities that are redeemable; (viii) issuing debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known changes is sufficient properly to
service the higher level of debt or unless the cash flow of the Company (for the
last fiscal year) excluding extraordinary, nonrecurring items, is sufficient to
cover the debt service on all debt securities to be outstanding; (ix) investing
more than 20% of its total assets in the equity securities of any
non-governmental issuers, including other REITs or limited partnerships, for a
period in excess of 18 months; (x) issuing equity securities on a deferred
payment basis or other similar arrangement; (xi) incurring any indebtedness,
secured or unsecured, if such indebtedness would result in an aggregate amount
of indebtedness in excess of 100 percent of Net Assets, before subtracting
liabilities (unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws); (xii) allowing aggregate borrowings of the Company to exceed 50 percent
of the Adjusted Net Asset Value (before subtracting any liabilities) of the
Company unless the excess borrowing is similarly approved by the Independent
Directors and disclosed to the Shareholders; (xiii) engaging in any short sale
of or underwriting or distributing, as an agent, securities issued by others, or
engaging in trading, as compared with investment activities; and (xiv) acquiring
securities in any company engaging in activities or holding investments
prohibited by the above prohibitions, the Code or Virginia law.
DIVERSIFICATION
One of the Company's investment objectives is to own properties in various
geographic locations within Texas and the southwestern United States, thereby
minimizing the effects of changes in specific industries, local economic
conditions or similar risks. The extent of geographic diversification depends
upon the number of separate properties which can be purchased. There can be no
assurance that the Company will achieve significant diversification. There is no
limit on the amount or percentage of net proceeds from the sale of Shares which
may be invested in any single property.
JOINT VENTURE INVESTMENTS
Some of the Company's investments may be made through partnerships or joint
ventures. The Company's partner or joint venturer could be an Affiliate of the
Advisor. While each such partnership or joint venture agreement may vary in
form, depending on negotiations, in no case will the co-venturer have any legal
right to take action which would prevent the Company from carrying on its
business as described in this Prospectus. Any joint venture investment of the
Company would be subject to the same conditions, limitations and restrictions
applicable to a Company investment not undertaken as a joint venture, and the
use of a joint venture structure would not itself be designed to alter or expand
the investment objectives and policies of the Company. Investment through a
joint venture could, for example, permit the Company to invest in a property
which is too large for the Company to acquire by itself.
The Company anticipates that any joint venture investment it might undertake
would involve only the ownership and operation of apartment communities of the
same general type sought to be acquired directly by the Company. The Company
could, for example, use a joint venture investment to acquire one or more
apartment communities located outside of the regions in which the Company
normally operates with a view toward minimizing risks otherwise associated
entering new markets. Although the
29
<PAGE>
Board of Directors would seek to contract only with a joint venture partner
which is competent and financially secure, the Company has not set any other
specific criteria which it would follow in connection with the identification of
joint venturers.
Joint venture arrangements may under certain circumstances involve risks not
otherwise present in investments directly in properties themselves, including,
for example, the risk of impasse and risks associated with the possibility that
the co-venturer may at any time experience adverse business developments or have
economic or business interests or goals which are inconsistent with the economic
or business interests or goals of the Company.
There is no limitation on the percentage of the proceeds of the offering that
can be invested in joint ventures.
BORROWING POLICIES
To maximize potential cash flow and minimize risk to the Company, the Company
intends to purchase its properties either on an "all-cash" or unleveraged basis,
or using the limited interim borrowing described under "Business and
Properties-Properties Owned by the Company." The Company will endeavor to repay
any interim borrowings with proceeds from the sale of Shares and thereafter to
hold its properties on an unleveraged basis. However, for the purpose of
flexibility in operations, the Company will have the right, subject to the
approval of the Board of Directors, to borrow.
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits at properties already owned.
Furthermore, although not anticipated, properties may be financed or refinanced
if the Board of Directors deems it in the best interests of Shareholders
because, for example, indebtedness can be incurred on favorable terms and the
incurring of indebtedness is expected to improve the Shareholders' after-tax
cash return on invested capital. See "Sale and Refinancing Policies" below. See
"Risk Factors -- Real Property Investment Risks -- Possible Borrowing; Debt
Financing May Reduce Cash Flow and Increase Risk of Default."
Loans obtained by the Company may be evidenced by promissory notes secured by
mortgages on the Company's properties. In addition, the Company may grant other
forms of security to a lender, including a conditional assignment of leases and
rents of the Company's properties. As a general policy, the Company would seek
to obtain mortgages securing indebtedness which encumber only the particular
property to which the indebtedness relates, but recourse on such loans may
include all of the Company's assets. If recourse on any loan incurred by the
Company to acquire or refinance any particular property includes all of the
Company's assets, the equity of the Company in its other properties could be
reduced or eliminated through foreclosure on that loan.
Subject to the approval of the Board of Directors, the Company may borrow
from the Advisor or its Affiliates or establish a line of credit with a bank or
other lender. The Advisor and its Affiliates are under no obligation to make any
such loans, however. Any loans made by the Advisor or its Affiliates must be
approved by a majority of the Independent Directors as being fair, competitive
and commercially reasonable and no less favorable to the Company than loans
between unaffiliated lenders and borrowers under the same circumstances.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Subject to the
foregoing limitations on the permitted maximum amount of debt, there is no
limitation on the number of mortgages or deeds of trust which may be placed
against any particular property.
30
<PAGE>
MANAGEMENT OF PROPERTIES
Day-to-day property management services for the Company's residential
properties will be provided by Apple Residential Management Group, Inc., an
Affiliate of the Advisor, subject to review by the Board of Directors. For such
services, Apple Residential Management Group, Inc. will receive a monthly
Property Management Fee equal to 5% of the monthly gross revenues of the
properties. The Company intends that Apple Residential Management Group, Inc.
will also be responsible for the accounting and financial reporting
responsibilities for each of the properties the Company acquires. Apple
Residential Management Group, Inc. will be reimbursed for expenses, including
salaries and related overhead expenses, associated with such accounting and
financial reporting responsibilities. The Company believes that the monthly 5%
property management fee it pays to Apple Residential Management Group, Inc. is
commercially reasonable. However, such fee may represent an expense which is
greater than the management expenses of self-administered REITs, which do not
use an outside property management company.
The Company will enter into a property management agreement (the "Property
Management Agreement") with Apple Residential Management Group, Inc. with
respect to each of the Company's residential properties at the time the Company
acquires each such property. The agreement will have an initial term of two
years and thereafter will be renewed automatically for successive two-year terms
until terminated as provided therein or until the property is sold. A copy of
the form of that agreement has been filed as an exhibit to the registration
statement of which this Prospectus is a part; reference is made to the agreement
itself for a complete statement of its provisions. See "Conflicts of Interest"
and "Compensation."
Depending on the location of the Company's real property investments,
unaffiliated, independent property management companies may also render
day-to-day property management services pursuant to contracts with the Company.
Such contracts with the Company may provide for unaffiliated property managers
to receive either fixed or performance-based incentive fees for property
management services, subject to the condition that compensation to such property
managers must be fair, competitive and commercially reasonable. It is intended
that the management capabilities of the property managers will maximize rental
revenues of specific properties through renewing leases at higher market rates;
renovating and retenanting under-performing properties; and constructing
additional rental space on the sites of existing properties, where appropriate.
Apple Residential Management Group, Inc. currently manages no apartment
complexes.
RESERVES
A portion of the proceeds of this offering will be reserved to meet working
capital needs and contingencies associated with the Company's operations. The
Company will initially allocate to its working capital reserve not less than
0.5% of the proceeds of the offering. As long as the Company owns any
properties, the Company will retain as working capital reserves an amount equal
to at least 0.5% of the proceeds of the offering, subject to review and
re-evaluation by the Board of Directors. If such reserves and any other
available income of the Company become insufficient to cover the Company's
operating expenses and liabilities, it may be necessary to obtain additional
funds by borrowing, refinancing properties or liquidating the Company's
investment in one or more properties.
SALE AND REFINANCING POLICIES
The Company is under no obligation to sell its investment properties, and
currently anticipates that it will hold its investment properties for an
indefinite length of time. However, sale may occur at any time if the Advisor
deems it advisable for the Company based upon current economic considerations,
and the Board of Directors concurs with such decision. In deciding whether to
sell a property, the Advisor will also take into consideration such factors as
the amount of appreciation in value, if any, to be realized, federal, state and
local tax consequences, the possible risks of continued ownership and the
anticipated advantages to be gained for the Shareholders from sale of a property
versus continuing to hold such property.
31
<PAGE>
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
At such time as the Company, acting through its Board of Directors,
determines that sale of a property is in the best interests of the Company, the
Company must first offer such property for sale to Cornerstone Realty Income
Trust, Inc. Cornerstone Realty Income Trust, Inc. is a Virginia corporation
which is a public real estate investment trust. Cornerstone Realty Income Trust,
Inc. was founded by Glade M. Knight, who currently serves as the Chairman of the
Board, President and a Director of that entity. Mr. Knight also serves as
Chairman of the Board, President and a Director of the Company. See
"Management-Directors and Officers." Any such sale of a property by the Company
to Cornerstone Realty Income Trust, Inc. would require the consent of a majority
of both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company.
The Company has also agreed with Cornerstone Realty Income Trust, Inc. that
if the Company proposes the sale or disposition of the Company or substantially
all of its assets, business or stock (whether such transaction is structured as
a sale, exchange, merger, consolidation, lease, share exchange or otherwise)
(any such transaction, a "Sale of the Company"), it will first offer Cornerstone
Realty Income Trust, Inc. the right to become the acquiring party in any such
proposed transaction before concluding the proposed Sale of the Company to a
third party. As in the case of a sale of an individual property by the Company
to Cornerstone Realty Income Trust, Inc., any such Sale of the Company to
Cornerstone Realty Income Trust, Inc. would require the consent of a majority of
both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company. Depending upon the form of any such
transaction, it might also require the consent of Shareholders owning a majority
of the outstanding Shares.
If the third party offers cash for the property, assets, stock or business of
the Company, Cornerstone Realty Income Trust, Inc. must offer cash if it wishes
to exercise its right of first refusal. If the third party offers property other
than cash, Cornerstone Realty Income Trust, Inc. will be permitted to offer
property of a like character with the same value. The value of the property
offered by the third party and Cornerstone Realty Income Trust, Inc. will be the
market value if the property has a readily ascertainable market value (such as
listed stock), and otherwise will be determined in good faith by agreement of
the boards of directors of the Company and Cornerstone Realty Income Trust,
Inc., or if such boards are unable to agree, by the average of two appraisals
undertaken by two qualified independent appraisers, one selected by each board
of directors.
If the Company defaults in its obligation to grant to Cornerstone Realty
Income Trust, Inc. a first right to acquire a property or to become the
acquiring party in a proposed Sale of the Company, the Company will be obligated
to pay Cornerstone Realty Income Trust, Inc. as liquidated and agreed-upon
damages cash in the amount of 3% of the aggregate consideration agreed to be
paid for the property, assets, stock or business by any third party in the
transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price. However, the presence of the right of first refusal
held by Cornerstone Realty Income Trust, Inc. with respect to the various sale
or disposition transactions which may be sought or proposed by the Company may
materially hamper the Company's ability to obtain the highest possible price for
its properties, assets, stock or business from a third party. A third party may
be reluctant to engage in negotiations and due diligence with respect to a
possible purchase or acquisition transaction knowing that Cornerstone Realty
Income Trust, Inc. can
32
<PAGE>
substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus, the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although the requirement for the approval of a
majority of the Independent Directors of the Company is intended to overcome any
potential conflict of interest which might be involved in any such sale to
Cornerstone Realty Income Trust, Inc., there can be no assurance that a sale by
the Company to Cornerstone Realty Income Trust, Inc. would be on terms as
favorable as a sale by the Company to a third party, since there may be no
alternative to selling assets to Cornerstone Realty Income Trust, Inc.
Unless required to maintain REIT status, the Company does not intend to
borrow or refinance to make distributions. Although not anticipated, in some
cases it might be advantageous for the Company to incur mortgage indebtedness
on, or finance or refinance, a property to further the Company's investment
objectives. If the original mortgage indebtedness, if any, on a property has
been significantly reduced and/or if a particular property has increased
substantially in value, then financing (or refinancing of existing
indebtedness), if achievable, may permit the Company to realize a portion of the
appreciation in value of the property and retain the property. See "Risk Factors
- -- Real Property Investment Risks -- Possible Borrowing; Debt Financing May
Reduce Cash Flow and Increase Risk of Default."
Under its Property Acquisition/Disposition Agreement with the Company, Apple
Realty Group, Inc., an Affiliate of the Advisor, may receive a 2% real estate
commission upon each sale by the Company of a property. Apple Realty Group, Inc.
will not be entitled to any disposition fee in connection with a sale of a
property by the Company to Cornerstone Realty Income Trust, Inc. or any
Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs in
marketing such property. See "Investment Objectives and Policies -- Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
It is also possible that Apple Realty Group, Inc., or an Affiliate, will
render services, and receive compensation, in connection with Company financings
and refinancings, although there are no specific agreements for such services as
of the date of this Prospectus. See "The Advisor and Affiliates -- Apple Realty
Group, Inc."
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the Articles of Incorporation, the Bylaws and
the Virginia Stock Corporation Act, the powers of the Company will be exercised
by or under the authority of, and the business and affairs of the Company will
be controlled by, the Board of Directors. The Board of Directors also has the
right and power to establish policies concerning investments and the right,
power and obligation to monitor the procedures, investment operations and
performance of the Company.
In general, the Articles of Incorporation and the Bylaws can be amended only
with the affirmative vote of a majority of the outstanding Common Shares, except
that the Bylaws may be amended by the Directors if necessary to comply with the
REIT provisions of the Code or with other applicable laws and regulations. The
Bylaws contain certain restrictions on the activities of the Company and
prohibit the Company from engaging in certain activities. See "Types of
Investments."
Within the express restrictions and prohibitions of the Bylaws, the Articles
of Incorporation and applicable law, however, the Board of Directors has
significant discretion to modify the investment objectives and policies of the
Company, as stated in this Prospectus. The Company has no present intention to
modify any of such investment objectives and policies, and it is anticipated
that any such modification would occur only if business and economic factors
affecting the Company made the Company's stated investment objectives and
policies unworkable or imprudent. By way of illustration only, owing to a
significant change in economic conditions, the Board of Directors could elect to
acquire apartment communities outside of Texas and the southwestern region of
the United States, or to acquire one or more commercial properties in addition
to residential properties.
Thus, while this Prospectus accurately and fully discloses the current
investment objectives and policies of the Company, prospective Shareholders must
be aware that the Board of Directors, acting consistently
33
<PAGE>
with the Company's organizational documents, applicable law and their fiduciary
obligations, may elect to modify or expand such objectives and policies from
time to time. Any such action by the Board of Directors would be based upon the
perceived best interests of the Company and the Shareholders.
DISTRIBUTION POLICY
The Company intends to make regular quarterly distributions to its
Shareholders. Federal income tax law requires that a REIT distribute annually at
least ninety-five percent (95%) of its REIT taxable income (which does not
include net capital gains). Under certain circumstances, the Company may be
required to make distributions in excess of cash available for distribution to
meet such distribution requirements. See "Federal Income Tax Consequences --
Requirements for Qualification as a REIT -- Annual Distribution Requirements"
and "Risk Factors -- Possible Borrowing; Debt Financing May Reduce Cash Flow and
Increase Risk of Default."
The timing and amounts of distributions to Shareholders are within the
discretion of the Board of Directors, although the Company will use its best
efforts to meet the distribution requirements established by the Code for REITs.
The Company's actual results of operations, and therefore the amount of cash
available for distribution to Shareholders, will be affected by a number of
factors, including the revenues received from the Company's properties, the
operating expenses of the Company, and the Company's interest expense, if any.
The distribution policy of the Board of Directors from time to time will depend
on a number of factors, including the amount of cash available for distribution,
the Company's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute them, the Company's capital and reserve
requirements, and such other factors as the Board of Directors deems relevant.
The Company expects to include within the acquisition budget for each
property it proposes to acquire amounts deemed necessary for repairs and
improvements required at the property. Such amounts are anticipated to be funded
with proceeds from the sale of Shares. Thus, the Company anticipates that all
net cash generated from operations of the properties will continue to be
available for distribution.
The Company does not intend to borrow in connection with the acquisition of
properties, or to incur debt in connection with the financing or refinancing of
properties. Therefore, the Company does not believe that its distributions will
be affected by financing activities. However, if the Company elects to incur
financing in conjunction with the acquisition of its properties, such financing
could have an adverse effect on the Company's ability to maintain its level of
distribution. See "Risk Factors -- Possible Borrowing; Debt Financing May Reduce
Cash Flow and Increase Risk of Default." The Company currently does not have any
debt financing nor does it have any current plans to incur debt.
The Company anticipates that cash available for distributions before capital
expenditures will exceed earnings and profits due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes will be taxable to
shareholders as ordinary dividend income. Distributions in excess of such
earnings and profits generally will be treated as a return of capital, resulting
in a non-taxable reduction of the Shareholder's basis in his Shares to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as non-taxable reduction in basis will have the effect of deferring taxation
until the sale of such Shareholder's Shares.
BUSINESS AND PROPERTIES
The Company was incorporated on August 7, 1996. Its principal executive
offices are located at 306 East Main Street, Richmond, Virginia 23219 and its
telephone number is (804) 643-1761. The Company does not have any employees.
Instead, services with respect to property acquisition, property management and
company administration will be provided by the Advisor and certain of its
Affiliates. See "The Advisor and Affiliates."
34
<PAGE>
BUSINESS
The Company has been established to provide both taxable and tax-exempt
investors with a professionally managed portfolio of real estate equity
interests consisting primarily of existing residential apartment communities
that have the potential for current cash flow and capital appreciation. The
Company may hold its investment properties for an indefinite length of time. The
Company does not plan to cause the Shares to be listed on any securities
exchange or quoted on any system or in any established market either immediately
or at any definite time in the future. While the Company, acting through its
Board of Directors, may cause the Shares to be so listed or quoted if the Board
of Directors determines such action to be prudent, there can be no assurance
that such event will ever occur. Prospective Shareholders should view the Shares
as illiquid and must be prepared to hold their investment for an indefinite
length of time.
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
Many factors will bear on whether any such actions are prudent and feasible.
The feasibility of causing the Shares to be listed or quoted will depend upon
many factors, many of which are not presently determinable or are not within the
control of the Company. Such factors would include general economic and market
conditions, the Company's satisfaction of the legal listing or quotation
requirements in effect at such time, the economic performance of the Company
during the interim period, and the Company's financial condition at the time
listing or quotation is considered. In addition, the size of the Company (in
terms of its total assets and the diversification of its property portfolio),
which will reflect the number of Shares sold in this offering, will bear upon
the feasibility of listing or quoting the Shares for trading. In general, a
smaller Company size may make it less feasible to cause the listing or quotation
of the Shares.
The feasibility of disposing of the Company's properties will also depend on
many factors, many of which are not presently determinable or are not within
control of the Company. General economic and market conditions will affect the
demand, if any, for the Company's properties and the prices which might be
offered for them. Adverse developments affecting a market or a Company property
after the Company's acquisition of a property may materially affect its market
value. Even if some properties are attractive to prospective purchasers, the
Company may determine that it is imprudent to dispose of only a portion of its
portfolio. Conversely, the larger the Company is, the less likely its is that it
will be able to dispose of substantially all of its properties within a
relatively short period of time. If the Company receives marketable securities
or other property, rather than cash, for the sale of its properties, it and any
subsequent holders of such property will bear the risk of decrease in the value
of such property.
As described under "Investment Objectives and Policies -- Sale and
Refinancing Policies," the Company has granted to Cornerstone Realty Income
Trust, Inc. a right of first refusal to acquire assets proposed for sale by the
Company. As described therein, the presence of such right of first refusal may
hamper the ability of the Company to sell its properties to any party other than
Cornerstone Realty Income Trust, Inc. and may tend to decrease the price the
Company is able to obtain for its properties.
The Advisor continually reviews possible investment opportunities on behalf
of the Company. When at any time during the offering period the Company believes
that there is a reasonable probability that any specific property will be
acquired by the Company, this Prospectus will be supplemented to provide a
description of the property and the anticipated terms of its purchase, financing
and management. Such supplement will be filed pursuant to Rule 424(c) under the
Securities Act and all supplements will be
35
<PAGE>
consolidated into a post-effective amendment filed at least once every three
months, with the information contained in such amendment provided simultaneously
to the existing Shareholders. If any such expected investment relates to a
property that has an operating history, the Company will include in the
post-effective amendment the audited financial statements required by Rule 3-14
of Regulation S-X of the Securities and Exchange Commission, and, as required,
the Company will also provide the pro forma financial information required by
Rule 11-01(a)(5) of Regulation S-X.
The Company has elected to be taxed as a REIT under the Code and intends to
qualify as such on a continuing basis. However, no assurance can be given that
it will so qualify. For years in which the Company qualifies as a REIT, it will
not be subject to federal income tax on that portion of its taxable income that
is distributed annually to Shareholders. See "Risk Factors -- Federal Income Tax
Risks -- Failure to Achieve or Maintain REIT Status" and "Federal Income Tax
Consequences."
LEGAL PROCEEDINGS
The Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any material litigation threatened against the Company,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by liability insurance.
REGULATION
General. Apartment community properties are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas.
Americans with Disabilities Act. The properties and any newly-acquired or
developed multi-family properties must comply with Title III of the Americans
with Disabilities Act ("ADA") to the extent that such properties are "public
accommodations" or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public areas of the properties where such removal
is readily achievable. The ADA does not, however, consider residential
properties, such as multi-family properties, to be public accommodations or
commercial facilities, except to the extent portions of such facilities, such as
a leasing office, are open to the public. Although the Company intends to take
actions to ensure that its properties substantially comply with all requirements
under the ADA and applicable state laws, final regulations under the ADA have
not yet been promulgated. Noncompliance could result in imposition of fines or
an award of damages to private litigants. If required changes involve greater
expenditures than the Company currently anticipates, or if the changes must be
made on a more accelerated basis than it anticipates, the Company's ability to
make expected distributions could be adversely affected. The Company believes
that its competitors face similar costs to comply with the requirements of the
ADA.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of 1988
(the "FHA") requires multi-family properties first occupied after March 13, 1990
to be accessible to the handicapped. Noncompliance with the FHA could result in
the imposition of fines or an award of damages to private litigants. The Company
believes that it is in compliance with such law.
Rent Control Legislation. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from tenants increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions. The Company does not presently intend to develop or acquire
multi-family properties in markets that are either subject to rent control or in
which rent limiting legislation exists, although the Company is not precluded
from doing so.
PROPERTIES OWNED BY THE COMPANY
The Company owns no Properties as of the date of this Prospectus.
It is expected that the Company's Board of Directors will authorize the
Company's officers to cause the Company to borrow up to a specified principal
dollar amount (from time to time outstanding) on prevailing commercial terms
from suitable commercial lenders (and on either an unsecured or secured
36
<PAGE>
basis), to permit property acquisitions by the Company, as long as the offering
and sale of Shares is continuing and it is anticipated by the Company's officers
that proceeds from futures sales of Shares will be sufficient to repay the
amount of the borrowing. This borrowing authorization, if implemented, would be
in addition to any other borrowings authorized in the Company's Bylaws, and
should not be construed as limiting any of the Company's rights and powers
generally provided for in its Bylaws.
Such a line of credit would be designed to facilitate the timely acquisition
of properties by the Company and improve the regularity with which closings of
sales of Shares can be effected, without changing the Company's overall business
objective and policy of owning properties on an unleveraged or "debt-free"
basis. The rate at which Shares are sold is not necessarily consistent with the
manner in which prospective attractive property acquisitions become available to
the Company. The use of interim borrowings which are designed to be repaid with
subsequent sales of Shares could permit the Company to acquire properties
thought by management to be desirable, before Shares representing the full
purchase price of a particular property have been sold. Also the use of such
interim debt following sale of the Minimum Offering amount could have the effect
of reducing the period of time during which investors' funds are held in escrow
pending disbursement to the Company, since the Company would no longer be
required to match exactly proceeds from Share sales with property purchase
prices.
It is expected that the Company would utilize such interim borrowings only
if, and to the extent that, it is anticipated that future sales of Shares would
provide funds necessary to repay such borrowings. However, there would be no
assurance any such borrowings could, in fact, be repaid from future sales of
Shares. To the extent that Share sales are insufficient to repay any such
borrowings, the Company would have a remaining outstanding loan, which would
entail the types of risks and investment considerations described under "Risk
Factors-Possible Borrowing; Debt Financing May Reduce Cash Flow and Increase
Risk of Default" and "Investment Objectives and Policies-Borrowing Policies."
The Company would have a variety of potential means of addressing any such loan
remaining outstanding, including the repayment of such borrowing with cash from
operations or refinancing such borrowing with other debt, but such repayment
and/or refinancing would entail the types of effects on investors and the risks
described in such sections of this Prospectus.
PROPERTY ACQUISITION AND MANAGEMENT COMPENSATION
Each Property will be managed by Apple Residential Management Group, Inc.
under a property management agreement requiring payment by the Company of a
monthly management fee equal to five percent (5%) of the gross revenues of the
Property. In addition, the Company will reimburse Apple Residential Management
Group, Inc. for its expenses, including salaries and related overhead expenses,
associated with accounting and financial reporting services rendered by Apple
Residential Management Group, Inc. under the property management agreements.
Also, in consideration of services rendered to the Company in connection with
the selection and acquisition of each Property the Company will pay Apple Realty
Group, Inc. a property acquisition fee of two percent (2%) of the purchase
prices of the Properties. See "Compensation."
MANAGEMENT
DIRECTORS AND OFFICERS
The Directors of the Company have ultimate control over the management of the
Company and the conduct of its affairs, including the acquisition and
disposition of the Company's assets, but the Company has entered into an
Advisory Agreement with the Advisor to manage the Company's day-to-day affairs.
The Directors are charged with the responsibility of monitoring the relationship
between the Company and the Advisor. The Independent Directors are required to
make an annual determination that the Advisor's compensation is reasonable, that
total fees and expenses of the Company are reasonable and that the Company's
borrowings, if any, are appropriate.
37
<PAGE>
The Directors will spend such time on the affairs of the Company as their
duties may require. It is expected that the Directors will meet quarterly or
more frequently as required. Financial statements and various other financial
reports of the Company will be provided to the Directors quarterly to aid them
in the discharge of their duties. It is not contemplated that the Directors will
devote a substantial portion of their time to the discharge of their duties as
Directors.
At the time of Initial Closing, the Company will have a total of five
Directors, a majority of whom, as required by the Company's Bylaws, are
Independent Directors.
The current Directors of the Company, and the executive officers of the
Company, and their primary occupations during the last five years or more are
set forth below. The fifth Director, who will be an Independent Director, will
be selected before Initial Closing. The initial Directors will serve until the
first Annual Meeting of Shareholders, to be held in 1997.
NAME AGE POSITION
- -------------------------- -- ---------------------------------------------
Glade M. Knight .......... 52 Director, Chairman of the Board and President
Ted W. Smith ............. 40 Director
Penelope W. Kyle ......... 48 Director (Independent)
Bruce H. Matson .......... 39 Director (Independent)
Glade M. Knight. Mr. Knight is Chairman, Chief Executive Officer and sole
shareholder and Director of Apple Residential Advisors, Inc., the Advisor. He
also is the chief executive officer, sole Director and sole shareholder of Apple
Realty Group, Inc. and Apple Residential Management Group, Inc. Apple
Residential Advisors, Inc., Apple Realty Group, Inc. and Apple Residential
Management Group, Inc. were all organized in July, 1996.
Mr. Knight founded, and serves as the Chairman of the Board, President and a
Director of, Cornerstone Realty Income Trust, Inc., a Virginia corporation which
is a public real estate investment trust. Cornerstone Realty Income Trust, Inc.,
which began operations in 1993, acquires, owns and operates apartment complexes
in the mid-Atlantic and southeastern regions of the United States. During the
period December, 1992 through September, 1996, Cornerstone Realty Income Trust,
Inc. raised approximately $300 million from the sale of Shares in a best-efforts
offering, and the net proceeds from the Share sales were invested in apartment
complexes. As of October 1, 1996, Cornerstone Realty Income Trust, Inc. owned 37
apartment complexes.
Since 1972, Mr. Knight has held executive and/or ownership positions in
several corporations (including, beginning in 1978, Knight-Austin Corporation)
involved in the management of and investment in real estate. He has served,
directly or indirectly, as a general or limited partner of 71 limited
partnerships owning 80 properties comprising over 13,000 apartment units. See
The Advisor and Affiliates -- Prior Performance of Programs Sponsored by
Affiliates of the Advisor," for information on certain prior real estate
programs organized by Glade M. Knight.
Mr. Knight is the Chairman of the Board of Trustees of Southern Virginia
College in Buena Vista, Virginia. Mr. Knight is a member of the advisory board
to the Graduate School of Real Estate and Urban Land Development at Virginia
Commonwealth University and the Board of Directors of the Richmond Business
Workout Council, and is a former member of the National Housing Roundtable. An
alumnus of Brigham Young University, he has served on a National Advisory
Council for the University and is a founding member of and active lecturer for
the University's Entrepreneurial Department of the Graduate School of Business
Management.
Ted W. Smith. Ted Smith has been employed in various real estate acquisition
and management businesses since 1978. For approximately the last 12 years, he
has held executive positions with several Texas-based companies, including
Johnstown American, Balcor/American Express, Intergroup Properties and Goldquest
Properties. During his career, Mr. Smith has directed apartment portfolios in
excess of 13,000 units and has overseen the management of over 250 apartment
communities throughout the
38
<PAGE>
United States. He received his Certified Property Manager (CPM) designation in
1983 and has remained actively involved in the Institute of Real Estate
Management (IREM) program. Mr. Smith attended the University of Kansas from 1975
to 1978 where he majored in business administration with a real estate minor. He
remains an active alumnus of the Delta Upsilon Fraternity.
Penelope W. Kyle. Ms. Kyle became Director of the Virginia Lottery on
September 1, 1994. Ms. Kyle had worked in various capacities for CSX Corporation
and its affiliated companies from 1981 until August, 1994. She served as Vice
President, Administration and Finance for CSX Realty, Inc. since 1991, as Vice
President, Administration for CSX Realty, Inc. from 1989 to 1991, and as
Assistant Vice President and Assistant to the President for CSX Realty, Inc.
from 1987 to 1989. She received a B.A. from Guilford College in 1969, an M.A.
from Southern Methodist University in 1971, a degree in law from the University
of Virginia in 1979 and an M.B.A. from The College of William and Mary in 1987.
Bruce H. Matson. Mr. Matson is a shareholder in the law firm of LeClair Ryan,
A Professional Corporation, in Richmond, Virginia. Mr. Matson has practiced law
since 1983. He received an A.B. from the College of William and Mary in 1979,
and a J.D. from Marshall-Wythe School of Law, College of William and Mary, in
1983.
COMMITTEES OF DIRECTORS
The Directors will establish an Executive Committee that has the authority of
the full Board except for the declaration of distributions and non-delegable
matters specified in Virginia law. A majority of the members of the Executive
Committee must be Independent Directors.
At this time, the Executive Committee is responsible for making all of the
Company's investment and acquisition decisions, including all decisions to
invest in or acquire real property. Depending on the circumstances, certain
transactions with the Advisor and its Affiliates will require the additional
approval of a majority of the Directors or a majority of the Directors who are
not parties to the transaction or Affiliates of any person (other than the
Company) who is a party to the transaction.
The Directors will also establish an Audit Committee which will be
responsible for overseeing the relationship between the Company and its
independent auditors, including the annual audit of the Company's financial
statements, and monitoring the reasonableness of the Company's expenses. A
majority of the members of the Audit Committee must be Independent Directors.
Any property acquisition made with proceeds representing the Minimum Offering
amount ($15 million) will require the approval of the Executive Committee of the
Board of Directors. Otherwise the acquisition of any property with a contract
purchase price not greater than $15,000,000 may be undertaken by the President
acting alone (unless it is an acquisition from an Affiliate of the Advisor). Any
property acquisition with a contract purchase price exceeding $15,000,000 will
require the consent of the Executive Committee of the Board of Directors. Any
acquisition from an Affiliate of the Advisor will require the consent of a
majority of all Independent Directors and of the entire Board.
DIRECTOR COMPENSATION
The Company will pay to each Director who is not an Affiliate of the Advisor
an annual fee of $5,000 plus $500 for each meeting of the full Board of
Directors attended by such person in person ($100 if any are attended by
telephonic means). There will be no additional compensation for serving on a
Committee or attending a Committee meeting. The Company will, however, reimburse
all Directors for their travel and other out-of-pocket expenses incurred in
connection with attending any meeting of the Board or any Committee, and for
carrying on the business of the Company, including reimbursement for expenses
for any on-site review of properties presented for acquisition or of new
markets. Directors who are Affiliates of the Advisor receive no compensation
from the Company for their service as Directors.
39
<PAGE>
These Directors, however, are remunerated indirectly by their relationship to
the Advisor and its Affiliated companies and are reimbursed by the Company for
their expenses in attending meetings of the Directors or a Committee and in
carrying on the business of the Company.
INDEMNIFICATION AND INSURANCE
See "Summary of Organizational Documents -- Responsibility of Board of
Directors, Advisor, Officers and Employees" for a description of the nature of
the Company's obligation to indemnify the Company's directors and officers and
certain others in certain situations.
The Company intends to obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
OFFICER COMPENSATION
The officers of the Company are not paid salaries by the Company. Such
officers are officers of the Advisor and its Affiliates, which entities are
entitled to certain fees for services rendered by them to the Company. Thus, the
officers of the Company are, in essence, compensated by the Advisor or its
Affiliates. See "Compensation" for a description of the fees payable to the
Advisor and its Affiliates.
STOCK INCENTIVE PLANS
The Company has adopted two stock incentive plans which are described below.
For purposes of the description below, the term "Offering" means the Initial
Offering plus all additional offerings and sales of Shares which may occur
during the five-year period beginning November 1, 1996 and ending October 31,
2001. The term "Initial Offering" means the offering of Shares made pursuant to
this Prospectus.
The aggregate number of Shares reserved for issuance under the two stock
incentive plans is (1) 80,000 Shares, plus (2) 6.425% of the number of Shares
sold in the Initial Offering in excess of the Minimum Offering, plus (3) 6.2% of
the number of Shares sold in the Offering above the Initial Offering.
THE INCENTIVE PLAN
Under one plan (the "Incentive Plan"), incentive awards may be granted to
certain employees (including officers and directors who are employees) of the
Company, or of Apple Residential Advisors, Inc., Apple Residential Management
Group, Inc. or Apple Realty Group, Inc. (the latter three companies being
sometimes referred to herein as the "Apple Companies"). Of the Directors of the
Company, initially Messrs. Knight and Smith will be participants in the
Incentive Plan. Such incentive awards may be in the form of stock options or
restricted stock (as described below). Under the Incentive Plan, the number of
Shares reserved for issuance is equal to an aggregate of (1) 35,000 Shares, plus
(2) 4.625% of the number of Shares sold in the Initial Offering in excess of the
Minimum Offering, plus (3) 4.4% of the number of the Shares sold in the Offering
above the Initial Offering. If an option is cancelled, terminates or lapses
unexercised, any unissued Shares allocable to such option may be subjected again
to an incentive award. The purpose of the Incentive Plan is to attract and
retain the services of experienced and qualified employees who are acting on
behalf of the Company, either directly or through the Apple Companies, in a way
that enhances the identification of such employees' interests with those of the
Shareholders.
The Incentive Plan will be administered by a Compensation Committee of the
Board of Directors of the Company (the "Committee"). Notwithstanding anything to
the contrary in this Prospectus (including the Company's organizational
documents referred to herein), the Committee must have a minimum of two members
who are not eligible to participate in the Incentive Plan or any similar plan of
the Company other than the Directors' Plan (described below).
40
<PAGE>
Subject to the provisions of the Incentive Plan, the Committee has authority
to determine (i) when to grant incentive awards, (ii) which eligible employees
will receive incentive awards, (iii) whether the award will be an option or
restricted stock, and the number of Shares to be allocated to each incentive
award. The Committee may impose conditions on the exercise of options and upon
the transfer of restricted stock received under the Plan, and may impose such
other restrictions and requirements as it may deem appropriate.
STOCK OPTIONS
An option granted under the Incentive Plan will not be transferrable by the
option holder except by will or by the laws of descent and distribution, and
will be exercisable only at such times as may be specified by the Committee.
During the lifetime of the option holder the option may be exercised only while
the option holder is in the employ of the Company or one of the Apple Companies,
or within 60 days after termination of employment. In the event the termination
is due to death or disability, the option will be exercisable for a 180-day
period thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the Shares as of the date of grant of the option.
The Committee has discretion to take such actions as it deems appropriate
with respect to outstanding options in the event of a sale of substantially all
of the stock or assets of the Company, a merger of the Apple Company by which an
option holder is employed, or the occurrence of similar events. Adjustments will
be made in the terms of options and the number of Shares which may be issued
under the Incentive Plan in the event of a future stock dividend, stock split or
similar pro rata change in the number of outstanding Shares or the future
creation or issuance to shareholders generally of rights, options or warrants
for the purchase of Shares.
Options granted under the Incentive Plan are non-qualified stock options, not
intended to qualify for favorable incentive stock option tax treatment under the
Code.
RESTRICTED STOCK
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (i) none of such Shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on such Shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (ii) if a holder of restricted stock
ceases to be employed by the Company or one of the Apple Companies, he will
forfeit any shares of restricted stock on which the restrictions have not lapsed
or been otherwise removed.
The Committee will establish as to each share of restricted stock issued
under the Incentive Plan the terms and conditions upon which the restrictions on
such Shares shall lapse. Such terms and conditions may include, without
limitation, the lapsing of such restrictions at the end of a specified period of
time, or as a result of the disability, death or retirement of the participant.
In addition, the Committee may, at any time, in its sole discretion, accelerate
the time at which any or all restrictions will lapse or remove any or all such
restrictions.
AMENDMENT OF THE INCENTIVE PLAN AND INCENTIVE AWARDS
The Board of Directors may amend the Incentive Plan in such respects as it
deems advisable; provided that the shareholders of the Company must approve any
amendment that would (i) materially increase the benefits accruing to
participants under the Incentive Plan, (ii) materially increase the number of
Shares that may be issued under the Incentive Plan, or (iii) materially modify
the requirements of eligibility for participation in the Incentive Plan.
Incentive awards granted under the Incentive Plan may be amended with the
consent of the recipient so long as the amended award is consistent with the
terms of the Plan.
DIRECTORS' PLAN
The Company has also adopted a stock option plan for Directors of the Company
who are not employees of the Company or the Apple Companies (the "Directors'
Plan"). Under the Directors' Plan, the number of Shares reserved for issuance is
equal to 45,000 Shares plus 1.8% of the number of Shares sold in the Offering in
excess of the Minimum Offering.
41
<PAGE>
A Director is eligible to receive an option under the Directors' Plan if the
Director is not otherwise an employee of the Company or any Apple Company or any
subsidiary of the Company and was not an employee of any of such entities for a
period of at least one year before the date of grant of an option under the
Plan. Three members of the Board (all of the Directors except Messrs. Knight and
Smith) are expected initially to qualify to receive options under the Directors'
Plan.
The Directors' Plan will be administered by the Board. Grants of stock
options to eligible Directors under the Plan will be automatic. However, the
Board has certain powers vested in it by the terms of the Plan, including,
without limitation, the authority (within the limitations described therein) to
prescribe the form of the agreement embodying awards of stock options under the
Plan, to construe the Plan, to determine all questions arising under the Plan,
and to adopt and amend rules and regulations for the administration of the Plan
as it may deem desirable. Any decision of the Board in the administration of the
Directors' Plan will be final and conclusive. The Board may act only by a
majority of its members in office, except members thereof may authorize any one
or more of their number, or any officer of the Company, to execute and deliver
documents on behalf of the Board.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the Shares, each eligible Director will
receive an option to purchase 5,500 Shares plus 0.0125% of the number of Shares
in excess of the Minimum Offering sold by the initial closing.
(2) As of each June 1 during the years 1997 through 2001 (inclusive), each
eligible Director shall automatically receive an option to purchase 0.02% of the
number of Shares issued and outstanding on that date.
(3) As of the election as a Director of any new person who qualifies as an
eligible Director, such eligible Director will automatically receive an option
to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating Directors' interests with those of the Shareholders.
The exercise price for each option granted under the Directors' Plan will be
100% of the fair market value on the date of grant; no consideration will be
paid to the Company for the granting of the option. Options granted under the
Directors' Plan will have a term of 10 years and will be fully exercisable six
months after the date of grant. If an optionee ceases to serve as a Director of
the Company prior to the expiration of the six-month period following the date
of grant, the option will terminate on the date of such termination of service
as a Director. If an optionee ceases to serve as a Director of the Company after
the expiration of the six-month period following the date of grant, the option
will terminate three years after the date of termination of service, or on
expiration of the option, whichever is earlier.
Options granted under the Directors' Plan are non-transferable other than by
will or the laws of descent and distribution upon the death of the optionee and,
during the lifetime of the optionee, are exercisable only by him. Payment upon
exercise of an option under the Directors' Plan may be made in cash or with the
Company's Shares of equivalent value.
The Board may suspend or discontinue the Directors' Plan or revise or amend
the Plan in any respect; provided, however, that without approval of the
Company's shareholders no revision or amendment may increase the number of
Shares subject to the Plan or materially increase the benefits accruing under
the Plan. In addition, the Directors' Plan may not be amended more than once
every six months other than to comply with changes in the Code or ERISA.
STOCK OPTION GRANTS
As of the date of this Prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
42
<PAGE>
THE ADVISOR AND AFFILIATES
GENERAL
Pursuant to the Advisory Agreement with the Company, the Advisor, among other
things, will seek to obtain, investigate, evaluate and recommend property
investment opportunities for the Company, serve as property investment advisor
and consultant in connection with investment policy decisions made by the
Directors and, subject to the direction of the Directors, supervise the
day-to-day operations of the Company. The Advisor is a Virginia corporation all
of the common stock of which is owned by Glade M. Knight. Cornerstone Realty
Income Trust, Inc., which might be deemed an Affiliate of the Advisor, will own
preferred stock in the Advisor. Glade M. Knight is the sole director of the
Advisor and also its sole officer (serving as its Chairman, Chief Executive
Officer, President and Secretary).
THE ADVISORY AGREEMENT
The current Advisory Agreement has a one-year term ending October 31, 1997,
and is renewable annually by the Directors. The Advisory Agreement provides that
it may be terminated at any time by a majority of the Independent Directors or
the Advisor upon 60 days' written notice. Under the Advisory Agreement, the
Advisor undertakes to use its best efforts (i) to supervise and arrange for the
day-to-day management of the Company and (ii) to assist the Company in
maintaining a continuing and suitable property investment program consistent
with the Company's investment policies and objectives. Under the Advisory
Agreement, generally the Advisor is not required to, and will not, advise the
Company on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
generally will make its own decisions with respect to such temporary securities
investments.
Pursuant to the Advisory Agreement, the Advisor will be entitled to an annual
Asset Management Fee. The Asset Management Fee is payable quarterly in arrears.
The amount of the Asset Management Fee is a percentage of Total Contributions.
The applicable percentage used to calculate the Asset Management Fee is based on
the ratio of Funds from Operations to Total Contributions (such ratio being
referred to as the "Return Ratio" for the preceding calendar quarter. The per
annum Asset Management Fee is initially equal to the following with respect to
each calendar quarter: 0.1% of Total Contributions if the Return Ratio for the
preceding calendar quarter is 6% or less; 0.15% of Total Contributions if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. See "Compensation." The Advisor or an Affiliate
thereof will also receive reimbursement for certain direct expenses and
allocable overhead incurred in connection with its provision of services to the
Company.
The Bylaws require the Independent Directors to monitor the Advisor's
performance of the Advisory Agreement and to determine at least annually that
the amount of compensation the Company pays the Advisor is reasonable, based on
such factors as they deem appropriate, including the amount of the Asset
Management Fee in relation to the size, composition and profitability of the
investments of the Company; the success of the Advisor in selecting
opportunities that meet the Company's investment objectives; the rates charged
by other investment advisors performing comparable services; the amount of
additional revenues realized by the Advisor and its Affiliates for other
services performed for the Company; the quality and extent of service and advice
furnished by the Advisor; the performance of the Company's investments and the
quality of the Company's investments in relation to any investments generated by
the Advisor for its own account.
The Company's Bylaws generally prohibit the Operating Expenses of the Company
(generally defined as all Company operating, general and administrative
expenses, but excluding depreciation and similar non-cash items and expenses of
raising capital, interest, taxes and costs related to asset acquisition,
operation and disposition) from exceeding in any year the greater of 2% of the
total Average Invested Assets of the Company (generally defined as the monthly
average of the aggregate book value of Company assets invested in real estate,
before deducting depreciation) or 25% of the Net Income of the Company
(generally defined as the revenues for any period, less expenses other than
depreciation or
43
<PAGE>
similar non-cash items) for such year. Unless the Independent Directors conclude
that a higher level of expenses is justified based upon unusual and nonrecurring
factors which they deem sufficient, the Advisor must reimburse the Company for
the amount of any such excess. The Advisor must make such reimbursement within
120 days from the end of the Company's fiscal year. The Advisor will be entitled
to be repaid such reimbursements in succeeding fiscal years to the extent actual
Operating Expenses are less than the permitted levels. In determining that
unusual and nonrecurring factors are present, the Independent Directors will be
entitled to consider all relevant factors pertaining to the Company's business
and operations, and will be required to explain their conclusion in written
disclosure to the Shareholders. The Advisor generally would expect to pay any
required reimbursement out of compensation received from the Company in the
current or prior years. However, there can be no assurance that the Advisor
would have the financial ability to fulfill its reimbursement obligations.
The Company's Bylaws further prohibit the total Organizational and Offering
Expenses (including Selling Commissions) from exceeding 15% of the Total
Contributions. Furthermore, the total of all Acquisition Fees and Acquisition
Expenses paid by the Company in connection with the purchase of a property by
the Company shall be reasonable and shall in no event exceed an amount equal to
6% of the contract price for the property, unless a majority of the Directors
(including a majority of the Independent Directors) not otherwise interested in
the transaction approves the transaction as being commercially competitive, fair
and reasonable to the Company. For purposes of the foregoing limitation, the
"contract price for the property" means the amount actually paid or allocated to
the purchase, development, construction or improvement of the property,
exclusive of Acquisition Fees and Acquisition Expenses. Any Organizational and
Offering Expenses or Acquisition Fees and Acquisition Expenses incurred by the
Company in excess of the permitted limits shall be payable by the Advisor
immediately upon demand of the Company.
The foregoing is only a summary of the Advisory Agreement. A copy of the form
of such agreement has been filed as an exhibit to the registration statement of
which this Prospectus is a part; reference is made to the agreement for a
complete statement of its provisions.
APPLE REALTY GROUP, INC.
Apple Realty Group, Inc. is a Virginia corporation which was organized on
August 5, 1996. Apple Realty Group, Inc. is engaged in the business of
management of real property and the solution of financial and marketing problems
related to investments in real property.
Apple Realty Group, Inc. and the Company have entered into a Property
Acquisition/Disposition Agreement under which Apple Realty Group, Inc. has
agreed to act as a real estate broker in connection with the Company's purchases
and sales of properties. Under such agreement, Apple Realty Group, Inc. is
entitled to a real estate commission equal to 2% of the gross purchase prices of
the Company's properties, payable by the Company in connection with each
purchase; provided that if indebtedness is assumed or incurred in connection
with the acquisition, the acquisition fee that would have been payable with
respect to the portion of the purchase price represented by such indebtedness
shall not be payable until such time, if ever, that such indebtedness is repaid
with the proceeds of this Offering or other equity financing. Under such
agreements, Apple Realty Group, Inc. is also entitled to a real estate
commission equal to 2% of the gross sales prices of the Company's properties,
payable by the Company in connection with each property sale if, but only if,
any such property is sold and the sales price exceeds the sum of (1) the
Company's cost basis in the property (consisting of the original purchase price
plus any and all capitalized costs and expenditures connected with the property)
plus (2) 10% of such cost basis. For purposes of such calculation, the Company's
cost basis will not be reduced by depreciation. If the sales price of a
particular property does not equal the required amount, no real estate
commission is payable, but Apple Realty Group, Inc. is still entitled to payment
by the Company of its "direct costs" incurred in marketing such property where
"direct costs" refers to a reasonable allocation of all costs, including
salaries of personnel, overhead and utilities, allocable to services in
marketing such property. If the person from whom the Company purchases or to
whom the Company sells a property pays any fee to Apple Realty Group, Inc., such
amount will decrease the amount of the Company's obligation to Apple Realty
Group, Inc. In addition, Apple Realty Group, Inc. will not be entitled to any
disposition
44
<PAGE>
fee in connection with a sale of a property by the Company to Cornerstone Realty
Income Trust, Inc. or any Affiliate of Apple Realty Group, Inc., but Apple
Realty Group, Inc. will, in such case, be entitled to payment by the Company of
its direct costs incurred in such regard. The agreement has an initial term of
five years ending October 31, 2001, and will renew automatically for successive
terms of five years unless either party to the agreement elects not to renew by
notice sent to the other party within 60 days before the end of any term.
A copy of the form of Property Acquisition/Disposition Agreement has been
filed as an exhibit to the registration statement of which this Prospectus is a
part, and reference is made to the agreement for a complete description of its
provisions.
Subject to the conditions applicable generally to transactions between the
Company and Affiliates of the Advisor (see "Conflicts of Interest --
Transactions with Affiliates and Related Parties"), Apple Realty Group, Inc. or
an Affiliate may render services to the Company in connection with Company
financings or refinancings, and would be entitled to compensation for such
services. As of the date of this Prospectus, there are no specific agreements
for any such services.
Glade M. Knight is the sole shareholder and Director of Apple Realty Group,
Inc., as well as its sole officer, serving as Chairman, Chief Executive Officer,
President and Secretary.
APPLE RESIDENTIAL MANAGEMENT GROUP, INC.
Property management services for the Company's properties generally will be
performed by Apple Residential Management Group, Inc., an Affiliate of the
Advisor. See "Investment Objectives and Policies -- Management of Properties."
Apple Residential Management Group, Inc. is a Virginia corporation which was
organized on August 5, 1996.
Apple Residential Management Group, Inc. currently manages no apartment
complexes.
All of the common stock of Apple Residential Management Group, Inc. is owned
by Glade M. Knight. Cornerstone Realty Income Trust, Inc., which might be deemed
on Affiliate of the Advisor, will own preferred stock in Apple Residential
Management Group, Inc. The sole Director of Apple Residential Management Group,
Inc. is Glade M. Knight, who also serves as its Chairman, Chief Executive
Officer, President and Secretary. Ted W. Smith (who is a Director of the
Company) is the President and Chief Operating Officer of Apple Residential
Management Group, Inc.
PRIOR PERFORMANCE OF PROGRAMS SPONSORED BY AFFILIATES OF THE ADVISOR
The following paragraphs contain information on certain prior programs, all
of which, except Cornerstone Realty Income Trust, Inc., were organized as
partnerships, sponsored by Affiliates of the Advisor to invest in real estate.
Except as otherwise indicated in this section, the information set forth is
current as of October 1, 1996. Such information should not be considered to be
indicative of the capitalization or operations of the Company. Purchasers of the
Shares will not have any interest in the entities referred to in this Section or
in any of the properties owned by such entities.
Affiliates of Apple Realty Group, Inc. or its predecessors previously
organized 40 partnerships for the purpose of investing in real estate. Interests
in 38 of these partnerships, in which Mr. Knight served as a general partner and
all but one of which were limited partnerships, were sold to investors in
privately offered transactions. The 38 privately offered partnerships
collectively owned and operated 40 apartment complexes with a total of 5,972
apartment units and one motel with 144 rooms. A total of 733 investors in these
partnerships contributed an aggregate of approximately $47,788,965 to the
capital of the partnerships. The aggregate cost of the 41 properties purchased
by these 38 privately offered partnerships was approximately $129,088,000. All
of the partnerships were formed before, and have investment objectives
dissimilar to those of, the Company.
Seven of the dissimilar partnerships filed for reorganization under Chapter
11 of the United States Bankruptcy Code. Five of these partnerships subsequently
reached agreements with their lenders to allow foreclosure on their properties
on terms which were more favorable to the partnerships than were available
before the filing of the petition for reorganization. Two of the partnerships
emerged from their
45
<PAGE>
Chapter 11 reorganizations and in one of those partnerships, an unaffiliated
entity became the new general partner as part of a partnership recapitalization.
Two other partnerships in which Mr. Knight formerly served as a general partner
filed for reorganization under Chapter 11 of the United States Bankruptcy Code
within two years after Mr. Knight ceased to serve as general partner. Six of the
dissimilar partnerships acquiesced to negotiated foreclosures on their
properties upon terms which were more favorable to the partners than would have
been available in the absence of negotiation. Each of the partnerships described
in this paragraph owned a single property, and the adverse business development
affecting the partnership therefore resulted in the partnership ceasing all cash
distributions to investors.
The dissimilar partnerships used leverage (debt) which varied from
substantial to 100% in the acquisition of their properties. In addition, a
significant objective of the dissimilar partnerships was the realization of tax
losses which could be used to offset some or all of investors' other sources of
income. In the opinion of the Advisor, the bankruptcy filings and foreclosures
described above which were experienced by various dissimilar partnerships were
attributable to a combination of high leverage, a downturn in economic
conditions generally and the real estate industry in particular, changes in tax
laws (which decreased the perceived value of real estate to potential buyers and
lenders) and the unavailability of favorable financing. The Advisor does not
expect that this combination of factors will be applicable to the operations of
the Company. In particular, the Company expects to acquire its properties on an
all-cash basis, or using interim borrowing planned to be repaid with proceeds
from the sale of Shares. See "Investment Objectives and Policies -- Borrowing
Policies."
As of October 1, 1996, Mr. Knight had ceased to hold an interest in all but
four of the partnerships described above.
Two partnerships sponsored by an Affiliate of Apple Realty Group, Inc. were
issuers in public offerings of assignee units of limited partnership interest.
These two publicly offered partnerships had investment objectives similar to
those of the Company. One publicly offered partnership, Southeastern Income
Properties Limited Partnership ("Southeastern I"), raised $25,000,000 from 2,714
investors. Southeastern I acquired four apartment complexes comprising 833
apartment units. The other publicly offered partnership, Southeastern Income
Properties II Limited Partnership ("Southeastern II"), raised $17,883,780 from
1,710 investors. Southeastern II acquired four apartment complexes comprising
794 apartment units. The aggregate cost of the eight properties purchased by
Southeastern I and Southeastern II (including capital improvements thereto) was
approximately $41,178,606. The Affiliates of Apple Realty Group, Inc. which
originally served as the general partners for these two partnerships transferred
management control over these partnerships to a third party in February, 1992 by
converting to limited partner status. Thus, Affiliates of Apple Realty Group,
Inc. ceased to serve as their general partners. The transfer of management
control was part of a transaction in which Cornerstone Realty Group, Inc. (which
had acted as manager of the two partnerships' properties) sold its property
management rights to an unaffiliated property management company.
Mr. Knight was also principally responsible for the organization of
Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate investment
trust organized to acquire and own apartment complexes in the mid-Atlantic and
southeastern regions of the country. The investment objectives of the Company
are generally the same as those of Cornerstone. Between December, 1992 and
October, 1996, Cornerstone sold approximately $300 million in common shares to
approximately 11,000 investors. The net proceeds of the Cornerstone public
offering were used to acquire 37 apartment communities in Virginia, North and
South Carolina, and Georgia. All but one of the apartment communities were built
and in service before acquisition by Cornerstone. The aggregate cost of the 37
properties (including capital improvements thereto) was approximately
$295,607,707. The purchase prices of all such properties were paid in cash using
the proceeds from the sale of the common shares or using the proceeds from an
unsecured line of credit which was subsequently repaid using proceeds from the
sale of common shares, except that at October 1, 1996, approximately $36.6
million remained unpaid on such line of credit. Cornerstone expects to repay
this outstanding balance within six months using proceeds from the sale of
additional common shares. None of these properties has been sold. The Advisor
will, upon request of any investor or prospective investor, provide at no cost a
copy of the most recent Report on
46
<PAGE>
Form 10-K filed by Cornerstone with the Securities and Exchange Commission. For
a reasonable fee, the Advisor will also provide copies of the exhibits to the
Report on Form 10-K.
Part II of the Company's Registration Statement (which is not a part of this
Prospectus) contains a more detailed summary of the 37 property acquisitions by
Cornerstone. The Advisor will provide a copy of such summary without charge upon
request of any investor or prospective investor.
Reference is also made to the additional information on prior performance
appearing under "Experience of Prior Programs" in this Prospectus.
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
Beneficial ownership of Shares of the Company's common stock, and options to
purchase Shares of the Company's common stock (exercisable currently or within
60 days), held by directors and officers of the Company as of the date of this
Prospectus, are indicated in the table below. Each person named in the table has
sole voting and investment powers as to such Shares, or shares such powers with
his spouse and minor children, if any.
PERCENT OF
NUMBER OF SHARES AGGREGATE
BENEFICIALLY OUTSTANDING
NAME OWNED SHARES OWNED
- --------------------------------- ------------------ --------------
Apple Residential Advisors, Inc. 10 100%
In addition to the foregoing, Glade M. Knight, who is a Director, Chairman of
the Board and President of the Company, owns 200,000 "Class B Convertible
Shares." The Class B Convertible Shares are convertible into Common Shares
pursuant to the formula and on the terms and conditions set forth below. The
Class B Convertible Shares were issued by the Company to Mr. Knight on November
14, 1996, in exchange for the payment by Mr. Knight of $0.10 per Class B
Convertible Share, or an aggregate of $20,000.
There are no dividends payable on the Class B Convertible Shares. On
liquidation of the Company, the holder of the Class B Convertible Shares is
entitled to a liquidation payment of $0.10 per Class B Convertible Share before
any distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B Convertible
Shares are convertible into Common Shares upon and for 180 days following the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services (the events
described in this clause (2), a "Self-Administration Conversion"). Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the offering made by this Prospectus according
to the following formula:
47
<PAGE>
NUMBER OF COMMON
SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE SHARE
- ------------------------------- -----------------------
$50 million.................... 1.0
$100 million................... 2.4
$150 million................... 4.2
$200 million................... 6.4
$250 million................... 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares.
The conversion into Common Shares of the Class B Convertible Shares will
result in dilution of the Shareholders' interests. However, if the Company
elects to issue Shares to the Advisor or Apple Residential Management Group,
Inc. in connection with a Self-Administration Conversion, the number of such
Shares otherwise issuable by the Company will be reduced by the number of Shares
which can then be acquired upon conversion of the Class B Convertible Shares.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of all material United States federal income tax
consequences applicable to the Company and its shareholders is based upon
current law, which is subject to change. Any such change could be retroactively
applied and alter significantly the tax considerations described herein. The
following discussion is not exhaustive of all possible tax considerations and
does not give a detailed discussion of any state, local or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a prospective Shareholder in light of his or
her particular circumstances or to certain types of Shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP, AND SALE OF SHARES OF THE COMPANY, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP
AND SALE, AND WITH RESPECT TO POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company will elect to be treated for federal income tax purposes as a
REIT and intends to conduct its operations in a manner that will permit it to
continue so to qualify. While the Board of Directors and the Advisor intend to
cause the Company to operate in a manner that will enable it to comply with the
REIT requirements, there can be no certainty that such intention will be
realized. Moreover, relevant law may change so as to make compliance with one or
more of the REIT requirements difficult or impracticable. Failure to meet any of
the REIT requirements with respect to a particular taxable year could result in
termination of the Company's election to be a REIT, effective for the year of
such failure and all succeeding years.
The Company has not requested, and does not intend to request, a ruling from
the Service that it will qualify as a REIT. However, the Company has received an
opinion of its counsel, McGuire, Woods, Battle & Boothe, L.L.P., that, based
upon various assumptions and certain representations made by the Company as to
factual matters, the Company currently qualifies as a REIT, and will continue so
to qualify if it conducts its operations in the manner assumed therein. However,
investors should be aware that opinions of counsel are not binding upon the
Service. Furthermore, both the validity of the opinion and the continued
qualification of the Company for treatment as a REIT will depend on its
continuing to meet various requirements concerning, among other things, the
ownership of its Shares, the nature of its assets, the sources of its income and
the amount of its distributions to Shareholders. McGuire,
48
<PAGE>
Woods, Battle & Boothe, L.L.P. will not review the actual annual operating
results of the Company. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy the
REIT requirements.
As long as the Company qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal income tax on any income or gain
that is distributed currently to Shareholders. However, any undistributed income
or gain will be taxed to the Company at regular corporate rates. In addition,
the Company may be subject to (i) a 100% tax on certain income from any
"prohibited transactions" (i.e., sales or other dispositions of property (other
than certain real estate assets held not less than four years) that is stock in
trade, inventory, or held primarily for sale to customers in the ordinary course
of business), (ii) a 100% tax on the greater of the amount, if any, by which it
fails the 75% income test or the 95% income test described below, multiplied by
a fraction intended to reflect the REIT's profitability, (iii) a tax at the
highest corporate rate on any net income relating to "dealer" activities with
respect to foreclosure property, (iv) a 4% excise tax on a portion of any
undistributed income, and (v) a minimum tax on any items of tax preference.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In order to qualify as a REIT, the Company must satisfy a variety of complex
tests relating to its organization, Share ownership, assets, income and
distributions. Those tests are summarized below.
Organizational Requirements. A REIT is defined in the Code as: (1) a
corporation, trust or association; (2) which is managed by one or more directors
or trustees; (3) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (4) which would
be taxable as a domestic corporation, but for Sections 856 through 860 of the
Code; (5) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (6) the beneficial ownership of which
is held by 100 or more persons; and (7) not more than 50% in value of the
outstanding stock of which is owned during the last half of each taxable year,
directly or indirectly, by or for five or fewer individuals (as defined in the
Code to include certain entities). In addition, the organization must meet
certain income and asset tests described below. Conditions (1) to (5),
inclusive, must be met during the entire taxable year and condition (6) must be
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. However, conditions
(6) and (7) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year will be the calendar year.
As a Virginia corporation, the Company satisfies the first and fourth
requirements. The Company also will be managed by a board of directors. The
Company has transferable shares and does not intend to operate as a financial
institution or insurance company. Additionally, the Company has more than 100
shareholders. To assure continued compliance with the 50% diversity of ownership
requirement, the Company's Bylaws prohibit any individual investor from
acquiring, directly or indirectly, more than 9.8% (by value) of the outstanding
Shares and provide restrictions regarding the transfer of Shares. Treasury
Regulations require the Company to maintain records of the actual ownership of
its Shares. In accordance with those regulations, the Company must demand from
record Shareholders written statements which disclose information concerning the
actual ownership of the Shares. Any record Shareholder who does not provide the
Company with required information concerning actual ownership of the Shares is
required to include certain specified information relating thereto in his income
tax return.
Income Tests. To maintain qualification as a REIT for any taxable year, three
gross income requirements must be met annually: the "75% income test," the "95%
income test," and the "30% income test." The 75% income test requires that the
Company derive, directly or indirectly, at least 75% of its gross income
(excluding gross income from prohibited transactions) from certain real estate
related sources, which include, but are not limited to: (i) certain types of
"rents from real property," (ii) "interest" on obligations secured by mortgages
on real property or interests in real property, (iii) income or
49
<PAGE>
gain from real property acquired through foreclosure or similar proceedings,
(iv) gains from the sale or other disposition of certain real property or
interests in real property that are not "dealer property" (i.e., property that
is stock in trade, inventory, or held primarily for sale to customers in the
ordinary course of business), (v) commitment fees with respect to mortgage
loans, (vi) income from stock or debt instruments that were acquired as a
temporary investment of new capital, if such income is received or accrued
during the first year after the Company receives the new capital ("qualified
temporary investment income"), (vii) dividends or other dividends on shares of
other qualified REITs, (viii) abatements and refunds of taxes on real property,
and (ix) gains from the sale or disposition of real estate assets which are not
prohibited transactions solely by reason of Section 857(b)(6) of the Code. The
95% income test requires that at least an additional 20% of the Company's gross
income for the taxable year consist either of income that qualifies under the
75% income test or certain types of passive income, which include, but are not
limited to: (i) dividends from companies other than REITs, (ii) interest on
obligations that are not secured by interests in real property, and (iii) gains
from the sale or other disposition of stock, securities, or real property, if
such assets are not dealer property. The 30% income test, unlike the other
income tests, prescribes a ceiling for certain types of income. The Company may
not derive more than 30% of its gross income from the sale or other disposition
of (i) stock or securities held for less than one year, (ii) property in a
transaction which is a prohibited transaction, and (iii) real property
(including interests in real property and interests in real property mortgages)
held for less than four years other than property compulsorily or involuntarily
converted within the meaning of Section 1033 of the Code or foreclosure
property.
In the case of a REIT that is a partner in a partnership, the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the assets and gross income of the partnership attributed to
the REIT retain the same character as in the hands of the partnership.
The Company expects that substantially all its gross income from its
properties will be considered "rents from real property." Rents received by the
Company will qualify as "rents from real property" for purposes of satisfying
the income tests described above only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits of
any person although rents generally will not be excluded merely because they are
based on a fixed percentage or percentages of receipts or sales. None of the
rents from properties that will be held by the Company are based on income or
profits of a kind that would disqualify such rents from being treated as rents
from real property. Second, rents received from a tenant will not qualify as
rents from real property if the REIT, or an owner of 10% or more of the REIT,
also directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). The Company does not anticipate receiving any rents from Related
Party Tenants. Third, if rent attributable to personal property that is leased
in connection with a lease of real property is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as rents from real property. The Company
anticipates that any rent attributable to personal property leased in connection
with a lease of real property will not be greater than 15% of the total rent
received under the lease. Finally, for rents to qualify as rents from real
property, the REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no income. However, the
Company may perform directly certain services customary in the geographic
markets in which it operates the property and customary to the type and class of
such property, provided that such services are not services which are considered
rendered to an occupant of the property. In this regard, the Company presently
intends to have Apple Residential Management Group, Inc., a corporation that
will qualify as an "independent contractor," manage and operate the Company's
real property assets.
The term "interest" generally does not include any amount determined, in
whole or in part, on the income or profits of any person, although an amount
generally will not be excluded from the term interest solely by reason of being
based on a fixed percentage or percentages of receipts or sales.
Any gross income derived from a prohibited transaction is taken into account
in applying the 30% income test necessary to qualify as a REIT (and the net
income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property
50
<PAGE>
(other than foreclosure property) that is held primarily for sale to customers
in the ordinary course of a trade or business. The Company believes that none of
its assets are held for sale to customers and that sale of any property will not
be in the ordinary course of business for the Company. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of business."
If the Company fails to satisfy one or both of the 75% or 95% income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if it
is eligible for relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule is not due to fraud with intent to evade
tax. It is not now possible to determine the circumstances under which the
Company may be entitled to the benefit of these relief provisions. If these
provisions apply, a 100% tax is imposed on the net income attributable to the
greater of the amount by which the Company failed the 75% income test or the 95%
income test. No analogous relief is available should the Company fail to satisfy
the 30% income test.
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy several tests relating to the nature and diversification of
its assets. First, at least 75% of the value of the Company's total assets must
be represented by real estate assets, cash, cash items (including receivables
arising in the ordinary course of the Company's operations) and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those includible in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the Company's
total assets. Finally, of the investments included in the 25% asset class, the
Company may not own more than 10% of any one issuer's outstanding voting
securities. The property in which the Company proposes to invest generally will
qualify largely or entirely as real estate assets under the 75% requirement
described above.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance.
Although not anticipated, the Company may organize and hold all of the stock
of one or more subsidiary corporations intended to qualify for treatment as a
"qualified REIT subsidiary." The Company's ownership of the stock of one or more
qualified REIT subsidiaries will not cause the Company to fail to satisfy the
asset tests described above. The Code provides that a corporation which is a
qualified REIT subsidiary will not be treated as a separate corporation, and,
for purposes of the asset and income tests, all assets, liabilities, and items
of income, deduction, and credit of a qualified REIT subsidiary will be treated
as assets, liabilities, and items of income, deduction and credit (as the case
may be) of the Company. Thus, in applying the income and asset tests described
above, the separate corporate existence of the Company's qualified REIT
subsidiary would be ignored in a manner analogous to an operating division of
the Company.
Annual Distribution Requirement. To qualify as a REIT, the Company is
required to make distributions (other than capital gain dividends) to its
Shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the after-tax net
income, if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. Such distributions must be
51
<PAGE>
paid in the taxable year to which they relate, or in the following taxable year
if declared before the Company timely files its tax return for such year and if
paid on or before the first regular distribution after such declaration. "REIT
taxable income" generally is computed in the same manner as taxable income of
ordinary corporations, with several adjustments, which include, but are not
limited to, the deduction allowed for dividends paid, but not for dividends
received. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its REIT
taxable income, as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Finally, as discussed above, the Company may be subject to
an excise tax if it fails to meet certain other distribution requirements.
The Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. Although not anticipated,
if such timing differences occur, the Company may find it necessary to arrange
for borrowings or, if possible, pay taxable stock dividends to meet the
distribution requirement.
The distribution requirement may be determined not to have been met by the
Company in a given year if the Service successfully challenges the deductibility
of a Company expenditure in an audit of that year. The Service also could
challenge the deductibility of the Asset Management Fee and other fees paid by
the Company. If a challenge by the Service were successful, the Company may be
able to rectify a resulting failure to meet the distribution requirement by
paying "deficiency dividends" to Shareholders in a later year, which may be
included in the Company's deduction for distributions paid for the earlier year.
Although the Company may be able, therefore, to avoid being taxed on amounts
distributed as deficiency dividends, it will be required to pay interest to the
Service based upon the amount of any deduction taken for deficiency dividends.
Failure to Qualify as a REIT. If the Company fails to qualify as a REIT for
any taxable year, and certain relief provisions do not apply, it will be subject
to federal income tax (including any applicable minimum tax) at regular
corporate rates and will not receive deductions for distributions paid to
Shareholders. As a result, the amount of after-tax earnings available for
distribution to Shareholders would decrease substantially. All distributions to
Shareholders would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and distributions received by corporate
Shareholders may be eligible for a dividends-received deduction. In addition,
the Company would not be eligible to elect REIT status for the four subsequent
taxable years, unless its failure to qualify was due to reasonable cause and not
to willful neglect, and certain other requirements were satisfied. In order to
renew its REIT qualification at the end of such a four-year period, the Company
would be required to distribute all of its current and accumulated earnings and
profits before the end of the period. Any such distributions would be taxable as
ordinary income to Shareholders. In addition, the Company would be subjected to
taxation on any unrealized gain inherent in its assets at such time. If the
Company were to lose REIT status, however, it expects that it would liquidate
over the period and in the manner that the Board of Directors deems to be in the
best interest of the Shareholders, and such liquidation likely would be
completed before the Company would be eligible to re-elect REIT status.
FEDERAL INCOME TAXATION OF THE SHAREHOLDERS
While the Company qualifies for taxation as a REIT, distributions made to the
Company's Shareholders from current or accumulated earnings and profits (and not
designated as capital gain dividends) will be includible by the Shareholders as
ordinary income for federal income tax purposes. None of these distributions
will be eligible for the dividends-received deduction for corporate
Shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the Shareholder has held his or her Shares in the Company.
Corporate Shareholders, however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
52
<PAGE>
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a Shareholder to the extent that they do not exceed the
adjusted basis of the Shareholder's Shares. Shareholders will be required to
reduce the tax basis of their Shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a Shareholder who holds
its Shares as a dealer). The tax basis as so reduced will be used in computing
the capital gain or loss, if any, realized upon sale of the Shares. Any loss
upon a sale or exchange of Shares by a Shareholder who held such Shares for six
months or less (after applying certain holding period rules) generally will be
treated as a long-term capital loss to the extent that such Shareholder
previously received capital gain distributions with respect to such Shares. All
or a portion of any loss realized upon a taxable disposition of Shares of the
Company may be disallowed if other Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within 30 days before or after the
disposition.
Shareholders may not include in their individual federal income tax returns
any net operating losses or capital losses of the Company. In addition, any
distribution declared by the Company in October, November, or December of any
year payable to a Shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the Shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company no later than January 31 of the following year. The Company may be
required to withhold a portion of capital gain distributions to any Shareholders
who fail to certify their non-foreign status to the Company.
Those Shareholders who avail themselves of the Additional Share Option
(described under "Plan of Distribution") or a dividend reinvestment plan, if
implemented, will be deemed for federal income tax purposes to have received the
gross amount distributed on their behalf notwithstanding its reinvestment in
Shares. Such Shareholders will thus be taxed as if they had received such
distributions despite the fact that their distributions have been reinvested
and, as a result, they will not receive any cash with which to pay the resulting
tax liability associated with the distribution. Shares received pursuant to the
Additional Share Option will have a holding period which begins on the day after
purchase of the Shares. The tax basis of such Shares will generally be the gross
amount of the deemed distribution.
INVESTMENT BY TAX-EXEMPT ENTITIES
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has ruled that distributions by a REIT to
an exempt employee pension trust do not constitute UBTI. Based on such ruling
and assuming the Company conducts its activities as a REIT as described in this
Prospectus, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances the
acquisition of its Shares, a portion of its income from the Company may
constitute UBTI pursuant to the "debt-financed property" rules under Section 514
of the Code.
For taxable years beginning after December 31, 1993, qualified trusts that
hold more than 10% (by value) of the shares of a REIT may be required to treat a
percentage of REIT distributions as UBTI. The requirement applies only if (i)
the qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on the holding of REIT shares by five or fewer
individuals, including qualified trusts, (ii) the REIT is "predominantly held"
by qualified trusts, and (iii) the REIT assets would have generated significant
UBTI if the qualified trust held such assets directly. A REIT would be
predominantly held if either (i) a single qualified trust held more than 25% by
value of the interests in the REIT or (ii) one or more qualified trusts, each
owning more than 10% by value, held in the aggregate more than 50% of the
interests in the REIT. The percentage of any distribution paid (or treated as
paid) to the qualified trust that will be treated as UBTI is determined by the
amount of UBTI earned by the REIT (treating the REIT as if it were a qualified
trust, and therefore subject to tax on UBTI) as a percentage of the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5%. For these purposes, a qualified trust is any trust defined under
Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code.
The Company does not anticipate that it will be predominantly held by qualified
trusts.
53
<PAGE>
FOREIGN INVESTORS
Foreign Shareholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign Shareholders (collectively, "Non-U.S.
Shareholders") are complex. This discussion does not attempt to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of federal, state, and local
income tax laws with regard to an investment in the Shares, including any
reporting requirements, as well as the tax treatment of such an investment under
the laws in their country of residence.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividend distributions and
as ordinary income to the extent of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces or eliminates that tax. However, if income from the
investment in the Shares is treated as effectively connected with the Non-U.S.
Shareholder's conduct of a United States trade or business, the Non-U.S.
Shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. Shareholders are taxed with respect to such distributions (and
may also be subject to the 30% branch profits tax in the case of a Shareholder
that is a foreign corporation). The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions paid
to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and an
appropriate Form 1001 has been filed with the Company or (ii) the Non-U.S.
Shareholder files an Internal Revenue Service Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a Shareholder to the extent that they do not exceed the adjusted
basis of the Shareholder's Shares but rather will reduce the adjusted basis of
such Shares. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Shareholder's Shares, the excess will give rise to tax liability if
the Non-U.S. Shareholder otherwise would be subject to tax on any gain from the
sale or disposition of his or her Shares in the Company, as described below. If
it cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Thus, Non-U.S. Shareholders would be taxed at the normal capital gain
rates applicable to U.S. Shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate Shareholder not entitled
to treaty exemption. The Company is required by applicable Treasury Regulations
to withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is not reduced by any U.S. tax treaty but is,
however, creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It currently is anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of Shares will not
be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which
54
<PAGE>
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals), except that the purchaser of such Shares may be
required to withhold a portion of the proceeds against such tax liability. In
addition, distributions that are treated as gain from the disposition of Shares
and are subject to tax under FIRPTA may also be subject to a 30% branch profits
tax when made to a foreign corporate Shareholder that is not entitled to treaty
exemptions.
THE FOREGOING DISCUSSION DOES NOT PURPORT TO DESCRIBE ANY FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY. NON-U.S. SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO ALL TAX ASPECTS OF AN INVESTMENT
IN THE COMPANY.
Backup Withholding. The Company will report to its Shareholders and the
Service the amount of distributions paid during each calendar year and the
amount of tax withheld, if any. Under the backup withholding rules, a
Shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) has provided a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A Shareholder that does
not provide the Company with a correct taxpayer identification number may also
be subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the Shareholder's income tax liability.
STATE AND LOCAL TAXES
Even if the Company qualifies on a continuing basis as a REIT for federal
income tax purposes, the Company and its Shareholders may be subject to certain
state and local taxes. This Prospectus does not purport to describe any state or
local tax consequences of an investment in the Company. State and local tax
treatment of the Company and the Shareholders may differ substantially from the
federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OR ITS OWN TAX ADVISOR WITH
REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
INVESTMENT BY TAX-EXEMPT ENTITIES
UNRELATED BUSINESS TAXABLE INCOME
As discussed above, distributions from the Company will not constitute UBTI
to most tax-exempt investors, except to the extent such investors finance the
purchase of their Shares. See "Federal Income Tax Consequences -- Federal Income
Taxation of the Shareholders -- Investment By Tax-Exempt Entities."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary responsibilities and other requirements regarding the
assets of an employee benefit plan ("Plan Assets"). For example, ERISA requires
that all Plan Assets shall be held in trust, that the plan shall avoid certain
prohibited transactions involving Plan Assets, and that investment management
responsibilities with respect to Plan Assets may be delegated only in certain
permitted manners. Although the matter is not entirely free from doubt, under
the relevant Department of Labor Regulations, the assets of the Company are not
expected to constitute Plan Assets because, subject to certain factual
determinations, the Shares should be treated as "publicly offered securities,"
i.e., securities that are widely held, freely transferable, and registered under
certain federal securities laws. In addition, the Company's assets would not
constitute Plan Assets to the extent that at least 75% of the Shares are held,
at all
55
<PAGE>
times, by investors other than "benefit plan investors." The term "benefit plan
investors" generally includes qualified employee pension or profit sharing
trusts and Keogh Plan trusts ("Employee Trusts"), individual retirement accounts
("IRAs"), and certain other entities.
The assets of the Company are expected to be exempt from the Plan Asset rules
for the reasons set forth above. However, this determination is based, in part,
on facts that cannot be ascertained at the present time. Consequently, there can
be no assurance that the Company's assets will not be treated as Plan Assets at
any given time. Nevertheless, the Advisor will use its best efforts to qualify
the Company's assets for exemption from the Plan Asset rules.
In considering the purchase of Shares and the number of Shares to be
purchased, a fiduciary with respect to an Employee Trust or other entity subject
to ERISA should consider, in addition to the foregoing, whether the investment
will satisfy: (i) the prudence requirement of Section 404(a)(1)(B) of ERISA,
considering the nature of an investment in, and the compensation structure of,
the Company, the fact that the Company has no history of operations and the fact
that the investments to be made by the Company have not been selected as of the
date of this Prospectus; (ii) the diversification requirement of Section
404(a)(1)(C) of ERISA; and (iii) the requirements that the fiduciary provide
benefits for the Plan participants and beneficiaries and value Plan Assets
annually.
In considering the purchase of Shares, a fiduciary with respect to an
Employee Trust should consider the trust requirement of ERISA. In addition, a
custodian or trustee of an IRA should consider the Code's prohibition against
the commingling of IRA assets with other property. Section 403(a) of ERISA
generally provides that the assets of employee benefit plans must be held in
trust. Section 408(a)(5) of the Code provides that an IRA must prohibit the
commingling of IRA assets with other property. The Department of the Treasury
and the Service have not issued any rulings or regulations that provide guidance
on the identification of the assets of an IRA for purposes of Section 408(a)(5)
of the Code.
If an IRA currently has insufficient funds to satisfy the minimum 200 Share
purchase requirement for an investment in the Company, it may be possible to
satisfy those requirements through contributions to the IRA by its owner
(concurrent with the investment in the Company) with respect to his prior and/or
current taxable year. In this regard, the owner of an IRA which is a prospective
investor should consult with his or her tax advisor.
Shares may not be purchased with Plan Assets by an Employee Trust or IRA with
respect to which the Board of Directors, the Advisor, or any of their Affiliates
(i) regularly gives investment advice, (ii) provides management services on a
discretionary basis, (iii) has an agreement, either written or unwritten, under
which information, recommendations, and advice used as a primary basis for
investment decisions is provided, (iv) has an agreement or understanding, either
written or unwritten, under which individualized investment advice is given, or
(v) is otherwise a fiduciary within the meaning of Section 3(21) of ERISA.
56
<PAGE>
CAPITALIZATION
The capitalization of the Company as of August 7, 1996, and as adjusted to
reflect the issuance and sale of the Shares offered hereby assuming the Minimum
Offering and Maximum Offering is as follows:
AS ADJUSTED
----------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- ------------- --------------
Common Shares; no par value; 10 shares
issued, 1,666,666.67 and 25,166,666.67
shares issued as adjusted,
respectively........................... $100 $15,000,100 $250,000,100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The Company was organized on August 7, 1996 and has had no operations to
date. The Company intends to invest primarily in existing residential apartment
communities located in Texas and the southwestern United States and to qualify
as a REIT under the Code.
The proceeds of this offering and the cash flow generated from properties the
Company acquires and short-term investments will be the Company's principal
sources of liquidity. In addition, although the Company has no current intention
to borrow funds, it reserves the right to do so, subject to approval of the
Board of Directors. See "Investment Objectives and Policies -- Borrowing
Policies." The Company generally will be obligated to distribute annually at
least 95% of its taxable income to its Shareholders to qualify as a REIT under
the Code. The Company anticipates that its cash flow will be adequate to cover
Operating Expenses and to permit the Company to meet its anticipated liquidity
requirements, including distribution requirements.
The effects of future inflation on the Company's operations may increase the
Company's operating costs, including interest costs on bank borrowings, if any.
The Company intends to establish initial working capital reserves of at least
0.5% of the proceeds of this offering. The Company also intends to maintain
ongoing working capital reserves in an amount equal to at least 0.5% of the
proceeds of the offering, subject to review and re-evaluation by the Board of
Directors. Such funds, in combination with income from investment properties and
short-term investments, are anticipated to be sufficient to satisfy its
liquidity requirements.
PLAN OF DISTRIBUTION
The Company is offering to sell the Shares using the service of David Lerner
Associates, Inc. as the Managing Dealer, and other broker-dealers selected by
the Managing Dealer ("Selected Dealers"). The Shares are being offered on a
"best efforts" basis, meaning that the Managing Dealer and Selected Dealers are
not obligated to purchase any Shares. No Shares will be sold unless at least the
Minimum Offering of $15,000,000 in Shares has been sold no later than one year
after the date of this Prospectus. If the Minimum Offering of Shares is not sold
by that date, the offering will terminate and all funds theretofore deposited by
investors into the Escrow Account will be promptly refunded in full, together
with each investor's share of any interest earned thereon (less withholding of
taxes in respect to payment of interest, if applicable). First Union National
Bank of North Carolina will act as escrow agent for the Escrow Account until the
Minimum Offering of Shares is sold.
The Shares are offered at $9 per Share until the Minimum Offering of
$15,000,000 in Shares is achieved. Thereafter, the Shares will be offered at $10
per Share.
The offering of Shares is expected to terminate when all Shares offered
hereby have been sold or one year from the date hereof, unless extended by the
Company for up to an additional year. In some states, extension of the offering
may not be allowed, or may be allowed only upon certain conditions.
Purchasers will be sold Shares at one or more closings. Following the sale of
the Minimum Offering, additional closings will be held from time to time during
the offering period as orders are received. The final closing will be held
shortly after the termination of the offering period or, if earlier, upon the
sale
57
<PAGE>
of all the Shares. It is expected that after the closing of the sale of the
Minimum Offering, purchasers will be sold Shares no later than the last day of
the calendar month following the month in which their orders are received. Funds
received during the offering but after the initial disbursement of funds may be
held in escrow for the benefit of purchasers until the next closing, and then
disbursed to the Company.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been accepted by a duly
authorized representative of the Company. The Company will either accept or
reject each subscription within four business days from the receipt of the
subscription by the Managing Dealer or a Selected Dealer. The Company intends to
cause to be paid from any escrow account each investor's share of net interest
on escrowed funds, whether or not the investor's subscription for Shares is
accepted. The Company reserves the right to adopt reasonable simplifying
conventions or assumptions in determining each investor's share of such net
interest. Investors' subscriptions will be revocable by written notice delivered
to the escrow agent at least five days before the applicable closing. Subject to
the foregoing, an investor's subscription funds may remain in escrow for an
indefinite period of time.
It is expected that Shareholders will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to herein as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per Share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. The
Company reserves the right to establish rules governing such reinvestment, as
well as the right to modify or terminate such Additional Share Option at any
time. The Company estimates that approximately 400,000 Shares ($4,000,000 at $10
per Share) offered through this Prospectus will be purchased through
Shareholders' reinvestment of distributions in Shares pursuant to the Additional
Share Option described in this paragraph, but the number of Shares which will be
so purchased cannot be determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a Shareholder his Shares, a Shareholder will
be able to elect the option by directing, on his Subscription Agreement, that
cash distributions be reinvested in additional Shares. Distributions
attributable to any calendar quarter will then be used to purchase Shares in
this offering. As described under "Federal Income Tax Consequences -- Federal
Income Taxation of the Shareholders," a Shareholder who elects the Additional
Share Option will be taxed as if he had received his distributions which are
used to purchase additional Shares. A Shareholder may elect to terminate his
participation in the Additional Share Option at any time by written notice sent
to the Company or to the broker-dealer through which the Shareholder initially
purchased Shares. The notice will be effective with respect to distributions
attributable to any calendar quarter if it is sent at least 10 days before the
end of such calendar quarter.
Funds not invested in real properties may be invested by the Company in
United States Government securities, certificates of deposit of banks located in
the United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States having
a net worth of at least $50,000,000, bankers' acceptances, prime commercial
paper or similar highly liquid investments (such as money market funds selected
by the Company) or evidences of indebtedness.
The Company will pay to the Managing Dealer Selling Commissions on all sales
made in an amount equal to 7.5% of the purchase price of the Shares ($0.675 per
Share purchased at $9 per Share and $0.75 per Share purchased at $10 per Share).
The Company will also pay to the Managing Dealer a Marketing Expense Allowance
equal to 2.5% of the purchase price of the Shares, as a non-accountable
reimbursement for expenses incurred by it in connection with the offer and sale
of the Shares. The Marketing Expense Allowance will equal $0.225 per Share
purchased at $9 per Share and $0.25 per Share purchased at $10 per Share. The
Selling Commissions and Marketing Expense Allowance are payable to the Managing
Dealer at the times of the issuance of Shares to purchasers.
58
<PAGE>
Prospective investors are advised that David Lerner Associates, Inc., and
other broker-dealers participating in this offering, reserve the right to
purchase Shares, on the same terms applicable generally to sales pursuant to
this Prospectus, for their own accounts, at any time and in any amounts, to the
extent not prohibited by relevant law.
The Agency Agreement among the Company, the Advisor, Apple Realty Group, Inc.
and the Managing Dealer permits the Managing Dealer to use the services of other
broker-dealers in offering and selling the Shares, subject to the Company's
approval. The Managing Dealer will pay the compensation owing to such
broker-dealers out of the Selling Commissions or Marketing Expense Allowance
payable to it. Sales by such broker-dealers would be carried on in accordance
with customary securities distribution procedures. The Managing Dealer may be
deemed to be an "underwriter" for purposes of the Securities Act in connection
with this offering. Purchasers' checks are to be made payable to "First Union
National Bank, Escrow Agent" or as otherwise directed by the Managing Dealer.
Purchasers are required to purchase a minimum of $5,000 in Shares ($2,000 in
Shares for Qualified Plans). The Advisor and Affiliates of the Advisor may
purchase in this offering up to 2.5% of the total number of Shares sold in the
offering, on the same terms and conditions as the public. If the Advisor or
Affiliates purchase any Shares, they will be permitted to vote on any matters
submitted to a vote of holders of the Shares. Any purchase of Shares in this
offering by the Advisor or Affiliates must be for investment, and not for resale
or distribution. The Shares described in this paragraph are exclusive of the
Shares which may be issued under the Company's stock incentive plans. See
"Management -- Stock Incentive Plans."
There has been no previous market for any of the Company's Shares. The
initial offering price for the Shares is arbitrary and was determined on the
basis of the proposed capitalization of the Company, market conditions and other
relevant factors.
The Company, the Advisor and Apple Realty Group, Inc. have agreed to
indemnify the Managing Dealer and other broker-dealers against certain
liabilities, including liabilities under the Securities Act. No indemnification
is provided for willful misfeasance, bad faith, gross negligence or reckless
disregard of duties under the Securities Act by any of such persons.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 Common
Shares, no par value and 200,000 Class B Convertible Shares, no par value. Each
Common Share will be fully paid and nonassessable upon issuance and payment
therefor. As of the date of this Prospectus, there were 10 Common Shares of the
Company issued and outstanding. All 200,000 authorized Class B Convertible
Shares are held by Glade M. Knight. See "Principal and Management Stockholders."
The Common Shares will have the sole voting power to elect Directors and
holders of the outstanding Common Shares will be entitled to one vote per Share
on all matters submitted to a vote of the Shareholders. Common Shares of the
Company have no preference, conversion, exchange, preemptive or cumulative
voting rights. No equity securities of the Company shall have greater voting
rights per share than those attributable to the Common Shares that will be sold
in this offering. Holders of Common Shares will be entitled to participate on a
per-Share basis in distributions paid in respect of the Shares if, when and as
declared by the Board of Directors and in the distribution of net assets of the
Company upon its liquidation, dissolution or winding up.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements for qualification for the tax benefits accorded a
REIT under the Code are that (i) at no time during the last half of each taxable
year may more than 50% in value of the outstanding Shares be owned, directly or
indirectly, by or for five or fewer individuals, and (ii) there must be at least
100 Shareholders for at least 335 days in any taxable year, or proportionate
part of any shorter taxable year, after its first taxable year. See "Federal
Income Tax Consequences."
59
<PAGE>
In order that the Company may meet these requirements at all times, the
Bylaws prohibit any person from acquiring or holding, directly or indirectly,
ownership of a number of Shares in excess of 9.8% of all the outstanding Shares.
Shares owned by a person in excess of such amounts will be referred to in the
Bylaws and herein as "Excess Shares." For this purpose the term "ownership" is
defined in accordance with the constructive ownership provisions of Section 544
of the Code (as modified by Section 856(h) of the Code). Accordingly, Shares
owned or deemed to be owned by a person who individually owns less than 9.8% of
the Shares outstanding nevertheless may be Excess Shares.
Holders of Excess Shares are not entitled to voting rights, dividends or
distributions. If, after the purported transfer or other event resulting in an
exchange of Common Shares for Excess Shares and before discovery by the Company
of such exchange, dividends or distributions are paid with respect to Common
Shares that were exchanged for Excess Shares, then such dividends or
distributions are to be repaid to the Company upon demand.
The Bylaws also provide that in the event any person acquires Excess Shares,
such Excess Shares may be redeemed by the Company, at the discretion of the
Board of Directors. Except as set forth below, the redemption price for redeemed
Excess Shares shall be the lesser of (i) the price paid for the Excess Shares
(or if no notice of such purchase price is given, at a price to be determined by
the Board of Directors, in its sole discretion, but no lower than the lowest
market price for the Common Shares during the year prior to the date the Company
exercises its purchase option) and (ii) the fair market value of such Excess
Shares, which shall be the fair market value of the Shares as determined in good
faith by the Board of Directors or, if the Shares are listed on a national
securities exchange, the closing price (average of closing bid and asked prices
if the Shares are quoted on the NASDAQ National Market System) on the last
business day prior to the redemption date. To redeem Excess Shares, the Board of
Directors must give a notice of redemption to the holder of such Excess Shares
not less than one week prior to the date fixed by the Board of Directors for
redemption. The holder may sell such Excess Shares before the date fixed for
redemption. If he does not, the redemption price for such Excess Shares shall be
paid on the redemption date fixed by the Board of Directors and included in such
notice. From and after the date fixed for redemption of Excess Shares, such
Shares shall cease to be entitled to any distributions and other benefits, other
than the right to payment of the redemption price for such Shares. Under certain
circumstances, the proceeds of redemption might be taxed as a distribution to
the recipient.
The redemption of Excess Shares, at the discretion of the Board of Directors,
is the only established Company procedure for the repurchase of Shares. The
Company has no other right or intent to repurchase the Shares, nor do the
Shareholders have any right to "put" the Shares to, or require redemption of
their Shares by, the Company.
The constructive ownership provisions applicable under Section 544 of the
Code (as modified by Section 856(h) of the Code) attribute ownership of
securities by a corporation, partnership, estate or trust proportionately to its
shareholders, partners or beneficiaries, attribute ownership of securities owned
by family members to other members of the same family, treat securities with
respect to which a person has an option to purchase as actually owned by that
person, and set forth rules as to when securities constructively owned by a
person are considered to be actually owned for the application of such
attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds Excess Shares, a person will be treated as
owning not only Shares actually or beneficially owned, but also any Shares
attributed to such person under the attribution rules described above. Ownership
of Shares through such attribution is generally referred to as constructive
ownership.
Under the Bylaws any acquisition of Shares of the Company that would result
in the disqualification of the Company as a REIT under the Code is void to the
fullest extent permitted by law, and the Board of Directors is authorized to
refuse to transfer Shares to a person if, as a result of the transfer, that
person would own Excess Shares. Prior to any transfer or transaction which, if
consummated, would cause a shareholder to own Excess Shares, and in any event
upon demand by the Board of Directors, a shareholder is required to file with
the Company an affidavit setting forth, as to that shareholder, the information
required to be reported in returns filed by shareholders under Treasury
Regulation Section
60
<PAGE>
1.857-9 and in reports filed under Section 13(d) of the Exchange Act.
Additionally, each proposed transferee of Common Shares, upon demand of the
Board of Directors, also may be required to file a statement or affidavit with
the Company setting forth the number of Shares already owned by the transferee
and any person to or from whom Shares may be attributed by or to the transferee.
The transfer or sale of Shares also will be subject to compliance with
applicable "Blue Sky" laws and federal securities laws.
FACILITIES FOR TRANSFERRING SHARES
The Managing Dealer may, but is not obligated to, assist Shareholders who
desire to transfer their Shares. In the event the Managing Dealer provides
assistance, it will be entitled to receive compensation as specified by the
Managing Dealer. Any assistance offered by the Managing Dealer may be terminated
or modified at any time without notice, and any fee charged for transfer
assistance may be modified or terminated at any time and without notice. The
Managing Dealer currently has no plans for rendering the type of assistance
referred to in this paragraph. Such assistance, if rendered, would likely
consist of informally matching isolated potential buyers and sellers, and would
not represent the creation of any "market" for the Shares.
No public market for the Shares currently exists. The Company does not plan
to cause the Shares to be listed on any securities exchange or quoted on any
system or in any established market either immediately or at any definite time
in the future. While the Company, acting through its Board of Directors, may
cause the Shares to be so listed or quoted if the Board of Directors determines
such action to be prudent, there can be no assurance that such event will ever
occur. Prospective Shareholders should view the Shares as illiquid and must be
prepared to hold their investment for an indefinite length of time. Currently,
the Company expects that within approximately three (3) years from Initial
Closing, it will use its best efforts either (i) to cause the Shares to be
listed on a national securities exchange or quoted on the NASDAQ National Market
System or (ii) to cause the Company to dispose of substantially all of its
properties in a manner which will permit distributions to Shareholders of cash
or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Shares will be selected by the Board
of Directors.
SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of the Company's
Articles of Incorporation and Bylaws, some of which may be described or referred
to elsewhere in this Prospectus. Neither this summary nor such descriptions
appearing elsewhere in this Prospectus purport to be, or should be considered, a
complete statement of the terms and conditions of the Articles of Incorporation
or Bylaws or any specific provision thereof, and this summary and all such
descriptions are qualified in their entirety by reference to, and the provisions
of, the Articles of Incorporation and Bylaws, which have been filed as exhibits
to the registration statement of which this Prospectus is a part. The Company's
Articles of Incorporation have been reviewed and approved unanimously by the
Directors.
BOARD OF DIRECTORS
The Board of Directors, subject to specific limitations in the Articles of
Incorporation and those imposed by law, has full, exclusive, and absolute power,
control and authority over the property and business of the Company. The Board
of Directors, without approval of the Shareholders, may alter the Company's
investment policies in view of changes in economic circumstances and other
relevant factors, subject to the
61
<PAGE>
investment restrictions set forth in the Bylaws. The Board of Directors named
under "Management" will serve until the first annual meeting of Shareholders, to
be held in the calendar year 1997. The term of each Director elected by the
Shareholders shall continue until the next annual meeting of Shareholders.
A Director may be removed (i) for cause by the vote or written consent of
all Directors other than the Director whose removal is being considered, or (ii)
with or without cause at a special meeting of the Shareholders by vote of a
majority of the outstanding Shares. "For cause" is defined as willful violations
of the Articles of Incorporation or Bylaws, or gross negligence in the
performance of a Director's duties. Any vacancies in the office of Director may
be filled by a majority of the Directors continuing in office or at a special
meeting of Shareholders by vote of a majority of the Shares present at a meeting
at which there is a quorum. Any Director so elected shall hold office for the
remainder of his predecessor's term. The number of Directors shall not be less
than three nor more than 15. At the time of Initial Closing, there will be five
Directors, a majority of whom are Independent Directors. See "Management." The
holders of the Common Shares are entitled to vote on the election or removal of
the Board of Directors, with each Share entitled to one vote.
The Board of Directors is empowered to fix the compensation of all officers
and the Board of Directors. Under the Bylaws, Directors may receive reasonable
compensation for their services as Directors and officers of the Company and
reimbursement of their expenses, and the Company may pay a Director such
compensation for special services, including legal and accounting services, as
the Board of Directors deems reasonable. The Board of Directors may delegate
certain of its powers to an Executive Committee, which must be comprised of at
least three Directors, the majority of whom are Independent Directors. At all
times a majority of the Directors and a majority of the members of any Board
committee shall be Independent Directors, except that upon the death, removal,
or resignation of an Independent Director such requirement shall not be
applicable for 60 days.
RESPONSIBILITY OF BOARD OF DIRECTORS, ADVISOR, OFFICERS AND EMPLOYEES
The Articles of Incorporation of the Company provide that the Directors and
officers of the Company shall have no liability to the Company or its
Shareholders in actions by or in the right of the Company unless such officer or
Director has engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities laws. The Advisory Agreement
provides that the Advisor shall have no liability to the Company or its
Shareholders unless the Advisor has engaged in gross negligence or willful
misconduct. Generally, claimants must look solely to the Company's property for
satisfaction of claims arising in connection with the affairs of the Company.
The Articles of Incorporation and the Advisory Agreement, respectively, provide
that the Company shall indemnify any present or former Director, officer,
employee or agent and the Advisor against any expense or liability in an action
brought against such person if the Directors (excluding the indemnified party)
determine in good faith that the Director, officer, employee or agent or the
Advisor was acting in good faith within what he or it reasonably believed to be
the scope of his or its employment or authority and for a purpose which he or it
reasonably believed to be in the best interests of the Company or its
Shareholders, and that the liability was not the result of willful misconduct,
bad faith, reckless disregard of duties or violation of the criminal law.
Indemnification is not allowed for any liability imposed by judgment, and costs
associated therewith, including attorneys' fees, arising from or out of a
violation of federal or state securities laws associated with the public
offering of the Common Shares unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee, or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
In the absence of the special exculpation and indemnification provisions in
the Company's Articles of Incorporation, the Directors and officers of the
Company would have greater accountability to the Company under Virginia
statutory law. In the absence of a special provision in the Articles of
Incorporation, a director or officer of a Virginia corporation would have
financial liability for misconduct equal to the greater of $100,000 or the
amount of cash compensation received by the director or officer from
62
<PAGE>
the corporation during the twelve preceding months. Virginia law permits, but
does not require, a corporation to indemnify a director if the director
conducted himself in good faith and believed that his conduct was in the best
interests (or in certain cases at least not opposed to the best interests) of
the corporation. As noted above, the Articles of Incorporation of the Company
require indemnification under the circumstances indicated, and therefore provide
rights more favorable to the Directors and officers than would be afforded by
Virginia law alone.
Although no Virginia court has passed upon the nature of the accountability
owed by an entity like the Advisor to an entity like the Company, it is almost
certain that the exculpation and indemnification provisions benefiting the
Advisor under the Advisory Agreement are more beneficial to the Advisor than
would be the result in the absence of such provisions. Since the Advisor has a
contractual relationship with the Company, in the absence of special exculpation
and indemnification provisions in the Advisory Agreement, a court would likely
hold that the Advisor is liable for ordinary negligence and ordinary misconduct,
in addition to the more egregious misconduct for which the Advisor is liable
under the Advisory Agreement.
The exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement have been adopted to help induce the
beneficiaries of such provisions to agree to serve on behalf of the Company or
the Advisor by providing a degree of protection from liability for alleged
mistakes in making decisions and taking actions. Such exculpation and
indemnification provisions have been adopted, in part, in response to a
perceived increase generally in shareholders' litigation alleging director and
officer misconduct. The exculpation and indemnification provisions in the
Articles of Incorporation and the Advisory Agreement may result in a Shareholder
or the Company having a more limited right of action against a Director, the
Advisor or its Affiliates than he or it would otherwise have had in the absence
of such provisions. See "Risk Factors -- Responsibilities of Directors, Advisor
and Affiliates -- Possible Inadequacy of Remedies." Conversely, the presence of
such provisions may have the effect of conferring greater discretion upon the
Directors, the Advisor and its Affiliates in making decisions and taking actions
with respect to the Company. Subject to the exculpation and indemnification
provisions in the Articles of Incorporation, the Advisory Agreement, and as
otherwise provided by law, the Advisor and the Directors and officers are
accountable to the Company and its Shareholders as fiduciaries and must exercise
good faith and integrity in handling the Company's affairs. As noted above,
however, the exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement represent a material change from the
accountability which would be imposed upon the Directors, officers, Advisor and
its Affiliates in the absence of such contractual provisions. Thus, such
fiduciary duties will be materially different from such fiduciary duties as they
would exist in the absence of the provisions of the Articles of Incorporation
and the Advisory Agreement.
ISSUANCE OF SECURITIES
The Board of Directors may in its discretion issue additional Shares or other
equity or debt securities of the Company, including options, warrants, and other
rights, on such terms and for such consideration as it may deem advisable. See
"Risk Factors -- Potential Dilution." Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases property, as part or all of the purchase price of the
property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans."
REDEMPTION AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of its
outstanding Shares may be owned directly or indirectly by five or fewer
individuals during the last half of any year other than the first year, and
after the first year all Shares of the Company must be owned by 100 or
63
<PAGE>
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. As a means of attempting to ensure
compliance with these requirements, the Bylaws provide that the Company may
prohibit any person from directly or indirectly acquiring ownership (beneficial
or otherwise) of Excess Shares. See "Description of Capital Stock -- Repurchase
of Shares and Restrictions on Transfer."
AMENDMENT
The Articles of Incorporation and the Bylaws may be amended or altered or the
Company may be dissolved by the affirmative vote of the holders of a majority of
the outstanding Common Shares, with each Shareholder entitled to cast one vote
per Share held. The Company's Articles and Bylaws may not be amended unless
approved by the vote of the holders of a majority of the Common Shares of the
Company (except that the Directors may amend the Bylaws if they determine such
amendment to be necessary to comply with the REIT provisions of the Code or
other applicable laws and regulations or the requirements of any state
securities regulator or similar official). No amendment that would change any
rights with respect to any outstanding Common Shares of the Company, or diminish
or eliminate any voting rights pertaining thereto, may be made unless approved
by the vote of the holders of two-thirds of the outstanding Common Shares so
affected.
SHAREHOLDER LIABILITY
The holders of the Company's Shares shall not be liable personally on account
of any obligation of the Company.
SALES LITERATURE
The Company may use certain sales or marketing literature in connection with
the offering of the Shares. Sales or marketing materials which may be used
include a sales brochure highlighting the Company. The literature may also
include a brochure describing Affiliates of the Advisor, and a "tombstone"
advertisement, mailer and introductory letter. The Company may, from time to
time, also utilize brochures describing completed or proposed property
acquisitions, summaries of the Company or of the offering of the Shares, and
discussions of REIT investments generally.
The offering is, however, made only by means of this Prospectus. Except as
described herein, the Company has not authorized the use of other supplemental
literature in connection with the offering other than marketing bulletins to be
used internally by broker-dealers. Although the information contained in such
literature does not conflict with any of the information contained in this
Prospectus, such material does not purport to be complete, and should not be
considered as a part of this Prospectus or the registration statement of which
this Prospectus is a part, as incorporated in this Prospectus or the
registration statement by reference, or as forming the basis of the offering of
the Shares described herein.
REPORTS TO SHAREHOLDERS
Financial information contained in all reports to Shareholders will be
prepared in accordance with generally accepted accounting principles. The annual
report, which will contain financial statements audited by a nationally
recognized accounting firm, will be furnished within 120 days following the
close of each fiscal year. The annual report will contain a complete statement
of compensation and fees paid or accrued by the Company to the Advisor and its
Affiliates, together with a description of any new agreements with Affiliates.
Under the Bylaws, the Company is also obligated to send to the Shareholders
quarterly reports after the end of the first three calendar quarters of each
year. Such quarterly reports will include unaudited financial statements
prepared in accordance with generally accepted accounting principles, a
statement of fees paid during the quarter to the Advisor and its Affiliates, and
a reasonable summary of the activities of the Company during such quarter. The
Shareholders also have the right under applicable law to obtain other
information about the Company.
64
<PAGE>
The Company will file a report meeting the requirements of Form 8-K under the
Exchange Act if, after the termination of the offering, a commitment is made
involving the use of 10 percent or more of the net proceeds of the offering and
will provide the information contained in such report to the Shareholders at
least once each quarter after the termination of this offering.
LEGAL OPINIONS
Certain legal matters with respect to the legality of the Shares offered
hereby and certain federal income tax matters as set forth under "Risk
Factors--Federal Income Tax Risks" and "Federal Income Tax Consequences" will be
passed upon by McGuire, Woods, Battle & Boothe, L.L.P., Richmond, Virginia, as
counsel to the Company. McGuire, Woods, Battle & Boothe, L.L.P. also acts as
counsel to the Advisor and certain of its Affiliates.
EXPERTS
The balance sheet of Apple Residential Income Trust, Inc. at August 7, 1996,
appearing in this Prospectus and Registration Statement has been audited by
Ernst & Young, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
65
<PAGE>
EXPERIENCE OF PRIOR PROGRAMS
The tables following this introduction set forth information with respect to
Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate investment
trust which was organized by Affiliates of the Advisor of Apple Residential
Income Trust, Inc. ("Apple"). These tables provide information for use in
evaluating Cornerstone, the results of the operations of Cornerstone, and
compensation paid by Cornerstone and certain other programs. In addition, Table
IV contains information on certain other programs organized by Affiliates of the
Advisor which completed operations in the last five years. Information in the
tables is current as of September 30, 1996. The tables are furnished solely to
provide prospective investors with information concerning the past performance
of entities formed by Affiliates of the Advisor. Regulatory filings and annual
reports of Cornerstone will be provided upon request for no cost (except for
exhibits thereto, for which there is a minimal charge). In addition, Part II of
Apple's Registration Statement contains detailed information on the property
acquisitions of Cornerstone and is available without charge upon request of any
investor or prospective investor. Please send all requests to Cornerstone Realty
Income Trust, Inc., 306 East Main Street, Richmond, VA 23219; telephone:
804-643-1761.
In the five years ending September 30, 1996, Affiliates of the Advisor of
Apple sponsored only Cornerstone, which has investment objectives similar to
those of Apple. Cornerstone was formed to invest in existing residential
properties on a substantially debt-free basis for the purpose of providing
regular quarterly distributions to shareholders and the possibility of long-term
appreciation in the value of properties and shares.
THE INFORMATION IN THE FOLLOWING TABLES SHOULD NOT BE CONSIDERED AS
INDICATIVE OF THE CAPITALIZATION OR OPERATIONS OF THE COMPANY. PURCHASERS OF
SHARES OFFERED BY THE OFFERING WILL NOT HAVE ANY INTEREST IN THE ENTITIES
REFERRED TO IN THE FOLLOWING TABLES OR IN ANY OF THE PROPERTIES OWNED BY THOSE
ENTITIES AS A RESULT OF THE ACQUISITION OF SHARES.
See "The Advisor and Affiliates -- Prior Performance of Programs Sponsored by
Affiliates of Advisor" in the Prospectus for additional information on certain
prior real estate programs sponsored by Affiliates of the Advisor and its
predecessors, including a description of the investment objectives which are
deemed by the sponsor to be similar and dissimilar to those of the Company.
66
<PAGE>
GLOSSARY
The following sets forth definitions of certain terms used in the prior
performance tables which follow.
Acquisitions Costs shall mean prepaid items and fees related to purchase of
property, cash down payment, acquisition fees, legal, and other costs related to
the acquisition of properties.
Amount Remaining Invested in Properties at End of Year shall mean the ratio
that acquisition costs of properties retained bears to the total acquisition
costs borne by the program.
Cash Generated from Operations shall mean excess or deficiency of operating
cash receipts, including interest on investments, over operating cash
expenditures, including debt service.
GAAP shall mean generally accepted accounting principles.
Percent Leverage shall mean mortgage financing divided by the total
acquisition costs including such mortgage financing.
Recapture shall mean the portion of taxable income from property sales or
other dispositions taxed as ordinary income.
Reserves shall mean offering proceeds designated at the time of acquisition
of each property for certain repairs and renovations and offering proceeds not
committed for expenditure and held for potential unforeseen cash requirements.
Return of Capital shall mean distributions to investors in excess of net
income.
Sponsor shall mean Apple Residential Advisors, Inc. and its predecessor
and affiliated corporations.
67
<PAGE>
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds by
Cornerstone, whose investment objectives are similar to those of the Company and
whose offering closed within three years ending September 30, 1996.
Dollar Amount Offered........................... 300,000,000
Dollar Amount Raised............................ 294,781,000
Less Offering Expenses:
Selling Commissions and Discounts ............. 7.50%
Organizational Expenses........................ 5.50%
Other.......................................... 0.00%
Reserves........................................ 3.00%
Percent Available for Investment................ 84.00%
Acquisition Costs:
Prepaid items and fees to purchase property.... 82.00%
Cash downpayment............................... 0.00%
Acquisition fees............................... 2.00%
Other.......................................... 0.00%
Total Acquisition Costs......................... 84.00%
Percent Leverage (excluding unsecured debt) .... 0.00%
Date offering began............................. May 1993
Length of offering (in months).................. 40
Months to invest amount available for
investment..................................... 40
68
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Sponsor and its Affiliates
(i) by programs organized by it and closed within three years ended September
30, 1996, and (ii) by all other programs during the three years ended September
30, 1996.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE PROGRAMS
-------------- -------------
<S> <C> <C>
Date offering commenced ....................................... May 1993 Various
Dollar amount raised .......................................... $294,781,000 $ 35,483,175
Amounts paid to sponsor from proceeds of offering:
Acquisition fees
Real Estate commission ...................................... $ 4,241,237 $ 0
Advisory fees ............................................... $ 0 $ 0
Other ....................................................... $ 0 $ 0
Cash generated from operations before deducting payments
to sponsor ................................................... $ 25,764,282 $ 7,521,808
Aggregate compensation to sponsor
Management fees .............................................. $ 3,063,590 $ 786,540
Accounting fees .............................................. $ 0 $ 161,496
Reimbursements ............................................... $ 2,717,655 $ 0
Leasing fees ................................................. $ 0 $ 0
Other fees ................................................... $ 659,930 $ 0
There have been no fees from property sales or refinancings
</TABLE>
69
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone,
the only offering closed in the five years ending September 30, 1996. Table III
is shown on both an income tax basis as well as in accordance with generally
accepted accounting principles, the only significant difference being the
methods of calculating depreciation.
<TABLE>
<CAPTION>
NINE MONTHS
--------------
1996 1995 1994 1993
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Capital contributions by year......... $171,666,206 $71,771,027 $23,496,784 $27,846,983
Gross revenue......................... $ 26,714,877 $16,300,821 $ 8,177,576 $ 1,784,868
Operating expenses................... $ 13,001,236 $ 8,260,723 $ 4,690,941 $ 1,079,517
Interest income (expense)............ $ (316,997) $ (21,565) $ 110,486 $ 46,633
Depreciation......................... $ 4,056,108 $ 2,788,818 $ 1,210,818 $ 255,338
Net income (loss) GAAP basis.......... $ 9,340,536 $ 5,229,715 $ 2,386,303 $ 496,646
Taxable income........................ $ 0 $ 0 $ 0 $ 0
Cash generated from operations ....... $ 14,501,763 $ 9,618,956 $ 3,718,086 $ 1,670,406
Less cash distributed to investors ... $ 10,313,604 $ 6,316,185 $ 2,977,136 $ 359,427
Cash generated after cash
distribution......................... $ 4,188,159 $ 3,302,771 $ 740,950 $ 1,310,979
Special items
Capital contributions, net .......... $171,666,206 $71,771,027 $23,496,784 $27,846,983
Fixed asset additions................ $194,557,133 $75,589,089 $28,557,568 $25,549,790
Line of credit....................... $ 18,300,000 $ 3,300,000 $ 5,000,000
Cash generated........................ $ (402,768) $ 2,784,709 $ 680,168 $ 3,608,172
End of period cash.................... $ 6,670,279 $ 7,073,047 $ 4,288,338 $ 3,608,172
Tax and distribution data per $1000
invested
Federal income tax results
Cornerstone Realty Income Trust is a
REIT and thus is not taxed at the
corporate level
Cash distributions to investors
Source (on GAAP basis)
Investment income................... $ 64 $ 72 $ 64 $ 37
Return of capital................... $ 14 $ 15 $ 16 $ 0
Source (on Cash basis)
Sales............................... $ 0 $ 0 $ 0 $ 0
Refinancings........................ $ 0 $ 0 $ 0 $ 0
Operations.......................... $ 68 $ 87 $ 80 $ 37
Other .............................. $ 0 $ 0 $ 0 $ 0
</TABLE>
70
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Affiliates of the Advisor
which completed operations in the five years ending September 30, 1996. All of
these programs had investment objectives dissimilar to those of the Company.
<TABLE>
<CAPTION>
COUNTY MOUNTAIN
GREEN VIEW WESTFIELD SUNSTONE FOXCROFT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Program Name
Dollar amount raised................ $1,595,125 $2,605,800 $1,825,600 $1,890,000 $1,025,500
Number of properties purchased...... 1 1 1 1 1
Date of closing of offering......... DEC 1983 OCT 1984 NOV 1984 JULY 1984 JUNE 1982
Date of first sale of property...... DEC 1993 AUG 1995 APR 1996 NOV 1995 NOV 1993
Date of final sale of property...... DEC 1993 AUG 1995 APR 1996 NOV 1995 NOV 1993
Tax and Distribution data per $1,000
investment through .................
Federal income tax results
Ordinary income
From operations.................... $ 327 $ 68 $ 80 $ 122 $ 172
From recapture..................... $ 1,165 $ 1,200 $ 1,302 $ 526 $ 1,414
Capital gain ....................... $ 0 $ 0 $ 0 $ 0 $ 0
Deferred gain
Capital............................ $ 0 $ 0 $ 0 $ 0 $ 0
Ordinary........................... $ 0 $ 0 $ 0 $ 0 $ 0
Cash distributions to investors
Source (On GAAP basis)
Investment income.................. $ 327 $ 68 $ 80 $ 122 $ 172
Return of capital.................. $ 333 $ 38 $ 233 $ 0 $ 0
Source (On cash basis)
Sales.............................. $ 333 $ 38 $ 233 $ 122 $ 172
Refinancing........................ $ 0 $ 0 $ 0 $ 0 $ 0
Operations......................... $ 327 $ 68 $ 80 $ 0 $ 0
Other.............................. $ 0 $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ ------------ ------------
Receivable on net purchase money
financing........................... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
Table V is not applicable. Cornerstone and its Affiliates have not sold or
disposed of any properties as required for inclusion in the Table (sale or
disposals of properties by programs with similar investment objectives within
the most recent three years).
71
<PAGE>
GLOSSARY
The following definitions are provided for information in reading this
Prospectus:
ACQUISITION EXPENSES. The total expenses, including but not limited to legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to selection and
acquisition of properties, whether or not acquired. Acquisition Expenses shall
not include Acquisition Fees.
ACQUISITION FEES. The total of all fees and commissions paid by any party in
connection with the purchase or development of real property by the Company,
except a development fee paid to a person not Affiliated with the Sponsor in
connection with the actual development of a project after acquisition of the
land by the Company. Included in the computation of such fees or commissions
shall be any real estate commission, selection fee, development fee,
nonrecurring management fee, or any fee of a similar nature, however designated.
ADDITIONAL SHARE OPTION. The option of Shareholders to reinvest distributions
from the Company in additional Shares so long as the registration statement of
which this Prospectus is a part remains effective.
ADJUSTED NET ASSET VALUE. The net assets of the Company (total assets before
deducting depreciation or non-cash reserves less total liabilities) valued at
fair market value as determined by qualified appraisals or valuations of the
assets.
ADVISOR. The person or entity responsible for directing or performing the
day-to-day business affairs of the Company, including a person or entity to
which the Advisor subcontracts substantially all such functions. The Company has
entered into an Advisory Agreement with Apple Residential Advisors, Inc., which
shall serve as the Advisor until it resigns such appointment or is replaced in
accordance with the provisions of the Bylaws.
ADVISORY AGREEMENT. The agreement between the Company and its Advisor, as the
same may be in effect from time to time.
AFFILIATE. Means (i) any person or entity directly or indirectly controlling,
controlled by or under common control with another person or entity, (ii) any
person or entity owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such other person or entity, (iii) any
officer, director, trustee or general partner of such person or entity, and (iv)
if such other person or entity is an officer, director, trustee or partner of
another entity, then the entity for which that person or entity acts in any such
capacity. AFFILIATED means being an Affiliate of a specified person or entity.
AMG. Apple Residential Management Group, Inc., a Virginia corporation, which
is an Affiliate of the Advisor.
ARG. Apple Realty Group, Inc., a Virginia corporation, which is an Affiliate
of the Advisor.
ARTICLES OF INCORPORATION. The Articles of Incorporation of the Company,
including all amendments, restatements or modifications thereof.
ASSET MANAGEMENT FEE. The fee payable to Apple Residential Advisors, Inc. as
the Advisor, pursuant to the Advisory Agreement.
AVERAGE INVESTED ASSETS. The average of the aggregate book value of the
assets of the Company invested, directly or indirectly, in equity interests in
and loans secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, computed by taking the average of such
values at the end of each month during any period.
BOARD OF DIRECTORS. The Directors of the Company as of any particular time,
under the Articles of Incorporation, whether they be the Directors named therein
or additional or successor Directors.
72
<PAGE>
BYLAWS. The Bylaws of the Company, including all amendments, restatements or
modifications thereof.
CODE. The Internal Revenue Code of 1986, as amended from time to time,
including successor statutes thereto.
COMPANY. Apple Residential Income Trust, Inc., a Virginia corporation.
CORNERSTONE. Cornerstone Realty Income Trust, Inc., a Virginia corporation.
DIRECTORS. The persons holding such office, as of any particular time,
whether they be the directors named under the Articles of Incorporation or
additional or successor directors.
EMPLOYEE TRUSTS. Qualified employee pension or profit sharing trusts and
Keogh Plan trusts.
ERISA. The Employee Retirement Income Security Act of 1974, as amended.
ESCROW ACCOUNT. The account into which funds will be deposited and retained
prior to the Initial Closing, and may be deposited thereafter pending investment
in properties.
EXCESS SHARES. Shares owned, directly or indirectly (applying the rules of
Sections 544 and 856(h) of the Code), by a person in excess of 9.8% of the
Company's total outstanding Shares.
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
EXEMPT ORGANIZATIONS. Tax-exempt entities, including Employee Trusts and
IRAs.
FINAL CLOSING. The last closing of the sale of Shares offered by the
Prospectus.
FIRPTA. The Foreign Investment in Real Property Tax Act of 1980, as amended.
FUNDS FROM OPERATIONS. Net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property, and
after adjustments for significant non-recurring items and unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same
basis.
INDEPENDENT DIRECTORS. The Directors of the Company who are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or serving as an officer or director of, the Advisor or an Affiliated
business entity of the Advisor (other than as an Independent Director of up to
three other real estate investment trusts advised by the Advisor or an Affiliate
of the Advisor). An Independent Director may perform no other services for the
Company, except as a Director. Notwithstanding anything to the contrary herein,
any member of a law firm whose only material business or professional
relationship with the Company, the Advisor and their Affiliates is as legal
counsel to any of such entities shall constitute an Independent Director (unless
such person serves as a director for more than three REITs organized by the
Advisor and its Affiliates). An "indirect" affiliation shall be deemed to refer
to circumstances in which a member of the "immediate family" of a Director is
Affiliated with the Advisor, and a person's "immediate family" shall mean such
person's spouse, parents, children, siblings, mother and father-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
INITIAL CLOSING. The first closing which occurs after the Mimimum Offering is
achieved.
INITIAL OFFERING. The offering of Shares made pursuant to this Prospectus.
MANAGING DEALER. David Lerner Associates, Inc.
MARKETING EXPENSE ALLOWANCE. An amount equal to up to 2.5% of the purchase
price of the Shares payable by the Company to the Managing Dealer or the
Selected Dealers as a non-accountable reimbursement for expenses incurred by
them in connection with the offer and sale of the Shares.
73
<PAGE>
MAXIMUM OFFERING. The sale of $250,000,000 in Shares by the Company in the
offering made by this Prospectus. If achieved, the Maximum Offering would be
comprised of $15,000,000 in Shares at $9 per Share (1,666,666.67 Shares) and
$235,000,000 in Shares at $10 per Share (23,500,000 Shares).
MINIMUM OFFERING. The sale of $15,000,000 in Shares at $9 per Share
(1,666,666.67 Shares) by the Company in the offering made by this Prospectus.
NET ASSETS OR NET ASSET VALUE. The total assets (other than intangibles) at
cost before deducting depreciation or other non-cash reserves less total
liabilities, calculated at least quarterly on a basis consistently applied.
NET INCOME. The total revenues of the Company for any period, less the
expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves.
OPERATING EXPENSES. All operating, general and administrative expenses of the
Company as determined under generally accepted accounting principles (including
regular compensation payable to the Advisor), excluding, however, the following:
(i) expenses of raising capital; (ii) interest payments; (iii) taxes; (iv)
non-cash expenditures, such as depreciation, amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any; and (vi) costs related directly
to asset acquisition, operation and disposition.
ORGANIZATIONAL AND OFFERING EXPENSES. Those expenses incurred in connection
with the formation and registration of the Company and in qualifying and
marketing the Shares under applicable federal and state law, and any other
expenses actually incurred and directly related to the qualification,
registration, offer, and sale of the Shares, including such expenses as (i) all
marketing expenses and payments made to broker-dealers as compensation or
reimbursement for all costs of reviewing the offering, including due diligence
investigations and fees and expenses of their attorneys, accountants, and other
experts; (ii) registration fees, filing fees, and taxes; (iii) the costs of
printing, amending, supplementing and distributing the registration statement
and Prospectus; (iv) the costs of obtaining regulatory clearances of, printing,
and distributing sales materials used in connection with the offer and sale of
the Shares; (v) the costs related to investor and broker-dealer sales meetings
concerning the offering; and (vi) accounting and legal fees incurred in
connection with any of the foregoing.
PLAN ASSETS. The assets of an employee benefit plan.
PROPERTIES. All properties owned by the Company from time to time.
PROSPECTUS. The final version of this prospectus of the Company in connection
with the registration of the Shares by registration statement filed with the
Securities and Exchange Commission on Form S-11, as amended and supplemented.
QUALIFIED PLANS. Employee Trusts and IRAs.
REIT. "REIT" and "real estate investment trust" shall mean a real estate
investment trust as described in Sections 856 through 860 of the Code, as now
enacted or hereafter amended, including successor statutes and regulations
promulgated thereunder.
RETURN RATIO. For any period, the ratio of Funds from Operations to Total
Contributions.
SECURITIES ACT. The Securities Act of 1933, as amended.
SELECTED DEALERS. Broker-dealers (other than the Managing Dealer) which offer
and sell Shares on behalf of the Company.
SELLING COMMISSIONS. Selling Commissions payable to the Managing Dealer or
the Selected Dealers in an amount equal to up to 7.5% of the purchase price of
the Shares.
SERVICE. The Internal Revenue Service.
SHAREHOLDERS. Those persons who, at any particular time, are shown as the
holders of record of the Common Shares.
74
<PAGE>
SHARES OR COMMON SHARES. The Common Shares of the Company, no par value, and
all other Common Shares of the Company issued in this or any subsequent
offering.
SPONSOR. Any person directly or indirectly instrumental in organizing, wholly
or in part, the Company or any person who will manage or participate in the
management of the Company, and any Affiliate of any such person, but not
including a person who is an Independent Director or whose only relationship
with the Company is as that of an independent property manager, whose only
compensation is as such. Sponsor also does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. No Independent Director shall be deemed to be a
Sponsor.
UBTI. Unrelated Business Taxable Income, as defined in the Code.
TOTAL CONTRIBUTIONS. The gross offering proceeds which have been received by
the Company from time to time from the sale or sales of the Shares.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
PAGE
----
Report of Independent Auditors .......................................... F-2
Balance Sheet at August 7, 1996 ......................................... F-3
Notes to the Balance Sheet .............................................. F-4
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Residential Income Trust, Inc.
We have audited the accompanying balance sheet of Apple Residential Income
Trust, Inc., as of August 7, 1996. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Apple Residential Income Trust
Inc., at August 7, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Richmond, Virginia
August 12, 1996
except for Note 5, as to which
the date is November 14, 1996
F-2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEET
AUGUST 7, 1996
Assets
Cash.............................................. $100
======
Stockholder's Equity
Common stock, no par value, Authorized 50,000,000
shares; issued and outstanding 10 shares ......... $100
======
See accompanying notes to balance sheet.
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO THE BALANCE SHEET
AUGUST 7, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Residential Income Trust, Inc. (the "Company") is a Virginia corporation
that intends to qualify as a real estate investment trust ("REIT") for federal
income tax purposes. The Company, which has no operating history, was formed to
invest primarily in existing residential apartment communities in Texas and
southwestern regions of the United States. Initial capitalization occurred on
August 7, 1996.
Apple Residential Advisors, Inc. (the "Advisor"), which owns 100% of the
outstanding common stock of Apple Residential Income Trust, Inc., is the advisor
to the Company and will provide its day-to-day management under a proposed
agreement between the Company and the Advisor.
SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Company intends to make an election to be treated, and expects to qualify
as, a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company will be allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company to
taxation only at the shareholder level. The Company's continued qualification as
a REIT will depend on its compliance with numerous requirements, including
requirements as to the nature of its income and assets and distribution of
dividends.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. OFFERING OF SHARES
The Company intends to raise capital through a "best-efforts" offering of shares
by David Lerner Associates, Inc. (the "Managing Dealer"), which will receive
selling commissions and a marketing expense allowance based on proceeds of the
shares sold.
A minimum offering of 1,666,667 shares ($15,000,000) must be sold no later than
one year after the date of the Prospectus, or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
3. RELATED PARTIES
The Company has negotiated, but not signed, a Property Management Agreement with
Apple Residential Management Group, Inc. to manage property to be acquired by
the Company for a management fee equal to 5% of gross rental collections, plus
reimbursement of certain expenses.
The Company has negotiated, but not signed, a Property Acquisition and
Disposition Agreement with Apple Realty Group, Inc. to acquire and dispose of
real estate assets for the Company. A fee of 2% of the purchase or sale price of
the property will be payable for this service.
The Company has negotiated, but not signed, an Advisory Agreement with the
Advisor to provide management of the Company and its assets. An annual fee of
.1% -- .25% of total contributions received by the Company, as defined, will be
payable for this service.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
Notes to the Balance Sheet - (Continued)
Apple Residential Management Group, Inc., Apple Realty Group, Inc. and ApplE
Residential Advisors, Inc. are all 100% owned by Glade M. Knight, Chairman and
President of Apple Residential Income Trust, Inc.
Affiliates of the Company have incurred organization and offering costs on
behalf of the Company. Upon successful completion of the offering, the Company
will reimburse the affiliates for these organizational and offering costs. The
Company is not responsible for these costs in the event that the offering is not
successfully completed.
4. STOCK INCENTIVE PLANS
The Company intends to adopt two stock incentive plans (the "Incentive Plan" and
"Directors' Plan") to provide incentives to attract and retain directors,
officers and key employees. The plans provide for the grants of options to
purchase a specified number of shares of common stock ("Options") or grants of
restricted shares of common stock ("Restricted Stock") to selected employees and
directors of the Company and certain affiliates. Following consummation of the
offering, a Compensation Committee ("Committee") will be established to
implement and administer the plans. The Committee will be responsible for
granting Options and shares of Restricted Stock and for establishing the
exercise price of Options and the terms and conditions of Restricted Stock.
5. SUBSEQUENT EVENTS
On November 14, 1996, the Company issued 200,000 shares of Class B Convertible
Shares to Mr. Knight for $.10 per share or $20,000 in aggregate.
There are no dividends payable on the Class B Convertible Shares. On
liquidation of the Company, the holder of the Class B Convertible Shares is
entitled to a liquidation payment of $0.1 per Class B Convertible Share before
any distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B Convertible
Shares are convertible into Common Shares upon and for 180 days following the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services (the events
described in this clause (2), a "Self-Administration Conversion"). Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the offering made by this Prospectus according
to the following formula:
NUMBER OF COMMON
SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE SHARE
- ------------------------------- -----------------------
$50 million.................... 1.0
$100 million................... 2.4
$150 million................... 4.2
$200 million................... 6.4
$250 million................... 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares.
F-5
<PAGE>
[SPECIMEN]
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Residential Income
Trust, Inc. ("REIT") at a purchase price of and 00/100 Dollars ($ .00) per
Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Residential
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of Kentucky and
North Carolina purchasers); and, in either event, further represent that the
purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion. The REIT
will either accept or reject this subscription within four business days from
the receipt of the subscription by the Managing Dealer or Selected Dealer. To
the extent permitted by applicable law, the REIT intends to assert the foregoing
representations as a defense to any claim based on factual assertions contrary
to those set forth above.
It is understood that until the Minimum Offering of $15 million in Shares is
sold, subscription payments will be held in an Escrow Account with First Union
National Bank of North Carolina as escrow agent. After the Minimum Offering
amount is sold, there is no requirement for an Escrow Account, and if there is
an Escrow Account, there is no limitation on the party which may act as escrow
agent.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT ANY
BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE THE
FOLLOWING:
<PAGE>
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR RULINGS
BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE
CLASS ACTION WHO HAS OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS
ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS
DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM
THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE
SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
[SPECIMEN]
APPLE RESIDENTIAL INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)___________________________________________________
Tax ID Number(s)____________________________________________________________
Account # (If applicable)___________________________________________________
2. Name(s) in which shares are to be registered:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for _________________________________________________________
[]For Estate of ____________________________________________________________
[]Other ____________________________________________________________________
4. Address for correspondence _________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as a
United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified plans).
Make check payable to: First Union National Bank, Escrow Agent (or as otherwise
instructed). |B* Liquidate funds from money market |B* Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x _____________________________________________________________________________
Signature Date
x _____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
___________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
___________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
___________________________________ __________________________________________
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative hereby
certifies: I have reasonable grounds to believe, based on information obtained
from the investor(s) concerning investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the REIT is suitable for such investor(s) in light of financial
position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Agreed and accepted by:
Signature page will not be an Apple Residential Income Trust, Inc.
effective agreement until it is By ___________________________________
signed by a duly authorized agent of Date _________________________________
Apple Residential Income Trust, Inc.
<PAGE>
SUBSCRIPTION AGREEMENT
To: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Residential Income
Trust, Inc. ("REIT") at a purchase price of and 00/100 Dollars ($ .00) per
Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Residential
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of Kentucky or North
Carolina purchasers); and, in either event, further represent that the purchase
amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion. The REIT
will either accept or reject this subscription within four business days from
the receipt of the subscription by the Managing Dealer or Selected Dealer. To
the extent permitted by applicable law, the REIT intends to assert the foregoing
representations as a defense to any claim based on factual assertions contrary
to those set forth above.
It is understood that until the Minimum Offering of $15 million in Shares is
sold, subscription payments will be held in an Escrow Account with First Union
National Bank of North Carolina as escrow agent. After the Minimum Offering
amount is sold, there is no requirement for an Escrow Account, and if there is
an Escrow Account, there is no limitation on the party which may act as escrow
agent.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT
DISCLOSE THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR RULINGS
BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE
CLASS ACTION WHO HAS OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS
ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS
DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM
THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE
SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)__________________________________________________
Tax ID Number(s)____________________________________________________________
Account # (If applicable)___________________________________________________
2. Name(s) in which shares are to be registered:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for _________________________________________________________
[]For Estate of ____________________________________________________________
[]Other ____________________________________________________________________
4. Address for correspondence _________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as a
United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified plans).
Make check payable to: First Union National Bank, Escrow Agent (or as otherwise
instructed). |B* Liquidate funds from money market |B* Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x _____________________________________________________________________________
Signature Date
x _____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
___________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
___________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
___________________________________ __________________________________________
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative hereby
certifies: I have reasonable grounds to believe, based on information obtained
from the investor(s) concerning investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the REIT is suitable for such investor(s) in light of financial
position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Agreed and accepted by:
Signature page will not be an Apple Residential Income Trust, Inc.
effective agreement until it is By ___________________________________
signed by a duly authorized agent of Date _________________________________
Apple Residential Income Trust, Inc.
<PAGE>
================================================================================
No dealer, salesman or other person
has been authorized to give any
information or to make any
representations other than those
contained in this Prospectus in
connection with the offering made by
this Prospectus, and, if given or
made, such other information or
representations must not be relied
upon. This Prospectus does not
constitute an offer in any state in
which such offer may not legally be
made. The delivery of this
Prospectus at any time does not
imply that information herein has
not changed as of any time
subsequent to its date.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information..............i
Summary of the Offering ...........1 APPLE RESIDENTIAL
Risk Factors .....................10 INCOME TRUST,
Estimated Use of Proceeds ........20 INC.
Compensation .....................21
Conflicts of Interest ............24
Investment Objectives and
Policies........................26
Distribution Policy ..............34
Business and Properties ..........34
Management .......................37
The Advisor and Affiliates .......43
Principal and Management
Stockholders ...................47 PROSPECTUS
Federal Income Tax Considerations 48
Investment by Tax-Exempt Entities 55
Capitalization ...................57
Management's Discussion and
Analysis of Financial Condition.57
Plan of Distribution .............57
Description of Capital Stock .....59
Summary of Organizational
Documents ......................61
Sales Literature .................64
Reports to Shareholders ..........64
Legal Opinions ...................65
Experts ..........................65
Experience of Prior Programs .....66
Glossary .........................72 DAVID LERNER ASSOCIATES, INC.
Index to Financial Statements of
the Company ...................F-1
Subscription Agreement ....Exhibit A
Until February, 1997, all dealers
effecting transactions in the
Shares, whether or not participating
in this distribution, may be November , 1996
required to deliver a copy of this
Prospectus. This is in addition to
the obligations of dealers to
deliver a Prospectus when acting as
underwriters and with respect to
their unsold allotments or
subscriptions.
================================================================================
===============================================================================
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection with
the issuance and distribution of the securities to be registered:
SEC registration fee .................................... $ 86,208
NASD filing fee ......................................... 25,500
Printing and engraving fees ............................. 250,000
Legal fees and expenses ................................. 300,000
Accounting fees and expenses ............................ 200,000
Blue Sky fees and expense ............................... 50,000
Escrow agent and registrar .............................. 20,000
Registrant travel expense ............................... 30,000
Marketing Expense Allowance ............................. 6,250,000
Contingency ............................................. 38,292
------
TOTAL .................................................. $7,250,000
==========
ITEM 31. SALES TO SPECIAL PARTIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. for $100 cash.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. for $100 cash, in a transaction that was exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
On November 14, 1996, the Registrant sold 200,000 Class B Convertible Shares to
Glade M. Knight for $20,000 cash, in a transaction that was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The Registrant's Articles of
Incorporation, as permitted by the Virginia Act, eliminate the damages that may
be assessed against a director or officer of the Registrant in a shareholder or
derivative proceeding. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws. Reference also is made to the indemnification provisions
set forth in the form of Agency Agreement filed as Exhibit 1 hereto.
II-1
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS - (Continued)
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
ITEM 35. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Financial Statements for the financial
statements which are included in the Prospectus.
(b) Financial Statement Schedules: None.
(c) Exhibits. Except as noted, the Exhibits have been previously filed.
EXHIBIT
NUMBERS DESCRIPTION OF DOCUMENTS
- ------- -----------------------------------------------------------------------
1.1 Agency Agreement between the Registrant and David Lerner Associates,
Inc. with form of Selected Dealer Agreement attached as Exhibit A
thereto. FILED HEREWITH.
1.2 Escrow Agreement among the Registrant, First Union National Bank of
North Carolina and David Lerner Associates, Inc. FILED HEREWITH.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant. FILED HEREWITH.
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant. FILED HEREWITH.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality
of the securities being registered. FILED HEREWITH.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax
matters. FILED HEREWITH.
10.1 Advisory Agreement between the Registrant and Apple Residential
Advisors, Inc. FILED HEREWITH.
10.2 Form of Property Management Agreement between the Registrant and Apple
Residential Management Group, Inc.
10.3 Property Acquisition/Disposition Agreement between the Registrant and
Apple Realty Group, Inc. FILED HEREWITH.
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors Stock
Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement. FILED HEREWITH.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in
Exhibits 5 and 8). FILED HEREWITH.
23.2 Consent of Ernst & Young LLP. FILED HEREWITH.
24.1 Power of Attorney of Glade M. Knight. FILED HEREWITH.
24.2 Power of Attorney of Ted W. Smith. FILED HEREWITH.
24.3 Power of Attorney of Penelope W. Kyle. FILED HEREWITH.
24.4 Power of Attorney of Bruce H. Matson. FILED HEREWITH.
- ----------
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
II-2
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS - (Continued)
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That all post-effective amendments will comply with the applicable forms,
rules and regulations of the Commission in effect at the time such
post-effective amendments are filed.
(d) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The Registrant undertakes to send to each Shareholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the Shareholders the financial
statements required by Form 10-K for the first full fiscal year of operations of
the Registrant.
The Registrant undertakes to file during the offering period a sticker
supplement pursuant to Rule 424(c) under the Act describing each property not
identified in the Prospectus at such time as there arises a reasonable
probability of investment in such property by the Registrant and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months with the information contained in such amendment provided
simultaneously to the existing Shareholders. Each sticker supplement will also
disclose all compensation and fees received by the Advisor or its Affiliates in
connection with any such investment. The post-effective amendment shall include
audited financial statements meeting the requirements of Rule 3-14 of Regulation
S-X only for properties acquired during the distribution period.
The Registrant undertakes to file, after the end of the offering period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment not previously disclosed in the Prospectus or a supplement thereto
involving the use of 10% or more (on
a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
Shareholders at least once each quarter after the end of the offering period.
The Registrant undertakes to file the financial statements required by Form 10-K
for the first full fiscal year of operations and will provide the financial
information contained therein to the Shareholders. The Registrant undertakes to
file a final report on Form SR pursuant to Rule 463 of the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commis
II-3
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS - (Continued)
sion such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than for expenses
incurred in a successful defense) is asserted by such officer, director or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, and will be governed by the final
adjudication of such issue.
ITEM 37.
TABLE VI: ACQUISITION OF PROPERTIES BY CORNERSTONE
Cornerstone acquired the following properties since inception in 1993. All
properties acquired are residential communities. All of Cornerstone's
acquisitions are done on a mortgage-free basis. Cost of acquisition represents
the total cost of the purchase price including any downpayment.
<TABLE>
<CAPTION>
AVERAGE
CONTRACT OTHER TOTAL SQUARE FT.
NAME OF DATE OF NUMBER PURCHASE ACQUISITION EXPENDITURES ACQUISITION OF UNITS
PROPERTY LOCATION PURCHASE OF UNITS PRICE FEE CAPITALIZED COST --
- ---------------- ---------------- ---------- ---------- ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GEORGIA
West Eagle
Greens Augusta 1996 165 $ 4,000,000 $ 80,000 $ 582,135 $ 4,662,135 796
Savannah West Augusta 1996 456 $ 9,804,000 $196,080 $ 101,864 $10,101,944 872
NORTH CAROLINA
Chase Mooring Wilmington 1994 224 $ 3,594,000 $ 71,880 $1,239,121 $ 4,905,001 867
Wimbledon Wilmington 1994 192 $ 3,300,000 $ 66,000 $1,857,968 $ 5,223,968 863
Osprey Landing Wilmington 1995 176 $ 4,375,000 $ 87,500 $1,191,434 $ 5,653,934 981
Sailboat Bay Charlotte 1995 358 $ 9,100,000 $182,000 $1,965,617 $11,247,617 906
Meadow Creek Charlotte 1996 250 $11,100,000 $222,000 $ 472,925 $11,794,925 860
Beacon Hill Charlotte 1996 349 $13,300,000 $266,000 $ 454,419 $14,020,419 734
The Hanover Charlotte 1995 192 $ 5,725,000 $114,500 $ 819,716 $ 6,659,216 832
Bridgetown Bay Charlotte 1996 120 $ 5,000,000 $100,000 $ 302,656 $ 5,402,656 868
Summer Walk Concord 1996 160 $ 5,700,000 $114,000 $ 412,626 $ 6,226,626 963
The Meadows Asheville 1996 176 $ 6,200,000 $124,000 $ 425,701 $ 6,749,701 1,066
Glen Eagles Winston Salem 1995 166 $ 7,300,000 $146,000 $ 200,870 $ 7,646,870 952
Mill Creek Winston Salem 1995 220 $ 8,550,000 $171,000 $ 331,003 $ 9,052,003 897
Wind Lake Greensboro 1995 299 $ 8,760,00 $175,200 $ 500,727 $ 9,435,927 727
Willow Creek Durham 1996 200 $ 8,400,000 $168,000 $ 40,807 $ 8,608,807 961
Hollows Raleigh 1993 176 $ 4,200,000 $ 84,000 $1,123,091 $ 5,407,091 903
Trestles Raleigh 1994 280 $10,350,000 $207,000 $ 573,711 $11,130,711 926
Paces Glen Charlotte 1996 172 $ 7,425,000 $ 0 $ 100,425 $ 7,525,425 905
Signature
Place Greenville 1996 171 $ 5,400,000 $ 0 $ 166,610 $ 5,566,610 1,037
Sterling Chase Charlotte 1996 272 $10,125,000 $ 0 $ 80,457 $10,205,457 699
Highland Hills Carrboro 1996 264 $12,100,000 $ 0 $ 129,865 $12,229,865 1,000
Parkside at
Woodlake Durham 1996 266 $14,550,000 $ 0 $ 113,886 $14,663,886 865
SOUTH CAROLINA
Polo Club Greenville 1993 365 $ 4,300,000 $ 86,000 $2,224,753 $ 6,610,753 842
Magnolia Run Greenville 1995 212 $ 5,500,000 $110,000 $ 852,679 $ 6,462,679 849
Breckinridge Greenville 1995 236 $ 5,600,000 $112,000 $ 650,105 $ 6,362,105 726
Stone Ridge Columbia 1993 191 $ 3,325,000 $ 66,500 $2,033,488 $ 5,424,988 1,027
VIRGINIA
County Green Lynchburg 1993 180 $ 3,800,000 $ 76,000 $1,988,865 $ 5,074,865 1,000
Ashley Park Richmond 1996 272 $12,205,000 $244,100 $ 231,701 $12,680,801 765
Trolley Square Richmond 1996 192 $ 6,000,000 $120,000 $ 31,105 $ 6,151,105 559
Trophy Chase Charlotteville 1996 185 $ 3,600,000 $ 72,000 $ 941,537 $ 4,613,537 803
Baywatch
Pointe Virginia Beach 1995 160 $ 3,372,525 $ 67,451 $1,131,466 $ 4,571,442 911
Harbour Club Virginia Beach 1994 214 $ 5,250,000 $105,000 $ 440,744 $ 5,795,744 813
Arbor Trace Virginia Beach 1996 148 $ 5,000,000 $100,000 $ 179,425 $ 5,279,425 850
Mayflower Virginia Beach 1993 263 $ 7,634,144 $152,683 $1,267,350 $ 9,054,176 698
Tradewinds Hampton 1995 284 $10,200,000 $204,000 $ 310,123 $10,714,123 929
Hampton Glen Richmond 1996 232 $11,500,000 $ 0 $ 273,842 $11,773,842 788
</TABLE>
Note: Cornerstone does not have any mortgages on its properties nor have down
payments outstanding. In addition all cash expenditures incurred in the
acquisition of a community are capitalized.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Richmond, Commonwealth of Virginia, on November
14, 1996.
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
-------------------------------
Glade M. Knight
President, and as President, the
Registrant's Principal Executive
Officer, Principal Financial
Officer and Principal Accounting
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
- ----------------------- ------------------------------------------ ----------------------
<S> <C> <C>
/s/ Glade M. Knight Director and President, and As President, November 14, 1996
- ----------------------- the Registrant's Principal Executive
Glade M. Knight Officer, Principal Financial Officer and
Principal Accounting Officer
* Director November 14, 1996
- ----------------------
Ted W. Smith
* Director November 14, 1996
- ----------------------
Penelope W. Kyle
* Director November 14, 1996
- ----------------------
Bruce H. Matson
</TABLE>
*By: /s/ Glade M. Knight
Glade M. Knight,
as attorney-in-fact for the
above-named persons
II-5
<PAGE>
EXHIBIT INDEX
(Except as stated, the following Exhibits have been previously filed)
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- -------- -------------- ----------
<S> <C> <C>
1.1 Agency Agreement between the Registrant and David Lerner Associates,
Inc. with form of Selected Dealer Agreement attached as Exhibit A
thereto. FILED HEREWITH.
1.2 Escrow Agreement among the Registrant, First Union National Bank of
North Carolina and David Lerner Associates, Inc. FILED HEREWITH.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant. FILED HEREWITH.
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant. FILED HEREWITH.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality
of the securities being registered. FILED HEREWITH.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax
matters. FILED HEREWITH.
10.1 Advisory Agreement between the Registrant and Apple Residential
Advisors, Inc. FILED HEREWITH.
10.2 Form of Property Management Agreement between the Registrant and Apple
Residential Management Group, Inc.
10.3 Property Acquisition/Disposition Agreement between the Registrant and
Apple Realty Group, Inc. FILED HEREWITH.
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors Stock
Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement. FILED HEREWITH.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in
Exhibits 5 and 8). FILED HEREWITH.
23.2 Consent of Ernst & Young LLP. FILED HEREWITH.
24.1 Power of Attorney of Glade M. Knight. FILED HEREWITH.
24.2 Power of Attorney of Ted W. Smith. FILED HEREWITH.
24.3 Power of Attorney of Penelope W. Kyle. FILED HEREWITH.
24.4 Power of Attorney of Bruce H. Matson. FILED HEREWITH.
</TABLE>
25,166,666.67 Shares
APPLE RESIDENTIAL INCOME TRUST, INC.
Common Stock
Agency Agreement
David Lerner Associates, Inc.
477 Jericho Turnpike
Syosset, New York 11791
Dear Sirs:
Apple Residential Income Trust, Inc., a Virginia corporation (the
"Company"), is a corporation which intends to qualify as a real estate
investment trust pursuant to Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended ( the "Code"). Apple Residential Advisors, Inc. (the
"Advisor"), a Virginia corporation, serves as the advisor to the Company and
Apple Realty Group, Inc.("Apple Realty"), a Virginia corporation, has been
engaged to provide property acquisition and disposition services to the Company.
Subject to the terms and conditions stated herein, the Company proposes to
engage David Lerner Associates, Inc. as its managing dealer (the "Agent") to
solicit offers to buy and obtain purchasers for shares of common stock, no par
value, of the Company as offered by the Prospectus which is part of the Form
S-11 Registration Statement under the Securities Act of 1933 (File No.
333-10635) as filed with the Securities and Exchange Commission on August 22,
1996. The term "Shares" refers to the shares of common stock, no par value, of
the Company registered pursuant to the Registration Statement referred to in the
preceding sentence. This will confirm our agreement respecting your engagement
as the exclusive agent to solicit offers to buy and obtain purchasers for the
Shares on a "best efforts" basis.
1. Representations and Warranties. The Company represents and warrants
to, and agrees with, the Agent that:
1
<PAGE>
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-11 (File No.
333-10635), and as a part thereof a preliminary prospectus, both as amended by
such amendments thereto as may have been required to the date hereof, with
respect to the registration of the Shares under the Securities Act of 1933, as
amended (the "Act"); any preliminary prospectus included in such registration
statement or filed with the Commission pursuant to Rule 424 of the Commission
under the Act is hereinafter called a "Preliminary Prospectus"; the registration
statement, as amended at the time it becomes effective under the Act, and the
prospectus filed as a part thereof or mailed for filing pursuant to Rule 424(b)
of the Act are hereinafter called the "Registration Statement" and "Prospectus,"
respectively; except that (A) if the Company files a post-effective amendment to
the registration statement, then the term "Registration Statement" shall refer
to the registration statement as amended by such post-effective amendment
thereto and the term "Prospectus" shall refer to the amended prospectus then on
file with the Commission, and (B) if the prospectus, including any sticker
supplement thereto not theretofore consolidated into a post-effective amendment,
filed by the Company pursuant to either Rule 424(b) or (c) of the rules and
regulations of the Commission under the Act (the "Regulations"), shall differ
from the prospectus on file at the time the Registration Statement or any
post-effective amendment thereto shall have become effective, the term
"Prospectus" shall refer to the prospectus, including any such sticker
supplement, filed pursuant to either Rule 424(b) or (c), as the case may be,
from and after the date on which it shall have been filed. The Company will not
at any time after the Registration Statement initially becomes effective file
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus to which you shall object in writing or which shall be
disapproved by your counsel;
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the Regulations, and did not contain any untrue
statement of a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished to the Company by
you, and relating to you, expressly for use therein;
(c) The Registration Statement and the Prospectus, when effective
or filed with the Commission, as the case may be, conformed or will conform, in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and did not and will not as of the
applicable effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and any
amendment or supplement thereto contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished to the Company by
you, and relating to you, expressly for use therein;
(d) There are no contracts or other documents that are required to
be filed as exhibits to the Registration Statement which have not been so filed;
(e) Each of the Company, the Advisor and Apple Realty has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of Virginia, with power and authority (corporate and other) to
own its properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership of property or the conduct of
business, except such jurisdictions, if any, in which the failure to be so
qualified will not have a material adverse effect on the respective company;
(f) Each of the Company, the Advisor and Apple Realty possesses
all material licenses, permits, authorizations, consents and orders required for
the contemplated method of operation of its business as described in the
Prospectus;
(g) The Company has an authorized capitalization as set forth in
the Prospectus; all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and conform to the description of the capital stock of the Company contained in
the Prospectus; there are no preemptive or other rights to subscribe for or to
purchase any shares of capital stock of the Company; except as described in the
Prospectus, there are no warrants or options to purchase any shares of capital
stock of the Company;
2
<PAGE>
and neither the filing of the Registration Statement nor the offering or sale of
the Shares as contemplated by this Agreement gives rise to any rights for or
relating to the registration of any shares of the capital stock of the Company;
(h) The Shares to be issued and sold by the Company pursuant to
this Agreement have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and validly
issued and fully paid and nonassessable and will conform to the description of
the Shares contained in the Prospectus;
(i) The Company has the corporate power to enter into this
Agreement, and the issue and sale of the Shares by the Company and the
performance of such Agreement and the consummation by the Company of the
transactions herein contemplated will not result in a breach or violation of any
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company, is subject, nor will such action result in any violation of the
provisions of the Articles of Incorporation or Bylaws of the Company, or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except such consents, approvals, authorizations,
registrations or qualifications as may be required under the Act and under state
securities or Blue Sky laws in connection with the distribution of the Shares by
the Agent;
(j) This Agreement has been duly authorized, executed and
delivered by the Company, and constitutes a valid and binding agreement of the
Company, enforceable in accordance with its terms, except to the extent that
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the enforcement of creditors' rights generally or by general principles of
equity, and except to the extent that the enforceability of the indemnity and
contribution provisions contained in this Agreement may be limited under
applicable laws;
(k) The Advisory Agreement has been or will be duly authorized,
executed and delivered by the parties thereto and constitutes or will constitute
a valid and binding agreement of the parties thereto enforceable in accordance
with its terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency or other laws affecting the enforcement of creditors'
rights generally or by general principles of equity;
(l) Ernst & Young LLP, which has certified the financial
statements of the Company, constitutes an independent public accountant as
required by the Act and the rules and regulations of the Commission thereunder;
(m) The financial statements of the Company, together with related
notes, as set forth in the Registration Statement and the Prospectus, presently
fairly the financial position of the Company at the indicated date;
(n) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, neither the Company, the Advisor
nor Apple Realty has experienced any material adverse change or any development
involving a prospective material adverse change in the general affairs,
management, financial position, properties or results of operations of the
Company, the Advisor or Apple Realty, otherwise than as set forth in the
Prospectus; and neither the Company, the Advisor nor Apple Realty have entered
into any material transactions other than as described in the Prospectus; and
the capitalization, indebtedness, properties, material liabilities and business
of the Company, the Advisor and Apple Realty conform to the descriptions thereof
contained in the Prospectus;
(o) There are no legal or governmental proceedings pending to
which the Company, the Advisor or Apple Realty is a party or of which any
property of the Company, the Advisor or Apple Realty is the subject, other than
as set forth or contemplated in the Prospectus, which, individually or in the
aggregate, would have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Company, the Advisor or
Apple Realty and, to the best of their knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened or
contemplated by others;
3
<PAGE>
(p) The Company is not and will not be an "investment company," or
under the control of an investment company as defined in the Investment Company
Act of 1940, as amended; and
(q) The Company is organized in conformity with the requirements
for qualification as a real estate investment trust under Sections 856 through
860 of the Code and the rules and regulations thereunder. The contemplated
method of operation of the Company's business as described in the Prospectus
will allow the Company to satisfy the operational requirements for qualification
as a real estate investment trust under such Sections and such rules and
regulations.
2. Offering and Sale of Shares -- Closing Dates
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Agent is hereby appointed the selling agent of the Company during the term
herein specified (the "Offering Period") for the purpose of finding subscribers
for the Shares for the account and risk of the Company through a public
offering. Your agency hereunder, which is subject to the conditions of Section 6
hereof, shall continue as long as Shares are being offered through the
Commission filing 333-10635 and any amendments thereto. However, your agency may
be terminated by the Company if you cease to be a member in good standing of the
NASD or if you become subject to an order or other action of or by the
Securities and Exchange Commission or other securities authority substantially
restricting or impairing your ability to offer and sell the Shares under this
Agreement, or if there is a material default by you under this Agreement which
is not promptly cured. Subject to the performance by the Company of all of its
obligations to be performed hereunder, and to the completeness and accuracy of
all the representations and warranties contained herein, the Agent hereby
accepts such agency and agrees on the terms and conditions herein set forth to
use its best efforts during the Offering Period to find subscribers for the
Shares at the current public offering price (each subscriber being required to
invest at least $5,000, or $2,000 in the case of a Qualified Plan, as defined in
the Prospectus). You will arrange for the purchase price for Shares to be
purchased by any subscriber to be deposited into an escrow account maintained
pursuant to an Escrow Agreement among the Company, First Union National Bank of
North Carolina, and you (the "Escrow Agreement"), and all payments of, from, or
on account of, funds so received from subscribers shall be made in accordance
with the provisions of the Escrow Agreement. The time for each issuance of and
payment for Shares is herein referred to as a "Closing Date."
(b) In the event the offering is commenced and subscriptions for
at least $15 million in Shares shall not have been received and accepted by the
date which is no later than one year after the date of the Prospectus (the
"Minimum Offering Date"), all funds received from subscribers (if any) shall be
returned in full, together with any interest earned thereon and without
deduction by you of any selling commissions or other fees or expenses. This
Agreement shall then terminate without obligation on the part of any party
hereto, except as provided in Sections 4 and 7 hereof.
(c) If by the Minimum Offering Date at least $15 million in Shares
shall have been subscribed for, then you shall notify the Advisor of the
aggregate number of Shares for which you have received subscriptions, and
payment of the purchase price for the Shares for which you have found
subscribers shall be made in accordance with the Escrow Agreement.
(d) If less than all the Shares shall have been subscribed and
paid for at the initial Closing Date (the "Initial Closing Date"), then, at
periodic intervals to be mutually agreed upon by you and the Company during the
Offering Period, there shall be subsequent closings for the payment to the
Company of the purchase price of additional Shares sold by you ("Subsequent
Closing Date(s)") as described in Section 2(e).
(e) Following the sale, by the Minimum Offering Date, of at least
$15 million in Shares and the issuance of such Shares, as subscriptions for
Share purchases are deposited in the escrow account pursuant to the Escrow
Agreement, the funds will be available to the Company for investment in
properties and other Company purposes as the Company sees fit. Closing(s) will
take place at such time(s), date(s) and place(s) as determined by the Company,
with the concurrence of the Agent in accordance with the Escrow Agreement.
Shares will be issued to subscribers and compensation will be paid to the Agent
at each Closing Date.
4
<PAGE>
(f) As compensation for your services under this Agreement, you
will be paid, on each Closing Date, a commission equal to 7.5% of the public
offering price for each Share subscribed and paid for at each Closing Date which
was sold by you or a Selected Dealer engaged by you. In addition, you will be
paid, on each Closing Date, a non-accountable Marketing Expense Allowance equal
to 2.5% of the public offering price for each Share subscribed and paid for on
the applicable Closing Date which was sold by you or a Selected Dealer engaged
by you.
(g) Subscriptions for Shares may be solicited by certain dealers
selected by you (the "Selected Dealers") and sales by Selected Dealers shall be
made under a Selected Dealer Agreement in substantially the form attached as
Exhibit A, which sets forth the terms and conditions, including compensation, of
the other dealers participating. Each such Selected Dealer shall be a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD").
Subscribers' checks are to be made payable to the escrow agent acting pursuant
to the Escrow Agreement. Selected Dealers must transmit all such checks directly
to the escrow agent by noon of the next business day after receipt.
(h) Neither you, the Company, the Advisor, nor any Selected Dealer
participating in the offering of the Shares shall, directly or indirectly, pay
or award any finder's fees, commissions or other compensation to any person
engaged by a potential investor for investment advice as an inducement to such
adviser to advise the purchase of Shares; provided, however, that normal sales
commissions payable to a registered broker-dealer or other properly licensed
person for selling Shares shall not be prohibited hereby.
3. Covenants of the Company
The Company agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify you immediately and
confirm in writing (i) when the Registration Statement and any amendments
thereto shall have become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, (iii) of the happening of any
event which makes untrue any statement of a material fact made in the
Registration Statement or the Prospectus, or which requires the making of a
change in the Registration Statement or the Prospectus, in order to make any
material statement therein not misleading; and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the initiation of any proceedings for that purpose, or of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution of any proceedings for such purpose; and the
Company will make every reasonable effort to prevent the issuance by the
Commission or any governmental agency pursuant to the securities laws of any
jurisdiction of any stop order and, if such stop order shall at any time be
issued, to obtain the lifting thereof at the earliest possible moment;
(b) It will, promptly from time to time take such actions as you
may reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales of Shares therein in such
jurisdictions for so long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith neither the Company, the
Advisor nor Apple Realty shall be required to qualify as a foreign corporation
or to file a general consent to service of process in any jurisdiction;
(c) The Company will deliver to you, as soon as available, a copy
of the Registration Statement as originally filed and each amendment thereto
(including exhibits);
(d) The Company will deliver promptly to you, as soon as the
Registration Statement becomes effective and thereafter from time to time during
the period when the Prospectus is required to be delivered under the Act, such
number of copies of the Prospectus (as amended or supplemented), as you may
reasonably request; and the Company consents to the use of the Prospectus and
any amendments or supplements thereto by you and by any Selected Dealers for the
purposes contemplated by the Act and this Agreement;
5
<PAGE>
(e) During the period when the Prospectus is required to be
delivered under the Act, the Company will comply, so far as it is able and at
the Company's expense, with all requirements imposed upon it by the Act, as now
and as hereafter amended, so far as necessary to permit the continuation of
sales of the Shares during such period in accordance with the provisions of this
Agreement and of the Prospectus;
(f) If any event relating to or affecting the Company or the
Advisor shall occur as a result of which it is necessary, in the opinion of your
counsel, to amend or supplement the Prospectus in order to make the Prospectus
not misleading in the light of the circumstances existing at the time it is
delivered to a subscriber, the Company will forthwith prepare and furnish to
you, without expense to you, a reasonable number of copies of an amendment or
amendments of, or a supplement or supplements to, the Prospectus (in form and
substance reasonably satisfactory to your counsel) which will amend or
supplement the Prospectus so that, as amended or supplemented, it will not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a subscriber,
not misleading. For the purposes of this subsection, the Company will furnish
such information with respect to the Company and any Company properties as you
may from time to time reasonably request;
(g) The Company will furnish to its Shareholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income and cash flows of the Company certified
by independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement), summary
financial information of the Company for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, the Company will furnish to you copies of all reports or
other communications (financial or other) furnished to securityholders, and
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably request;
(i) The Company, will not, at any time before or after the
Registration Statement becomes effective, file any amendment to the Registration
Statement or any amendment or supplement to the Prospectus to which you shall
reasonably object in writing or which shall be reasonably disapproved by your
counsel promptly after notice thereof; will deliver to you, from time to time,
all supplemental sales materials (whether designated solely for broker-dealer
use or otherwise) proposed to be used or delivered by the Company in connection
with the offering of Shares, prior to the use or delivery to third parties of
such material, and it will not use or deliver any such material to which you
shall object or which shall be disapproved by your counsel; and
(j) Subsequent to the date of this Agreement and through each
Closing Date, except as described, contemplated or permitted in the Registration
Statement, the Company will not take any action (or refrain from taking any
action) that will result in the Company incurring any material liability or
obligation, direct or contingent, or enter into any material transaction not in
the ordinary course of business, and there will not be any material change in
the capital stock, long-term debt, notes payable or short-term borrowings of the
Company or any issuance of options, warrants or rights to purchase capital stock
of the Company, or any declaration or payment or commitment to pay or
anticipated payment of any dividend or other distribution on the capital stock
of the Company, except as contemplated in the Prospectus, which has resulted in
or reasonably could be expected to result in a material adverse change in the
business or financial position of the Company, taken as a whole.
4. Expenses. The Company covenants and agrees with you that, except as
otherwise agreed by you and the Company, the Company will pay the following: (i)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to you and the Selected
Dealers; (ii) the cost of printing or producing this Agreement, any Blue Sky
Surveys, all sales material and any other documents in connection with the
offering, purchase, sale and delivery of the Shares; (iii) the cost of preparing
stock certificates, if any; (iv) the costs or expenses of any depositary, escrow
agent, transfer agent or registrar; (v) all
6
<PAGE>
travel, lodging and other expenses incurred by the Company for advertising,
publicity and selling materials used in connection therewith; and (vi) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section. It is
understood, however, that you will pay all of your own costs and expenses,
including the fees of your counsel and any advertising expenses incurred by you
in making offers and sales of the Shares. Also, notwithstanding the foregoing,
we understand that you have agreed to pay the filing and examination fees of the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc. and the various states but the Company will reimburse you such
amounts following the Initial Closing Date.
5. Covenants of Agent. Insofar as the distribution of the offering is
within your control and not the Company's, you agree that the distribution of
the offering will comply with the terms of the Prospectus, the Act, the
Securities Exchange Act of 1934 and the securities laws (including applicable
suitability standards, if any) of all jurisdictions in which you offer the
Shares or whose laws are applicable to your offering of the Shares, and all
rules promulgated under such Acts and laws, and all applicable rules of the
NASD. You agree to provide, from time to time as requested by the Company,
written certificates of compliance by you with the terms of this Agreement.
6. Conditions to Closing. Your obligations hereunder shall be subject,
in your discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of the date hereof, and
each Closing Date, true and correct, and the condition that the Company shall
have performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) If required by law, the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) under the Act within the applicable time
period prescribed for such filing by the rules and regulations under the Act and
in accordance with Section 1(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) (i) The Company shall not have sustained since the date of the
latest audited financial statement included in the Prospectus, any loss or
interference with its business, fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock or long-term debt of the Company as a whole or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operation of the Company otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in your reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being issued at such Closing Date on the terms and in the manner
contemplated by the Prospectus;
(c) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange; (ii) a general moratorium on commercial banking activities in New York
declared by either Federal or New York State Authorities; (iii) the engagement
by the United States in hostilities which have resulted in the declaration of a
national emergency or war if the effect of any such event specified in this
clause in your reasonable judgment makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being issued at
such Closing Date on the terms and in the manner contemplated in the Prospectus;
or (iv) such a material adverse change in general economic, political, financial
or international conditions affecting financial markets in the United States
having a material adverse impact on trading prices of securities in general, as,
in your reasonable judgment makes it inadvisable to proceed with the sale of the
Shares through you; and
(d) If requested by you, the Company shall have furnished or
caused to be furnished to you at such Closing Date certificates of officers of
the Company satisfactory to you as to the accuracy of the representations and
warranties of the Company, herein at and as of such Closing Date and as to the
performance by the Company of all of its obligations hereunder to be performed
at or prior to such Closing Date.
7
<PAGE>
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless you and each Selected Dealer against any losses, claims, damages
or liabilities, joint or several, to which you and such Selected Dealer may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto (including any sales
literature furnished to you by any of them), or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of or are based upon any misrepresentation or breach of warranty or
any alleged misrepresentation or breach of warranty set forth in Section 1 of
this Agreement, or arise out of or are based upon the failure of the Company to
comply with Sections 1 or 3 of this Agreement; and will reimburse you and each
Selected Dealer for any legal or other expenses reasonably incurred by you and
such Selected Dealer in connection with investigating or defending any such
action or claim; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by you or any Selected Dealer, relating to
you or such Selected Dealer, expressly for use therein; and provided further
that as to any Preliminary Prospectus, this agreement to indemnify and hold
harmless shall not inure to the benefit of you or any Selected Dealer if such
person failed to give or send a copy of the Prospectus, as the same may be
amended or supplemented, to an investor within the time required by the Act and
Regulations, and the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in the Prospectus or any supplement or
amendment thereto.
(b) You and each Selected Dealer will indemnify and hold harmless
the Company, the Advisor and Apple Realty against any losses, claims, damages or
liabilities to which the Company, the Advisor and Apple Realty may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by you or a
Selected Dealer to comply with any covenants contained in Section 5 of or
elsewhere in this Agreement or a Selected Dealer Agreement, or arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with information furnished to the Company by you or such Selected
Dealer relating to you or such Selected Dealer expressly for use therein; and
will reimburse the Company, the Advisor or Apple Realty for any legal or other
expenses reasonably incurred by any of them in connection with investigating or
defending any such action or claim.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof,
other than reasonable costs of investigation.
(d) If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the
8
<PAGE>
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and you or a Selected Dealer on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of Company, on the one hand and
you or a Selected Dealer on the other in connection with the statements or
omissions which resulted in such losses, claims, and damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand
and you or a Selected Dealer on the other shall be deemed to be in the same
proportion as the total proceeds from the offering received by the Company bear
to the total compensation received by you or such Selected Dealer. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, on the one hand or you or a Selected Dealer on the other, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and you agree that it
would not be just and equitable if contributions pursuant to this subsection (d)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section ll(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(e) The obligations of the Company under this Section 7 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
you and any Selected Dealer within the meaning of the Act; and the obligations
of you or any Selected Dealer under this Section 7 shall be in addition to any
liability which you and the respective Selected Dealers may otherwise have and
shall extend, upon the same terms and conditions, to each officer and director
of the Company, the Advisor and Apple Realty (including any person who, with his
consent, is named in the Registration Statement as proposed to become a director
of the Company) and to each person, if any, who controls the Company, the
Advisor or Apple Realty within the meaning of the Act.
8. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company and you, as set forth in this
Agreement or made by you or on your behalf pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by you or on behalf of you or any
controlling person of you, or the Company, Apple Realty or the Advisor, or any
officer or director or controlling person of the Company, and shall survive each
Closing Date.
9. Effective Date of This Agreement. This Agreement shall become
effective (the "Effective Date") upon the date of your acceptance hereof, as set
forth below.
10. Notices. All statements, requests, notices and agreements hereunder
shall be in writing, and if to you shall be sufficient in all respects if
delivered by hand or sent by registered or certified mail, or by reputable
overnight courier service, to you in care of David Lerner Associates, Inc., at
477 Jericho Turnpike, Syosset, New York 11791, Attention: Daniel E. Chafetz.,
and if to the Company, the Advisor or Apple Realty shall be sufficient in all
respects if delivered by hand or sent by registered or certified mail, or by
reputable overnight courier service, to the address of the Company, the Advisor
or Apple Realty, as the case may be, as set forth in the Registration Statement,
Attention: Glade M. Knight.
11. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of you and the Company and to the extent provided in
Sections 7 and 8 hereof, the officers and directors of the Company, the Advisor
and, Apple Realty Apple Realty and each person who controls the Company, the
Advisor, Apple Realty or you, and their respective heirs, executors,
administrators, and successors under or by virtue of this agreement.
9
<PAGE>
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Virginia.
13. Counterparts. This Agreement may be executed by any one or more of
the parties in any number of counterparts, each of which shall be deemed to be
an original, but all such counterparts shall together constitute one and the
same instrument.
If the foregoing is in accordance with your understanding,
please sign and return to us four counterparts hereof, and upon the acceptance
hereof by you, this letter and such acceptance hereof shall constitute a binding
agreement among you and the Company.
Very truly yours,
APPLE RESIDENTIAL INCOME TRUST, INC
By: /s/ Glade M. Knight
--------------------------------
Title: Chairman
-----------------------------
Accepted as of the 22 day of October, 1996.
------ -------------
DAVID LERNER ASSOCIATES, INC., AS
MANAGING DEALER
By: /s/ D. Lerner
----------------------------------
Title: President
-------------------------------
10
<PAGE>
Exhibit A
APPLE RESIDENTIAL INCOME TRUST, INC.
Shares of Common Stock
SELECTED DEALER AGREEMENT
-------------------------
, 199
----------- --
Gentlemen:
We have agreed to use our best efforts to sell up to 25,166,666.67
shares of common stock (the "Shares") in Apple Residential Income Trust, Inc., a
Virginia corporation (the "Company"), as described in the enclosed prospectus
(the "Prospectus"). The Shares are being offered by David Lerner Associates,
Inc., as Sales Agent for the Company ("DLA"), pursuant to an agency agreement
(the "Agency Agreement") among us and the Company. We have been advised by the
Company that the registration statement relating to the Shares (and including
the Prospectus) (the "Registration Statement") filed by the Company under the
Securities Act of 1933, as amended (the "Act"), has become effective with the
Securities and Exchange Commission.
We are hereby inviting you, subject to the other terms and conditions
set forth below and in the Prospectus, to solicit subscriptions for the Shares.
You confirm that you are a member in good standing of the National Association
of Securities Dealers, Inc. (the "NASD") and that you are currently registered
as a dealer under the Securities Exchange Act of 1934, as amended (the "1934
Act"). You hereby agree to comply with the provisions of Section 34 of Article
III of the Rules of Fair Practice of the NASD. In addition, you hereby agree to
comply with the provisions of Sections 8, 24, 25 and 36 of the Rules of Fair
Practice of the NASD to the extent such sections are applicable to your
activities in connection with this offering.
1. You agree to offer the Shares at a purchase price of $9.00 per Share
until the Minimum Offering of $15 million in Shares is achieved, and thereafter
at a purchase price of $10.00 per Share. Upon the admission of subscribers to
the Company, you shall be paid a commission equal to $___ (____%) per Share for
each Share purchased by an Investor provided by you. Commissions will be payable
to you only with respect to transactions that are lawful in the jurisdiction
wherein they occur.
2. Subscriptions may be taken by you from your customers in accordance
with the procedures described in the Prospectus. Each subscription solicited by
you shall be promptly forwarded by you, in accordance with the requirements of
SEC Rule 15c2-4, together with a check payable to "First Union National Bank,
Escrow Agent," for the full purchase price of the Shares subscribed for, to:
First Union Bank of North Carolina, Escrow Agent; Corporate Trust
Department-Att: ___________________ 230 South Tryon Street, 8th Floor;
Charlotte, NC 28288- 1179. Such forwarding shall take place by noon of the next
business day after receipt by you from your customer of such subscription and
payment. Notwithstanding the foregoing, any subscribers' checks not properly
completed as described above shall be promptly returned to such subscribers not
later than the next business day following receipt by you of such checks.
With respect to each subscription solicited by you, you shall obtain
and furnish to the Company in the case of United States residents, (i) the
subscriber's name, address, taxpayer identification number, the number of Shares
to be acquired by each subscriber, (ii) the certification as to non-foreign
status as required by Temp. Treas. Reg. ss. 1.1445-2T(b), and (iii) Form W-9.
1
<PAGE>
All acceptable subscriptions solicited by you will be strictly subject
to acceptance thereof by the Company, which has reserved the right to refuse to
accept in whole or in part any subscription and related payment and to refuse to
accept as a purchaser any person for any reason whatsoever. Subscriptions
delivered to the Company will be accepted or rejected within 30 days of their
receipt; provided, however that the Company may at any time reject in whole or
in part any subscription in its sole and absolute discretion if the total
offering for the Company is oversubscribed, or if the Company would be
prohibited from accepting such subscription by any Blue Sky or other applicable
securities law or regulation. If the Company rejects a subscription in whole or
in part, it will arrange for First Union National Bank (the "Escrow Agent") to
return to such subscriber within ____ days after rejection of the subscription
by the Company, any payment made by him applicable to the portion of the
subscription which has been rejected.
3. Neither you nor any other person is authorized to give any
information or make any representations in connection with the sale of any of
the Shares other than those contained in the Prospectus or in the supplemental
sales material authorized for use in connection with this offering, as described
below. No dealer is authorized to act as agent for us when offering any of the
Shares to the public or otherwise, it being understood that you and each other
Selected Dealer are independent contractors with us. Nothing herein contained
shall constitute you or any other Selected Dealer an association or partner with
us.
4. We understand that the Company will provide you with such number of
copies of the enclosed Prospectus and such number of copies of amendments and
supplements thereto as you may reasonably request. We also understand that the
Company may provide you with certain supplemental sales literature for Shares in
the Company. You agree that such material shall not be used in connection with
the solicitation of subscribers for Shares unless accompanied or preceded by the
Prospectus as then currently in effect and as it may be amended or supplemented
in the future. You agree that neither you nor any person under your control will
deliver or show to any prospective subscriber for Shares any supplementary sales
material other than the Prospectus (including, inter alia, transmittal letters,
underwriting memoranda, summary descriptions, graphics, supplemental exhibits,
media advertising, charts, pictures, written scripts or outlines), except as
supplied by the Company and described under the caption "SALES LITERATURE" in
the Prospectus, or otherwise specifically described in written advice from the
Company authorizing the type and manner of use. The delivery or showing of any
such other supplementary sales materials to prospective subscribers is expressly
prohibited except to the extent specified in such written advice.
5. You agree that neither you nor any person under your control shall
directly or indirectly pay or award any finder's fees, commissions or other
compensation to any person engaged by a potential investor for investment advice
as an inducement to such advisor to advise the purchase of Shares; provided,
however, that this provision shall not prohibit the normal sales commission
payable to any registered broker-dealer or other properly licensed person for
selling Shares. In addition, you agree not to receive any rebates or give-ups or
participate in any reciprocal business arrangements which would violate any
restriction on the Company contained in the Prospectus.
6. You represent that neither you nor any of your directors, officers,
partners or "persons associated with" you (as defined in the By-laws of the
NASD), nor, to your knowledge, any related person (as defined by the NASD in its
Interpretation with respect to Review of Corporate Financing) have participated
or intend to participate in any transaction or dealing as to which documents or
information are required to be filed with the NASD pursuant to such
Interpretation.
7. This Agreement shall terminate simultaneously with the termination
of the Agency Agreement, but may be terminated by us prior thereto at any time
by written or telegraphic notice. Upon termination, rights and obligations
hereunder shall cease, except rights and obligations accrued or unsatisfied at
the date of termination.
8. You agree that in selling Shares of the Company you will comply with
the applicable provisions of the
2
<PAGE>
Act, the 1934 Act, the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the laws of the jurisdictions in which the
Shares are offered and sold and the applicable rules and regulations of the
NASD. We shall have full authority to take such action as we may deem advisable
in respect to all matters pertaining to the offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement. Nothing contained in this paragraph is intended
to operate as, and the provisions of this paragraph shall not constitute, a
waiver by you of compliance with any provision of the Act, the 1934 Act, or the
rules and regulations thereunder.
9. Upon application to us, we will inform you as to the states and
other jurisdictions of the United States in which we believe the Shares have
been qualified for the sale under, or are exempt from the requirements of, the
respective securities laws of such jurisdictions, but we assume no
responsibility or obligation as to your right to sell the Shares in any
jurisdiction. You covenant and agree that you will not effect sales in any
jurisdiction where the Shares are not qualified or exempt from qualification.
You further agree to provide us, promptly upon our request, with geographic
distribution information, setting forth (a) the number of Shares sold, (b) the
number of transactions done, (c) the jurisdictions where sold, and (d) the types
of purchasers.
10. You confirm that you are familiar with Securities Act Release No.
4968 and Rule 15c2-8 under the 1934 Act, relating to the distribution of
preliminary and final prospectuses, and that you have complied and will continue
to comply therewith.
11. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless DLA and each Selected
Dealer against any losses, claims, damages or liabilities, joint or several, to
which they may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto (including
any sales literature furnished to you by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arise out of or are based upon any misrepresentation or breach of
warranty or any alleged misrepresentation or breach of warranty set forth in
Section 1 of the Agency Agreement, or arise out of or are based upon the failure
of the Company to comply with Sections 1 or 3 of the Agency Agreement; and will
reimburse DLA and each Selected Dealer for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement or Prospectus
or any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by DLA or any Selected Dealer, relating to
them, expressly for use therein; and provided further that as to any Preliminary
Prospectus, this agreement to indemnify and hold harmless shall not inure to the
benefit of DLA or any Selected Dealer if such person failed to give or send a
copy of the Prospectus, as the same may be amended or supplemented, to an
investor within the time required by the Act and Regulations, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was corrected
in the Prospectus or any supplement or amendment thereto.
(b) DLA and each Selected Dealer will indemnify and hold harmless
the Company, the Advisor and Apple Realty against any losses, claims, damages or
liabilities to which the Company, the Advisor or Apple Realty may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by DLA or a
Selected Dealer to comply with any covenants contained in Section 8 of or
elsewhere in this Agreement, or arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the
3
<PAGE>
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with information furnished to the Company by you or such Selected
Dealer relating to you or such Selected Dealer expressly for use therein; and
will reimburse the Company, the Advisor and Apple Realty for any legal or other
expenses reasonably incurred by any of them in connection with investigating or
defending any such action or claim.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the idemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation.
(d) If the indemnification provided for in this Section is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and DLA or a Selected
Dealer on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of Company on the one hand and DLA or a Selected Dealer on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and DLA or a Selected Dealer on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
received by the Company bear to the total compensation received by DLA or such
Selected Dealer. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or DLA or a Selected Dealer
on the other, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and we agree that it would not be just and equitable if contributions pursuant
to this subsection (d) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section ll(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls DLA and
any Selected Dealer within the meaning of the Act; and the obligations of DLA or
any Selected Dealer under this Section shall be in addition to any liability
which DLA and the respective Selected Dealers may
4
<PAGE>
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company, the Advisor and Apple Realty (including any
person who, with his consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company, the Advisor and Apple Realty within the meaning of the Act.
12. This Agreement shall be subject to and interpreted consistently
with the Agency Agreement. All representations, warranties, and covenants and
agreements made by you herein shall inure to the benefit of David Lerner
Associates, Inc. and the Company, the Advisor and Apple Realty.
Any notice from us to you shall be deemed to have been duly given if
mailed or telegraphed to you at your address as specified below.
Please confirm your agreement hereby by signing and returning to us at
477 Jericho Turnpike Syosset, New York 11791, Attn: Daniel E. Chafetz, an
original of this letter.
Upon receipt thereof, this letter and such signed copy will evidence
the agreement among us.
Very truly yours,
DAVID LERNER ASSOCIATES, INC.
By: _______________________________
Title:_____________________________
READ AND AGREED TO:
- ----------------------------
By: _______________________
Title: ____________________
Address: ___________________
- ----------------------------
5
Exhibit 1.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of October 10, 1996 ("Escrow
Agreement"), is by and between David Lerner Associates, Inc., a New York
corporation ("Agent"); Apple Residential Income Trust, Inc., a Virginia
corporation ("Company"); and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association, as Escrow Agent hereunder ("Escrow Agent").
BACKGROUND
A. Company has engaged Agent to sell up to 25,166,666.67 in shares of
Common Stock, no par value (the "Shares"), with a minimum required investment of
$5,000 in Shares ($2,000 in Shares in the case of Qualified Plans, as defined
therein) at a price of $9.00 per share until the Minimum Offering of $15,000,000
is achieved and thereafter $10.00 per share (the "Shares") on a "best efforts"
basis, pursuant to Registration Statement No. 333-10635 filed with the
Securities and Exchange Commission (the "SEC") which includes a Prospectus, as
supplemented and amended from time to time (the "Offering Document").
B. In accordance with the Offering Document, subscribers to the Shares
(the "Subscribers" and individually, a "Subscriber") will be required to submit
full payment for their respective investments at the time they enter into
subscription agreements.
C. In accordance with the Offering Document, all payments received by
Agent on or before sale of the Minimum Offering amount (as defined in the
Offering Document) in connection with subscriptions for Shares shall be promptly
forwarded to Escrow Agent, and Escrow Agent has agreed to accept, hold, and
disburse such funds deposited with it and the earnings thereon in accordance
with the terms of this Escrow Agreement.
D. In order to establish the escrow of funds and to effect the
provisions of the Offering Document, the parties hereto have entered into this
Escrow Agreement.
STATEMENT OF AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, for
themselves, their successors and assigns, hereby agree as follows:
<PAGE>
1. Definitions. The following terms shall have the following meanings
when used herein:
"Agent" shall mean David Lerner Associates, Inc., and/or any
selected dealer participating at a later date.
"Cash Investment" shall mean the number of Shares to be purchased
by any Subscriber multiplied by the offering price per share of $9.00 until the
Minimum Offering is achieved and thereafter $10.00 as set forth in the Offering
Document.
"Cash Investment Instrument" shall mean a check, money order or
similar instrument, made payable to "First Union National Bank, Escrow Agent"
and referencing the Agent's account number in full payment for the Shares to be
purchased by any Subscriber.
"Escrow Funds" shall mean the funds deposited with the Escrow
Agent pursuant to this Agreement, together with any interest and other income
thereon.
"Minimum Offering" shall mean the sale of $15,000,000 in Shares at
$9.00 per Share (1,666,666.67 Shares) by the Company in the offering made by the
Offering Document.
"Pro Rata Basis," with respect to the allocation among Subscribers
of interest and other earnings held in the Escrow Funds, shall mean, for each
Subscriber, the Subscriber's Cash Investment multiplied by the number of
calendar days the Cash Investment of such Subscriber was held in
interest-bearing investments pursuant to Section 6 hereof, multiplied by the
average yield earned on the Escrow Funds during such period of days.
"Shares" shall have the meaning set forth in the section of this
Escrow Agreement titled "Background."
"Subscriber" or "Subscribers" shall have the meaning set forth in
the section of this Escrow Agreement titled "Background."
"Subscription Accounting" shall mean an accounting of all
subscriptions for Shares received by Agent as of the date of such accounting,
indicating for each subscription the Subscriber's name, social security number
and address, the number and total purchase price of subscribed Shares, the date
of receipt by Agent of the Cash Investment Instrument, and notations of any
nonpayment of the Cash Investment Instrument submitted with such subscription,
any withdrawal of such subscription by the Subscriber, any rejection of such
subscriber by Company, or other termination, for whatever reason, of such
subscription.
2. Appointment of and Acceptance by Escrow Agent. Company and Agent
hereby appoint Escrow Agent to serve as escrow agent hereunder, and Escrow Agent
hereby accepts such appointment in accordance with the terms of this Escrow
Agreement.
-2-
<PAGE>
3. Deposits into Escrow
a. Upon receipt by Agent of any Cash Investment Instrument for the
purchase of Shares, Agent shall forward to Escrow Agent the Cash Investment
Instrument for deposit into the following escrow account:
First Union National Bank of North Carolina, Escrow Agent
Charlotte, North Carolina
ABA # 053000219
ATTN: Karen Atkinson
for Apple Residential Income Trust, Inc. Escrow Account
Notify (704) 374-2670
Each such deposit shall be accompanied by the following
document:
(1) A Subscription Accounting
The Escrow Agent is under no obligation to accept deposits from anyone
other than the Agent. If a deposit is received by 12:00 P.M. on a given business
day, it will be accepted that business day; otherwise it will be accepted on the
next business day.
ALL FUNDS SO DEPOSITED SHALL REMAIN THE PROPERTY OF THE
SUBSCRIBERS ACCORDING TO THEIR RESPECTIVE INTERESTS AND SHALL NOT BE SUBJECT TO
ANY LIEN OR CHARGE BY ESCROW AGENT OR BY JUDGMENT OR CREDITORS' CLAIMS AGAINST
COMPANY UNTIL RELEASED TO COMPANY IN ACCORDANCE WITH SECTION 4(a) HEREOF.
b. Agent and Company understand and agree that all checks and
similar instruments received by Escrow Agent hereunder are subject to collection
requirements of presentment and final payment, and that the funds represented
thereby cannot be drawn upon or disbursed until such time as final payment has
been made and is not longer subject to dishonor. Upon receipt, Escrow Agent
shall process each Cash Investment Instrument for collection, and the proceeds
thereof shall be held as part of the Escrow Funds until disbursed in accordance
with Section 4 hereof. If, upon presentment for payment, any Cash Investment
Instrument is dishonored, Escrow Agent's sole obligation shall be to notify
Agent of such dishonor and to return such Cash Investment Instrument to Agent to
take whatever action it deems necessary. Notwithstanding the foregoing, if for
any reason any Cash Investment Instrument is uncollectible after payment of the
funds represented thereby has been made by Escrow Agent, the party
-3-
<PAGE>
receiving such funds shall immediately reimburse Escrow Agent upon receipt from
Escrow Agent of written notice thereof (period of notification is not to exceed
10 business days).
Upon receipt of any Cash Investment Instrument that represents
payment less than or greater than the Cash Investment, Escrow Agent's sole
obligation shall be to notify Company and Agent of such fact and to return such
Cash Investment Instrument to Agent.
c. All Cash Investment Instruments shall be made payable to the
order of, or endorsed to the order of, "First Union National Bank, Escrow Agent"
and Escrow Agent shall not be obligated to accept, or present for payment, any
Cash Investment Instrument that is not payable or endorsed in that manner.
4. Disbursements of Escrow Funds.
a. Generally. Subject to the provisions of Section 10 hereof,
Escrow Agent shall pay to Company the liquidated value of the Escrow Funds, by
certified or bank check or by wire transfer, no later than ten (10) days
following receipt of the following documents:
(1) A request in writing from the Company for disbursement,
including a statement that the conditions, if any, to
disbursement described in the Offering Document have
been satisfied; and
(2) Such other certificates and notices as Escrow Agent
shall reasonably require.
b. Rejection of Any Subscription or Termination of the Offering.
No later than fifteen (15) business days after receipt by Escrow Agent of
written notice (i) from Company or Agent that Company intends to reject a
Subscriber's subscription, or (ii) that a subscriber has revoked his
subscription or (iii) from the SEC or any other federal or state regulatory
authority that a stop order has been issued with respect to the Offering
Document and has remained in effect for at least twenty (20) days, Escrow Agent
will, upon written instructions given by the Company, transmit to the Agent that
portion of the escrowed funds attributable to such subscriber or subscribers
affected by such event, or equal to the amount of the reduction, as the case may
be, with interest, and the Agent shall promptly deposit such funds directly to
the account of the subscriber entitled thereto, each Subscriber's share of
interest to be calculated on a Pro Rata Basis.
c. Interest. All interest earned on investments is payable to the
Subscribers, less the investment sweep fee prorated by investor in accordance
with the length of time of their escrow deposit.
5. Suspension of Performance or Disbursement Into Court. If, at any
time, there shall exist any dispute between Agent, Company, Escrow Agent, any
Subscriber or any other person with respect to the holding or disposition of any
portion of the Escrow Funds or any
-4-
<PAGE>
other obligations of Escrow Agent hereunder, or if at any time Escrow Agent is
unable to determine, to Escrow Agent's sole satisfaction, the proper disposition
of any portion of the Escrow Funds or Escrow Agent's proper actions with respect
to its obligations hereunder, or if Agent and Company have not within 30 days of
the furnishing by Escrow Agent of a notice of resignation pursuant to Section 7
hereof appointed a successor Escrow Agent to act hereunder, then Escrow Agent
may, in its sole discretion, take either or both of the following actions:
a. Suspend the performance of any of its obligations under this
Escrow Agreement until such dispute or uncertainty shall be resolved to the sole
satisfaction of Escrow Agent or until a successor Escrow Agent shall have been
appointed (as the case may be); provided however, that Escrow Agent shall
continue to invest the Escrow Funds in accordance with Section 6 hereof; and/or
b. Petition (by means of an interpleader action or any other
appropriate method) any court of competent jurisdiction in Charlotte, North
Carolina, for instructions with respect to such dispute or uncertainty, and pay
into such court all funds held by it in the Escrow Funds for holding and
disposition in accordance with the instructions of such court.
Escrow Agent shall have no liability to Agent, Company, any Subscriber
or any other person with respect to any such suspension of performance or
disbursement into court, specifically including any liability or claimed
liability that may arise, or be alleged to have arisen, out of or as a result of
any delay in the disbursement of funds held in the Escrow Funds or any delay in
or with respect to any other action required or requested of Escrow Agent.
6. Investment of Funds. Escrow Agent shall invest and reinvest the
Escrow Funds as Company shall direct (subject to applicable minimum investment
requirements) in writing; provided, however, that no investment or reinvestment
may be made except in the following:
a. Short-term direct obligations of the United States of America
or obligations the principal of and the interest on which are unconditionally
guaranteed by the United States of America; or
b. Short-term certificates of deposit issued by any bank (as
defined in Section 3(a)(6) of the Securities Exchange Act of 1934) (including
Escrow Agent and its affiliates) having a net worth of at least $50,000,000 or
c. If, but only if, such investment or reinvestment occurs after
sale of the Minimum Offering amount, bank repurchase agreements covering the
securities of the United States government or United States governmental
agencies issued by banks located in the United States having a net worth of at
least $50,000,000 or
d. If, but only if, such investment or reinvestment occurs after
sale of the Minimum Offering amount, banker's acceptances, prime commercial
paper or similarly highly
-5-
<PAGE>
liquid investments (such as money market funds selected by the Company,
including those of the Escrow Agent and its affiliates)
If Escrow Agent has not received written instructions from Company at
any time that an investment decision must be made, Escrow Agent shall invest the
Escrow Funds, or such portion thereof as to which no written instructions have
been received, in investments described in clause (b) above. Each of the
foregoing investments shall be made in the name of Escrow Agent in its stated
capacity as escrow agent. No investment shall be made in any instrument or
security that has a maturity of greater than three (3) months. Notwithstanding
anything to the contrary contained herein, Escrow Agent may, without notice to
Company or Agent, sell or liquidate any of the foregoing investments at any time
if the proceeds thereof are required for any release of funds permitted or
required hereunder, and Escrow Agent shall not be liable or responsible for any
loss, cost or penalty resulting from any such sale or liquidation. With respect
to any funds received by Escrow Agent for deposit into the Escrow Funds or any
written investment instruction of Company received by Escrow Agent after ten
o'clock, a.m., Charlotte, North Carolina, time, Escrow Agent shall not be
required to invest such funds or to effect such investment instruction until the
next day upon which banks in Charlotte, North Carolina, are open for business.
The Escrow Agent shall deliver to Company, upon request by Company, an
accounting of all funds held in escrow pursuant to this Agreement, to the extent
such funds have not been previously paid over by the Escrow Agent.
7. Resignation and Removal of Escrow Agent.
a. Escrow Agent may resign from the performance of its duties
hereunder at any time by giving thirty (30) days' prior written notice to Agent
and Company or may be removed, with or without cause, by Agent and Company,
acting jointly in writing, at any time by the giving of thirty (30) days' prior
written notice to Escrow Agent. Such resignation or removal shall take effect
upon the appointment of a successor Escrow Agent as provided hereinbelow. Upon
any such notice of resignation or removal, Agent and Company jointly shall
appoint a successor Escrow Agent hereunder, which shall be a bank (as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934). Upon the acceptance in
writing of any appointment as Escrow Agent hereunder by a successor Escrow
Agent, such successor Escrow Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring Escrow Agent,
and the retiring Escrow Agent shall be discharged from its duties and
obligations under this Escrow Agreement, but shall not be discharged from any
liability for actions taken as escrow agent hereunder prior to such succession.
After any retiring Escrow Agent's resignation or removal, the provisions of this
Escrow Agreement shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Escrow Agent under this Escrow Agreement.
b. Notwithstanding anything to the contrary in this Escrow
Agreement, at any time after Shares representing the Minimum Offering have been
sold (and the
-6-
<PAGE>
corresponding Escrow Funds disbursed in accordance with this Escrow Agreement),
Company and Agent, by ten (10) days' prior written notice to Escrow Agent, may
terminate this Escrow Agreement. Any Escrow Funds remaining at the time of
termination of this Escrow Agreement shall be disbursed in accordance with
Section 4 hereof.
8. Liability of Escrow Agent. Escrow Agent shall have no liability or
obligation with respect to the Escrow Funds except for Escrow Agent's willful
misconduct or gross negligence. Escrow Agent's sole responsibility shall be for
the safekeeping, investment, and disbursement of the Escrow Funds in accordance
with the terms of this Escrow Agreement. Escrow Agent shall have no implied
duties or obligations and shall not be charged with knowledge or notice of any
fact or circumstance not specifically set forth herein or in a written notice
provided hereunder. Escrow Agent may rely upon any instrument, not only as to
its due execution, validity and effectiveness, but also as to the truth and
accuracy of any information contained therein which Escrow Agent shall in good
faith believe to be genuine, to have been signed or presented by the person or
parties purporting to sign the same and to conform to the provisions of this
Escrow Agreement. In no event shall Escrow Agent be liable for incidental,
indirect, special, consequential or punitive damages. Escrow Agent shall not be
obligated to take any legal action or commence any proceeding in connection with
the Escrow Funds or any account in which Escrow Funds are deposited or this
Escrow Agreement, or to appear in, prosecute or defend any such legal action or
proceeding. Without limiting the generality of the foregoing, Escrow Agent shall
not be responsible for or required to enforce any of the terms or conditions of
any subscription agreement with any Subscriber or any other agreement between
Company, Agent and/or any Subscriber. Escrow Agent shall not be responsible or
liable in any manner for the performance by Company or any Subscriber of their
respective obligations under any subscription agreement nor shall Escrow Agent
be responsible or liable in any manner for the failure of Company, Agent or any
third party (including any Subscriber) to honor any of the provisions of this
Escrow Agreement. Escrow Agent may consult legal counsel selected by it in the
event of any dispute or question as to the construction of any of the provisions
hereof or of any other agreement or of its duties hereunder, and shall incur no
liability and shall be fully protected from any liability whatsoever in acting
in accordance with the opinion or instruction of such counsel. Company shall
promptly pay, upon demand, the reasonable fees and expenses of any such counsel.
9. Indemnification of Escrow Agent. From and at all times after the
date of this Escrow Agreement, Company shall, to the fullest extent permitted by
law, indemnify and hold harmless the Escrow Agent and each director, officer,
employee, attorney, agent and affiliate of Escrow Agent (collectively, the
"Indemnified Parties") against any and all actions, claims (whether or not
valid), losses, damages, liabilities, costs and expenses of any kind or nature
whatsoever (including without limitation reasonable attorneys' fees, costs and
expenses) incurred by or asserted against any of the Indemnified Parties from
and after the date hereof, whether direct, indirect or consequential, as a
result of or arising from or in any way relating to any claim, demand, suit,
action or proceeding (including any inquiry or investigation) by any person,
whether threatened or initiated, asserting a claim for any legal or equitable
remedy against any person under any statute or regulation, including, but not
limited to, any federal or state
-7-
<PAGE>
securities laws, or under any common law or equitable cause or otherwise,
arising from or in connection with the negotiation, preparation, execution,
performance or failure of performance of this Escrow Agreement or any
transactions contemplated herein, whether or not any such Indemnified Party is a
party to any such action, proceeding, suit or the target of any such inquiry or
investigation; provided, however, that no Indemnified Party shall have the right
to be indemnified hereunder for any liability finally determined by a court of
competent jurisdiction, subject to no further appeal, to have resulted solely
from the gross negligence or willful misconduct of such Indemnified Party. If
any such action or claim shall be brought or asserted against any Indemnified
Party, such Indemnified Party shall promptly notify Company in writing, and
Company shall assume the defense thereof, including the employment of counsel
and the payment of all expenses. Such Indemnified Party shall, in its sole
discretion, have the right to employ separate counsel in any such action and to
participate in the defense thereof, and the fees and expenses of such counsel
shall be paid by such Indemnified Party unless (a) Company agrees to pay such
fees and expenses, or (b) Company shall fail to assume the defense of such
action or proceeding or shall fail, in the reasonable discretion of such
Indemnified Party, to employ counsel satisfactory to the Indemnified Party in
any such action or proceeding, or (c) the named parties to any such action or
proceeding (including any impleaded parties) include both Indemnified Party and
Company, and Indemnified Party shall have been advised by counsel that there may
be one or more legal defenses available to it which are different from or
additional to those available to Company. All such fees and expenses payable by
Company pursuant to the foregoing sentence shall be paid from time to time as
incurred, both in advance of and after the final disposition of such action or
claim. The obligations of Company under this Section 9 shall survive any
termination of this Escrow Agreement and the resignation or removal of Escrow
Agent.
10. Compensation to Escrow Agent.
a. Fees and Expenses. Company shall compensate Escrow Agent for
its services hereunder in accordance with Exhibit A attached hereto and, in
addition, shall reimburse Escrow Agent for all of its reasonable out-of-pocket
expenses, including attorneys' fees, travel expenses, telephone and facsimile
transmission costs, postage (including express mail and overnight delivery
charges), copying charges and the like. All of the foregoing compensation and
reimbursement obligations shall be payable by Company upon demand by Escrow
Agent. The obligations of Company under this Section 10 shall survive any
termination of this Escrow Agreement and the resignation or removal of Escrow
Agent.
b. Disbursements from Escrow Funds to Pay Escrow Agent. The Escrow
Agent is authorized to and may disburse from time to time, to itself or to any
Indemnified Party from the Escrow Funds (but only to the extent of Company's
rights thereto), the amount of any compensation and reimbursement of
out-of-pocket expenses due and payable hereunder (including any amount to which
Escrow Agent or any Indemnified Party is entitled to seek indemnification
pursuant to Section 9 hereof). Escrow Agent shall, prior to disbursement, notify
Company of any disbursement from the Escrow Funds to itself or to any
Indemnified Party in
-8-
<PAGE>
respect of any compensation or reimbursement hereunder and shall furnish to
Issuer copies of all related invoices and other statements.
c. Security and Offset. Company hereby grants to Escrow Agent and
the Indemnified Parties a security interest in and lien upon the Escrow Funds
(but only to the extent of Company's rights thereto) to secure all obligations
hereunder, and Escrow Agent and the Indemnified Parties shall have the right to
offset the amount of any compensation or reimbursement due any of them hereunder
(including any claim for indemnification pursuant to Section 9 hereof) against
the Escrow Funds (but only to the extent of Company's rights thereto.) If for
any reason the Escrow Funds available to Escrow Agent and the Indemnified
Parties pursuant to such security interest or right of offset are insufficient
to cover such compensation and reimbursement, Company shall promptly pay such
amounts to Escrow Agent and the Indemnified Parties upon receipt of an itemized
invoice.
11. Representations and Warranties
a. Company makes the following representations and warranties to
Escrow Agent:
(1) Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Virginia, and has full power
and authority to execute and deliver this Escrow Agreement and to perform its
obligations hereunder;
(2) This Escrow Agreement has been duly approved by all
necessary corporate action of Company, including any necessary shareholder
approval, has been executed by duly authorized officers of Company, and
constitutes a valid and binding agreement of Company, enforceable in accordance
with its terms.
(3) The execution, delivery, and performance by Company of this
Escrow Agreement will not violate, conflict with, or cause a default under the
articles of incorporation or bylaws of Company, any applicable law or regulation
applicable to the Company, any court order or administrative ruling or decree to
which Company is a party or any of its property is subject, or any agreement,
contract, indenture, or other binding arrangement to which Company is a party or
any of its property is subject. The execution, delivery and performance of this
Escrow Agreement is consistent with and accurately described in the Offering
Document, and the allocation of interest and other earnings to Subscribers, as
set forth in Section 4 hereof, has been properly described therein.
(4) No party other than the parties hereto and the prospective
Subscribers have, or shall have, any lien, claim or security interest in the
Escrow Funds or any part thereof. No financing statement under the Uniform
Commercial Code is on file in any jurisdiction claiming a security interest in
or describing (whether specifically or generally) the Escrow Funds or any part
thereof.
-9-
<PAGE>
(5) Company hereby acknowledges that the status of Escrow Agent
is that of agent only for the limited purposes set forth herein, and hereby
represents and covenants that no representation or implication shall be made
that the Escrow Agent has investigated the desirability or advisability of
investment in the Shares or has approved, endorsed or passed upon the merits of
the investment therein and that the name of the Escrow Agent has not and shall
not be used in any manner in connection with the offer or sale of the Shares
other than to state that the Escrow Agent has agreed to serve as escrow agent
for the limited purposes set forth herein.
(6) All of the representations and warranties of Company
contained herein are true and complete as of the date hereof and will be true
and complete at the time of any deposit to or disbursement from the Escrow
Funds.
b. Agent makes the following representations and warranties to
Escrow Agent:
(1) Agent is a corporation duly organized, validly existing, and
in good standing under the laws of the State of New York, and has full power and
authority to execute and deliver this Escrow Agreement and to perform its
obligations hereunder;
(2) This Escrow Agreement has been duly approved by all
necessary corporate action of Agent, has been executed by duly authorized
officers of Agent, and constitutes a valid and binding agreement of Agent,
enforceable in accordance with its terms.
(3) The execution, delivery, and performance by Agent of this
Escrow Agreement will not violate, conflict with, or cause a default under the
articles of incorporation or bylaws of Agent, any applicable law, regulation or
license applicable to the Agent, any court order or administrative ruling or
decree to which Agent is a party or any of its property is subject, or any
agreement, contract, indenture, or other binding arrangement to which Agent is a
party or any of its property is subject. The execution, delivery and performance
of this Agreement is consistent with and accurately described in the Offering
Document, and the allocation of interest and other earnings to Subscribers, as
set forth in Section 4 hereof, has been properly described therein.
(4) The deposit with Escrow Agent by Agent of Cash Investment
Instruments pursuant to Section 3 hereof shall be deemed a representation and
warranty by Agent that such Cash Investment Instrument represents a bona fide
sale to the Subscriber described therein of the amount of Shares set forth
therein, subject to and in accordance with the terms of the Offering Document.
(5) Agent hereby acknowledges that the status of Escrow Agent is
that of agent only for the limited purposes set forth herein, and hereby
represents and covenants that no representation or implication shall be made
that the Escrow Agent has investigated the desirability or advisability of
investment in the Shares or has approved, endorsed or passed upon the merits of
the investment therein and that the name of the Escrow Agent has not and shall
not
-10-
<PAGE>
be used in any manner in connection with the offer or sale of the Shares other
than to state that the Escrow Agent has agreed to serve as escrow agent for the
limited purposes set forth herein.
(6) All of the representations and warranties of Agent contained
herein are true and complete as of the date hereof and will be true and complete
at the time of any deposit to or disbursement from the Escrow Funds.
12. Consent to Jurisdiction and Venue. In the event that any party
hereto commences a lawsuit or other proceeding relating to or arising from this
Escrow Agreement, the parties hereto agree that the United States District Court
for the Western District of North Carolina shall have the sole and exclusive
jurisdiction over any such proceeding. If all such courts lack federal subject
matter jurisdiction, the parties agree that the Superior Court Division of the
General Court of Justice of Mecklenburg County, North Carolina shall have sole
and exclusive jurisdiction. Any of these courts shall be proper venue for any
such lawsuit or judicial proceeding and the parties hereto waive any objection
to such venue. The parties hereto consent to and agree to submit to the
jurisdiction of any of the courts specified herein and agree to accept service
or process to vest personal jurisdiction over them in any of these courts.
13. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mails, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
after delivery to any overnight courier, or when transmitted by facsimile
transmission facilities (with a copy mailed or otherwise delivered as provided
in this section 13), and addressed to the party to be notified as follows:
If to Agent at:
David Lerner Associates, Inc.
477 Jericho Turnpike
Syosset, New York 11791
Attention: Daniel E. Chafetz
Facsimile Number: (516) 364-1637
If to Company at:
Apple Residential Income Trust
306 East Main Street
Richmond, Va. 23219
Attention: Glade M. Knight
Facsimile Number: (804) 782-9302
If to the Escrow
Agent at:
First Union National Bank of
North Carolina, as Escrow Agent
Corporate Trust Department
-11-
<PAGE>
230 South Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
ATTENTION: Karen Atkinson
Facsimile Number: (704) 383-7316
or to such other address as each party may designate for itself by like notice.
14. Amendment or Waiver. This Escrow Agreement may be changed, waived,
discharged or terminated only by a writing signed by Agent, Company and Escrow
Agent. No delay or omission by any party in exercising any right with respect
hereto shall operate as a waiver. A waiver on any one occasion shall not be
construed as a bar to, or waiver of, any right or remedy on any future occasion.
15. Severability. To the extent any provision of this Escrow Agreement
is prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Escrow Agreement.
16. Governing Law. This Escrow Agreement shall be construed and
interpreted in accordance with the internal laws of the State of Virginia
without giving effect to the conflict of laws principles thereof.
17. Entire Agreement. This Escrow Agreement constitutes the entire
agreement between the parties relating to the acceptance, collection, holding,
investment and disbursement of the Escrow Funds and sets forth in their entirety
the obligations and duties of the Escrow Agent with respect to the Escrow Funds.
18. Binding Effect. All of the terms of this Escrow Agreement, as
amended from time to time, shall be binding upon, inure to the benefit of and be
enforceable by the respective successors and assigns of Agent, Company and
Escrow Agent.
19. Execution in Counterparts. This Escrow Agreement may be executed
in two or more counterparts, which when so executed shall constitute one and the
same agreement.
20. Termination. Upon the first to occur of notice of termination by
Company or deposit of all amounts in the Escrow Funds into court pursuant to
Section 5 hereof, this Escrow Agreement shall terminate and Escrow Agent shall
have no further obligation or liability whatsoever with respect to this Escrow
Agreement or the Escrow Funds.
21. Acts of the Escrow Agent. The Escrow Agent and any stockholder,
director, officer or employee of the Escrow Agent may buy, sell, and deal in any
of the securities of the Company and become pecuniarily interested in any
transaction in which the Company may be interested, and contract and lend money
to the Company and otherwise act as fully and freely
-12-
<PAGE>
as though it were not Escrow Agent under this Agreement. Nothing herein shall
preclude the Escrow Agent from acting in any other capacity for the Company or
for any other entity.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed under seal as of the date first above written.
Apple Residential Income Trust, Inc.
/s/ Glade M. Knight
By: ______________________________
President
Title: ______________________________
David Lerner Associates, Inc.
/s/ Michael P. Benvenuto
By: ______________________________
Senior Vice President
Title: ______________________________
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as Escrow Agent
/s/ Karen E. Atkinson
By: ______________________________
Assistant Vice President
Title: ______________________________
-14-
<PAGE>
Exhibit A
Fees Payable to Escrow Agent
Annual Acceptance Fee (charged once a year) $3,000
Annual Administration Fee* $3,000
*In addition 20 Basis Points on funds invested.
-15-
Amended Through November 5, 1996
--------------------------------
BYLAWS
OF
APPLE RESIDENTIAL INCOME TRUST, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLES: Page
----
ARTICLE I
THE COMPANY; DEFINITIONS.............................................1
1.1 Name........................................................1
1.2 Nature of Company...........................................1
1.3 Definitions.................................................1
ARTICLE II
MINIMUM CAPITAL......................................................6
2.1 Minimum Capital.............................................6
2.2 [Reserved]..................................................6
ARTICLE III
OFFICES; FISCAL YEAR.................................................6
3.1 Principal Office............................................6
3.2 Other Offices...............................................6
3.3 Taxable Year................................................6
ARTICLE IV
MEETINGS OF SHAREHOLDERS.............................................7
4.1 Place of Meetings...........................................7
4.2 Annual Meetings.............................................7
4.3 Special Meetings............................................8
4.4 Notice; Affidavit of Notice.................................8
4.5 Record Date for Shareholder Notice, Voting and Giving
Consents....................................................9
4.6 Adjourned Meetings; Notice.................................10
4.7 Voting at Meetings of Shareholders.........................10
4.8 Quorum.....................................................10
4.9 Waiver of Notice or Consent of Absent Shareholders.........11
4.10 Action Without Meeting.................................... 11
4.11 Proxies....................................................11
4.12 Inspectors of Election.....................................12
ARTICLE V
DIRECTORS...........................................................13
5.1 Powers.....................................................13
5.2 Number, Tenure and Qualifications..........................13
5.3 Nomination of Directors....................................14
5.4 Vacancies..................................................15
5.5 Place of Meeting...........................................16
5.6 Organization Meeting.......................................16
5.7 Special Meetings...........................................16
5.8 Adjournment................................................17
5.9 Notice of Adjournment......................................17
5.10 Entry of Notice............................................17
5.11 Waiver of Notice...........................................17
5.12 Quorum.....................................................17
5.13 Fees and Compensation......................................17
ii
<PAGE>
5.14 Action Without Meeting.....................................18
5.15 Independent Directors......................................18
5.16 Removal of Director for Cause..............................20
5.17 Removal of Director Without Cause..........................20
5.18 Committees.................................................21
5.19 Fiduciary Relationship.....................................21
ARTICLE VI
OFFICERS............................................................21
6.1 Officers...................................................21
6.2 Election...................................................22
6.3 Subordinate Officers.......................................22
6.4 Removal and Resignation....................................22
6.5 Vacancies..................................................22
6.6 Chairman of the Board......................................22
6.7 President..................................................22
6.8 Vice Presidents............................................23
6.9 Secretary..................................................23
6.10 Assistant Secretaries......................................23
6.11 Chief Financial Officer....................................23
6.12 Assistant Chief Financial Officers.........................24
ARTICLE VII
SHARES OF STOCK.....................................................24
7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form................................24
7.2 Transfer of Shares.........................................25
7.3 Disclosures by Holders of Shares; Redemption of Shares.....25
7.4 Right to Refuse to Transfer the Shares.....................26
7.5 Limitation on Acquisition of Shares........................2
7.6 Lost or Destroyed Certificates.............................28
7.7 Dividend Record Date and Closing Stock Books...............28
7.8 Dividend Reinvestment Plan.................................29
ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE............................................29
8.1 Employment of Advisor......................................29
8.2 Term.......................................................30
8.3 Other Activities of Advisor................................30
8.4 Limitation on Offering and Organization Expenses and
Acquisition Fees and Expenses..............................31
8.5 Limitation on Operating Expenses...........................31
8.6 Limitation on Real Estate Brokerage Commissions on
Purchase and Resale of Property............................32
8.7 Limitation on Incentive Fees...............................32
8.8 Limitations on Leverage....................................33
ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES..........................33
9.1 Restrictions...............................................33
ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES..................35
10.1 Transactions with Affiliates...............................35
10.2 Restriction of Duties and Liabilities......................36
iii
<PAGE>
10.3 Persons Dealing with Directors or Officers.................37
10.4 Reliance...................................................37
10.5 Income Tax Status..........................................37
ARTICLE XI
MISCELLANEOUS.......................................................38
11.1 Competing Programs.........................................38
11.2 Corporate Seal.............................................38
11.3 Inspection of Bylaws.......................................38
11.4 Inspection of Corporate Records............................39
11.5 Checks, Drafts, Etc........................................39
11.6 Contracts, Etc., How Executed..............................39
11.7 Representation of Shares of Other Corporations.............39
11.8 Annual Report..............................................39
11.9 Quarterly Reports..........................................40
11.10 Other Reports..............................................40
11.11 Provisions of the Company in Conflict with Law or
Regulation...............................................40
11.12 Voluntary Dissolution......................................41
11.13 Distributions..............................................41
11.14 Shareholder Liability......................................41
11.15 Return of Offering Proceeds................................41
ARTICLE XII
AMENDMENTS TO BYLAWS................................................41
12.1 Amendments.................................................41
12.2 [Reserved]..................................................42
iv
<PAGE>
ARTICLE I
THE COMPANY; DEFINITIONS
1.1 Name. The name of the corporation is APPLE RESIDENTIAL
INCOME TRUST, INC. and is referred to in these Bylaws as the "Company." As far
as practicable and except as otherwise provided in the Organizational Documents,
the Directors shall direct the management of the business and the conduct of the
affairs of the Company, execute all documents and sue or be sued in the name of
the Company. If the Directors determine that the use of that name is not
practicable, legal or convenient, they may use such other designation or may
adopt another name under which the Company may hold property or conduct all or
part of its activities.
1.2 Nature of Company. The Company is a corporation organized
under the laws of the Commonwealth of Virginia. It is intended that the Company
shall carry on business as a "real estate investment trust" ("REIT").
1.3 Definitions. Whenever used in these Bylaws, the terms
defined in this Section 1.3 shall, unless the context otherwise requires, have
the respective meanings specified in this Section 1.3. In these Bylaws, words in
the singular number include the plural and in the plural number include the
singular.
(a) Acquisition Expenses. The total expenses,
including but not limited to legal fees and expenses, travel and communications
expenses, costs of appraisals, non-refundable option payments on property not
acquired, accounting fees and expenses, title insurance, and miscellaneous
expenses related to selection and acquisition of properties, whether or not
acquired. Acquisition Expenses shall not include Acquisition Fees.
(b) Acquisition Fees. The total of all fees and
commissions paid by any party in connection with the purchase or development of
real property by the Company, except a development fee paid to a person not
Affiliated with the Sponsor in connection with the actual development of a
project after acquisition of the land by the Company. Included in the
computation of such fees or commissions shall be any real estate commission,
selection fee, development fee, nonrecurring management fee, or any fee of a
similar nature, however designated.
(c) Adjusted Net Asset Value. The net assets of
the Company (total assets before deducting depreciation or non-cash reserves
less total liabilities) valued at fair market value as determined by qualified
appraisals or valuations of the assets.
(d) Advisor. The Person responsible for
directing or performing the day-to-day business affairs of the
1
<PAGE>
Company, including a Person to which the Advisor subcontracts substantially all
such functions.
(e) Affiliate. Means (i) any Person directly or
indirectly controlling, controlled by or under common control with another
Person, (ii) any Person owning or controlling 10% or more of the outstanding
voting securities or beneficial interests of such other Person, (iii) any
officer, director, trustee or general partner of such Person, and (iv) if such
other Person is an officer, director, trustee or partner of another entity, then
the entity for which that Person acts in any such capacity. Affiliated means
being an Affiliate of a specified Person.
(f) Annual Report. As set forth in Section 11.8.
(g) Appraisal. The values as of the date of the
appraisal or valuation of property in its existing state or in a state to be
created, as determined by the Directors, the Advisor or by another person, who
is a member in good standing of the American Institute of Real Estate Appraisers
or who in the sole judgment of the Directors is properly qualified to make such
a determination. The Directors may in good faith rely on a previous Appraisal
made on behalf of another Person, provided (i) it meets the standards of this
definition and was made in connection with an investment in which the Company
acquires the entire or a participating interest, and (ii) it was prepared not
earlier than two years prior to the acquisition by the Company of its interest
in the property. In appraising properties, appraisers may take into
consideration each of the specific terms and conditions of a purchase, including
any leaseback or other guarantee arrangement. The Appraisal may not necessarily
represent the cash value of the property but may consider the value of the
income stream from such property plus the discounted value of the fee interest
and other terms of the purchase. An Appraisal shall be obtained from an
independent qualified appraiser if a majority of the Independent Directors so
decides or if the transaction is with the Advisor, Directors or any of their
Affiliates. Each Appraisal shall be maintained in the Company's records for a
minimum of five years and shall be available for inspection and duplication by
any Shareholder.
(h) Articles of Incorporation. The Articles of
Incorporation of the Company, including all amendments, restatements or
modifications thereof.
(i) Average Invested Assets. The average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
any period.
2
<PAGE>
(j) Bylaws. These Bylaws, including all
amendments, restatements or modifications hereof.
(k) Competitive Real Estate Commission. The real
estate or brokerage commission paid for the purchase or sale of a property which
is reasonable, customary and competitive in light of the size, type and location
of such property.
(l) Contract Price. The amount actually paid or
allocated to the purchase, development, construction or improvement of real
property exclusive of Acquisition Fees and Acquisition Expenses.
(m) Directors. As of any particular time, the
directors of the Company holding office at such time.
(n) Dividend Reinvestment Plan. The program
adopted by the Board of Directors pursuant to Section 5.1 hereof and available
to Shareholders to reinvest dividends in Shares available under the Liquidity
Matching Program.
(o) Independent Director. A Director of the
Company who is not Affiliated, directly or indirectly, with the Advisor, whether
by ownership of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of, the
Advisor, or an Affiliated business entity of the Advisor (other than as an
Independent Director of up to three other real estate investment trusts advised
by the Advisor or an Affiliate of the Advisor). An Independent Director may
perform no other services for the Company, except as a Director. Notwithstanding
anything to the contrary herein, any member of a law firm whose only material
business or professional relationship with the Company, the Advisor and their
Affiliates is as legal counsel to any of such entities shall constitute an
Independent Director (unless such person serves as a director for more than
three REITs organized by the Advisor and its Affiliates). The independence of
any Independent Director must be maintained throughout his term as Director. An
"indirect" affiliation shall be deemed to refer to circumstances in which a
member of the "immediate family" of a Director is Affiliated with the Advisor,
and a person's "immediate family" shall mean such person's spouse, parents,
children, siblings, mother and father-in-law, sons and daughters- in-law and
brothers and sisters-in-law.
(p) Initial Investment. That portion of the
initial capitalization of the Company contributed by the Sponsor
or its Affiliates.
(q) Leverage. The aggregate amount of
indebtedness of the Company for money borrowed (including purchase money
mortgage loans) outstanding at any time, both
3
<PAGE>
secured and unsecured.
(r) Liquidity Matching Program. The program
adopted by the Board of Directors pursuant to Section 5.1 hereof under which
Shareholders may tender Shares for resale to participants in the Dividend
Reinvestment Plan.
(s) Net Assets. The total assets of the Company
(other than intangible assets) at cost before deducting depreciation or other
non-cash reserves less total liabilities, calculated at least quarterly on a
basis consistently applied.
(t) Net Income. The total revenues of the
Company for any period, less the expenses applicable to such period other than
additions to reserves for depreciation or bad debts or other similar non-cash
reserves. For purposes of calculating Operating Expenses, Net Income shall
exclude any gain from the sale of the Company's assets.
(u) Offering and Organization Expenses. Those
expenses incurred in connection with the formation and registration of the
Company and in qualifying and marketing the Shares under applicable federal and
state law, and any other expenses actually incurred and directly related to the
qualification, registration, offer and sale of the Shares, including such
expenses as (i) all marketing expenses and payments made to broker-dealers as
compensation or reimbursement for all costs of reviewing the offering, including
due diligence investigations and fees and expenses of their attorneys,
accountants and other experts; (ii) registration fees, filing fees and taxes;
(iii) the costs of printing, amending, supplementing and distributing the
registration statement and Prospectus; (iv) the costs of obtaining regulatory
clearances of, printing and distributing sales materials used in connection with
the offer and sale of the Shares; (v) the costs related to investor and
broker-dealer sales meetings concerning the offering; and (vi) accounting and
legal fees incurred in connection with any of the foregoing.
(v) Operating Expenses. All operating, general
and administrative expenses of the Company as determined under generally
accepted accounting principles (including regular compensation payable to the
Advisor), excluding, however, the following:
(i) expenses of raising capital;
(ii) interest payments;
(iii) taxes;
(iv) non-cash expenditures, such as depreciation,
4
<PAGE>
amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any;
and
(vi) costs related directly to asset acquisition,
operation and disposition.
(w) Organizational Documents. The Articles of
Incorporation and these Bylaws.
(x) Person. An individual, corporation,
partnership, joint venture, association, company, trust, bank or other entity,
or government and any agency and political subdivision of a government.
(y) Prospectus. Shall mean a Prospectus as that
term is defined by the Securities Act of 1933, including a preliminary
Prospectus, an offering circular as described in Rule 256 of the General Rules
and Regulations promulgated under the Securities Act of 1933 and, in the case of
an intra-state offering, any document, by whatever name known, utilized for the
purpose of offering and selling securities to the public.
(z) REIT. A real estate investment trust, as
defined in Section 856 of the Internal Revenue Code of 1986, as amended.
(aa) REIT Provisions of the Internal Revenue Code.
Part II, Subchapter M of Chapter 1, of the Internal Revenue Code of 1986, as
amended, or successor statutes, and regulations and rulings promulgated
thereunder.
(bb) Securities. Any stock, shares, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities."
(cc) Shares or Common Shares. All of the common
shares of the Company, no par value.
(dd) Shareholders. As of any particular date, all
holders of record of outstanding Common Shares at such time.
(ee) Sponsor. Any Person directly or indirectly
instrumental in organizing, wholly or in part, the Company or any Person who
will manage or participate in the management of the Company, and any Affiliate
of any such Person, but not including a Person who is an Independent Director or
whose only relationship with the Company is that of an independent property
manager, whose only compensation is as such, or wholly
5
<PAGE>
independent third parties such as attorneys, accountants and underwriters whose
only compensation is for professional services. No Independent Director shall be
deemed to be a Sponsor.
(ff) Unimproved Real Property. Property which has
the following three characteristics: (i) an equity interest in property which
was not acquired for the purpose of producing rental or other operating income,
(ii) has no development or construction in process on such land, and (iii) no
development or construction on such land is planned in good faith to commence
within one year.
ARTICLE II
MINIMUM CAPITAL
2.1 Minimum Capital. Prior to the public offering of the
Shares, the Sponsor or Affiliates of the Sponsor purchased 10 Common Shares for
an aggregate purchase price of $100, as an Initial Investment. The Sponsor or
its Affiliates may not withdraw the Initial Investment for a period of one year
following completion of the offering.
2.2 [Reserved].
ARTICLE III
OFFICES; FISCAL YEAR
3.1 Principal Office. The principal executive office of the
Company shall be located at 306 East Main Street, Richmond, Virginia 23219,
until otherwise established by a vote of a majority of the Board of Directors.
3.2 Other Offices. Other offices may at any time be
established by the Board of Directors at any place or places they
deem appropriate.
3.3 Taxable Year. The annual accounting period of the
Company shall be the calendar year.
6
<PAGE>
ARTICLE IV
MEETINGS OF SHAREHOLDERS
4.1 Place of Meetings. All annual and all other meetings of
Shareholders shall be held at such place, either within or outside of the
Commonwealth of Virginia as from time to time may be fixed by the President or
by the Board of Directors.
4.2 Annual Meetings. The annual meetings of Shareholders shall
be held on such date as is fixed by the President or the Board of Directors;
provided, however, that the first annual meeting of Shareholders who purchase
Shares in the public offering made by the Prospectus shall be held in the year
following the year in which the Initial Closing (as defined in the Prospectus)
occurs; and provided further, that such date fixed by the Directors shall not be
less than 30 days after the Board of Directors shall have caused to be sent to
the Shareholders an Annual Report as provided in Section 11.8 of these Bylaws,
but if no such date and time is fixed by the President or the Board of
Directors, the meeting for any calendar year shall be held on the first Tuesday
in May in such year, if not a legal holiday under the laws of Virginia. If the
date fixed by the President or the Board of Directors falls upon a legal
holiday, then any annual meeting of Shareholders shall be held at the same time
and place on the next day which is not a legal holiday. At each annual meeting
of Shareholders, only such business shall be conducted as is proper to consider
and has been brought before the meeting (i) pursuant to the Company's notice of
the meeting, (ii) by or at the direction of the Board of Directors, or (iii) by
a Shareholder who is a Shareholder of record of a class of Shares entitled to
vote on the business such Shareholder is proposing, both at the time of the
giving of the Shareholder's notice hereinafter described in this Section 4.2 and
on the record date for such annual meeting, and who complies with the notice
procedures set forth in this Section 4.2.
In order to bring before an annual meeting of Shareholders any
business which may properly be considered and which a Shareholder has not had
included in the Company's proxy statement for the meeting, a Shareholder who
meets the requirements set forth in the preceding paragraph must give the
Company timely written notice. To be timely, a Shareholder's notice must be
given, either by personal delivery to the Secretary of the Company at the
principal office of the Company, or by first class United States mail, with
postage thereon prepaid, addressed to the Secretary of the Company at the
principal office of the Company. Any such notice must be received (i) on or
after February 1st and before March 1st of the year in which the meeting will be
held, if clause (ii) is not applicable, or (ii) not less than 60 days before the
date of the meeting if the date of such meeting is earlier than May 1 or
7
<PAGE>
later than May 31 in such year.
Each such Shareholder's notice shall set forth as to each
matter the Shareholder proposes to bring before the annual meeting (i) the name
and address, as they appear on the Company's stock transfer books, of the
Shareholder proposing business, (ii) the class and number of Shares of stock of
the Company beneficially owned by such Shareholder, (iii) a representation that
such Shareholder is a Shareholder of record at the time of the giving of the
notice and intends to appear in person or by proxy at the meeting to present the
business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such
business, and (v) any interest which the Shareholder may have in such business.
The Secretary of the Company shall deliver each Shareholder's
notice that has been timely received to the Chairman for review.
4.3 Special Meetings. Special meetings of the Shareholders may
be called at any time for any purpose or purposes whatsoever by the President,
by a majority of the Board of Directors, by a majority of Independent Directors,
by the Chairman of the Board or by one or more Shareholders holding not less
than 10% of the eligible votes. If a meeting is called by any Person or Persons
other than the Board of Directors, the Chairman of the Board or the President, a
request shall be made in writing, specifying the time of the meeting and the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board, the President, or the Secretary of
the Company. The officer receiving the request shall cause notice to be promptly
given to the Shareholders entitled to vote, in accordance with the provisions of
Section 4.4.
4.4 Notice; Affidavit of Notice. Notice of meetings of the
Shareholders of the Company shall be given in writing to each Shareholder
entitled to vote thereat, either personally or by first class mail, or, if the
Company has 500 or more Shareholders, by third-class mail, or other means of
written communication, charges prepaid, addressed to the Shareholder at his or
its address appearing on the books of the Company or given by the Shareholder to
the Company for the purpose of notice. Notice of any such meeting of
Shareholders shall be sent to each Shareholder entitled thereto not less than 10
nor more than 60 days before the meeting; provided, however, that within 10
business days after receipt by the Company, in person, or by registered mail, of
a written request for a meeting by Shareholders holding not less than 10% of the
outstanding Shares
8
<PAGE>
entitled to vote at such meeting, the Company shall provide written notice of
such meeting to all Shareholders, and such meeting shall be held not less than
20 nor more than 60 days after the Company's receipt of such written Shareholder
request; and, provided further, that if such notice is not given within 10
business days after receipt of the request, the Person or Persons requesting the
meeting may give the notice. Nothing contained in this Section 4.4 shall be
construed as limiting, fixing or affecting the time when a meeting of
Shareholders called by action of the Board of Directors may be held. All notices
given pursuant to this Section shall state the place, date and hour of the
meeting and, (i) in the case of special meetings, the general nature of the
business to be transacted, and no other business may be transacted, or (ii) in
the case of annual meetings, those matters which the Board of Directors, at the
time of the mailing of the notice, intends to present for action by the
Shareholders, and (iii) in the case of any meeting at which Directors are to be
elected, the names of the nominees intended at the time of the mailing of the
notice to be presented by management for election. An affidavit of the mailing
or other means of giving any notice of any Shareholders' meeting shall be
executed by the Secretary, Assistant Secretary or any transfer agent of the
Company giving the notice, and shall be filed and maintained in the minute book
of the Company.
4.5 Record Date for Shareholder Notice, Voting and Giving
Consents. For purposes of determining the Shareholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 days nor less than 10 days before the date of any meeting
nor more than 60 days before any action without a meeting, and in this event
only Shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer of
any Shares on the books of the Company after the record date.
If the Board of Directors does not so fix a record date:
(a) The record date for determining Shareholders
entitled to notice of or to vote at a meeting of Shareholders shall be at the
close of business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business day next
preceding the date on which the meeting is held.
(b) The record date for determining Shareholders
entitled to give consent to corporate action in writing without a meeting, (i)
when no prior action by the Board has been taken, shall be the day on which the
first written consent in given, or (ii) when prior action of the Board has been
taken, shall be at
9
<PAGE>
the close of business on the day on which the Board adopts the resolution
relating to that action, or the 60th day before the date of the other action,
whichever is later.
4.6 Adjourned Meetings; Notice. Any Shareholders' meeting,
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of the majority of the Shares, the holders of which are
either present in person or represented by proxy, but in the absence of a quorum
no other business may be transacted at the meeting.
When any Shareholders' meeting, either annual or special, is
adjourned for more than 45 days or if after the adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of a special meeting. In all other cases, it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at any adjourned meeting other than by announcement at the meeting at
which the adjournment is taken.
4.7 Voting at Meetings of Shareholders. Subject to the
provisions of the Virginia Stock Corporation Act, and subject to the right of
the Board of Directors to provide otherwise, only Persons in whose name Shares
entitled to vote registered on the stock records of the Company on the record
date shall be entitled to the notice of and to vote at the meeting,
notwithstanding any transfer of any Shares on the books of the Company after the
record date.
The vote may be via voice or by ballot; provided, however,
that all elections for Directors must be by ballot upon demand made by any
Shareholder at any election and before the voting begins. Except as provided in
this Section 4.7, each outstanding Share shall be entitled to one vote on each
matter submitted to a vote of Shareholders.
4.8 Quorum. The presence in person or by proxy of a majority
of the Shares entitled to vote at any meeting shall constitute a quorum for the
transaction of business. Except as otherwise expressly provided in these Bylaws,
if a quorum exists, action on a matter, other than the election of Directors, is
approved if the votes cast favoring the action exceed the votes cast opposing
the action unless a vote of a greater number is required by the Articles of
Incorporation or by the Virginia Stock Corporation Act. Directors shall be
elected by a plurality of the votes cast by the Shares entitled to vote in the
election at a meeting at which a quorum is present. The Shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the Shares required to
10
<PAGE>
constitute a quorum.
4.9 Waiver of Notice or Consent of Absent Shareholders. The
transactions of any meeting of Shareholders, either annual or special, however
called and noticed, shall be as valid as though made at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy and if, either before or after the meeting, each of the Shareholders
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to the holding of the meeting or an approval of the minutes.
All waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
4.10 Action Without Meeting. Any action which may be taken at
any annual or special meeting of Shareholders may be taken without a meeting and
without action by the Board of Directors, if the action is taken by all the
Shareholders entitled to vote on the action. The action shall be evidenced by
one or more written consents describing the action taken, signed by all the
Shareholders entitled to vote on the action, and delivered to the Secretary of
the Company for inclusion in the minutes or filing with the corporate records.
Action taken under this Section 4.10 shall be effective when all consents are in
the possession of the Company, unless the consent specifies a different
effective date and states the date of execution by each Shareholder, in which
event it shall be effective according to the terms of the consent. A Shareholder
may withdraw consent only by delivering a written notice of withdrawal to the
Company prior to the time that all consents are in the possession of the
Company.
The record date for determining Shareholders entitled to take
action without a meeting is the date the first Shareholder signs the consent
described in the preceding paragraph.
Any form of written consent distributed to 10 or more
Shareholders must afford the Person whose consent is thereby solicited an
opportunity to specify a choice among approval, disapproval or abstention as to
each matter or group of related matters presented, other than elections of
Directors or officers.
4.11 Proxies. Every Person entitled to vote or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such Person or his duly authorized
agent and filed with the Secretary of the Company, provided that no such proxy
shall be valid after the expiration of 11 months from the date of its execution,
unless the Person executing it specifics in the proxy the length of time for
which the proxy is to continue in force.
11
<PAGE>
A proxy shall be deemed signed if the Shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the Shareholder or the Shareholder's attorney in
fact. A validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless revoked by the Person executing it
before the vote pursuant to that proxy by (i) a writing delivered to the Company
stating that the proxy is revoked, (ii) execution of a subsequent proxy, (iii)
attendance at the meeting and voting in person (but only as to any items on
which the Shareholder chooses to vote in person), or (iv) transfer of the Shares
represented by the proxy to a transferee who becomes a Shareholder of record
prior to the record date established for the vote. A validly executed proxy
otherwise may be revoked by written notice of the death or incapacity of the
maker of that proxy received by the Company before the vote pursuant to that
proxy is counted.
Any proxy distributed to 10 or more Shareholders must afford
the Person voting an opportunity to specify a choice among approval, disapproval
or abstention as to each matter or group of related matters, other than election
of Directors or officers.
4.12 Inspectors of Election. Before any meeting of
Shareholders, the Board of Directors may appoint any Persons, other than
nominees for office, to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the Chairman of the
meeting may, and on the request of any Shareholder or a Shareholder's proxy
shall, appoint inspectors of election at the meeting. The number of inspectors
shall be either one or three. If inspectors are appointed at a meeting on the
request of one or more Shareholders or proxies, the holders of a majority of
Shares or their proxies present at the meeting shall determine whether one or
three inspectors are to be appointed. If any Person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may, and upon
the request of any Shareholder or a Shareholder's proxy shall, appoint a Person
to fill that vacancy.
These inspectors shall:
(a) Determine the number of Shares outstanding
and the voting power of each, the Shares represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and
questions in any way arising in connection with the right to vote;
12
<PAGE>
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to
conduct the election or vote with fairness to all Shareholders.
ARTICLE V
DIRECTORS
5.1 Powers. Subject to limitations contained in the Articles
of Incorporation, these Bylaws and the Virginia Stock Corporation Act relating
to action required to be authorized or approved by the Shareholders, or by the
holders of a majority of the outstanding Shares, and subject to the duties of
Directors as prescribed by these Bylaws, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Company shall
be controlled by, the Board of Directors. The Board of Directors may delegate
the management of the day-to-day operation of the business of the Company to the
Advisor, provided that the business and affairs of the Company shall be managed
and all corporate powers shall be exercised under the ultimate direction of the
Board of Directors. The Board of Directors shall establish policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company and the Advisor, to assure
that such policies are carried out.
Each individual Director, including each Independent Director,
may engage in other business activities of the type conducted by the Company and
is not required to present to the Company any investment opportunities presented
to them even though the investment opportunities may be within the Company's
investment policies.
5.2 Number, Tenure and Qualifications. The authorized number
of Directors of the Board of Directors shall be not less than three nor more
than 15 as shall be determined from time to time by resolution of the Board of
Directors. Notwithstanding the foregoing, until Initial Closing (as defined in
the Prospectus), the number of Directors shall be not less than one.
13
<PAGE>
Each individual Director, including each Independent Director,
shall have at least three years of relevant experience demonstrating the
knowledge and experience required successfully to acquire and manage the type of
assets being acquired by the Company, and as set forth in Section 5.15, at least
one Independent Director shall have relevant real estate experience.
Directors need not be Shareholders.
Except as provided in Section 5.3, the Directors elected by
the holders of the Shares at a meeting of Shareholders at which a quorum is
present shall be those persons who receive the greatest number of votes even
though they do not receive a majority of the votes cast. No individual shall be
named or elected as a Director without his prior consent.
5.3 Nomination of Directors. No person shall be eligible for
election as a Director at a meeting of Shareholders unless nominated (i) by the
Board of Directors or any committee thereof or (ii) by a Shareholder who is a
Shareholder of record of a class of Shares entitled to vote for the election of
Directors, both at the time of the giving of the Shareholder's notice
hereinafter described in this Section 5.3 and on the record date for the meeting
at which the nominee(s) will be voted upon, and who complies with the notice
procedures set forth in this Section 5.3.
In order to nominate for election as Directors at a meeting of
Shareholders any persons who are not listed as nominees in the Company's proxy
statement for the meeting, a Shareholder who meets the requirements set forth in
the preceding paragraph must give the Company timely written notice. To be
timely, a Shareholder's notice must be given, either by personal delivery to the
Secretary of the Company at the principal office of the Company, or by first
class United States mail, with postage thereon prepaid, addressed to the
Secretary of the Company at the principal office of the Company. Any such notice
must be received (i) on or after February 1st and before March 1st of the year
in which the meeting will be held if the meeting is to be an annual meeting and
clause (ii) is not applicable, or (ii) not less than 60 days before an annual
meeting, if the date of the applicable annual meeting is earlier than May 1 or
later than May 31 in such year, or (iii) not later than the close of business on
the tenth day following the day on which notice of a special meeting of
Shareholders called for the purpose of electing Directors is first given to
Shareholders.
Each such Shareholder's notice shall set forth the following:
(i) as to the Shareholder giving the notice, (a) the name and address of such
Shareholder as they appear on the Company's stock transfer books, (b) the class
and number of Shares of the Company beneficially owned by such Shareholder, (c)
a representation that such Shareholder is a Shareholder of record
14
<PAGE>
at the time of giving the notice and intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice, and (d) a
description of all arrangements or understandings, if any, between such
Shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made; and
(ii) as to each person whom the Shareholder wishes to nominate for election as a
Director, (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of Shares of the Company which are beneficially owned by such person,
and (d) all other information that is required to be disclosed about nominees
for election as Directors in solicitations of proxies for the election of
Directors under the rules and regulations of the Securities and Exchange
Commission. In addition, each such notice shall be accompanied by the written
consent of each proposed nominee to serve as a Director if elected and such
consent shall contain a statement from the proposed nominee to the effect that
the information about him or her contained in the notice is correct.
5.4 Vacancies. Vacancies in the Board of Directors may be
filled by a majority of the remaining Directors, though less than a quorum, or
by a sole remaining Director, except that a vacancy created by the removal of a
Director by the vote or written consent of the Shareholders or by court order
may be filled only by the vote of a majority of the Shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding Shares entitled to
vote. Each Director so elected shall hold office until his successor is elected
at an annual or a special meeting of the Shareholders.
A vacancy or vacancies in the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any Director or
if the authorized number of Directors is increased or if the Shareholders fail,
at any annual or special meeting of Shareholders at which any Director or
Directors are elected, to elect the full authorized number of Directors to be
voted for at that meeting.
Any Director may resign effective on giving written notice to
the Chairman of the Board, the President, the Secretary, or the Board of
Directors. The Shareholders may elect a Director or Directors at any time to
fill any vacancy or vacancies not filled by the Directors. Any election by
written consent to fill a vacancy shall require the consent of a majority of the
outstanding Shares entitled to vote.
If the Board of Directors accepts the resignation of a
Director tendered to take effect at a future time, the Board or
15
<PAGE>
the Shareholders shall have the power to elect a successor to take office when
the resignation is to become effective; provided, however, that any remaining
Independent Directors shall nominate replacements for vacancies among the
Independent Director positions.
No reduction of the authorized number of Directors shall have
the effect of removing any Director prior to the expiration of his term of
office.
If the number of vacancies occurring during a year is
sufficiently large that a majority of the Directors in office has not been
elected by the Shareholders, the holders of 5% or more of the outstanding Shares
entitled to vote may call a special meeting of Shareholders to elect the entire
Board of Directors.
5.5 Place of Meeting. Regular meetings of the Board of
Directors shall be held at any place within or without the Commonwealth of
Virginia which has been designated from time to time by the Chairman of the
Board or by written consent of all members of the Board. In the absence of a
designation, regular meetings shall be held at the principal office of the
Company. Special meetings of the Board may be held either at a place so
designated or at the principal office. Members of the Board may participate in a
meeting through use of conference telephone or similar communication equipment,
so long as all members participating in such meeting can hear one another.
Participation in a meeting by telephone or similar communication equipment shall
constitute presence in person at the meeting.
5.6 Organization Meeting. Immediately following each annual
meeting of Shareholders, the Board of Directors shall hold a regular meeting for
the purpose of organization, election of officers and the transaction of other
business. Notice of that meeting is hereby dispensed with.
5.7 Special Meetings. Special meetings of the Board of
Directors for any purpose or purposes shall be called at any time by the
Chairman of the Board or the President or Vice President or the Secretary or any
two Directors.
Written notice of the time and place of special meetings shall
be delivered personally to the Directors or sent to each Director by mail or by
other form of written communication, charges prepaid, addressed to him at his
address as it appears upon the records of the Company or, if it is not so shown
or is not readily ascertainable, at the place in which the meetings of Directors
are regularly held. In case the notice is mailed, it shall be deposited in the
United States mail in the place in which the principal office of the Company is
located at least four days prior to the time of the meeting. In case the notice
is delivered personally, telegraphed or communicated by
16
<PAGE>
electronic means, it shall be delivered, deposited with the telegraph company or
communicated at least 48 hours prior to the time of the meeting. Mailing,
telegraphing or delivery, as above provided, shall be due legal and personal
notice to the Director.
5.8 Adjournment. A majority of the Directors present, whether
or not a quorum is present, may adjourn any Directors' meeting to another time
and place.
5.9 Notice of Adjournment. If a meeting is adjourned for more
than 24 hours, notice of any adjournment to another time or place shall be given
prior to the time of the adjourned meeting to the Directors who were not present
at the time of adjournment.
5.10 Entry of Notice. Whenever any Director has been absent
from any special meeting of the Board of Directors, an entry in the minutes to
the effect that notice has been duly given shall be conclusive and
incontrovertible evidence that due notice of the special meeting was given to
that Director as required by law and the Bylaws of the Company.
5.11 Waiver of Notice. The transactions of any meeting of the
Board of Directors, however called and noticed, or wherever held, shall be as
valid as though authorized at a meeting duly held after regular call and notice
if a quorum is present and if, either before or after the meeting, each of the
Directors not present signs a written waiver of notice of or consent to holding
the meeting or an approval of the minutes. All waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
5.12 Quorum. A majority of the authorized number of Directors
shall be necessary to constitute a quorum for the transaction of business,
except to adjourn as provided above or to fill a vacancy. Every act or decision
done or made by a majority of the Directors at a meeting duly held at which a
quorum is present shall be regarded as an act of the Board of Directors unless a
greater number be required by law or by the Articles of Incorporation or these
Bylaws. However, a meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of Directors, if any action
taken after such withdrawal is approved by at least a majority of the Directors
required to constitute a quorum for the meeting.
5.13 Fees and Compensation. The Directors shall be entitled to
receive such reasonable compensation for their services as Directors as the
Directors may fix or determine from time to time by resolution of the Board of
Directors; provided, however, that Directors and officers of the Company who are
Affiliated with the Advisor shall not receive compensation from
17
<PAGE>
the Company for their services as Directors or officers of the Company. The
Directors shall also be entitled to receive remuneration for services rendered
to the Company, either directly or indirectly, in any other capacity. Those
services may include, without limitation, services as an officer of the Company,
legal, accounting or other professional services, or services as a broker,
transfer agent or underwriter, whether performed by a Director or any Person
Affiliated with a Director.
5.14 Action Without Meeting. Any action required or permitted
to be taken by the Board of Directors under the Virginia Stock Corporation Act
and these Bylaws may be taken without a meeting if all members of the Board
individually or collectively consent in writing to such action. The consent or
consents shall be filed with the minutes of the meetings of the Board. Any
certificate or other document filed under the provision of the Virginia Stock
Corporation Act which relates to action so taken shall state that the action was
taken by unanimous written consent of the Board of Directors without a meeting.
5.15 Independent Directors. At all times after Initial Closing
(as defined in the Prospectus), a majority of the Directors of the Company, and
a majority of the members of any Board committee, will be Independent Directors,
except during the 60 days following the departure of an Independent Director.
Successor Independent Directors will be nominated by any remaining Independent
Directors. At least one of the Independent Directors shall have had three years
of actual direct experience in acquiring or managing the type of real estate to
be acquired by the Company for his or her account or as an agent. The Directors
shall, in good faith, determine for all purposes which persons constitute or
would constitute Independent Directors and which persons do not or would not
constitute Independent Directors. Notwithstanding any other provision of these
Bylaws, the Independent Directors, in addition to their other duties, to the
extent that they may legally do so, shall:
(a) Monitor the relationship of the Company with the
Advisor. In this regard, the Independent Directors as a group, in addition to
all Directors as a group, will monitor the Advisor's performance of the advisory
contract and will determine at least annually that the Advisor's compensation is
reasonable in relation to the nature and quality of services performed. This
determination will be based on (i) the size of the advisory fee in relationship
to the size, composition and profitability of the invested assets; (ii) the
investment opportunities generated by the Advisor; (iii) advisory fees paid to
other advisors by other real estate investment trusts and to advisors performing
similar services by investors other than real estate investment trusts; (iv)
additional revenues realized by the Advisor and its Affiliates through their
relationship with the Company, including
18
<PAGE>
loan administration, underwriting or broker commissions, servicing, engineering,
inspection and other fees, whether paid by the Company or by others with whom
the Company does business; (v) the quality and extent of service and advice
furnished by the Advisor; (vi) the performance of the investment portfolio of
the Company, including income, conservation or appreciation of capital,
frequency of problem investments and competence in dealing with distress
situations; (vii) quality of the portfolio of the Company in relationship to the
investments generated by the Advisor for its own account; and (viii) all other
factors the Independent Directors may deem relevant. The Independent Directors
will also determine that the Advisor's compensation is within the limits
prescribed by Sections 8.5, 8.6 and 8.7 herein.
The Independent Directors shall approve all
transactions between the Company and the Advisor or any Affiliates of the
Advisor (other than as provided in Section 10.1 herein). The material terms and
circumstances of all such approved transactions shall be fully disclosed in the
Annual Report of the Company as required by Section 11.8, and the Independent
Directors shall examine and comment in the Annual Report on the fairness of such
transactions.
(b) Review at least annually the Company's investment
policies to determine that they remain in the best interests of the
Shareholders. The findings of the Independent Directors shall be set forth in
the minutes of meetings of the Board of Directors. Such investment policies may
be altered from time to time by the Board of Directors with the consent of a
majority of the Independent Directors and without approval of the Shareholders
upon a determination that such a change is in the best interests of the Company
and the Shareholders.
(c) Take reasonable steps to ensure that the Annual
Report is sent to Shareholders and that the annual meeting is conducted pursuant
to Article IV.
(d) Determine at least annually that the total fees
and expenses of the Company are reasonable in light of its Net Assets and Net
Income, the investment experience of the Company, and the fees and expenses of
comparable advisors in real estate. In this regard, the Independent Directors
will have the fiduciary responsibility of limiting Operating Expenses to amounts
that do not exceed the limitation set forth in Section 8.5, unless they conclude
that a higher level of expense is justified for such a year based on unusual and
nonrecurring factors which they deem sufficient.
Within 60 days after the end of any fiscal quarter of
the Company for which Operating Expenses (for the 12 months then ended) exceed
the limitations set forth in Section 8.5, there shall be sent to the
Shareholders a written disclosure of
19
<PAGE>
such fact together with an explanation of the factors the Independent Directors
considered in arriving at the conclusion that the higher Operating Expenses were
justified. In the event the Independent Directors determine that the excess
expenses are not justified, the Advisor shall reimburse the Company at the time
and in the manner set forth in the Company's agreement with the Advisor.
(e) The Independent Directors shall review at least
quarterly the aggregate borrowings, secured and unsecured, of the Company to
determine that the relation of such borrowings to Net Assets does not exceed the
limitations set forth in Sections 8.8 and 9.1(k) and (l) of these Bylaws. Any
excess in borrowings over the limitations set forth in Sections 9.1(k) and (l)
shall be approved by a majority of the Independent Directors and disclosed to
Shareholders in the next quarterly report of the Company, along with a
justification of the excess.
(f) For all purposes, a transaction which is subject
to approval by the Independent Directors shall be approved if the Independent
Directors voting to approve the transaction in any vote of the Directors or the
Independent Directors constitute an absolute majority of all Independent
Directors serving at such time.
5.16 Removal of Director for Cause. The Board of Directors may
declare vacant the office of a Director who has been declared of unsound mind by
an order of court, or who has pled guilty or nolo contendere to or been
convicted of a felony involving moral turpitude. In addition, throughout the
term of the existence of the Company, any Director may be removed for cause by:
(i) a vote or written consent of all Directors other than the Director who is to
be removed, or (ii) the vote of the holders of a majority of the outstanding
Shares of the Company at a meeting of the Shareholders called for such purpose.
The notice for such special meeting of Shareholders shall state that the
purpose, or one of the purposes, of the meeting is to vote on the removal of a
Director. "For cause" shall mean, for purposes of this Section, a willful
violation of the Articles of Incorporation or these Bylaws, or gross negligence
in the performance of a Director's duties.
5.17 Removal of Director Without Cause. Any or all Directors
may be removed without cause upon the affirmative vote of a majority of the
outstanding Shares entitled to vote. A Director may be removed by the
Shareholders only at a meeting called for the purpose of removing him and the
meeting notice must state that the purpose, or one of the purposes of the
meeting, is removal of the Director. Any reduction of the authorized number of
Directors shall not operate to remove any Director prior to the expiration such
Director's term of office.
20
<PAGE>
5.18 Committees. The Board of Directors may, by resolution
adopted by a majority of the authorized number of Directors, designate one or
more committees, each consisting of three or more Directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more Directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of Directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Company, except that no
committee shall have authority to take any action with respect to (i) the
approval of any action requiring Shareholders' approval or approval of the
outstanding Shares, (ii) the filling of vacancies of the Board or any committee,
(iii) the fixing of compensation of Directors for serving on the Board or a
committee, (iv) the adoption, amendment or repeal of these Bylaws, (v) the
amendment or repeal of any resolution of the Board that by its express terms is
not so amendable or repealable, (vi) a distribution to Shareholders, except at a
rate or in a periodic amount or within a price range determined by the Board,
and (vii) the appointment of other committees of the Board or the members
thereof. A majority of the Directors on all committees must be Independent
Directors and only Independent Directors may serve as alternate members for
Independent Directors on committees. However, notwithstanding anything to the
contrary in these Bylaws, the Board of Directors may appoint a committee to
administer any stock incentive plan adopted by the Company, which committee may
have as few as two (2) Directors, and each of whose Directors may be either an
Independent Director or not an Independent Director, except as otherwise
provided in the applicable stock incentive plan.
5.19 Fiduciary Relationship. The Directors of the Company have
a fiduciary relationship to the Shareholders as provided by applicable Virginia
law, which includes a fiduciary duty to the Shareholders to supervise the
relationship of the Company with the Advisor. A majority of the Independent
Directors must approve matters which these Bylaws state are subject to the
approval of the Independent Directors.
ARTICLE VI
OFFICERS
6.1 Officers. The officers of the Company shall be as
determined by the Board of Directors and shall include a President and
Secretary, and may include a Chairman of the Board, Chief Financial Officer
(Treasurer) and such other officers with such titles and duties as may be
appointed in accordance with the
21
<PAGE>
provisions of Section 6.3 of this Article. Any number of offices may be held by
the same person.
6.2 Election. The officers of the Company, except such
officers as may be appointed in accordance with the provisions of Section 6.3 or
Section 6.5 of this Article, shall be chosen annually by the Board of Directors
to serve at the pleasure of the Board of Directors, and each shall hold his
office until he shall resign or shall be removed or otherwise disqualified to
serve or his successor shall be elected and qualified. All officers serve at the
will of the Board of Directors and nothing in these Bylaws shall give any
officer any expectation or vesting of employment.
6.3 Subordinate Officers. The Board of Directors may appoint
other officers as the business of the Company may require, each of whom shall
hold office for the period, have the authority and perform the duties as are
provided in these Bylaws or as the Board of Directors may from time to time
determine.
6.4 Removal and Resignation. Any officer may be removed,
either with or without cause, by a majority of the Directors at the time in
office, at any regular or special meeting of the Board or, except in the case of
an officer chosen by the Board of Directors, by any officer upon whom such power
of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to
the Board of Directors or to the Chairman, the President or to the Secretary of
the Company. A resignation shall take effect at the date of the receipt of the
notice or any later time specified in the notice; and, unless otherwise
specified, the acceptance of the resignation shall not be necessary to make it
effective.
6.5 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
6.6 Chairman of the Board. The Chairman of the Board shall be
the Chief Executive Officer of the Company, and, if present, shall preside at
all meetings of the Board of Directors and Shareholders and exercise and perform
all other powers and duties as may from time to time be assigned to him by the
Board of Directors or prescribed by these Bylaws.
6.7 President. The President shall, subject to the Board of
Directors and the supervisory powers of the Chairman of the Board, have general
supervision, direction and control of the business of the Company. He shall
preside at meetings of the Shareholders or at meetings of the Board of Directors
if the
22
<PAGE>
Chairman is absent. He shall have general powers and duties of management,
together with any other powers and duties as may be prescribed by the Board of
Directors.
6.8 Vice Presidents. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors or, if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President and, when so acting,
shall have all the powers of and be subject to all the restrictions upon, the
President. The Vice Presidents shall have any other powers and shall perform
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or these Bylaws.
6.9 Secretary. The Secretary shall keep, or cause to be kept,
a book of minutes at the principal office, or any other place as the Board of
Directors may order, of all meetings of Directors or Shareholders, with the time
and place of holding, whether regular or special and, if special, how
authorized, the notice thereof given, the names of those present at Directors'
meetings, the number of Shares present or represented at Shareholders' meetings
and the proceedings of meetings.
The Secretary shall keep, or cause to be kept, at the
principal office or at the office of the Company's transfer agent, a Share
register or a duplicate Share register showing the names of the Shareholders and
their addresses, the number and classes of Shares held by each (whether in
certificate or "unissued certificate" form), the number and the date of
certificates issues, if any, and the number and date of cancellation of every
certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all
the meetings of the Shareholders and of the Board of Directors required by these
Bylaws or by law to be given, shall keep the seal of the Company (if any) in
safe custody and shall have such other powers and shall perform such other
duties as may be prescribed by the Board of Directors or these Bylaws.
6.10 Assistant Secretaries. In the absence or disability of
the Secretary, the Assistant Secretaries in order of their rank as fixed by the
Board of Directors or, if not ranked, the Assistant Secretary designated by the
Board of Directors, shall perform all the duties of the Secretary and, when so
acting, shall have all the powers of and be subject to all the restrictions
upon, the Secretary. The Assistant Secretaries shall have any other powers and
shall perform other duties as from time to time may be prescribed for them by
the Board of Directors or these Bylaws.
6.11 Chief Financial Officer. The Chief Financial Officer may
also be designated by the alternate title of
23
<PAGE>
"Treasurer." The Chief Financial Officer shall have custody of all moneys and
securities of the Company and shall keep regular books of account. Such officer
shall disburse the funds of the Company in payment of the just demands against
the Company, or as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Board of Directors from
time to time as may be required of such officer, an account of all transactions
as Chief Financial Officer and of the financial condition of the Company. Such
officer shall perform all duties incident to such officer or which are properly
required by the President or by the Board of Directors.
6.12 Assistant Chief Financial Officers. The Assistant Chief
Financial Officers or the Assistant Treasurers, in the order of their seniority,
shall, in the absence or disability of the Chief Financial Officer, or in the
event of such officer's refusal to act, perform the duties and exercise the
powers of the Chief Financial Officer, and shall have such powers and discharge
such duties as may be assigned from time to time by the President or by the
Board of Directors.
ARTICLE VII
SHARES OF STOCK
7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form. Certificates shall be issued and transferred in
accordance with these Bylaws, but need not be issued if the Shareholder elects
to have his Shares maintained in "unissued certificate" form. The Persons in
whose names certificates of Shares in "unissued certificate" form are registered
on the records of the Company shall be deemed the absolute owners of the Shares
represented thereby for all purposes of the Company; but nothing in these Bylaws
shall be deemed to preclude the Directors or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. The Shares
are non-assessable. Until a transfer is duly effected on the records of the
Company, the Directors shall not be affected by any notice of transfer, either
actual or constructive. The receipt by the Person in whose name any Shares are
registered on the records of the Company or of the duly authorized agent of that
Person, or if the Shares are so registered in the names of more than one Person,
the receipt by any one of these Persons, or by the duly authorized agent of that
Person, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of the Shares and from all liability to see
the application of those funds. The certificates of Shares of the capital stock
of the Company, if any, shall be in a form consistent with the Articles of
Incorporation and the laws of the Commonwealth of Virginia as shall be approved
by the Board of Directors. All certificates shall be signed by (i) the Chairman
of the Board or the President
24
<PAGE>
or a Vice President and (ii) the Treasurer or the Secretary or any Assistant
Secretary, certifying the number of Shares and the class or series of Shares
owned by the Shareholder. Any or all of the signatures on the certificate may be
facsimile signatures.
7.2 Transfer of Shares. Subject to the provisions of law and
of Sections 7.3, 7.4 and 7.5, Shares shall be transferable on the records of the
Company only by the record holder or by his agent thereunto duly authorized in
writing upon delivery to the Directors or a transfer agent of the certificate or
certificates (unless held in "unissued certificate" form, in which case an
executed stock power duly guaranteed must be delivered), properly endorsed or
accompanied by duly executed instruments of transfer and accompanied by all
necessary documentary stamps together with evidence of the genuineness of each
endorsement, execution or authorization and of other matters as may reasonably
be required by the Directors or transfer agent. Upon delivery, the transfer
shall be recorded in the records of the Company and a new certificate, if
requested, for the Shares so transferred shall be issued to the transferee and
in case of a transfer of only a part of the Shares represented by any
certificate or account, a new certificate or statement of account for the
balance shall be issued to the transferor. Any Person becoming entitled to any
Shares in consequence of the death of a Shareholder or otherwise by operation of
law shall be recorded as the holder of such Shares and shall receive a new
certificate, if requested, but only upon delivery to the Directors or a transfer
agent of instruments and other evidence required by the Directors or the
transfer agent to demonstrate that entitlement, the existing certificate (or
appropriate instrument of transfer if held in "unissued certificate" form) for
the Shares and any necessary releases from applicable governmental authorities.
Nothing in these Bylaws shall impose upon the Directors or a transfer agent any
duty or limit their rights to inquire into adverse claims.
7.3 Disclosures by Holders of Shares; Redemption of Shares.
The Holders of the Shares shall upon demand disclose to the Directors in writing
such information with respect to direct and indirect ownership of their Shares
as the Directors deem necessary to comply with the provisions of the Internal
Revenue Code of 1986, as amended, and applicable regulations, as amended, or to
comply with the requirements of any taxing authority. If the Directors shall at
any time and in good faith be of the opinion that direct or indirect ownership
of the Shares of the Company has or may become concentrated to an extent which
would prevent the Company from qualifying as a REIT under the REIT Provisions of
the Internal Revenue Code, the Directors shall have the power by lot or other
means deemed equitable by them to prevent the transfer and/or call for
redemption of a number of the Shares sufficient in the opinion of the Directors
to maintain or bring the direct or indirect ownership of the Shares into
25
<PAGE>
conformity with the requirements for a REIT. The redemption price shall be (i)
the last reported sale price of the Shares on the last business day prior to the
redemption date on the principal national securities exchange on which the
Shares are listed or admitted to trading, or (ii) if the Shares are not so
listed or admitted to trading, the average of the highest bid and lowest asked
prices on such last business day as reported by the NASDAQ, National Quotation
Bureau or a similar organization selected by the Company for that purpose, or
(iii) otherwise, as determined in good faith by the Directors. The holders of
any Shares so called for redemption shall be entitled to payment of such
redemption price within 21 days of the redemption date. From and after the date
fixed for redemption, the holders of such Shares shall cease to be entitled to
dividends, distributions, voting rights and other benefits with respect to the
Shares, excepting only the right to payment of the redemption price fixed as
described above. The redemption date with respect to any Shareholders shall be
the date specified by the Directors which is not less than one week after the
date postmarked on the disclosure demand made by the Directors under this
Section 7.3, or, if such date is not a business day, on the next business day
thereafter. For the purpose of this Section 7.3, the term "individual" shall be
construed as provided in Section 542(a)(2) of the Internal Revenue Code of 1986,
as amended, or any successor provisions and "ownership" of Shares shall be
determined as provided in Section 544 of the Internal Revenue Code of 1986, as
amended, or any successor provision.
7.4 Right to Refuse to Transfer the Shares. Whenever it is
deemed by them to be reasonably necessary to protect the tax status of the
Company, the Directors may require statements or affidavits from any holder of
the Shares or proposed transferee of the Shares or warrants to purchase such
Shares, setting forth the number of Shares (and warrants to purchase such
Shares) already owned by him or it and any related Person specified in the form
prescribed by the Directors for that purpose. If, in the opinion of the
Directors, which shall be conclusive upon any proposed transferor or proposed
transferee of Shares, or warrants to purchase such Shares, any proposed transfer
or exercise would jeopardize the status of the Company as a REIT under the
Internal Revenue Code of 1986, as amended, the Directors may refuse to permit
the transfer or exercise. Any attempted transfer or exercise as to which the
Directors have refused their permission shall be void and of no effect to
transfer any legal or beneficial interest in the Shares. All contracts for the
sale or other transfer or exercise of the Shares or warrants to purchase such
Shares, shall be subject to this provision.
7.5 Limitation on Acquisition of Shares.
26
<PAGE>
(a) Subject to the provisions of Section 7.5(b),
no Person may own in excess of 9.8% of the total outstanding Shares, and no
Shares shall be transferred (or issued) to any Person if, following the
transfer, the Person's direct or indirect ownership of Shares would exceed this
limit. For the purpose of this Section 7.5, ownership of Shares shall be
computed in accordance with Internal Revenue Code Sections 856(h), 542(a)(2) and
544.
(b) If Shares are purportedly acquired by any
Person in violation of this Section 7.5, the acquisition shall be valid only to
the extent it does not result in a violation of this Section 7.5, and the
acquisition shall be null and void ab initio with respect to the excess ("Excess
Shares") unless the Person acquiring the Excess Shares provides the Independent
Directors with evidence and an opinion of counsel so that the Independent
Directors are satisfied that the Company's qualification as a REIT will not be
jeopardized. Excess Shares shall be deemed to have been acquired and to be held
on behalf of the Company, and, as the equivalent of treasury shares for that
purpose, shall not be considered to be outstanding for quorum or voting
purposes, and shall not be entitled to receive dividends, interest or any other
distribution. If prior to the discovery by the Company of the acquisition or
transfer of any Excess Shares dividends, interest or any other distributions are
paid with respect to any Excess Shares, then such dividends, interest or any
other distributions shall be repaid to the Company.
(c) This Section 7.5 shall apply to the
acquisition of Shares only after conclusion of the earlier of the Company's sale
of the Minimum Offering (as defined in the Prospectus) or the Company's first
taxable year, and a Shareholder will not be required to dispose of Excess Shares
acquired prior to the earlier of the conclusion of the sale of the Minimum
Offering or the Company's first taxable year. So long as any Person holds more
than 9.8% of the outstanding Shares, a lower percentage limit may be established
by the Directors to the extent necessary to assure, to the extent possible, that
no five persons own in the aggregate more than 50% of the outstanding Shares.
(d) The Company shall, if deemed necessary or
desirable to implement the provisions of any portion of this Article VII,
include on the face or back of each Share certificate issued by the Company an
appropriate legend referring the holder of the certificate to the restrictions
contained in any portion of this Article VII and stating that the complete text
of Article VII, or these Bylaws, is on file with the Secretary of the Company at
the Company's offices, and/or will be furnished without charge by the Company to
any Shareholder.
27
<PAGE>
(e) Nothing in these Bylaws shall limit the
ability of the Directors to impose, or to seek judicial or other imposition of
additional restrictions if deemed necessary or advisable to protect the Company
and the interests of its Shareholders by preservation of the Company's status as
a qualified REIT.
(f) If any provision of this Section 7.5 is
determined to be invalid, in whole or in part, by any federal or state court
having jurisdiction, the validity of the remaining provisions shall not be
affected and the provision shall be affected only to the extent necessary to
comply with the determination of the court.
(g) For purposes of this Section 7.5 only,
"Shares" means the Common Shares of the Company as defined in these Bylaws, and
includes any Shares issuable upon conversion, surrender or exercise of any other
Securities of the Company.
(h) The Advisor and its Affiliates shall not
purchase in the offering made by the Company's Prospectus more than 2.5% of the
total number of Shares sold in such offering. This limitation shall not apply to
any Shares issued pursuant to a stock incentive plan duly adopted by the
Company.
(i) The Company shall have the right to issue
fractional Shares.
7.6 Lost or Destroyed Certificates. The holder of any Shares
shall immediately notify the Company of any loss or destruction of the Share
certificates, and the Company may issue a new certificate in the place of any
certificate alleged to have been lost or destroyed upon approval of the Board of
Directors. The Board may, in its discretion, as a condition to authorizing the
issue of such new certificate, require the owner of the lost or destroyed
certificate, or his legal representative, to make proof satisfactory to the
Board of Directors of the loss or destruction and to give the Company a bond or
other security, in such amount and with such surety or sureties, as the Board of
Directors may determine as indemnity against any claim that may be made against
the Company on account of the certificate alleged to have been lost or
destroyed.
7.7 Dividend Record Date and Closing Stock Books. T Board of
Directors may fix a date in the future as a record date for the determination of
the Shareholders entitled to receive any dividend or distribution or any
allotment of rights or to exercise rights with respect to any change, conversion
or exchange of Shares. The record date so fixed shall not be more than 60 days
or less than 10 days prior to the date of the event for the purposes of which it
is fixed. When a record date is so fixed, only Shareholders of record on that
day shall be entitled
28
<PAGE>
to receive the dividend, distribution or allotment of rights or to exercise the
rights, as the case may be, notwithstanding any transfer of any Shares on the
books of the Company after the record date.
7.8 Dividend Reinvestment Plan. The Company's Dividend
Reinvestment Plan shall provide that:
(a) all material information regarding the
distribution to the Shareholder and the effect of reinvesting such distribution,
including the tax consequences thereof, shall be provided to the Shareholder at
least annually, and
(b) each Shareholder participating in the
Dividend Reinvestment Plan shall have a reasonable opportunity to withdraw from
the Dividend Reinvestment Plan at least annually after receipt of the
information required by Section 7.8(a) of these Bylaws.
ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE
8.1 Employment of Advisor. The Directors have absolute and
exclusive control of the management of the Company, its property and the
disposition thereof. The Directors are responsible for the general policies of
the Company and for general supervision of the business of the Company conducted
by all officers, agents, employees, advisors, managers or independent
contractors of the Company as may be necessary to insure that the business
conforms to the provisions of these Bylaws. However, the Directors shall not be
required personally to conduct all the business of the Company, and subject to
their ultimate responsibility as stated above, the Directors shall have the
power to appoint, employ or contract with any Person (including one or more of
themselves or any corporation, partnership, or company in which one or more of
them may be directors, officers, stockholders, partners or directors) as the
Directors may deem necessary or proper for the transaction of the business of
the Company. The Directors may employ or contract with such a Person and the
Directors may grant or delegate authority to any such Person as the Directors
may in their sole discretion deem necessary or desirable without regard to
whether that authority is normally granted or delegated by Directors.
The Directors (subject to the provisions of this Article VIII)
shall have the power to determine the terms and compensation of the Advisor or
any other Person whom they may employ or with whom they may contract; provided,
however, that any determination to employ or contract with any Director or any
Person of which a Director is an Affiliate, shall be valid only
29
<PAGE>
if made, approved or ratified by the Independent Directors. The Directors may
exercise broad discretion in allowing the Advisor to administer and regulate the
operations of the Company, to act as agent for the Company, to execute documents
on behalf of the Company, and to make executive decisions which conform to
general policies and general principals previously established by the Directors.
The Directors must evaluate the performance of the Advisor and the criteria used
in such evaluation shall be reflected in the minutes of the meeting.
Notwithstanding anything to the contrary in the advisory contract or
these Bylaws, the Advisor shall not be required to, and shall not, advise the
Company as to any investments in securities, except when, and to the extent
that, the Advisor and the Company specifically agree (i) that such advice is
desirable, and (ii) that such advice can be rendered consistently with
applicable legal requirements, including any applicable provisions of relevant
"investment advisor" laws. The Directors and officers of the Company shall be
responsible for decisions as to investments in securities, except insofar as the
Directors elect to consult with (i) the Advisor in compliance with the preceding
sentence, or (ii) any other Person in compliance with any applicable laws.
8.2 Term. The Directors shall not enter into any advisory
contract with the Advisor unless the contract has a term of no more than one
year and provides for annual renewal or extension thereafter, except that the
initial contract may have a term ending one year after Final Closing, where
"Final Closing" is the last closing of the sale of Shares offered by the
Prospectus. The Directors shall not enter into a similar contract with any
Person of which a Director is an Affiliate unless the contract provides for
renewal or extension by the Independent Directors. The advisory contract with
the Advisor may be terminated by the Advisor upon 60 days' written notice or by
the Company without cause by action of the Independent Directors of the Company
upon 60 days' written notice, in a manner to be set forth in the advisory
contract with the Advisor. The advisory contract shall also require the Advisor
to cooperate with the Company to provide an orderly management transition after
any termination. The Directors shall determine that any successor Advisor (i) is
qualified to perform advisory functions for the Company and (ii) can justify the
compensation provided for in the advisory contract.
8.3 Other Activities of Advisor. The Advisor shall not be
required to administer the investment activities of the Company as its sole and
exclusive function and may have other business interests and may engage in other
activities similar or in addition to those relating to the Company, including
the performance of services and advice to other Persons (including other real
estate investment companies) and the management of
30
<PAGE>
other investments (including investments of the Advisor and its Affiliates). The
Directors may request the Advisor to engage in other activities which complement
the Company's investment, and the Advisor may receive compensation or
commissions for those activities from the Company or other Persons.
The Advisor shall be required to use its best efforts to
present a continuing and suitable investment program to the Company which is
consistent with the investment policies and objectives of the Company, but
neither the Advisor nor any Affiliate of the Advisor shall be obligated
generally to present any particular investment opportunity to the Company even
if the opportunity is of a character which, if presented to the Company, could
be taken by the Company, and, subject to the foregoing, shall be protected in
taking for its own account or recommending to others the particular investment
opportunity.
Upon request of any Director, the Advisor and any Person who controls,
is controlled by, or is under common control with the Advisor shall from time to
time promptly furnish the Directors with information on a confidential basis as
to any investments within the Company's investment policies made by the Advisor
or the other Person for its own account.
8.4 Limitation on Offering and Organization Expenses and
Acquisition Fees and Expenses. The Offering and Organization Expenses paid by
the Company in connection with the Company's formation or the offering of its
Shares or other Securities shall in each case be reasonable and in no event
exceed an amount equal to 15% of the gross proceeds raised in any such offering.
The Advisor shall pay (without the right of reimbursement from the Company) any
Offering and Organization Expenses in the initial offering of Shares which,
exclusive of the Selling Commissions and Marketing Expense Allowance, exceed 3%
of gross offering proceeds.
The total of all Acquisition Fees and Acquisition Expenses
paid by the Company in connection with the purchase of real property by the
Company shall be reasonable and shall in no event exceed an amount equal to 6%
of the Contract Price for such real property, or, in the case of a mortgage
loan, 6% of the funds advanced, unless a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction approve the transaction as being commercially competitive, fair and
reasonable to the Company.
Any Offering and Organization Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
set forth in this Section 8.4 shall be payable to the Company by the Advisor
immediately upon demand of the Company.
8.5 Limitation on Operating Expenses. The total Operating
Expenses of the Company, including fees paid to the Advisor, shall not exceed in
any year the greater of 2% of the total Average Invested Assets of the Company
or 25% of the Net Income of the Company for such year. Subject to the
31
<PAGE>
determination referred to in Section 5.15(d), the Advisor shall reimburse the
Company at least annually for the amount by which Operating Expenses of the
Company exceed the above limitations. All figures used in the foregoing
computation shall be determined in accordance with generally accepted accounting
principals applied in a consistent basis. The compensation of the Advisor shall
be computed by an independent certified public accountant at the end of each
year and there shall be made any necessary adjustments between the compensation
so computed and that already paid.
8.6 Limitation on Real Estate Brokerage Commissions on
Purchase and Resale of Property. If the Advisor, any Director or any Affiliate
thereof provides a substantial amount of the services in the effort to purchase
or sell the real property of the Company, then such Person may receive a real
estate or brokerage commission which is reasonable, customary and competitive in
light of the size, type and location of such property; provided that such
commission shall not exceed an amount equal to 2% of the contracted for purchase
or sales price for such property. In the event such real estate or brokerage
commissions are also payable to any other party pursuant to such transactions,
the Advisor, any Director or any Affiliate may receive up to one-half of the
brokerage commission paid but in no event to exceed an amount equal to 2% of the
contracted for purchase or sales price for such property. In addition, the
amount paid when added to the sums paid to unaffiliated parties in such a
capacity shall not exceed the lesser of the Competitive Real Estate Commission
or an amount equal to 6% of the contracted for sales price. The Company may
enter into an agreement (with any term approved by the Directors) pursuant to
which the Advisor, any Director or any Affiliate thereof will provide the
services referred to in this Section with respect to all of the Company's
properties, and will receive compensation therefor.
8.7 Limitation on Incentive Fees. An incentive fee based upon
an interest in the gain from the sale, financing or refinancing of real property
of the Company, for which full consideration is not paid in cash or property of
equivalent value, shall be allowed provided the amount or percentage of such
interest is reasonable. Such an interest in gain from the sale of real property
of the Company shall be considered reasonable if it does not exceed 15% of the
balance of such gain remaining after payment to Shareholders, in the aggregate,
of an amount equal to 100% of the adjusted price per Share (defined to be the
original issue price of the Common Shares reduced by prior distributions of gain
from the sale of the Company's assets), plus an amount equal to a 6% per annum
cumulative (noncompounded) return on the adjusted price per Share. In the case
of multiple Advisors, Advisors and their Affiliates shall be allowed incentive
fees provided such fees are distributed by a proportional method reasonably
designed to reflect the value
32
<PAGE>
added to such assets by each respective Advisor or Affiliate. Distribution of
incentive fees to Advisors and their Affiliates in proportion to the length of
time served as Advisor while such property was held by the Company or in ratio
to the fair market value of the asset at the time of the Advisor's termination,
and the fair market value of the asset upon its disposition by the Company shall
be considered reasonable methods by which to apportion incentive fees.
8.8 Limitations on Leverage. All borrowings by the Company
must be approved by the Directors. The aggregate borrowings of the Company,
secured and unsecured, shall be reasonable in relation to the Net Assets of the
Company and shall be reviewed by the Directors at least quarterly.
ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES
9.1 Restrictions. Notwithstanding any other provision of these
Bylaws, the Company shall not:
(a) invest more than 10% of the total assets of
the Company in Unimproved Real Property or mortgage loans on Unimproved Real
Property;
(b) invest in commodities or commodity future
contracts or effect short sales of commodities or securities, except when done
solely for hedging purposes;
(c) invest in or make mortgage loans on property
unless the Company shall obtain a mortgagee's or owner's title insurance policy
or commitment as to the priority of the mortgage or the condition of the title;
(d) invest in contracts for the sale of real
estate unless they are recordable in the chain of title;
(e) make or invest in mortgage loans, including
construction loans, on any one property if the aggregate amount of all mortgage
loans outstanding on the property (at the time the Company makes or invests in
its mortgage loan), including the loans of the Company, would exceed 85% of the
appraised value of the property;
(f) make or invest in junior mortgage loans
(provided that this and the preceding limitation shall not apply to the Company
taking back secured debt in connection with the sale of any property);
(g) issue securities that are redeemable;
33
<PAGE>
(h) issue debt securities unless the historical
debt service coverage (in the most recently completed fiscal year) as adjusted
for known changes is sufficient to properly service the higher level of debt or
unless the cash flow of the Company (for the last fiscal year) excluding
extraordinary, nonrecurring items, is sufficient to cover the debt service on
all debt securities to be outstanding;
(i) invest more than 20% of its total assets in
the equity securities of any non- governmental issuer, including other REITs or
limited partnerships for a period in excess of 18 months;
(j) issue equity securities on a deferred
payment basis or other similar arrangement;
(k) incur any indebtedness, secured or
unsecured, which would result in an aggregate amount of indebtedness in excess
of 100% of Net Assets (before subtracting any liabilities), unless any excess
borrowing over such 100% level shall be approved by a majority of the
Independent Directors and disclosed to the Shareholders in the next quarterly
report of the Company, along with justification for such excess;
(l) allow aggregate borrowings of the Company to
exceed 50% of the Adjusted Net Asset Value (before subtracting any liabilities)
of the Company, unless any excess borrowing over such 50% level shall be
approved by a majority of the Independent Directors and disclosed to the
Shareholders in the next quarterly report of the Company, along with
justification for such excess;
(m) invest in single-family residential homes,
condominiums, secondary homes, resort or recreation properties, nursing homes,
gaming facilities, mobile home parks, or any other commercial or industrial
properties (other than shopping centers);
(n) engage in any short sale, underwrite or
distribute, as an agent, securities issued by others, or engage in trading, as
compared with investment activities; and
(o) acquire Securities in any company holding
investments or engaging in activities prohibited by the Internal Revenue Code of
1986, as amended, Virginia law or this Section 9.1.
The foregoing limitations shall not limit the manner in which
any required investment by the Advisor or its Affiliates in the Company is made
or preclude the Company from structuring an investment in real property to
minimize Shareholder liability and facilitate the investment policies of the
Company under Article IX.
34
<PAGE>
ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES
10.1 Transactions with Affiliates.
(a) Neither the Advisor nor any Affiliate of the Advisor shall
sell, transfer or lend any assets or property to the Company or purchase, borrow
or otherwise acquire any assets or property from the Company, directly or
indirectly, unless the transaction comes within one of the following exceptions:
(i) the transaction consists of the acquisition
of property or assets at the formation of the Company or
shortly thereafter, and is fully disclosed in the Prospectus;
or
(ii) the transaction is a borrowing of money by
the Company on terms not less favorable than those then
prevailing for comparable arms-length borrowings; or
(iii) the transaction consists of the acquisition
by the Company of federally insured or guaranteed mortgages at
prices not exceeding the currently quoted prices at which the
Federal National Mortgage Association is purchasing comparable
mortgages; or
(iv) the transaction consists of the acquisition of
other mortgages if an Appraisal is obtained concerning the
underlying property and on terms not less favorable to the
Company than similar transactions involving unaffiliated
parties; or
(v) the transaction consists of the acquisition by
the Company of other property at prices not exceeding the fair
value thereof as determined by an independent Appraisal.
All of the above transactions and all other transactions (other than
the entering into, and the initial term under, the Advisory Agreement, the
Property Acquisition/Disposition
35
<PAGE>
Agreement, and the Property Management Agreement for each property acquired by
the Company, each of which agreement is specifically disclosed in the
Prospectus), whether such transaction involves the transfer of property, the
lending of money or the rendition of any services, in which any such Persons
have any direct or indirect interest shall be permitted only if:
(i) such transaction has been approved by the
affirmative vote of the majority of the Independent Directors;
and
(ii) if the transaction involves the purchase or
acquisition of property, the purchase or acquisition from any
such Person is on terms not less favorable to the Company than
those then prevailing for arms-length transactions concerning
comparable property (based upon a determination of a majority
of the Directors, including a majority of the Independent
Directors); and
(iii) each such transaction is in all respects on
such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the
Shareholders of the Company and, in the case of a purchase or
acquisition of property, at a price to the Company no greater
than the cost of the asset to such Persons (based upon a
determination of a majority of the Directors, including a
majority of the Independent Directors) or, if the price to the
Company is in excess of such cost, then substantial
justification for such excess must exist and such excess is
not unreasonable (based upon a determination of a majority of
the Directors, including a majority of the Independent
Directors).
(b) Neither the Advisor nor any Affiliate of the
Advisor shall invest in joint ventures with the Company, unless (i) such
transaction has been approved by the affirmative vote of a majority of the
Independent Directors; (ii) the transaction is on terms not less favorable to
the Company than those then prevailing for comparable arms-length transactions
(based upon a determination of a majority of the Directors, including a majority
of the Independent Directors); and (iii) each such transaction is in all
respects on such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the Shareholders of the
Company and on substantially the same terms and conditions as those received by
other joint venturers (based upon a determination of a majority of the
Directors, including a majority of the Independent Directors).
10.2 Restriction of Duties and Liabilities. The duties and
liabilities of Shareholders, Directors and officers
36
<PAGE>
shall in no event be greater than the duties and liabilities of shareholders,
directors and officers of a Virginia corporation. The Shareholders, Directors
and officers shall in no event have any greater duties or liabilities than those
imposed by applicable law as shall be in effect from time to time. However, in
no event shall the duties and liabilities of Shareholders, Directors and
officers be inconsistent with the standards contained in the Articles of
Incorporation.
10.3 Persons Dealing with Directors or Officers. Any act of
the Directors or officers purporting to be done in their capacity as such shall,
as to any Persons dealing in good faith with the Directors or officers, be
conclusively deemed to be within the purposes of this Company and within the
powers of the Directors and officers.
The Directors may authorize any officer or officers or agent
or agents to enter into any contract or execute any instrument in the name and
on behalf of the Company and/or Directors.
No Person dealing in good faith with the Directors or any of
them or with the authorized officers, employees, agents or representatives of
the Company, shall be bound to see to the application of any funds or property
passing into their hands or control. The receipt of the Directors, or any of
them, or of authorized officers, employees, agents, or representatives of the
Company, for moneys or other considerations, shall be binding upon the Company.
10.4 Reliance. The Directors and officers may consult with
counsel and the advice or opinion of the counsel shall be full and complete
personal protection to all of the Directors and officers in respect of any
action taken or suffered by them in good faith and in reliance on and in
accordance with such advice or opinion. In discharging their duties, Directors
and officers, when acting in good faith, may rely upon financial statements of
the Company represented to them to be correct by the Chairman or the officer of
the Company having charge of its books of account, or stated in a written report
by an independent certified public accountant fairly to present the financial
position of the Company. The Directors may rely, and shall be personally
protected in acting upon any instrument or other document believed by them to be
genuine.
10.5 Income Tax Status. Without limitation of any rights of
indemnification or non-liability of the Directors, the Directors by these Bylaws
make no commitment or representation that the Company will qualify for the
dividends paid deduction permitted by the Internal Revenue Code of 1986, as
amended, and the Rules and Regulations pertaining to real estate investment
trusts under the Internal Revenue Code of 1986, as amended, and
37
<PAGE>
any such failure to qualify shall not render the Directors liable to the
Shareholders or to any other Person or in any manner operate to annul the
Company.
ARTICLE XI
MISCELLANEOUS
11.1 Competing Programs. Nothing in these Bylaws shall be
deemed to prohibit any Affiliate of the Company from dealing, or otherwise
engaging in business with, Persons transacting business with the Company or from
providing services relating to the purchase, sale, management, development or
operation of real property and receiving compensation therefor, not involving
any rebate, reciprocal arrangement or other transaction which would have the
effect of circumventing any restrictions set forth herein relating to the
dealings between the Company and its Affiliates. The Company shall not have any
right, by virtue of these Bylaws, in or to such other ventures or activities or
to the income or proceeds derived therefrom, and the pursuit of such ventures,
even if competitive with the business of the Company, shall not be deemed
wrongful or improper. No Affiliate of the Company shall be obligated to present
any particular investment opportunity to the Company, even if such opportunity
is of a character which, if presented to the Company, could be taken by the
Company; provided, however, that until substantially all the net proceeds of the
offering of the Shares have been invested or committed to investment, the
Sponsor shall be obligated to present to the Company any investment opportunity
which is of an amount and character which, if presented to the Company, would be
a suitable investment for the Company. To the extent necessary, the Sponsor
shall seek to allocate investment opportunities between the Company and other
entities based upon differences in investment policies and objectives, the
make-up of the investment portfolio of each entity, the amount of cash available
to each entity for investment financing, the estimated income tax effects of the
purchase on each entity, and the policies of each relating to leverage. Subject
to the limitations in this Section, it will be within the discretion of the
Sponsor to allocate the investment opportunities as it deems advisable. The
Sponsor shall attempt to resolve any other conflicts of interests between the
Company and others by exercising the good faith required of fiduciaries.
11.2 Corporate Seal. The Company shall have a corporate seal
in the form of a circle containing the name of the Company and such other
details as may be required by the Board of Directors.
11.3 Inspection of Bylaws. The Company shall keep at its
principal office in this Commonwealth for the transaction of business, a list of
the names and addresses of the Company's
38
<PAGE>
Shareholders and the original or a copy of the Bylaws, as amended, certified by
the Secretary, which shall be open to inspection by Shareholders at any
reasonable time during office hours.
11.4 Inspection of Corporate Records. Shareholders of the
Company, or any holders of a voting trust certificate, shall have the right to
inspect the accounting books and records of the Company, and the minutes of
proceedings of the Shareholders and the Board and committees of the Board as
provided by the Virginia Stock Corporation Act.
11.5 Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the Company, shall be signed or endorsed by the Person or
Persons and in the manner as from time to time shall be determined by resolution
of the Board of Directors.
11.6 Contracts, Etc., How Executed. The Board of Directors,
except as provided elsewhere in these Bylaws, may authorize any officer or
officers or agent or agents to enter into any contract or execute any instrument
in the name of and on behalf of the Company. That authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors
or as otherwise provided in these Bylaws, no officer, agent or employee shall
have any power or authority to bind the Company by any contract or engagement or
to pledge its credit to render it liable for any purpose or to any amount.
11.7 Representation of Shares of Other Corporations. The
Chairman or the President or, in the event of their absence or inability to
serve, any Vice President and the Secretary or Assistant Secretary of this
Company, are authorized to vote, represent and exercise, on behalf of the
Company, all rights incidental to any and all shares of any other company
registered in the name of the Company. The authority granted to such officers to
vote or represent on behalf of the Company any and all shares held by the
Company in any other company may be exercised by any authorized Person in person
or by proxy or power of attorney duly executed by the officers.
11.8 Annual Report. The Board of Directors of the company
shall cause to be sent to the Shareholders, not later than 120 days after the
close of the calendar year, and not less than 30 days before the date of the
Company's annual meeting of Shareholders as provided in Section 4.2 of these
Bylaws, an Annual Report in the form deemed appropriate by the Board of
Directors, including without limitation, any explanation of excess expenses as
set forth in Sections 5.15 and 8.5. The reports shall also disclose the ratio of
the cost of raising capital to the capital raised during the year and the
aggregate
39
<PAGE>
amount of the advisory fees and other fees paid during the year to the Advisor
and its Affiliates, including fees or charges paid to the Advisor and Affiliates
by a third party on behalf of the Company. The Annual Report also shall include
as required by Section 5.15 full disclosure of all material terms, factors and
circumstances surrounding any and all transactions involving the Company and the
Directors, Advisor and/or Affiliates thereof occurring during the year, and the
Independent Directors shall examine and comment in the report as to the fairness
of any such transactions. The Annual Report shall include a statement of assets
and liabilities and a statement of income and expense of the Company prepared in
accordance with generally accepted accounting principles. The financial
statements shall be accompanied by the report of an independent certified public
accountant. A manually signed copy of the accountant's report shall be filed
with the Directors.
11.9 Quarterly Reports. At least quarterly, the Directors
shall send interim reports to the Shareholders having the form and content as
the Directors deem proper. The quarterly reports shall disclose (i) the ratio of
the costs of raising capital during the quarter to the capital raised, and (ii)
the aggregate amount of the advisory fees and the fees paid during the quarter
to the Advisor and its Affiliates, including fees or charges paid to the Advisor
and its Affiliates by third parties on behalf of the Company. The quarterly
report shall also disclose any excess in borrowings over the level specified in
Section 8.8, along with a justification for such excess.
11.10 Other Reports. The Directors shall furnish the
Shareholders at least annually with a statement in writing advising as to the
source of dividends or distributions so distributed. If the source has not been
determined, the communication shall so state and the statement as to the source
shall be sent to the Shareholders not later than 60 days after the close of the
calendar year in which the distribution was made.
11.11 Provisions of the Company in Conflict with Law or
Regulation.
(a) The provisions of these Bylaws are severable,
and if the Directors shall determine, with the advice of counsel, that any one
or more of these provisions (the "Conflicting Provisions") are in conflict with
the REIT Provisions of the Internal Revenue Code, or with other applicable laws
and regulations, the Conflicting Provisions shall be deemed never to have
constituted a part of these Bylaws. The Directors shall have the power to amend
or revise the Bylaws (which shall include both the deletion and the addition of
provisions) to the extent necessary to bring the provisions of these Bylaws into
conformity with the REIT Provisions of the Internal Revenue Code, or any other
applicable law or regulation or the requirements of any state securities
regulator or similar official. Any such action by the Directors shall not affect
or impair any of the remaining provisions of these Bylaws or render invalid or
improper any action taken or omitted (including but not limited to the
40
<PAGE>
election of Directors) prior to the action. A certification signed by a
majority of the Directors setting forth any such action and reciting that it
was duly adopted by the Directors, or a copy of these Bylaws, with the relevant
changes made, signed by a majority of the Directors, shall be conclusive
evidence of such action when logged in the records of the Company. The Directors
shall not be liable for failure to make any determination or take any action
under this Section 11.11.
(b) If any provisions of these Bylaws shall be
held invalid or unenforceable, the invalidity or unenforceability shall attach
only to that provision and shall not in any manner affect or render invalid or
unenforceable any other provision, and these Bylaws shall be carried out as if
the invalid or unenforceable provision were not present.
11.12 Voluntary Dissolution. The Company may elect to wind up
and dissolve by the vote of Shareholders entitled to exercise a majority of the
voting power of the Company.
11.13 Distributions. The payment of distributions on Shares
shall be at the discretion of the Directors, including a majority of the
Independent Directors, and shall depend upon the earnings, cash flow and general
financial condition of the Company, and such other facts as the Directors deem
appropriate.
11.14 Shareholder Liability. The holders of the Company's
Shares shall not be personally liable on account of any obligation of the
Company.
11.15 Return of Offering Proceeds. The Directors shall have
the right and power, at any time, to return to Shareholders offering proceeds to
the extent required by applicable law, including to the extent necessary to
avoid characterization of the Company as an "investment company."
ARTICLE XII
AMENDMENTS TO BYLAWS
12.1 Amendments. These Bylaws may be amended or repealed by
the vote of Shareholders entitled to exercise a majority of the voting power of
the Company; provided, however, that any amendment to these Bylaws or any
provision hereof which would affect any rights with respect to any outstanding
Common Shares or other Securities, or diminish or eliminate any voting rights
pertaining thereto, may not be effected unless approved by
41
<PAGE>
the vote of the holders of two-thirds of the outstanding Securities of the class
of Securities affected. The Board of Directors may propose any such amendment to
the Shareholders, but the Board of Directors may not amend the Bylaws or any
portion, except to the extent expressly provided in Section 11.11.
12.2 [Reserved]
42
APPLE RESIDENTIAL INCOME TRUST, INC.
ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION
Designating
CLASS B CONVERTIBLE SHARES
1. Name. The name of the Corporation is Apple Residential Income Trust,
Inc.
2. The Amendment. The amendment, a copy of which is attached hereto as
Exhibit A, deletes Section 3.1 in its entirety and replaces such deleted Section
with a new Section 3.1, and adds a new Article IX to the Articles of
Incorporation, to create an additional class of shares (the Class B Convertible
Shares), states the designation and number of shares in the class and fixes the
preferences, limitations and relative rights thereof.
3. Board Action. By Consent of the Sole Director dated November 11, 1996,
the sole Director found the amendment to the Articles of Incorporation to be in
the best interests of the Corporation and directed that the amendment be
submitted to the sole shareholder for its approval.
4. Shareholder Action. As of November 11, 1996, the amendment was approved
by the written consent of the sole shareholder of the Corporation.
Dated: November 11, 1996
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/Glade M. Knight
--------------------------------
Chairman
-1-
<PAGE>
Exhibit A
3.1 Designation and Number. The designation and aggregate number of shares
that the Corporation shall have authority to issue are as follows:
Class Number of Shares
----- ----------------
Common Shares (no par value) 50,000,000
Class B Convertible Shares 200,000
(no par value)
- --------------------------------------------------------------------------------
ARTICLE IX
CLASS B CONVERTIBLE SHARES
There are hereby designated Two Hundred Thousand (200,000) Class B
Convertible Shares, no par value (the "Class B Convertible Shares"). The Class B
Convertible Shares shall have the following preferences, limitations and
relative rights:
9.1 Dividends.
The holders of the outstanding Class B Convertible Shares shall not be
entitled to receive dividends on such Class B Convertible Shares.
9.2 Voting Rights.
(a) Except for the voting rights expressly conferred by this
Article IX, and except to the extent provided by law, the holders of the
outstanding Class B Convertible Shares shall not be entitled (i) to vote on any
matter, or (ii) to receive notice of, or to participate in, any meeting of
shareholders of the Corporation at which they are not entitled to vote.
-2-
<PAGE>
(b) The affirmative vote of the holders of more than
two-thirds of the outstanding Class B Convertible Shares shall be required for
(i) the adoption of any amendment, alteration or repeal of any provision of the
Articles of Incorporation of the Corporation that adversely changes the
preferences, limitations or relative rights of the Class B Convertible Shares or
the holders thereof (it being understood that an increase in the number of
Directors of the Corporation is not such an adverse change), or (ii) the
authorization of, or the increase in the authorized number of shares of, any
class of stock ranking senior to or on a parity with the Class B Convertible
Shares as to rights in liquidation.
(c) Whenever the holders of Class B Convertible Shares are
entitled to vote as a separate voting group on any matter pursuant to the
provisions of paragraph (b) of this Section 9.2, the vote required to approve
such matter shall be the affirmative vote of more than two-thirds of all the
votes entitled to be cast by that voting group, with each share having one vote.
9.3 Redemption.
The Corporation may not redeem all or any portion of the outstanding
Class B Convertible Shares.
9.4 Liquidation.
In the event of the liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of the outstanding Class B Convertible
Shares shall be entitled to be paid in cash out of the net assets of the
Corporation, including its capital, a liquidation payment of $0.10 per share,
and no more, before any distribution or payment shall be made to the holders of
any
-3-
<PAGE>
shares of the Corporation ranking junior to the Class B Convertible Shares as to
rights in liquidation but, after payment of the amounts to which they are
respectively entitled to the holders of the outstanding Class B Convertible
Shares and the other shares, if any, ranking senior to or on a parity with the
Class B Convertible Shares as to rights in liquidation, the balance of such
assets, if any, shall be paid to the holders of the shares of the Corporation
ranking junior to the Class B Convertible Shares as to rights in liquidation,
according to their respective rights. For the purposes of the preceding
sentence, neither the consolidation of the Corporation with nor the merger of
the Corporation into any other corporation, nor the sale, lease or other
disposition of all or substantially all of the Corporation's properties and
assets shall, without further corporate action, be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation. If the net assets
of the Corporation are insufficient to pay to the holders of the Class B
Convertible Shares the full amounts to which they are respectively entitled, the
entire net assets of the Corporation remaining shall be distributed ratably to
the holders of the Class B Convertible Shares and the holders of other preferred
shares, if any, ranking on a parity with the Class B Convertible Shares as to
rights in liquidation in proportion to the full amounts to which they are
respectively entitled.
9.5 Conversion.
(a) Each holder of outstanding Class B Convertible Shares shall
have the right to convert any of such shares into Common Shares of the
Corporation upon and for 180 days following
-4-
<PAGE>
the occurrence of either of the following events: (1) substantially all of the
Corporation's assets, stock or business is sold or otherwise transferred,
whether through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Corporation ceases to use Apple Residential Management Group,
Inc. to provide substantially all of its property management services. Upon the
occurrence of either such event, each Class B Convertible Share may be converted
into a number of Common Shares based upon the gross proceeds raised through the
date of conversion in the offering made by the Corporation's Prospectus
according to the following formula:
Gross Proceeds Raised From Number of Common Shares
Sales of Common Shares through through Conversion of One
Date of Conversion Class B Convertible Share
------------------ -------------------------
$50 million 1.0
$100 million 2.4
$150 million 4.2
$200 million 6.4
$250 million 8.0
(b) Each holder of outstanding Class B Convertible Shares may
exercise the conversion right provided in paragraph (a) above as to all or any
portion of the shares he holds by delivering to the Corporation during regular
business hours, at the principal office of the Corporation or at such other
place as may be designated in writing by the Corporation, the certificate or
certificates for the shares to be converted, duly endorsed or assigned in blank
or endorsed or assigned to the Corporation (if
-5-
<PAGE>
required by it), or if such shares are not evidenced by a certificate or
certificates, a written notice of election, accompanied in either such case by
written notice stating that the holder elects to convert such shares and stating
the name or names (with address and applicable social security or other tax
identification number) in which the Common Shares are to be issued. Conversion
shall be deemed to have been effected on the date (the "Conversion Date") when
such delivery is made. As promptly as practicable thereafter the Corporation
shall issue and deliver to or upon the written order of such holder, at such
office or other place designated by the Corporation, a certificate or
certificates for the number of Common Shares to which he is entitled (or shall
cause such Common Shares to be duly issued as required herein, if the Common
Shares are uncertificated). The person in whose name the Common Shares are to be
issued shall be deemed to have become a shareholder of record on the Conversion
Date, unless the transfer books of the Corporation are closed on that date, in
which event he shall be deemed to have become a shareholder of record on the
next succeeding date on which the transfer books are open; but the Conversion
Ratio shall be that in effect on the Conversion Date. The Corporation may issue
fractional Common Shares upon conversion of Class B Convertible Shares.
(c) The issuance of Common Shares on conversion of outstanding
Class B Convertible Shares shall be made by the Corporation without charge for
expenses or for any tax in respect of the issuance of such Common Shares, but
the Corporation shall not be required to pay any tax which may be payable in
respect of
-6-
<PAGE>
any transfer involved in the issuance and delivery of Common Shares in any name
other than that of the holder of record on the books of the Corporation of the
outstanding Class B Convertible Shares converted, and the Corporation shall not
be required to issue or deliver any certificate for Common Shares unless and
until the person requesting the issuance thereof shall have paid to the
Corporation the amount of such tax or shall have established to the satisfaction
of the Corporation that such tax has been paid.
(d) The term "Fair Market Value" of one Common Share, as used in
this Section 9.5 shall, if the Common Shares are traded in the over-the-counter
market, be deemed to be the mean between the bid and asked prices on the date
the value is required to be determined, as reported by NASDAQ or any similar
service, and if the Common Shares are listed and traded on a national stock
exchange, be deemed to be the closing price of the Common Shares for such day
derived from the New York Stock Exchange Composite Tape or any similar service;
provided, however, that if the Common Shares are not traded on that date, then
the Fair Market Value shall be determined, in the manner hereinabove set forth,
on the most recent preceding business day on which the Common Shares were
traded; provided further, however, that if the Fair Market Value of the Common
Shares cannot be determined in accordance with the foregoing provisions (for
example, if the Common Shares are not traded), the Fair Market Value of the
Common Shares shall be determined in good faith by the Corporation's Board of
Directors. The term "Conversion Ratio," as used herein, shall mean, as of any
date,
-7-
<PAGE>
the number of Common Shares into which each Class B Convertible Share is
convertible on that date.
(e) The Conversion Ratio shall be subject to the following
adjustments.
(i) If the Corporation shall (y) pay a dividend on its
outstanding Common Shares in Common Shares or subdivide or otherwise
split its outstanding Common Shares, or (z) combine its outstanding
Common Shares into a smaller number of shares, the Conversion Ratio
shall be adjusted so that the holder of any Class B Convertible Shares
surrendered for conversion after such event shall be entitled to
receive the same aggregate number of Common Shares that he would have
been entitled to receive had such shares been converted immediately
prior to any such event and such event had then occurred.
(ii) If the Corporation shall issue rights, warrants
or options to all holders of its Common Shares entitling them to
subscribe for or purchase Common Shares at a price per share which is
less than the Current Market Value per share (as hereinafter defined)
on the record date mentioned below, the Conversion Ratio shall be
adjusted to an amount determined by multiplying the Conversion Ratio in
effect immediately prior to the issuance of such rights, warrants or
options by a fraction, (y) the numerator of which shall be the number
of Common Shares outstanding at the close of business on the date of
issuance of such
-8-
<PAGE>
rights, warrants or options plus the number of additional Common
Shares offered for subscription pursuant to such rights, warrants or
options and (z) the denominator of which shall be the number of Common
Shares outstanding at the close of business on the date of issuance of
such rights, warrants or options plus the number of Common Shares
which the aggregate exercise price of all such rights, warrants or
options would purchase at such Current Market Value. Such adjustment
shall be retroactively effective to the time immediately after the
record date for the determination of the shareholders entitled to
receive such rights, warrants or options. For the purposes of this
Section 9.5(e), the "Current Market Value" per Common Share on any
date shall be deemed to be the average of the Fair Market Value of one
Common Share (as defined in Section 9.5(d)) on each of the 20
consecutive trading days commencing 40 trading days before such date
(a trading day being a day on which securities are traded in the
over-the-counter market or, if the Common Shares are then listed on
any national stock exchange, on such exchange), and if the Common
Shares are not then traded, the Fair Market Value of one Common Share
(as determined under Section 9.5(d)) as of the date in question.
(iii) If the Corporation shall make a distri bution
to all holders of its Common Shares of evidences of its indebtedness
or assets (excluding dividends paid in cash out of funds available for
dividends in accordance with applicable law), or rights, warrants or
options to subscribe for or purchase securities of the Corporation
(other than those referred to in subparagraph (ii) of this Section
-9-
<PAGE>
9.5(e)), the Conversion Ratio immediately prior to such distribution
shall be adjusted to an amount determined by multiplying such
Conversion Ratio by a fraction, (y) the numerator of which shall be
the Current Market Value of one Common Share (as defined in
subparagraph (ii) of this Section 9.5(e)), and (z) the denominator of
which shall be the Current Market Value of one Common Share on the
next full business day after the record date fixed for the
determination of the shareholders entitled to such distribution less
the fair value (as conclusively determined in good faith by the Board
of Directors of the Corporation) at the time of such distribution of
that portion of the evidences of indebtedness, assets, or the rights,
warrants or options, distributed which is applicable to one Common
Share. Such adjustment shall be retroactively effective to a time
immediately after such record date.
(f) Notwithstanding any of the foregoing provisions of this
Section 9.5, no adjustment of the Conversion Ratio shall be made (i) if the
Corporation shall issue Common Shares or rights, warrants or options to purchase
Common Shares pursuant to one or more stock purchase plans, stock option plans,
stock purchase contracts, incentive compensation plans, or other remuneration
plans for employees (including officers) or directors of the Corporation or its
Subsidiaries adopted or approved as required by law at any time or, (ii) in
respect of any right granted by the Corporation to all holders of its Common
Shares to purchase Common Shares at a discount from their Current Market Value
by the reinvestment of dividends paid on its Common Shares.
-10-
<PAGE>
(g) If any Class B Convertible Shares are converted into Common
Shares after the record date for the happening of any of the events described in
subparagraphs (i), (ii) or (iii) of Section 9.5(e) but before the happening of
such event the Corporation may defer, until the happening of such event, issuing
to the holder of Class B Convertible Shares so converted the Common Shares which
he is entitled to receive because of the adjustments required pursuant to any
such subparagraph.
(h) Whenever there is a required adjustment to the Conversion
Ratio, such adjustment shall be made to the Conversion Ratio applicable to each
step in the formula set forth in Section 9.5(a) so that the adjustment given
effect at the time of conversion is applied to the Conversion Ratio applicable
to the amount of gross proceeds raised through the date of conversion. Anything
in this Section 9.5 to the contrary notwithstanding, no adjustment in the
Conversion Ratio shall be required unless such adjustment would require an
increase or decrease of at least 0.1 in such ratio; provided, however, that any
adjustments which by reason of this Section 9.5 are not required to be made
shall be carried forward and taken into account in making subsequent
adjustments. All calculations under this Section 9.5 shall be made to the
nearest 0.01.
(i) Whenever the Conversion Ratio and subsequent changes to be
made therein are adjusted pursuant to this Section 9.5, the Corporation shall
(i) promptly place on file at its principal office and at the office of each
transfer agent for the Class B Convertible Shares, if any, a statement, signed
by the Chairman or President of the Corporation showing in detail the
-11-
<PAGE>
facts requiring such adjustment and a computation of the adjusted Conversion
Ratio, and shall make such statement available for inspection by shareholders of
the Corporation, and (ii) cause a notice to be mailed to each holder of record
of outstanding Class B Convertible Shares stating than such adjustment has been
made and setting forth the adjusted Conversion Ratio.
(j) In the event of any reclassification or recapita lization of
the outstanding Common Shares (except a change in par value, or from no par
value to par value, or subdivision or other split or combination of shares), or
in case of any consolidation or merger to which the Corporation is a party,
except a merger in which the Corporation is the surviving corporation and which
does not result in any such reclassification or recapitalization, or in case of
any sale or conveyance to a person or another business entity of all or
substantially all of the property of the Corporation, effective provision shall
be made by the Corporation or by the successor or purchasing business entity (i)
that the holder of each Class B Convertible Share then outstanding shall
thereafter have the right to convert such share into the kind and amount of
stock and other securities and property receivable, upon such reclassification,
recapitalization, consolidation, merger, sale or conveyance, by a holder of the
number of Common Shares of the Corporation into which such Class B Convertible
Shares might have been converted, and (ii) that there shall be subsequent
adjustments of the Conversion Ratio which shall be equivalent, as nearly as
practicable, to the adjustments provided for in this Section 9.5. The provisions
of this paragraph (j) of this Section 9.5 shall similarly apply to successive
-12-
<PAGE>
reclassifications, recapitalizations, consolidations, mergers, sales or
conveyances.
(k) Common Shares issued on conversion of Class B Convertible
Shares shall be issued as fully paid shares and shall be nonassessable by the
Corporation. The Corporation shall, at all times, reserve and keep available for
the purpose of effecting the conversion of the outstanding Class B Convertible
Shares such number of its duly authorized Common Shares as shall be sufficient
to effect the conversion of all of the outstanding Class B Convertible Shares.
(l) Class B Convertible Shares converted as provided herein shall
not again become authorized and unissued shares.
8.6 Definitions and Interpretation.
As used in these Articles, unless the context otherwise requires,
the following terms shall have the following meanings:
"Advisor" means Apple Residential Advisors, Inc. a Virginia
corporation.
"Advisory Agreement" means the Advisory Agreement between the
Corporation and the Advisor, as it may be in effect from time to time.
"Prospectus" means the final version of the prospectus of the
Corporation in connection with the registration of certain of the Corporation's
Common Shares by registration statement filed with the United States Securities
and Exchange Commission on Form S-11 (File No. 333-10635), as amended and
supplemented.
"Subsidiary" means any corporation a majority of the out standing
voting shares of which is owned, directly or indirectly, by the Corporation, by
one or more Subsidiaries of the Corpo ration or by the Corporation and one or
more Subsidiaries of the Corporation.
For the purpose of these Articles the shares of any class of the
Corporation shall be deemed to rank as follows:
(a) senior to the Class B Convertible Shares, either as to
dividends or as to rights in liquidation, if the holders of such shares shall be
entitled to the receipt of dividends or of amounts distributable upon the
liquidation, dissolution or winding up of the affairs of the Corporation, as the
case may be, in preference or priority to the holders of Class B Convertible
Shares;
(b) on a parity with the Class B Convertible Shares, either as
to dividends or as to rights in liquidation, whether or not the dividend rates,
dividend payment dates, or redemption or liquidation prices per share thereof be
different from those of the Class B Convertible Shares, if the holders of such
shares shall be entitled to the receipt of dividends or of amounts distributable
upon the liquidation, dissolution or winding up of the affairs of the
Corporation, as the case may be, in proportion to their respective dividend
rates or liquidation prices, without preference or priority of one over the
other as between the holders of such shares; and
(c) junior to the Class B Convertible Shares, either as to
dividends or as to rights in liquidation, if such shares shall be Common Shares
or if the holders of the Class B Convertible Shares shall be entitled to the
receipt of dividends
-14-
<PAGE>
or of amounts distributable upon the liquidation, dissolution or winding up of
the affairs of the Corporation, as the case may be, in preference or priority to
the holders of such shares.
-15-
McGUIRE WOODS
BATTLE & BOOTHE LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219-4030
Telephone/TDD (804) 775-1000 Fax (804) 775-1061
November 13, 1996
Board of Directors
Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Dear Sirs:
We have acted as counsel to Apple Residential Income Trust, Inc. (the
"Company"), a Virginia corporation, in connection with the preparation of the
registration statement on Form S-11 to which this opinion is an exhibit (the
"Registration Statement"), which is being filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), for the
registration under the Act of 25,166,666.67 Common Shares of the Company. Terms
not otherwise defined herein shall have the meanings assigned to them in the
Registration Statement.
We have reviewed originals or copies of (i) the Articles of
Incorporation, Bylaws and other corporate documents of the Company, (ii) certain
resolutions of the Board of Directors of the Company, and (iii) the Registration
Statement and the prospectus included therein (the "Prospectus"). In addition,
we have reviewed such other documents and have made such legal and factual
inquiries as we have deemed necessary or advisable for purposes of rendering the
opinions set forth below.
Based upon and subject to the foregoing we are of the opinion that:
1. The Company is duly organized and validly existing under the laws of
the Commonwealth of Virginia; and
2. The Common Shares registered under the Registration Statement have
been duly authorized and, when issued and paid for as described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the reference to our firm under the captions
"Legal Opinions," "Federal Income Tax Consequences" and "Risk Factors -
Federal Income Tax Risks" in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement. In giving this
consent, we do not admit
<PAGE>
Board of Directors
November 13, 1996
- ----------------
Page 2
that we are in the category of persons whose consent is required by Section 7 of
the Act, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe, L.L.P.
EXHIBIT 8
McGUIRE WOODS
BATTLE & BOOTHE LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219-4030
November 13, 1996
Board of Directors
Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Dear Sirs:
We have acted as counsel to Apple Residential Income Trust, Inc. (the
"Company"), a Virginia corporation, in connection with the preparation of the
registration statement on Form S-11 to which this opinion is attached as an
exhibit (the "Registration Statement"). The Company is filing the Registration
Statement (File No. 333-10635) with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Act"), to register under the Act
25,166,666.67 Common Shares of the Company. Terms not otherwise defined herein
shall have the meanings assigned to them in the Registration Statement.
We have reviewed originals or copies of (i) the Articles of
Incorporation, Bylaws and other corporate documents of the Company, (ii) certain
resolutions of the Board of Directors of the Company, (iii) the Registration
Statement and the prospectus included therein (the "Prospectus"), and (iv) the
form of Advisory Agreement between the Company and Apple Residential Advisors,
Inc., a Virginia corporation (the "Advisor"), included in the Registration
Statement as an exhibit. In addition, we have reviewed such other documents and
have made such legal and factual inquiries as we have deemed necessary or
advisable for purposes of rendering the opinions set forth below.
We understand and assume that the Company will duly elect to be treated
as a real estate investment trust ("REIT") for federal income tax purposes
commencing with its taxable year ended December 31, 1996. The Company's initial
and continuing qualification as a REIT depends upon the satisfaction of various
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
The satisfaction of those requirements generally will be within the control of
the Company's Board of Directors and the Advisor, which has been engaged to
conduct the affairs of the Company under the supervision of the Board of
Directors. The Advisor and appropriate officers of the Company have made the
<PAGE>
Board of Directors
November 13, 1996
Page 2
following representations to us with respect to the operation of the Company:
1. The Company will operate in compliance with the Articles of
Incorporation and the Bylaws;
2. The Company will not operate so that it becomes either (i) a
financial institution referred to in Section 582(c)(5) of the Code, or (ii) an
insurance company to which subchapter L of the Code applies;
3. The Company will have at least 100 Shareholders for at least 335
days of each full taxable year, or proportionate part of any shorter taxable
year, after its first taxable year and will not be closely held as defined in
Section 856(h) of the Code;
4. The Company will use a calendar year for federal income tax
purposes;
5. The Company will elect to be treated as a REIT under the Code, and
will not elect to be treated as an S Corporation, a real estate mortgage
investment conduit, a regulated investment company, or any entity other than a
REIT for federal income tax purposes;
6. The Company will not revoke its election to be treated as a REIT and
will satisfy all relevant filing and other administrative requirements
established by the Internal Revenue Service that must be met to elect and to
maintain REIT status;
7. The Company will not have, as of the close of any taxable year, any
earnings and profits accumulated in any year during which the Company was not
treated as a REIT under the Code;
8. The Company will conduct its operations as described in the
Registration Statement (including the Prospectus), will operate in a manner so
as to qualify for taxation as a REIT under the Code, and intends to continue to
operate in such a manner;
9. The Company will invest in assets that, when acquired by the
Company, will cause the Company to satisfy (i) the asset test described in the
Prospectus, and (ii) the sources of income tests described in the Prospectus;
10. The Company will not hold any assets for sale to customers in the
ordinary course of a trade or business and will attempt to comply with the terms
of safe-harbor provisions in the
<PAGE>
Board of Directors
November 13, 1996
Page 3
Code prescribing when asset sales by a REIT will not be characterized as
prohibited transactions;
11. The Company expects that substantially all of the operating gross
income from the properties of the Company will be considered "rents from real
property" within the meaning of Section 856(d) of the Code;
12. The Company will comply with the distribution requirements of the
Code applicable to REITs;
13. The Company will comply for each taxable year with the Treasury
regulations prescribed for the purpose of ascertaining the actual ownership of
outstanding Shares of the Company; and
14. The Company anticipates that it will be a "domestically controlled
REIT," within the meaning of Section 897(h) of the Code.
Based on the foregoing documents, representations, and assumptions
being, and continuing to be, accurate, we are of the opinion that:
1. The Company will qualify as a REIT;
2. Provided that a Shareholder which is an Exempt Organization does not
incur any "acquisition indebtedness" as defined in Section 514(c) of the Code in
connection with its acquisition of Shares, dividends paid by the Company to such
Shareholder will not constitute unrelated business taxable income under Section
512 of the Code even if the Company owns "debt-financed property" as that term
is defined in Section 514(b) of the Code; and
3. The statements and legal conclusions contained in the Registration
Statement under the captions "Risk Factors--Federal Income Tax Risks" and
"Federal Income Tax Consequences" describe the material federal income tax
aspects of the offering made by the Registration Statement applicable to the
Company and the Shareholders, are correct in all material respects, and the
discussion thereunder does not omit any material provision with respect to the
matters covered.
With respect to our opinion contained in paragraph 1 above, you should
note that qualification of the Company as a REIT will depend, in part, upon the
Company's ability, through its actual operations, to meet the qualification
tests imposed by Section 856(c)(2), (3), (4) and (5) of the Code.
<PAGE>
Board of Directors
November 13, 1996
Page 4
The foregoing opinions are based solely on the provisions of the Code,
the Treasury regulations promulgated thereunder and the judicial and
administrative rulings, pronouncements and decisions now in effect, all of which
are subject to change, which change may be retroactively applied, or possible
differing interpretations that may affect the conclusions stated herein. To the
extent this opinion relies upon recent tax legislation, and recently promulgated
Treasury regulations, no assurance can be given as to the interpretations of
such recent legislation that will be reflected in applicable Internal Revenue
Service rulings and future Treasury regulations, which could be applied
retroactively. Further, this opinion does not purport to deal with any aspects
of state law that may affect particular investors nor with certain types of
investors subject to special treatment under the federal income tax laws.
We hereby consent to the reference to our firm under the captions
"Federal Income Tax Consequences," "Risk Factors Federal Income Tax
Consequences" and "Legal Opinions" in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe, L.L.P.
ADVISORY AGREEMENT
between
APPLE RESIDENTIAL INCOME TRUST, INC.
and
APPLE RESIDENTIAL ADVISORS, INC.
<PAGE>
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT, dated as of November 1, 1996, is between
APPLE RESIDENTIAL INCOME TRUST, INC., a Virginia corporation (the "Company"),
and APPLE RESIDENTIAL ADVISORS, INC., a Virginia corporation (the "Advisor").
RECITALS
A. The purpose of the Company is to invest primarily in existing
residential apartment communities in Texas and the southwestern region of the
United States and, to a lesser extent, in certain other permitted investments
described in the Prospectus (as hereinafter defined). The Company intends to
qualify as a real estate investment trust pursuant to Sections 856 through 860
of the Internal Revenue Code of 1986, as amended.
B. The Company desires to engage the Advisor to provide information,
advice, assistance and facilities to the Company and to have the Advisor
undertake the duties and responsibilities hereinafter set forth, all subject to
the supervision of the Company's Board of Directors, on the terms and conditions
set forth herein. In consideration therefor, the Company desires to pay the
Advisor certain fees as herein set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the meanings set forth below.
(a) "Affiliate" means (i) any Person directly or indirectly
controlling, controlled by or under common control with another Person,
(ii) any Person owning or controlling 10% or more of the outstanding
voting securities or beneficial interests of such other Person, (iii)
any officer, director, trustee or general partner of such Person and
(iv) if such other Person is an officer, director, trustee or partner
of another entity, then the entity for which that Person acts in any
such capacity. "Affiliated" means being an Affiliate of a specified
Person.
(b) "Articles of Incorporation" means the Company's Articles
of Incorporation filed with the Virginia State Corporation Commission,
including all amendments, restatements or modifications thereof.
(c) "Asset Management Fee" means the fee payable to the
Advisor for its services hereunder. Such fee will be paid pursuant and
subject to Section 11 of this Agreement.
1
<PAGE>
(d) "Average Invested Assets" for any period means the average
of the aggregate book value of the assets of the Company invested,
directly or indirectly, in equity interests in and loans secured by
real estate, before reserves for depreciation or bad debts or other
similar non-cash reserves, computed by taking the average of such
values at the end of each month during such period.
(e) "Board of Directors" means the Company's Board of
Directors as of any particular time.
(f) "Bylaws" means the Company's Bylaws, including all
amendments, restatements or modifications thereof.
(g) "Calendar Year" means the year ended December 31st and any
portion thereof treated by the Internal Revenue Service as a reporting
period for the Company.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including successor statutes thereto.
(i) "Directors" means, as of any particular time, the
directors of the Company holding office at such time.
(j) "Funds from Operation" means net income (computed in
accordance with generally accepted accounting principles) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real property, and after adjustments for significant
non-recurring items and unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operation on the same basis.
(k) "Independent Director" means a Director of the Company who
is not Affiliated, directly or indirectly, with the Advisor, whether by
ownership of, ownership interest in, employment by, any material
business or professional relationship with, or serving as an officer or
director of, the Advisor, or an Affiliated business entity of the
Advisor (other than as an Independent Director of up to three other
real estate investment trusts advised by the Advisor or an Affiliate of
the Advisor). An Independent Director may perform no other services for
the Company, except as a Director. Notwithstanding anything to the
contrary herein, any member of a law firm whose only material business
or professional relationship with the Company, the Advisor and their
Affiliates is as legal counsel to any of such entities shall constitute
an Independent Director (unless such person serves as a director for
more than three real estate investment trusts organized by the Advisor
and its Affiliates). An "indirect" affiliation shall be deemed to
2
<PAGE>
refer to circumstances in which a member of the "immediate family" of a
Director is Affiliated with the Advisor, and a person's "immediate
family" shall mean such person's spouse, parents, children, siblings,
mother and father-in-law, sons and daughters-in-law and brothers and
sisters-in-law.
(l) "Net Income" for any period means the total revenues of
the Company for such period, less expenses applicable to such period
other than additions to reserves for depreciation or bad debts or other
similar non-cash reserves. "Net Income," for purposes of calculating
Operating Expenses in Section 15 of this Agreement, does not include
the gain from the sale of the Company's assets.
(m) "Offering" means the public offering of the Company's
Common Shares.
(n) "Operating Expenses" means all operating, general and
administrative expenses of the Company as determined under generally
accepted accounting principles (including regular compensation payable
to the Advisor), excluding, however, the following:
(i) expenses of raising capital;
(ii) interest payments;
(iii) taxes;
(iv) non-cash expenditures, such as depreciation,
amortization and bad debt reserves;
(v) incentive fees paid to the Advisor, if any;
and
(vi) costs related directly to asset acquisition,
operation and disposition.
(o) "Organizational and Offering Expenses" means all expenses
incurred in connection with the formation and registration of the
Company and in qualifying and marketing the Shares under applicable
federal and state law, and any other expenses actually incurred and
directly related to the qualification, registration, offer and sale of
the Shares, including such expenses as (i) all marketing expenses and
payments made to broker-dealers as compensation or reimbursement for
all costs of reviewing the Offering, including due diligence
investigations and fees and expenses of their attorneys, accountants
and other experts; (ii) registration fees, filing fees and taxes; (iii)
the costs of printing, amending, supplementing and distributing the
registration statement and Prospectus; (iv) the costs of
3
<PAGE>
obtaining regulatory clearances of, and printing and distributing,
sales materials used in connection with the offer and sale of the
Shares; (v) the costs related to investor and broker-dealer sales
meetings concerning the Offering; and (vi) accounting and legal fees
incurred in connection with any of the foregoing.
(p) "Person" includes an individual, corporation, partnership,
joint venture, association, company, trust, bank or other entity, or
government and any agency and political subdivision of a government.
(q) "Property" or "Properties" means partial or entire equity
interests, including equity participation interests such as general
partnership interests and joint venture interests, owned by the Company
in real property as described in the Prospectus.
(r) "Prospectus" has the meaning given to that term by Section
2(10) of the Securities Act of 1933, as amended, and as used herein,
the term means the Prospectus of the Company pursuant to which the
Shares are offered to the public.
(s) "Return Ratio" means, for any period, the ratio of Funds
from Operation to Total Contributions.
(t) "Shares" or "Common Shares" means the Common Shares of the
Company, no par value.
(u) "Shareholders" means the holders of record of the
Company's Common Shares.
(v) "Total Contributions" means the gross offering proceeds
which have been received by the Company from time to time from the sale
or sales of the Shares. Total Contributions shall be calculated to
reflect the average of the daily amounts during the period in question
of the gross offering proceeds which have been received by the Company
from time to time from the sales of Shares, to extent such Shares are
issued and such sales have actually been closed.
2. Duties of the Advisor. Subject to the terms of the Articles of
Incorporation, the Bylaws, and the supervision of the Board of Directors, the
Advisor, at its own cost and expense, unless otherwise set forth herein, on
behalf of the Company, shall:
(a) serve as the Company's investment advisor and consultant
in connection with policy and investment decisions to be made by the
Board of Directors, furnish reports to the Board of Directors, and
provide research, economic and statistical data in connection with the
4
<PAGE>
acquisition, financing, refinancing, holding, leasing and disposition
of Properties and other investments of the Company;
(b) administer the day-to-day operations of the Company and
perform or supervise the various administrative functions reasonably
necessary for the management of the Company;
(c) investigate, select and, on behalf of the Company, engage
and conduct business with (including, but not limited to, entering into
contracts in the name of the Advisor or the Company) consultants,
accountants, correspondents, lenders, servicers, technical advisors,
attorneys, brokers, underwriters, corporate fiduciaries, escrow agents,
depositaries, custodians, agents for collection, insurers, insurance
agents, banks, builders, developers, property owners, mortgagors, and
other mortgage and investment participants, any and all agents for any
of the foregoing, including Affiliates of the Advisor, and Persons
acting in any other capacity deemed by the Board of Directors necessary
or desirable for the performance of any of the foregoing services;
(d) act as attorney-in-fact or agent in acquiring, financing,
refinancing, leasing and disposing of Properties and other investments,
in disbursing and collecting funds of the Company, in paying the debts
and fulfilling the obligations of the Company and in handling,
prosecuting and settling any claims of the Company, including the
foreclosure or other enforcement of any mortgage or other lien securing
Properties or other investments, and exercise its own discretion in
doing so; provided that any fees and costs payable to independent
Persons incurred by the Advisor in connection with the foregoing shall
be the responsibility of the Company;
(e) negotiate on behalf of the Company with banks or other
lenders for loans to be made to the Company, and negotiate on behalf of
the Company with investment banking firms and broker-dealers or
negotiate private sales of the securities of the Company or obtain
loans for the Company, but in no event in such a way so that the
Advisor shall be acting as broker-dealer or underwriter; and provided,
further, that any fees and costs payable to third parties incurred by
the Advisor in connection with the foregoing shall be the
responsibility of the Company;
(f) invest or reinvest any money of the Company, as directed
by the Board of Directors or subject to such discretionary powers as
the Board of Directors may from time to time delegate;
5
<PAGE>
(g) if requested by the Company, provide appraisal reports on
any real property that is, or is proposed to be, acquired by the
Company for investment;
(h) at any time reasonably requested by the Board of Directors
(but not more than monthly) make reports of its performance of services
to the Company;
(i) communicate on behalf of the Company with the Shareholders
of the Company as required to satisfy the continuous reporting and
other requirements of any governmental bodies or agencies to the
Shareholders and third parties and to maintain effective relations with
the Shareholders;
(j) counsel the Company in connection with policy decisions to
be made by the Board of Directors;
(k) provide the executive and administrative personnel, office
space and services required in rendering the foregoing services to the
Company; and
(l) perform such other services as may be required from time
to time for management and other activities relating to the assets of
the Company as the Advisor shall deem appropriate under the particular
circumstances.
3. Commitments. In order to meet the investment requirements of the
Company, but only as determined by the Board of Directors, or any authorized
committee thereof, from time to time, the Advisor agrees at the direction of the
Board of Directors or any such committee to issue on behalf of the Company
commitments on such terms as are established by the Board of Directors or any
such committee, for the acquiring of Properties or other assets.
4. Duties of the Board of Directors. In order for the Advisor to
fulfill its duties, the Board of Directors shall, to the extent it deems proper,
provide the Advisor with full information concerning the Company, its
capitalization and investment policies and the intentions of the Board of
Directors with respect to future investments. The Company shall furnish the
Advisor with a copy of all audited financial statements, a signed copy of each
report prepared by independent accountants, and such other information with
regard to its affairs as the Advisor may from time to time reasonably request.
5. Advice. In addition to the services described in Section 2 above,
the Advisor shall consult with the Board of Directors and the officers of the
Company and shall furnish them with advice and recommendations with respect to
the acquiring of Properties or commitments therefor, or other investments of, or
6
<PAGE>
investments considered by, the Company, and shall furnish advice and
recommendations with respect to other aspects of the business and affairs of the
Company. In order to facilitate the investment of the funds of the Company and
enable it to avail itself of investment opportunities as they arise, the Advisor
may from time to time be granted, but is not hereby granted, the power and
authority to make and dispose of investments and to make and terminate
commitments for investments, on behalf of and in the name of the Company,
without further or express authority from the Board of Directors; provided,
however that the Board of Directors shall have the power to revoke, suspend,
modify or limit such power and authority at any time or from time to time, but
not retroactively. Unless otherwise notified by the Board of Directors, a
representative of the Advisor shall attend all regular and special meetings of
the Board of Directors, and the Board of Directors shall notify the Advisor of
such meetings.
The Advisor shall first present to the Company all investment
opportunities which are suitable for the Company, because such investment
opportunities are within the investment objectives and policies of the Company,
before the Advisor offers such opportunities to any other Person or takes for
its own account. It is expressly understood, however, that the primary
investments of the Company are expected to be existing residential apartment
communities in Texas and the southwestern region of the United States.
6. Bank Accounts. The Advisor may establish and maintain one or more
bank accounts in the name of the Company and may collect and deposit into any
such account or accounts, and disburse from any such account or accounts, any
money on behalf of the Company, under such terms and conditions as the Board of
Directors may approve, provided that all such accounts shall be maintained in
such fashion as to make clear that the funds therein are the property of the
Company and not of the Advisor. The Advisor shall from time to time render
appropriate accountings of such collections and payments to the Board of
Directors and to the auditors of the Company.
7. Investment Undertakings. The Advisor shall use its best efforts to
assure that (i) any mortgage securing a Property of the Company shall be and
remain a valid lien upon the mortgaged property according to its terms; (ii) the
title to any Property is insured by appropriate policies of title insurance;
(iii) any Property is duly insured against loss or damage by fire, with extended
coverage, and against such other insurable hazards and risks as is customary and
appropriate in the circumstances; and (iv) the policies from time to time
specified by the Board of Directors with regard to the protection of the
Company's investments are carried out. Any and all fees and costs incurred by
the Advisor in performing such functions,
7
<PAGE>
whether payable to its Affiliates or independent Persons shall be borne by the
Company.
8. Records; Confidentiality. The Advisor shall maintain appropriate
records of all its activities hereunder and make such records available for
inspection by the Board of Directors and by counsel, auditors and authorized
agents of the Company, at any time or from time to time during normal business
hours. The Advisor shall at all reasonable times have access to the books and
records of the Company. The Advisor shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated Persons except with the
prior consent of the Board.
9. Limitation of Activities. Anything else in this Agreement to the
contrary notwithstanding:
(a) The Advisor shall refrain from taking any action which, in
its sole judgment made in good faith, would adversely affect the status
of the Company as a real estate investment trust as defined in the
Code, subject the Company to regulation under the Investment Company
Act of 1940, violate any law, rule or regulation or would otherwise not
be permitted by the Articles of Incorporation or Bylaws of the Company,
except if such action shall be ordered by the Board of Directors, in
which case the Advisor shall notify promptly the Board of Directors of
the Advisor's judgment of the potential impact of such action and shall
refrain from taking such action until it receives further clarification
or instructions from the Board of Directors. Notwithstanding the
foregoing, the Advisor and its stockholders, directors, officers and
employees shall not be liable to the Company, or to the Company's Board
of Directors or Shareholders for any act or omission by the Advisor, or
its stockholders, directors, officers or employees except as provided
in Section 16 of this Agreement.
(b) In performing its duties and obligations under this
Agreement, the Advisor shall abide by and comply with the provisions
and policies set forth in the Articles of Incorporation and Bylaws.
10. Relationship with Board of Directors. Employees of the Advisor may
serve as members of the Board of Directors or any committee thereof and as
officers of the Company, except that no employee of the Advisor who also is a
Director or officer of the Company shall receive any compensation from the
Company for serving as a Director or officer other than for reasonable
reimbursement for travel and related expenses incurred in attending meetings of
the Board of Directors or any committee thereof.
8
<PAGE>
11. Fees.
(a) Asset Management Fee. The Company shall pay to the Advisor
quarterly, for services rendered under this Agreement, an Asset
Management Fee calculated as follows: The Asset Management Fee for any
calendar quarter shall be a applicable percentage of the Total
Contributions. The applicable percentage used to calculate such Asset
Management Fee shall be based upon the Return Ratio, calculated on a
per annum basis, for the preceding calendar quarter. The Asset
Management Fee shall be as follows with respect to any such quarter:
0.1% of Total Contributions if the Return Ratio for the preceding
calendar quarter is 6.0% per annum or less; 0.15% of Total
Contributions if the Return Ratio for the preceding calendar quarter is
more than 6.0% per annum but not more than 8.0% per annum; and 0.25% of
Total Contributions if the Return Ratio for the preceding calendar is
above 8.0% per annum. If the Asset Management Fee is payable with
respect to any partial calendar quarter, it shall be prorated based on
the number of days elapsed during any such partial calendar quarter.
(b) Payment of Asset Management Fee. The Advisor shall compute
the compensation payable to it under Section 11(a) of this Agreement
within 45 days of the end of each calendar quarter. A copy of the
computations made by the Advisor to calculate its compensation shall
thereafter promptly be delivered to the Board of Directors and, upon
such delivery, payment of the compensation earned under Section 11(a)
of this Agreement shown therein shall be due and payable within 60 days
after the end of such calendar quarter.
12. Expenses.
(a) The Company shall pay directly or reimburse the Advisor
for the following expenses in addition to the compensation provided for
in this Agreement:
(i) all costs of personnel employed by the Company
and involved in the business of the Company;
(ii) expenses incurred in connection with the initial
investment of the funds of the Company, including all direct
expenses incurred in connection with investigation and
acquisition of Properties;
(iii) interest and other costs for borrowed money,
including discounts, points and other similar fees;
9
<PAGE>
(iv) taxes and assessments on income or property and
taxes as an expense of doing business;
(v) fees and commissions, including finder's fees and
brokerage commissions with respect to the acquisition and
disposition of assets of the Company, whether payable to an
Affiliate of the Advisor or an unrelated Person, including,
without limitation, costs of foreclosure, maintenance, repair
and improvement of Property;
(vi) costs associated with insurance required in
connection with the business of the Company or by the Board of
Directors;
(vii) expenses of managing and operating real
property owned by the Company, whether payable to an Affiliate
of the Advisor or an unrelated Person;
(viii) fees and expenses of legal counsel for the
Company;
(ix) fees and expenses of independent auditors and
accountants for the Company;
(x) all expenses in connection with payments to the
Board of Directors or any committee thereof and meetings of
the Board of Directors or any committee thereof and
Shareholders;
(xi) expenses associated with listing the Shares on a
national stock exchange or quoting the Shares on the NASDAQ
National Market System if requested by the Board of Directors,
or with the issuance and distribution of any additional Shares
of the Company at any time, such as taxes, legal and
accounting fees, listing and registration fees, and other
expenses;
(xii) dividend and dividend distributions;
(xiii) expenses of organizing, revising, amending,
converting, modifying or terminating the Company, the Articles
of Incorporation or the Bylaws; and
(xiv) expenses of maintaining communications with
Shareholders, including the cost of preparation, printing, and
mailing annual reports and other Shareholder reports, proxy
statements and other reports required by governmental
entities.
10
<PAGE>
Expenses incurred by the Advisor on behalf of the Company and payable pursuant
to this Section, shall be reimbursed quarterly to the Advisor within 60 days
after the end of each quarter. The Advisor shall prepare a statement documenting
the expenses of the Company during each quarter, and shall deliver such
statement to the Company within 45 days after the end of each quarter.
(b) Except as otherwise provided herein, the Advisor shall pay
all expenses of performing its obligations under this Agreement,
including, without limitation, the following expenses:
(i) employment expenses of the Advisor, including,
but not limited to, salaries, wages, payroll taxes, costs of
employee benefit plans, and temporary help expenses, except to
the extent that such expenses are otherwise reimbursable
pursuant to Section 12(a) of this Agreement or the Articles of
Incorporation or Bylaws;
(ii) audit fees and expenses of the Advisor;
(iii) legal fees and other expenses of professional
services to the Advisor;
(iv) rent, telephone, utilities and other office
expenses of the Advisor;
(v) insurance of the Advisor; and
(vi) all other administrative expenses of the
Advisor.
13. Limitation on the Advisor's Investment Advice. Notwithstanding
anything to the contrary in this Agreement, the Advisor shall not be required
to, and shall not, advise the Company as to any investments in securities,
except when, and to the extent that, the Advisor and the Company specifically
agree (i) that such advice is desirable, and (ii) that such advice can be
rendered consistently with applicable legal requirements, including any
applicable provisions of relevant "investment advisor" laws.
14. Other Services. Should the Board of Directors request that the
Advisor or any employee thereof render material services for the Company other
than set forth in Section 2, such services shall be separately compensated and
shall not be deemed to be services pursuant to the terms of this Agreement.
15. Limitation on Operating Expenses. Within 120 days from the end of
any Calendar Year, the Advisor shall refund to the
11
<PAGE>
Company the amount, if any, by which the Operating Expenses of the Company,
excluding extraordinary nonrecurring items and those items referred to in
Section 14, during such Calendar Year exceeded the greater of either of the
following limitations:
(a) 2% of the Average Invested Assets of the Company for such
Calendar Year; or
(b) 25% of the Company's Net Income for such Calendar Year,
determined in accordance with generally accepted accounting principles.
The Independent Directors of the Company may determine that, because of unusual
and nonrecurring factors which they deem sufficient, a higher level of Operating
Expenses is justified for such Calendar Year. The Advisor shall be promptly
reimbursed for any payments made under this Section 15 if, in any succeeding
Calendar Year, the Operating Expenses of the Company are less than the permitted
level of Operating Expenses.
16. Advisory Responsibility. The Advisor assumes no responsibility
under this Agreement other than to render the services called for hereunder in
good faith and with integrity, and shall not be responsible for any action
of the Company in following or declining to follow any advice or recommendation
of the Advisor. Neither the Advisor, its shareholders, directors, officers nor
employees nor any of its Affiliates, nor any Person contracting with the Advisor
for services and its shareholders, directors, officers and employees nor any of
its Affiliates shall be liable to the Company or its Shareholders, except by
reason of acts constituting gross negligence or willful misconduct. The Advisor
hereby agrees to look solely to the assets of the Company for satisfaction of
all claims against the Company, and in no event shall any Shareholder, Director,
officer or agent of the Company have any personal liability for the obligation
of the Company under this Agreement.
17. Incorporation of the Articles of Incorporation and Bylaws. To the
extent the Articles of Incorporation and Bylaws impose obligations or
restrictions on the Advisor or grant the Advisor certain rights which are not
set forth in this Agreement, the Advisor shall abide by such obligations or
restrictions and such rights shall inure to the benefit of the Advisor with the
same force and effect as if they were set forth herein.
18. Fiduciary Duty and Indemnification. Subject to Section 16, the
Advisor shall have a fiduciary relationship to the Shareholders. However,
the Company shall indemnify the Advisor, to the fullest extent permitted by law,
for its liabilities and losses arising from the operations of the Company
(including its costs and expenses, including legal fees and expenses, incurred
12
<PAGE>
in connection with investigating and defending itself against such liabilities
and losses) if the following conditions are met:
(a) the Directors have determined, in good faith, that the
course of conduct which caused the liability or loss was undertaken in
good faith within what the Advisor reasonably believed to be the scope
of its employment or authority and for a purpose which it reasonably
believed to be in the best interests of the Company;
(b) the Directors have determined, in good faith, that the
liability or loss was not the result of willful misconduct, bad faith,
reckless disregard of duties or violation of the criminal law on the
part of the Advisor; and
(c) the indemnified amount is recoverable only out of the
assets of the Company and not from the Shareholders.
Notwithstanding the foregoing, indemnification will not be allowed for
any liability imposed by judgment, and costs associated therewith, including
attorneys' fees, arising from or out of a violation of state or federal
securities laws associated with the Offering of the Common Shares unless (i)
there has been a successful adjudication on the merits of each count involving
alleged securities laws violations as to the particular indemnitee, or (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnitee.
19. Transactions between the Advisor and the Company. All transactions
between the Advisor and the Company shall require the approval by a majority of
the Directors (including a majority of the Independent Directors) and shall
otherwise comply with the conflict of interest provisions of the Bylaws.
20. Relationship of Advisor and Company. The Company and the Advisor
are not partners or joint venturers with each other, and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
21. Other Activities. Except as otherwise expressly provided herein,
nothing contained herein shall limit the right of the Advisor or any of its
officers, directors or employees, whether or not a Director, officer or employee
of the Company, to engage in other business activities or to render services of
any kind to any other Person even if such other business activities or services
may be in direct competition with the Company.
22. Term; Termination of Agreement.
(a) This Agreement shall have an initial term ending one year
from the date of this Agreement, and thereafter
13
<PAGE>
shall be renewed from year to year upon the consent of the Directors.
(b) Prior to any renewal of this Agreement, the Independent
Directors shall review (i) the performance of the Advisor hereunder to
determine its compliance with the provisions of this Agreement, and
(ii) the fees payable to the Advisor hereunder to determine whether
they are reasonable in relation to the nature and quality of services
performed. The findings of the Independent Directors shall be recorded
in the minutes of the Directors.
(c) This Agreement shall be terminable (i) without cause by
the Advisor or (ii) without cause by a majority of the Independent
Directors, in each case upon 60 days' prior written notice to the
non-terminating party.
(d) In the event of the termination of the Advisor, the
Advisor will cooperate with the Company and take all reasonable steps
requested to assist the Directors in making an orderly transition of
the advisory function to another Person.
(e) At the sole option of a majority of the Independent
Directors, this Agreement may be terminated for cause by written notice
of termination from the Company to the Advisor if any of the following
events occur:
(i) if the Advisor shall violate or default in the
performance of any material provision of this Agreement and,
after written notice of such violation or default, shall not
cure such violation or default within 30 days;
(ii) if the Advisor shall be adjudged bankrupt or
insolvent by a court of competent jurisdiction, or an order
shall be made by a court of competent jurisdiction for the
appointment of a receiver, liquidator or trustee of the
Advisor, or of all or substantially all of its property by
reason of the foregoing, or approving any petition filed
against the Advisor for reorganization, and such adjudication
or order shall remain in force or unstayed for a period of 30
days; or
(iii) if the Advisor shall institute proceedings for
voluntary bankruptcy or shall file a petition seeking
reorganization under the federal bankruptcy laws, or for
relief under any law for relief of debtors, or shall consent
to the appointment of a
14
<PAGE>
receiver for itself or for all or substantially all of its
property, or shall make a general assignment for the benefit
of its creditors, or shall admit in writing its inability to
pay its debts, generally, as they become due.
(f) Any notice of termination under this Section shall (except
to the extent this Section requires a different notice period) be
effective on the date specified in such notice, which may be the day on
which such notice is given or any date thereafter. The Advisor agrees
that if any of the events specified in subparagraph (ii) or (iii) of
Section 22(e) shall occur, it shall give written notice thereof to the
Board of Directors within 5 days after the occurrence of such event.
23. Action Upon Termination.
(a) From and after the effective date of termination of this
Agreement pursuant to Section 22 hereof, the Advisor shall not be
entitled to compensation for further services rendered hereunder, but
shall be entitled to receive from the Company within 30 days after the
effective date of such termination, an amount in cash equal to all
earned but unpaid Asset Management Fees payable to the Advisor prior to
the termination of this Agreement.
(b) Within a reasonable period of time, but in no event later
than 30 days after the termination of this Agreement, the Advisor
shall:
(i) pay over to the Company all money collected and
held for the account of the Company pursuant to this
Agreement, after deducting any accrued compensation and
reimbursement for its expenses to which it is then entitled;
(ii) deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and
a statement of all money held by it, covering the period
following the date of the last accounting furnished to the
Board of Directors; and
(iii) deliver to the Board of Directors all property and
documents of the Company then in the custody of the Advisor.
The Advisor shall be entitled to receive, promptly after such
30-day period, reimbursement for any additional
15
<PAGE>
expenses to which it is entitled (and for which it has not been
reimbursed under clause (i) of Section 23(b)).
24. Assignment Prohibition. This Agreement may not be assigned by the
Advisor without the approval of a majority of the Board of Directors; provided,
however, that such approval shall not be required in the case of an assignment
to a corporation, association, trust or organization which may take over the
assets and carry on the affairs of the Advisor, provided that at the time of
such assignment, such successor organization shall be owned substantially by the
Advisor or its Affiliates and that an officer of the Advisor shall deliver to
the Board of Directors a statement in writing indicating the ownership structure
of the successor organization. Such an assignment shall bind the assignees
hereunder in the same manner as the Advisor is bound hereunder. This Agreement
shall not be assigned by the Company without the consent of the Advisor, except
in the case of an assignment by the Company to a corporation or other
organization which is a successor to the Company, in which case such successor
organization shall be bound hereunder and by the terms of said assignment in the
same manner as the Company is bound hereunder.
25. Bylaws. The execution and performance of this Agreement hereby is
expressly made subject to Article VIII of the Bylaws of the Company.
26. Notices. Any notice, report or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report or other communication is accepted by the party to
whom it is given, and shall be given by being delivered to the addresses set
forth herein:
To the Board of
Directors or
to the Company: Apple Residential Income Trust, Inc.
306 E. Main Street
Richmond, Virginia 23219
Attn: Board of Directors
To the Advisor: Apple Residential Advisors, Inc.
306 E. Main Street
Richmond, Virginia 23219
Attn: Glade M. Knight
Either party may at any time give notice in writing to the other party of a
change in its address for the purposes of this Section.
16
<PAGE>
27. Modification. This Agreement shall not be changed, modified,
amended, terminated or discharged, in whole or in part, except by an instrument
in writing signed by both parties hereto, or their respective successors or
assigns.
28. Shareholder Liability. No Shareholder of the Company shall be
personally liable for any of the obligations of the Company under this
Agreement.
29. Severability. The provisions of this Agreement are independent of
and severable from each other, and no provision shall be affected or rendered
invalid or unenforceable by virtue of the fact that for any reason any other or
others of them may be invalid or unenforceable in whole or in part.
30. Binding. This Agreement shall bind any successors or permitted
assigns of the parties hereto as herein provided.
31. Construction. The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of the Commonwealth of Virginia.
32. Entire Agreement. This Agreement contains the entire agreement and
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof.
33. Indulgences, Not Waivers. Neither the failure nor any delay on the
part of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
34. Gender. Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
17
<PAGE>
35. Titles Not to Affect Interpretation. The titles of sections and
subsections contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
36. Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the date first written above.
APPLE RESIDENTIAL INCOME TRUST, INC.
a Virginia corporation
By: /s/ Glade M. Knight
---------------------------------
Title: President
------------------------------
APPLE RESIDENTIAL ADVISORS, INC.,
a Virginia corporation
By: /s/ Glade M. Knight
---------------------------------
Title: President
------------------------------
18
EXHIBIT 10.3
PROPERTY ACQUISITION/DISPOSITION
AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of
November, 1996, by and between Apple Residential Income Trust, Inc., a
Virginia corporation (hereinafter referred to as "Owner"), and Apple Realty
Group, Inc., a Virginia corporation (hereinafter referred to as "Agent").
W I T N E S S E T H :
WHEREAS, Owner plans to conduct business as a "real estate investment
trust," and, in connection therewith, plans to, from time to time, acquire and
dispose of real property, including particularly residential apartment complexes
(hereinafter referred to individually as a "Property" and collectively as the
"Properties");
WHEREAS, Owner desires to use the services of Agent as a broker in
connection with the acquisition and disposition of the Properties on the terms
set forth in this Agreement; and
WHEREAS, Owner and Agent desire to enter into this Agreement for the
purposes herein contained.
NOW, THEREFORE, in consideration of the promises herein contained, and
for other valuable consideration, receipt of which is hereby acknowledged, the
parties agree as follows:
1. Engagement of Agent as Broker for the Properties. Owner hereby
engages Agent as a broker in connection with the purchase and sale of the
Properties, upon the conditions and for the term and compensation herein set
forth. All or any portion of the services being performed by Agent may be
contracted or subcontracted by Agent to another company, provided that such
company agrees to be bound by the terms of this Agreement.
2. Term of Agreement; Renewal. This Agreement shall be valid for an
initial term of five (5) years. Unless either party by written notice sent to
the other party at least sixty (60) days before the end of any 5-year term
hereof elects not to renew this Agreement, this Agreement shall renew
automatically for successive terms of five (5) years on the same terms as
contained herein.
3. Acceptance of Engagement. Agent hereby accepts its engagement as a
broker for the purchase and sale of the Properties and agrees to perform all
services necessary to effectuate such purchases and sales which are customarily
provided by commercial real estate brokers, and, without limitation, Agent
agrees:
<PAGE>
a. To supervise, on behalf of Owner, the preparation of
contracts of purchase or sale for each Property, on such terms as are specified
by Owner or its duly authorized representatives, and all other documents related
thereto or required to effectuate such purchase or sale;
b. To coordinate the activities of, and act as liaison between
Owner and, independent professionals connected with the purchase or sale of a
Property, including attorneys, appraisers, engineers, inspectors, lenders, if
any, and others;
c. To assist Owner and its authorized representatives in
satisfying any conditions precedent to the purchase or sale of a Property, which
shall include contracting on behalf of Owner with any third parties whose
services are required to close any such purchase or sale;
d. To represent Owner at the closing of the purchase or sale
of a Property, to coordinate the activities of professionals and other third
persons connected with such closing, and to supervise the compliance by Owner
with all requirements and customary actions associated with such purchase or
sale, including, without limitation, the obtaining of property title insurance,
the delivery and recordation of deeds and other instruments of conveyance, and
the delivery and recordation, as required, of any documents evidencing loans
obtained or made by Owner;
e. Generally to act on behalf of Owner in connection with such
purchase or sale as a commercial real estate broker would customarily act with
respect to such transaction, including the provision of such additional services
as would normally be provided by such a person.
4. Indemnification. Owner hereby agrees to indemnify and hold harmless
Agent against and in respect of any loss, cost or expense (including reasonable
investigative expenses and attorneys' fees), judgment, award, amount paid in
settlement, fine, penalty and liability of any and every kind incurred by or
asserted against Agent by reason of or in connection with the engagement of
Agent hereunder, the performance by Agent of the services described herein or
the occurrence or existence of any event or circumstance which results or is
alleged to have resulted in death or injury to any person or destruction of or
damage to any property and any suit, action or proceeding (whether threatened,
initiated or completed) by reason of the foregoing; provided, however, that no
such indemnification of Agent shall be made, and Agent shall indemnify and hold
Owner harmless against, and to the extent of, any loss that a court of competent
jurisdiction shall, by final adjudication, determine to have resulted from
willful misconduct, gross negligence or fraud by or on the part of Agent.
2
<PAGE>
5. Compensation of Agent. Owner shall pay to Agent a real estate
commission in connection with each purchase of a Property in an amount equal to
two percent (2%) of the gross purchase price of the Property (which does not
include amounts budgeted for repairs and improvements), in consideration of
Agent (or any person with whom Agent subcontracts or contracts hereunder)
performing the services provided for in this Agreement in connection with the
purchase of the Property, provided, that if indebtedness is assumed or incurred
in connection with the acquisition, the fee that would have been payable with
respect to the portion of the purchase price represented by such indebtedness
shall not be payable until such time, if ever, that such indebtedness is repaid
with the proceeds of the sale of the Owner's common stock or other equity
financing. In consideration of Agent (or any person with whom Agent subcontracts
or contracts hereunder) performing the services provided for in this Agreement
in connection with the sale of a Property, Owner shall pay to Agent the
following: a real estate commission in connection with the sale of a Property in
an amount equal to two percent (2%) of the gross sales price of the Property,
if, but only if, the sales price of the Property exceeds the sum of (A) the
Company's cost for the Property (consisting of the original purchase price plus
all capitalized costs and expenditures connected with the Property), without any
reduction for depreciation, and (B) ten percent (10%) of such cost. If the sales
price of the Property does not equal such amount, Agent shall be entitled only
to payment by the Company of its "direct costs" incurred in marketing such
property (where "direct costs" refers to a reasonable allocation of all costs,
including salaries of personnel, overhead and utilities), allocable to services
in marketing such property. If the two percent (2%) real estate commission is
payable in connection with sale of a Property, Agent shall not also be paid the
reimbursement of its "direct costs" as described in the preceding sentence.
If the person from whom Owner purchases or to whom Owner sells a Property pays
any fee to Agent, such amount shall decrease the amount of Owner's obligation to
Agent. Furthermore, Agent shall not be entitled to any real estate commission in
connection with a sale of a Property by Owner to Cornerstone Realty Income
Trust, Inc. or any Affiliate or Agent (where "Affiliate" has the meaning
specified in the Prospectus of Owner), but Agent will, in such case, be entitled
to payment by Owner of its direct costs in such regard.
6. Power of Attorney. Owner hereby makes, constitutes and appoints
Agent its true and lawful attorney-in-fact, for it and in its name, place and
stead and for its use and benefit to sign, acknowledge and file all documents
and agreements (other than contracts for purchase or sale of a Property,
promissory notes, mortgages, deeds of trust or other documents or instruments
which would bind Owner to purchase or sell a Property, result or evidence the
incurrence of debt by Owner, or encumber a Property) necessary to perform or
effect the duties and obligations of Agent under the terms of this Agreement.
The foregoing power of attorney is a special power of attorney coupled with an
interest.
3
<PAGE>
It shall terminate when this Agreement terminates as provided herein.
7. Relationship of Parties. The parties agree and acknowledge that
Agent is and shall operate as an independent contractor in performing its duties
under this Agreement, and shall not be deemed an employee of Owner.
8. Entire Agreement. This Agreement represents the entire understanding
between the parties hereto with regard to the transactions described herein and
may only be amended by a written instrument signed by the party against whom
enforcement is sought.
9. Governing Law. This Agreement shall be construed in accordance with
and be governed by the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
OWNER:
APPLE RESIDENTIAL INCOME TRUST, INC.,
a Virginia corporation
By: /s/ Glade M. Knight
----------------------------------
Title: President
-------------------------------
AGENT:
APPLE REALTY GROUP, INC.,
a Virginia corporation
By: /s/ Glade M. Knight
----------------------------------
Title: President
------------------------------
4
Exhibit 10.7
RIGHT OF FIRST REFUSAL AGREEMENT
This Right of First Refusal Agreement is made as of November 1, 1996 by and
between Apple Residential Income Trust, Inc. ("Apple") and Cornerstone Realty
Income Trust, Inc. ("Cornerstone"), and provides:
RECITALS
A. Apple is a Virginia corporation which intends to elect tax treatment as a
"real estate investment trust," and to engage in the business of the
acquisition and ownership of apartment properties in Texas and other areas.
B. Cornerstone is a real estate investment trust engaged in the acquisition,
ownership and management of apartment properties in the mid-Atlantic and
southeastern regions of the United States.
C. Apple Residential Advisors, Inc. ("ARA") and Apple Residential Management
Group, Inc. ("ARM") have agreed to provide to Apple certain company
administration and property management services under contracts between
them and Apple. Cornerstone will own certain stock in ARA and ARM and has
agreed to make certain of its personnel available to assist ARA and ARM in
providing their company administration and property management services to
Apple.
D. Apple and Cornerstone desire to enter into a further agreement under which
Apple will grant to Cornerstone a "right of first refusal" to acquire
certain properties or assets of Apple at such time or times as Apple
proposes to sell or otherwise dispose of such properties or assets, all on
the terms set forth herein.
NOW THEREFORE, in consideration of the matters referred to in the foregoing
Recitals, and other good and valuable consideration, the receipt and sufficiency
of which are acknowledged, the parties agree as follows:
1. Right of First Refusal.
(a) At such time as Apple proposes the sale or other disposition of one or more
properties owned by it or proposes the sale or other disposition by Apple
of substantially all of its assets, stock or business, whether in a single
transaction or in a series of transactions, and whether such transaction is
structured as a sale, exchange, merger, consolidation, lease, share
exchange or otherwise, it shall first offer
1
<PAGE>
Cornerstone the right to acquire such property or properties or to become
the acquiring property in any such proposed transaction before concluding
the proposed sale, disposition or transaction with any third party.
(b) If the third party offers cash for the property, assets, stock or business
of Apple, Cornerstone must offer cash if it wishes to exercise its right of
first refusal. If the third party offers property other than cash,
Cornerstone will be permitted to offer property of a similar character with
the same value. The value of the property offered by the third party and
Cornerstone will be the market value if the property has a readily
ascertainable market value (such as listed stock), and otherwise will be
determined in good faith by agreement of the boards of directors of Apple
and Cornerstone, or if such boards are unable to agree, by the average of
two appraisals undertaken by two qualified independent appraisers, one
selected by each board of directors.
2. Procedures for Exercise.
(a) Apple shall give Cornerstone written notice (the "Transaction Notice") of
any proposed transaction within the scope of this Agreement (a
"Transaction") not later than 30 days before the closing date set for the
proposed Transaction. Such notice shall set forth in reasonable detail the
subject of the proposed Transaction, including without limitation the
property or other assets proposed to be sold or otherwise disposed of, the
consideration for which such property or other assets are proposed to be
sold or disposed of, the identity of the proposed purchaser or acquiring
party, and all other information which has been disclosed or is proposed to
be disclosed by Apple to the third party in the proposed Transaction. By
notice (the "Exercise Notice") delivered to Apple within 15 days after
receipt of the Transaction Notice, Cornerstone may elect to exercise its
right of first refusal by stating in its Exercise Notice to Apple that it
will acquire the property or other assets described in the Transaction
Notice. The Exercise Notice from Cornerstone shall, if the consideration to
be paid by it is other than cash, include a description of the property
proposed to be provided by Cornerstone as the purchase or acquisition
price.
(b) Should Cornerstone fail to elect by notice sent in compliance with this
Agreement to exercise its right of first refusal, then for not more than 60
days following the expiration of the period for exercise of the right of
first refusal, Apple may conclude the proposed sale or other disposition to
the third party on terms not materially different from those set forth in
the Transaction Notice.
2
<PAGE>
After the expiration of such 60-day period, the right of first refusal
provided for in this Agreement shall again apply.
3. Liquidated Damages for Breach.
(a) Should Apple default in any obligation to grant to Cornerstone a right of
first refusal to acquire a property or properties or to become the
acquiring property in any proposed transaction as required under this
Agreement, Apple agrees that it shall be obligated to pay to Cornerstone as
liquidated and agreed-upon damages cash in the amount of 3% of the
aggregate consideration agreed to be paid for the property, assets, stock
or business by any third party in the transaction with respect to which
there is a breach.
(b) Apple agrees and acknowledges that it would be impossible to quantify the
damages that would be suffered by Cornerstone in the event of a breach by
Apple of its obligations to grant to Cornerstone a right of first refusal
hereunder, that the agreed-upon liquidated damages set forth herein are
reasonable and a good faith estimate of the minimum damages that
Cornerstone might be expected to suffer as a result of any such breach, and
that it has agreed to pay such liquidated damages in consideration of the
matters referred to in the Recitals and other good and valuable
consideration given by Cornerstone to Apple, including Cornerstone's
execution of this Agreement.
4. Miscellaneous.
This Agreement shall be construed in accordance with and in all respects
governed by the laws of the Commonwealth of Virginia.
WITNESS the following the signatures.
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
-----------------------------
Title: President
--------------------------
3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
By: /s/ Glade M. Knight
-----------------------------
Title: President
--------------------------
4
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 12, 1996, except for Note 5, as to which the date
is November 14, 1996, in Amendment No. 2 to the Registration Statement (Form
S-11 No. 333-10635) and related Prospectus of Apple Residential Income Trust,
Inc., for the registration of 25,166,666.67 shares of its common stock.
Ernst & Young LLP
Richmond, Virginia
November 14, 1996
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Ted W.
Smith, each acting singly, his attorney-in-fact, to execute on his behalf,
individually and in each capacity stated below, and to file, any documents
referred to below relating to the registration of up to $250 million of the
common shares of Apple Residential Income Trust, Inc. (the "Company"), such
documents being: a Registration Statement to be filed with the Securities and
Exchange Commission; such statements with, or applications to, the regulatory
authorities of any state in the United States as may be necessary to permit such
shares to be offered and sold in such states; and any and all amendments to any
of the foregoing, with all exhibits and documents required to be filed in
connection therewith. The undersigned further grants unto said attorneys and
each of them full power and authority to perform each and every act necessary to
be done in order to accomplish the foregoing registrations as fully as he
himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney
as of this 10th day of October, 1996.
/s/ Glade M. Knight
___________________________
Glade M. Knight, Director
of the Company
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Ted W.
Smith, each acting singly, his attorney-in-fact, to execute on his behalf,
individually and in each capacity stated below, and to file, any documents
referred to below relating to the registration of up to $250 million of the
common shares of Apple Residential Income Trust, Inc. (the "Company"), such
documents being: a Registration Statement to be filed with the Securities and
Exchange Commission; such statements with, or applications to, the regulatory
authorities of any state in the United States as may be necessary to permit such
shares to be offered and sold in such states; and any and all amendments to any
of the foregoing, with all exhibits and documents required to be filed in
connection therewith. The undersigned further grants unto said attorneys and
each of them full power and authority to perform each and every act necessary to
be done in order to accomplish the foregoing registrations as fully as he
himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney
as of this 10th day of October, 1996.
/s/ Ted W. Smith
___________________________
Ted M. Smith, Director
of the Company
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Ted W.
Smith, each acting singly, his attorney-in-fact, to execute on his behalf,
individually and in each capacity stated below, and to file, any documents
referred to below relating to the registration of up to $250 million of the
common shares of Apple Residential Income Trust, Inc. (the "Company"), such
documents being: a Registration Statement to be filed with the Securities and
Exchange Commission; such statements with, or applications to, the regulatory
authorities of any state in the United States as may be necessary to permit such
shares to be offered and sold in such states; and any and all amendments to any
of the foregoing, with all exhibits and documents required to be filed in
connection therewith. The undersigned further grants unto said attorneys and
each of them full power and authority to perform each and every act necessary to
be done in order to accomplish the foregoing registrations as fully as he
himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney
as of this 10th day of October, 1996.
/s/ Penelope W. Kyle
___________________________
Penelope W. Kyle, Director
of the Company
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Ted W.
Smith, each acting singly, his attorney-in-fact, to execute on his behalf,
individually and in each capacity stated below, and to file, any documents
referred to below relating to the registration of up to $250 million of the
common shares of Apple Residential Income Trust, Inc. (the "Company"), such
documents being: a Registration Statement to be filed with the Securities and
Exchange Commission; such statements with, or applications to, the regulatory
authorities of any state in the United States as may be necessary to permit such
shares to be offered and sold in such states; and any and all amendments to any
of the foregoing, with all exhibits and documents required to be filed in
connection therewith. The undersigned further grants unto said attorneys and
each of them full power and authority to perform each and every act necessary to
be done in order to accomplish the foregoing registrations as fully as he
himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney
as of this 10th day of October, 1996.
/s/ Bruce H. Matson
___________________________
Bruce H. Matson, Director
of the Company
