APPLE RESIDENTIAL INCOME TRUST INC, 10-K405, 1997-03-31

APPLE RESIDENTIAL INCOME TRUST INC
10-K405, 1997-03-31
REAL ESTATE INVESTMENT TRUSTS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended Commission File Number
December 31, 1996 333-10635

APPLE RESIDENTIAL INCOME TRUST, INC.

(Exact name of registrant as specified in its charter)

Virginia 54-1816010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

306 East Main Street
Richmond, VA 23219
(Address of principal executive offices) (Zip Code)

(804) 643-1761
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

(None)

Securities registered pursuant to Section 12(g) of the Act:

(None)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 31, 1997, 4,643,238 common shares of the registrant were
outstanding. The common shares are not currently being traded in any market.
Therefore, the common shares did not have either a market selling price or bid
and asked prices within 60 days prior to the date of this filing,

<PAGE>

and the aggregate market value of the common shares held by non-affiliates of
the registrant is not determinable.

DOCUMENTS INCORPORATED BY REFERENCE

The portions of the registrant's Prospectus dated November 19, 1996 filed with
the Commission pursuant to Rule 424(b) under the Securities Act of 1933 referred
to in Parts I and III.

PART I

Item 1. Business.

Apple Residential Income Trust, Inc. (the "Company"), a
Virginia corporation, was incorporated in August 1996. The
Company intends to qualify as a real estate investment trust
for federal income tax purposes.

The Company had no operations during the period ending
December 31, 1996. Accordingly, the Company had no revenue,
operating profits or loss, and identifiable assets. A minimum
offering of $15,000,000, an equivalent of 1,666,667 common
shares sold, was required to be raised before the Company
could begin operations (the "Minimum Offering"). Investor
proceeds were required to be held in escrow until the Minimum
Offering was achieved. As of December 31, 1996, the Minimum
Offering had not been met and there were no funds available to
the Company.

The Company will invest primarily in existing residential
apartment communities in Texas and the southwestern region of
the United States. The complete investment objectives and
policies of the Company are described under the caption
"Investment Objectives and Policies" on pages 26 through 34 of
the Company's prospectus dated November 19, 1996 (the
"Prospectus") filed with the Securities and Exchange
Commission as part of the Company's Registration Statement on
Form S-11 (Registration No. 333-10635), which are hereby
incorporated herein by reference.

Item 2. Properties.

None.

Item 3. Legal Proceedings.

None.

<PAGE>

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.

There is currently no established public market in which the
Company's common shares are traded.

On March 31, 1997, there were 3,375 shareholders of record of
the Company's common shares.

No distributions have been made to the shareholders.

Item 6. Selected Financial Data.

Not applicable as the Company had not commenced operations as
of December 31, 1996.

Item 7.

Results of Operations for the period August 7, 1996 (date of
inception) through December 31, 1996:

The Company had no operations prior to December 31, 1996.
Accordingly, the Company had no revenues and operating profits
or loss. A minimum offering of $15,000,000, an equivalent of
1,666,667 common shares sold, must be raised before the
Company can begin operations (the `Minimum Offering").
Investor proceeds are required to be held in escrow until the
Minimum Offering is achieved. As of December 31, 1996, the
Minimum Offering had not been met and there were no funds
available to the Company.

Liquidity and Capital Resources:

In the period January 1, 1997 through March 21, 1997, the
Company meet and exceeded its Minimum Offering by closing the
sale to investors of 4,643,239 shares (1,666,667 at $9 per
share and 2,976,573 at $10 per share) representing gross
proceeds to the Company of $44,765,718 and net proceeds after
payment of commissions and other offering costs of
$40,289,146. Upon completion of the Minimum Offering, $522,000
in organizational and offering costs incurred by affiliates of
the Company on behalf of the Company, became the liability of
the Company.

On November 14, 1996, the Company issued 200,000 shares of
Class B Convertible Shares to Mr. Glade Knight, the Companies
Principal Executive Officer and Chairman of the Board of the
Company, 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
$.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.
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 the Prospectus dated
November 19, 1996 filed with the Securities and Exchange
Commission according to the following formula:

2
<PAGE>

Gross Proceeds Raised From Number of Common Shares
Sales of Common Shares Through Through Conversion of One
Date of Conversion Class B Convertible Share
------------------------------------ -----------------------------
<S> <C>

$50 million------------------------ 1.0
$100 million----------------------- 2.4
$150 million----------------------- 4.2
$200 million----------------------- 6.4
$250 million----------------------- 8.0

</TABLE>

During January 1997, effective January 1, 1997, the Company
acquired three apartment communities. Brookfield Apartments, a
232-unit apartment community located in Dallas, Texas, was
purchased for $5,458,485. Eagle Crest Apartments, a 484-unit
apartment community located in Irving, Texas, was purchased
for $15,650,000. Tahoe Apartments, a 240-unit apartment
community located in Arlington, Texas, was purchased for
$5,690,560. During February, 1997, the Company acquired Mill
Crossing Apartments, a 184-unit apartment community located in
Arlington, Texas for $4,544,121.

The Company is expecting to close on the following properties
on March 31, 1997-Wildwood Apartments, a 120-unit apartment
community located in Euless, Texas; Toscana Apartments, a
194-unit apartment community located in Dallas, Texas; and
Polo Run, a 224-unit apartment community located in Arlington,
Texas. The combined purchase price is approximately $16
million, which will be funded with proceeds from the offering
and the line of credit.

On March 1, 1997 the Company entered into an agreement with a
commercial bank to obtain an unsecured revolving line of
credit of $10,000,000. The line of credit expires on March 31,
1998. This agreement allows the Company to finance a portion
of the purchase price of property acquisitions. Borrowings
under the agreement are evidenced by an unsecured promissory
note and bears interest at one-month LIBOR plus 200 basis
points. There have been no borrowings under the agreement
through March 26, 1997.

Capital resources are expected to grow from the sale of common
shares and from cash flows from operations of properties
acquired. The Company's liquidity and capital requirements are
believed to be more than adequate to meet the Company's cash
requirements in 1997.

2
<PAGE>

Item 8. Financial Statements and Supplementary Data.

The financial statements of the Company are set forth in Item
14 of this report and are hereby incorporated herein by
reference.

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure Matters.

None.

<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information with respect to the Company's directors and
executive officers is contained and described under the
caption "Management" on pages 37 through 42 of the Prospectus,
which is hereby incorporated herein by reference.

A fifth director of the Company has been elected. The fifth
director is Lisa B. Kern. Information on Ms. Kern is set
forth below.

Lisa B. Kern. Ms. Kern is a portfolio manager with Davenport &
Co. of Virginia, Inc., in Richmond, Virginia. Before joining
Davenport as Vice President in 1996, Ms. Kern advised clients
in the areas of investments and estate planning. She began
her investment career in 1982 as a financial planner and
later District Manager with IDS/American Express Advisory.
In 1985, Ms. Kern received her CFP designation. In 1989, Ms.
Kern joined Crestar Bank's Trust and Investment Management
Group as a Vice President. Ms. Kern is a graduate of Randolph
Macon College and received her MBA from Virginia Commonwealth
University in 1991.

The current members of the Company's Executive Committee are
Glade M. Knight, Penelope W. Kyle and Bruce H. Matson. The
current members of the Audit Committee are Penelope W. Kyle,
Ted W. Smith and Lisa B. Kern. The current members of the
Compensation Committee are Bruce H. Matson, Penelope W.
Kyle and Lisa B. Kern.

Item 11. Executive Compensation.

The executive officers of the Company did not receive salary
or other compensation from the Company in 1996 for carrying
out their duties as executive officers. The information with
respect to the director compensation and the Company's two
stock incentive plans is contained and described under the
caption "Management" on pages 37 through 42 of the Prospectus,
which is hereby incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and
Management.

As of March 1, 1997, no person was the beneficial owner of
more than five percent of any class of the registrant's voting
securities.

The following table shows the beneficial ownership of the
registrant's common shares by the registrant's directors and
executive officers, as of March 1, 1997.

<TABLE>
<CAPTION>
Name of Beneficial Amount and Nature of
Owner Beneficial Ownership Percent of Class
------ -------------------- ----------------
<S> <C>
Glade M. Knight 5,555.56 *
Ted W. Smith 0 0
Penelope W. Kyle 0 0
Bruce H. Matson 0 0
Lisa B. Kern 0 0
- --------------------------------
All Directors and 5,555.56 *
Executive Officers as a
Group
</TABLE>

* Less than 1% of outstanding Common Shares.

In addition, at March 1, 1997, Glade M. Knight owned 200,000
Class B Convertible Shares of the registrant, constituting all
of the registrant's issued and outstanding Class B Convertible
Shares. Information on the Class B Convertible Shares of the
registrant is set forth under the caption "Principal and
Management

<PAGE>

Stockholders" on pages 47 and 48 of the Prospectus, which is
hereby incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

A description of the Company's transactions with management
and others and certain business relationships is described
under the caption "The Advisor and Affiliates" on pages 43
through 47 of the Prospectus, which is hereby incorporated
herein by reference.

In addition, the Company has granted to Cornerstone Realty
Income Trust a continuing right to acquire up to 9.8% of
the common shares of the Company. The purchase price
of such common shares, which would be issued apart from,
and in addition to, the public offering of common shares
equals the public offering price less selling commissions
and marketing expense allowance payable with respect thereto.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.

(a) Documents filed as part of this report

1. Financial Statements

Balance Sheet at December 31, 1996.

2. Financial Statement Schedules

All other financial statement schedules have
been omitted because they are not applicable
or because the required information is shown
in the Balance Sheet or in the notes
thereto.

(b) Reports on Form 8-K

None.

Incorporated herein by reference are the Exhibits
listed under "Exhibit Index" on page 14 of this
report.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized this
27th day of March, 1997.

APPLE RESIDENTIAL INCOME TRUST, INC.

By: /s/ Glade M. Knight
-----------------------------
Glade M. Knight,
President

Pursuant to the requirements of the Securities Exchange Act
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C>

/s/ Glade M. Knight
- -------------------- Director, Principal March 27, 1997
Glade M. Knight Executive Officer,
Principal Financial
Officer and Principal
Accounting Officer

- --------------------- Director March , 1997
Ted W. Smith

/s/ Penelope W. Kyle
- --------------------- Director March 27, 1997
Penelope W. Kyle

/s/ Bruce H. Matson
- --------------------- Director March 27, 1997
Bruce H. Matson

/s/ Lisa B. Kern
- --------------------- Director March 26, 1997
Lisa B. Kern

<PAGE>

Supplemental information to be furnished with reports filed pursuant to Section
15(d) of the Securities Exchange Act of 1934 by Registrants which have not
registered Securities pursuant to Section 12 of that Act

No annual report to security holders for the registrant's fiscal year ended
December 31, 1996 or proxy material has been or will be sent to security
holders.

<PAGE>

Report of Independent Auditors

The Board of Directors and Shareholder of
Apple Residential Income Trust, Inc.

We have audited the accompanying balance sheets of Apple Residential Income
Trust, Inc., as of December 31, 1996 and August 7, 1996 (date of inception). The
balance sheets are the responsibility of the Company's management. Our
responsibility is to express an opinion on these balance sheets based on our
audits.

We conducted our audits 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 sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Apple Residential Income Trust
Inc., at December 31, 1996 and August 7, 1996 (date of inception), in conformity
with generally accepted accounting principles.

/s/ Ernst & Young LLP
Richmond, Virginia
March 26, 1997

<PAGE>

Apple Residential Income Trust, Inc.

Balance Sheets

</TABLE>
<TABLE>
<CAPTION>
(Date of
inception)
December 31, 1996 August 7, 1996
--------------------------------------
<S> <C>
Assets
Cash $ 100 $ 100
======================================

Shareholder's equity Common stock, no par value.
Authorized 50,000,000 shares;
Issued and outstanding 10 shares
(Notes 2 and 5) 100 100
Class B Convertible Stock, no par value.
Authorized 200,000 shares;
Issued and outstanding 200,000 (Note 2) 20,000 -
Receivable from principal shareholder (20,000) -
--------------------------------------

$ 100 $ 100
======================================
</TABLE>

See accompanying notes to balance sheet.

<PAGE>

Apple Residential Income Trust, Inc.

Notes to the Balance Sheet

December 31, 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 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.

<PAGE>

Apple Residential Income Trust, Inc.

Notes to the Balance Sheet (Continued)

2. Offering of Shares (continued)

A minimum offering of 1,666,667 shares ($15,000,000) must be sold no later than
November 19, 1997, 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. Class B Convertible Shares

On November 14, 1996, the Company issued 200,000 shares of Class B Convertible
Shares to Mr. Glade Knight, President and Chairman of the Board of the Company,
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 $.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. 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 "best efforts" offering according to the
following formula:

Number of Common Shares
Gross Proceeds Raised From Through Conversion of One
Sales of Common Shares Through Class B Convertible Share
Date of Conversion
- ------------------------------------ -----------------------------
<S> <C>

$50 million------------------------ 1.0
$100 million----------------------- 2.4
$150 million----------------------- 4.2
$200 million----------------------- 6.4
$250 million----------------------- 8.0

</TABLE>

<PAGE>

3. Class B Convertible Shares (continued)

No additional consideration is due upon the conversion of the Class B
Convertible Shares. Upon the probable occurrence of a triggering event, the
Company will record expense in the statement of operations based on
convertibility of the Class B Convertible shares.

4. Organizational and Offering Costs

As of December 31, 1996, affiliates of the Company have incurred on behalf of
the Company organizational and offering costs amounting to approximately
$522,000. Upon the sale of 1,666,667 Common Shares, the Company will reimburse
the affiliates for these organizational and offering costs.

5. Related Parties

The Company has negotiated a Property Management Agreement with Apple
Residential Management Group, Inc. ("ARMG") to manage each 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 entered into a Property Acquisition and Disposition Agreement
with Apple Realty Group ("ARG") 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 entered into an Advisory Agreement with the Apple Residential
Advisors, Inc. ("AA") to provide management for the Company and its assets. An
annual fee equal to .1% - .25% of total contributions received by the Company
will be payable for this service.

Mr. Knight owns 100% of the common stock of ARMG, ARG and AA.

Upon the completion of a public offering of common shares being pursued by
Cornerstone Realty Income Trust, Inc., for which Mr. Knight also serves as Chief
Executive Officer and Chairman of the Board, Cornerstone will enter into a
contract with the Company and subcontracts with Apple Residential Management
Group, Inc. and Apple Residential Advisors, Inc. whereby Cornerstone will
provide advisory, property management and brokerage services to the Company in
exchange for fees and expense reimbursements as described above.

<PAGE>

5. Related Parties (continued)

Cornerstone Realty Income Trust, Inc. has a continuing right to own up to
9.8% of the common shares of Apple. In addition, Cornerstone has a right of
first refusal to purchase the properties and business of Apple.

6. Stock Incentive Plans

The Company has adopted 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 grant 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. 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.

7. Subsequent Event

For the period January 1, 1997 through March 21, 1997, the Company closed the
sale to investors of 4,643,239 shares (1,666,667 at $9 per share and 2,976,572
at $10 per share) representing gross proceeds to the Company of $44,765,718 and
net proceeds after payment of selling commissions and other costs of
$40,289,146.

During January 1997, effective January 1, 1997, the Company acquired three
apartment communities. Brookfield Apartments, a 232-unit apartment community
located in Dallas, Texas, was purchased for $5,458,485. Eagle Crest Apartments,
a 484-unit apartment community located in Irving, Texas, was purchased for
$15,650,000. Tahoe Apartments, a 240-unit apartment community located in
Arlington, Texas, was purchased for $5,690,560. During February, 1997, the
Company acquired Mill Crossing Apartments, a 184-unit apartment community
located in Arlington, Texas for $4,544,121.

On March 1, 1997 the Company entered into an agreement with a commercial bank to
obtain an unsecured revolving line of credit of $10 million. The line of credit
expires on March 31, 1998. This agreement allows the Company to finance a
portion of the purchase price of property acquisitions. Borrowings under the
agreement are evidenced by an unsecured promissory note and bears interest at
one-month LIBOR plus 200 basis points. As of March 26, 1997, there have been no
borrowings under the agreement.

<PAGE>

EXHIBIT INDEX

Exhibit Number Description

3.1 Amended and Restated Articles of Incorporation of Apple Residential
Income Trust, Inc., as amended. Incorporated by reference to
Exhibits 3.1, 3.3 and 3.4 filed with the Commission in the
registrant's registration statement on Form S-11, Registration No.
333-10635.

3.2 Bylaws of Apple Residential Income Trust, Inc.*

10.1 Advisory Agreement between Apple Residential Income Trust, Inc. and
Apple Residential Advisors, Inc.*

10.2 Form of Property Management Agreement between Apple Residential
Income Trust, Inc. and Apple Residential Management Group, Inc.*

10.3 Property Acquisition/Disposition Agreement between Apple Residential
Income Trust, Inc. and Apple Realty Group, Inc.*

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 Right of First Refusal Agreement. Incorporated by reference to
Exhibit 10.7 filed with the Commission in the registrant's
registration statement on Form S-11, Registration No. 333-10635.

28.1 Portions of pages 26 through 34, 37 through 42, 43 through 47 and 47
through 48 of the Prospectus dated November 19, 1997 of Apple
Residential Income Trust, Inc. FILED HEREWITH

* Incorporated by reference to the Exhibit of the same number filed with the
Commission in the registrant's registration statement on Form S-11,
Registration No. 333-10635.

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

<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 the 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 the 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 in a REIT owning properties in other regions of the United States,
rather than seeking to invest directly in real

<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 acquisitions 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; (i) investing more than 10 percent of the total
assets of the Company in unimproved real property or mortgaged 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

<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.

<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
acton 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 Dirctor 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

<PAGE>

substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply be 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 if 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."

<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 the 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.

<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 Proper-

<PAGE>

ties 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 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. 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 of a Committee and in carrying on the
business of the Company.

<PAGE>

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).

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.

<PAGE>

Stock Options

An option granted under the Incentive Plan will not be transferable 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 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.

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 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.

<PAGE>

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 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 Director's 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.

<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 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

<PAGE>

or 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

<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

<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

<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 Aggregate

NAME Number of Shares Outstanding
Beneficially 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:

<PAGE>

<TABLE>
<CAPTION>
Number of Common Shares
Gross Proceeds Raised From through Conversion
Sales of Common Shares through of One Class B
Date of Conversion Convertible Shares
-------------------------------- ------------------------
<S> <C>
$50 million..................................... 1.0
$100 million..................................... 2.4
$150 million..................................... 4.2
$200 million..................................... 6.4
$250 million..................................... 8.0

</TABLE>

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' interest. 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 Shares, the nature of its assets, the sources of its income and the amount
of its distributions to Shareholders. McGuire,

<ARTICLE> 5

<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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0
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