<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
FILE NO. 333-10635
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 7
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in governing instruments)
306 East Main Street, Richmond, Virginia 23219
(804) 643-1761
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Glade M. Knight
306 East Main Street
Richmond, Virginia 23219
(804) 643-1761
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Leslie A. Grandis
McGuire, Woods, Battle & Boothe LLP
One James Center, 901 East Cary Street, Richmond, Virginia 23219
--------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]_______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
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<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus......... Forepart of Registration Statement and Outside
Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus ........................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges ............ Summary of the Offering; Risk Factors; Summary
of Organizational Documents -- Shareholder Lia-
bility
4. Determination of Offering Price ............... Risk Factors -- Arbitrary Share Offering Prices
5. Dilution ...................................... Risk Factors -- Potential Dilution; Summary of Or-
ganizational Documents -- Issuance of Securities
6. Selling Security Holders ...................... Not Applicable
7. Plan of Distribution .......................... Plan of Distribution
8. Use of Proceeds ............................... Estimated Use of Proceeds
9. Selected Financial Data ....................... Supplement No. 11
10. Management's Discussion and Analysis of
Financial Condition and Results of Oper-
ations ........................................ Management's Discussion and Analysis of Financial
Condition; Supplement No. 11
11. General Information as to Registrant .......... Summary of the Offering; Business and Properties;
Management
12. Policy with Respect to Certain Activities...... Summary of the Offering; Investment Objectives
and Policies; Summary of Organizational Docu-
ments; Reports to Shareholders
13. Investment Policies of Registrant ............. Summary of the Offering; Investment Objectives
and Policies
14. Description of Real Estate .................... Business and Properties; Supplement No. 11
15. Operating Data ................................ Business and Properties; Supplement No. 11
16. Tax Treatment of Registrant and its
Security Holders .............................. Summary of the Offering; Federal Income Tax Con-
siderations; Investment by Tax-Exempt Entities
17. Market Price of and Dividends on the Reg-
istrant's Common Equity and Related Stock-
holder Matters ................................ Distribution Policy; Supplement No. 11
18. Description of Registrant's Securities ........ Summary of the Offering; Description of Capital Stock
19. Legal Proceedings ............................. Business and Properties -- Legal Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management ......................... Principal and Management Stockholders; Supplement
No. 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------
<S> <C> <C>
21. Directors and Executive Officers ............ Management; Supplement No. 11
22. Executive Compensation ...................... Compensation; Management; Supplement No. 11
23. Certain Relationships and Related Trans-
actions ..................................... Summary of the Offering; Compensation; Conflicts
of Interest; Management; The Advisor and Affili-
ates; Supplement No. 11
24. Selection, Management and Custody of
Registrant's Investments .................... Summary of the Offering; Compensation; Conflicts
of Interest; Investment Objectives and Policies;
Management; The Advisor and Affiliates
25. Policies with Respect to Certain Transac-
tions ....................................... Investment Objectives and Policies; Conflicts of In-
terest
26. Limitation of Liability ..................... Risk Factors; Summary of Organizational Docu-
ments
27. Financial Statements and Information ........ Index to Financial Statements; Supplement No. 11
28. Interests of Named Experts and Counsel....... Legal Opinions
29. Disclosure of Commission Position on In-
demnification for Securities Act Liabilities. Risk Factors; Summary of Organizational Docu-
ments
</TABLE>
<PAGE>
SUMMARY OF SUPPLEMENT TO PROSPECTUS
(SEE THE SUPPLEMENT FOR ADDITIONAL INFORMATION):
Supplement No. 11 dated July 31, 1998 (incorporating Supplements No. 1, No. 2,
No. 3, No. 4, No. 5, No. 6, No. 7, No. 8, No. 9 and No. 10):
(1) Reports on the acquisition by the Company of 25 apartment complexes.
(2) Reports on the granting to Cornerstone Realty Income Trust, Inc. of a
right to acquire up to 9.8% of the Company's outstanding Shares, and
on certain other relationships with Cornerstone Realty Income Trust,
Inc.
(3) Reports on organization by the Company of subsidiary limited
partnerships to hold the Company's apartment complexes.
(4) Provides 1997 and first quarter 1998 financial statements and certain
other updated information concerning the Company and its properties.
As of June 30, 1998 the Company had closed the sale of 2,084,444 Shares at
$9 per Share, and 18,025,254 Shares at $10 per Share, representing aggregate
gross proceeds to the Company of $199,008,936, and proceeds net of selling
commissions and marketing expense allowance of $179,484,042. From April 1, 1998
through July 31, 1998, the Company raised in the offering $50,651,819 in gross
proceeds and $45,586,637 net of selling commissions and marketing expense
allowance. The Company endeavors continually to invest proceeds in the
acquisition of additional apartment communities as promptly as practicable after
the receipt of such proceeds. As of July 31, 1998, after all acquisitions
reported by this Supplement, approximately $13 million was not invested or
committed to investment.
Cornerstone Realty Income Trust, Inc. will receive fees and expense
reimbursements in connection with the Company's acquisitions and the management
of the properties and the Company. In connection with the completed property
acquisitions described in the Supplement, Apply Realty Group, Inc., an Affiliate
of the Advisor, or Cornerstone Realty Income Trust, Inc., as
successor-in-interest to Apple Realty Group, Inc., will be entitled to property
acquisition fees totaling up to $3,745,017 and have been paid $3,261,838 of such
amount.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
COMMON SHARES (THE "SHARES")
$9 PER SHARE
($10 PER SHARE AFTER MINIMUM OFFERING OF $15,000,000 IS ACHIEVED)
MINIMUM INVESTMENT--$5,000
Apple Residential Income Trust, Inc. (the "Company") is a Virginia
corporation which will elect to be treated as a real estate investment trust
("REIT") for federal income tax purposes. The Company will invest primarily in
existing residential apartment communities in Texas and the southwestern region
of the United States. The Company intends to hold its properties on an all-cash
(unleveraged) basis, and to hold its properties for an indefinite length of
time. Apple Residential Advisors, Inc. (the "Advisor") and Apple Residential
Management Group, Inc., will provide the day-to-day management for the Company
and its properties, respectively. Glade M. Knight, the sole holder of common
shares of the Advisor and Apple Residential Management Group, Inc., is the
Chairman of the Board and President of the Company. Accordingly, the Advisor and
Apple Residential Management Group, Inc. may be deemed to be Affiliates of the
Company. A minimum offering of $15,000,000 in Shares must be sold no later than
one year after the date of this Prospectus, or the offering will terminate and
investors' subscription payments, with interest, will be promptly refunded to
investors. Pending sale of such minimum offering amount, investors' subscription
payments will be placed in an escrow account with First Union National Bank of
North Carolina as escrow agent. See "Plan of Distribution."
THESE ARE SPECULATIVE SECURITIES. The offering involves certain risks and
investment considerations (see "Risk Factors" beginning on page 10), including:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Thus, investors may be unable to resell their Shares,
or may be able to resell them only at a substantial discount from the purchase
price.
o Because the Company has no obligation and no specific plan to list the
Shares or sell its properties at any particular time, investors may not receive
a return of their investment for an indefinite period, if ever.
o Another company originally organized by Glade M. Knight will have a right
of first refusal to acquire Company assets, which may decrease the return the
Company is able to obtain upon sales of its properties.
o The Advisor and persons related to it will receive substantial compensation
from the Company. The payment of such compensation may tend to reduce investment
return by reducing funds available for investment and reducing cash flow from
operations. The compensation is generally payable before distributions to
Shareholders and regardless of Company profitability.
See "Compensation."
o The Advisor and persons related to it will be subject to various conflicts
of interest with the Company, including non-arms-length transactions and
competition for management services. See "Conflicts of Interest." As a result,
such persons could have an incentive to favor their interests to those of the
Company.
o Certain private partnerships sponsored by persons related to the Advisor
have experienced adverse business developments, including bankruptcy
reorganizations. See "The Advisor -- Prior Performance of Programs Sponsored by
Affiliates of the Advisor."
o Shareholders' interests are subject to dilution through the conversion of
Class B Convertible Shares held by Glade M. Knight.
o The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and property operating expenses, which in
turn will be affected by property selection, property and Company management,
property location and local and general economic conditions. The Company may not
operate profitably.
o There can be no assurance that the Company will generate sufficient cash
from operations to make distributions at any particular rate.
o Neither the Company nor the Advisor has any operating history, and there is
no assurance that the Company will operate successfully or achieve its
objectives.
o The Company has not identified any properties to be acquired with the
proceeds of this offering, and prospective investors may receive no information
regarding property acquisitions before buying Shares. Furthermore, the Company
may not achieve diversification in its property holdings.
o Company borrowing is permitted within limits set forth in the Company's
Bylaws, and would entail additional risks such as reduction of cash available
for distribution and risk of default. See "Risk Factors -- Possible Borrowing;
Debt Financing May Reduce Cash Flow and Increase Risk of Default."
All of the Shares offered hereby are being sold by the Company. It is
expected that approximately 84.5% of the gross offering proceeds will be
available for investment in properties and 0.5% allocated to a working capital
reserve. The balance of proceeds will pay expenses and fees of the Advisor and
others. See "Estimated Use of Proceeds."
THE OFFERING WILL TERMINATE WHEN ALL SHARES HAVE BEEN SOLD OR ONE YEAR FROM
THE DATE HEREOF, UNLESS SOONER TERMINATED BY THE COMPANY OR EXTENDED FOR UP TO
AN ADDITIONAL YEAR. SEE "SUMMARY OF THE OFFERING -- THE OFFERING" AND "PLAN OF
DISTRIBUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
================================================================================
Price to Selling Proceeds to
the Public Commissions(1)(2) the Company(3)
- --------------------------------------------------------------------------------
Per Share (4)............. $ 9 $ 0.675 $ 8.325
Total Minimum Offering ... $ 15,000,000 $ 1,125,000 $ 13,875,000
Total Maximum Offering(5). $250,000,000 $ 18,750,000 $231,250,000
================================================================================
(1) The Shares are being offered on a "best-efforts" basis exclusively through
David Lerner Associates, Inc. (the "Managing Dealer") pursuant to an Agency
Agreement. Under the Agency Agreement, the Managing Dealer may engage other
broker-dealers. The Company has agreed to indemnify the Managing Dealer and
such other broker-dealers against certain liabilities, including
liabilities under the Securities Act of 1933.
(2) Payable to David Lerner Associates, Inc., the Managing Dealer, which will
also receive a Marketing Expense Allowance equal to 2.5% of the purchase
price of the Shares.
(3) Before deducting other expenses payable by the Company in connection with
the offering. Such expenses are estimated at $825,000 for the minimum
offering and $7,250,000 for the maximum offering (including the Marketing
Expense Allowance referred to in (2)). See "Estimated Use of Proceeds."
(4) At such time as the Minimum Offering of $15,000,000 is achieved, the per
Share offering price will become $10. At $10 per Share, the Selling
Commission per Share will be $0.75 and the Proceeds to the Company per
Share (before deducting other expenses) will be $9.25.
(5) The Company estimates that approximately 400,000 Shares ($4,000,000 at $10
per Share) will be purchased through Shareholders' reinvestment of
distributions during the offering period. See "Plan of Distribution."
DAVID LERNER ASSOCIATES, INC.
477 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791
The date of this Prospectus is November 19, 1996
<PAGE>
Each purchaser of Shares must certify that he has either (i) a minimum annual
gross income of $50,000 and a net worth of at least $50,000 (exclusive of equity
in home, home furnishings and personal automobiles), or (ii) a net worth
(similarly defined) of at least $100,000, or $150,000 in the case of Kentucky
and North Carolina purchasers. No purchaser of Shares may purchase Shares
costing more than 10% of the purchaser's net worth (similarly defined).
Until February 17, 1997, all dealers effecting transactions in the Shares,
whether or not participating in this distribution, may be required to deliver a
copy of this Prospectus. This is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offering made by this Prospectus, and, if
given or made, such other information or representations must not be relied
upon. This Prospectus does not constitute an offer in any state in which such
offer may not legally be made. The delivery of this Prospectus at any time does
not imply that information herein has not changed as of any time subsequent to
its date.
AVAILABLE INFORMATION
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission, Washington, D.C., with respect to the
Shares. This Prospectus does not contain all the information set forth in the
registration statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the Shares, reference is made to the registration statement,
including the exhibits filed as part thereof.
Apple Residential Income Trust, Inc., with principal executive offices at 306
East Main Street, Richmond, Virginia 23219, telephone number (804) 643-1761, is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, files
reports, proxy and information statements and other information with the
Commission. The reports, proxy and information statements and other information
and the Registration Statement and the exhibits and financial statement
schedules thereto filed by the Company with the Commission can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 13th Floor, 7 World Trade Center, New York,
New York 10048, and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the material can be obtained from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company files reports, proxy and
information statements and other information with the Commission electronically.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Web site is http.//www.sec.gov.
i
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION .............................................. i
SUMMARY OF THE OFFERING ............................................ 1
RISK FACTORS ....................................................... 10
Absence of Public Trading Market ................................... 10
Uncertainty Regarding Return of Investment ......................... 11
Right of Refusal May Affect Sales .................................. 11
Compensation to Affiliates is Payable Before
Distributions and Will Reduce Investors'
Return ............................................................. 11
Acquisition, Management and Other Fees and
Expenses Will Reduce Return ........................................ 11
Conflicts of Interest .............................................. 12
Prior Performance Difficulties of Certain
Affiliates ......................................................... 12
Potential Dilution of Shareholders' Interests ...................... 13
Uncertainty Regarding Revenues and Expenses ........................ 13
Environmental Problems and Liabilities ............................. 14
Competition for Properties and Tenants ............................. 14
Uninsured Losses ................................................... 15
Risk of Insufficient Cash Available for
Distribution ...................................................... 15
Lack of Operating History; No Assurance of
Success ........................................................... 15
Size of Offering -- Possible Lack of
Diversification and Lower Return .................................. 15
Delay in Investment in Real Property ............................... 15
No Specified Properties ............................................ 15
Possible Borrowing; Debt Financing May Reduce Cash
Flow and Increase Risk of Default ................................. 16
Federal Income Tax Risks ........................................... 17
Failure to Achieve or Maintain REIT Status ....................... 17
Uncertainties in and Possible Changes to the Tax
Law ............................................................. 17
Required Reliance on Management .................................... 18
Possible Changes in Investment Objectives and
Policies May Not Serve the Interests of Certain
Shareholders ...................................................... 18
Responsibilities of Directors, Advisor and
Affiliates -- Possible Inadequacy of Remedies;
Directors, Advisor and Affiliates benefit from
Exculpation and Indemnification Provisions ........................ 18
Arbitrary Share Offering Prices .................................... 19
Advisor and Affiliates May Purchase and Vote
Shares ............................................................ 19
Accumulation Restrictions .......................................... 19
Joint Venture Investments -- Risks of Conflicting
Interests and Impasse ............................................. 19
ESTIMATED USE OF PROCEEDS .......................................... 20
COMPENSATION ....................................................... 21
CONFLICTS OF INTEREST .............................................. 24
General ........................................................... 24
Transactions with Affiliates and Related Parties .................. 25
Competition by the Company with Affiliates ........................ 25
Competition for Management Services ............................... 25
Lack of Separate Representation ................................... 26
INVESTMENT OBJECTIVES AND POLICIES ................................. 26
General ........................................................... 26
Investment Criteria ............................................... 28
Types of Investments .............................................. 28
Diversification ................................................... 29
Joint Venture Investments ......................................... 29
Borrowing Policies ................................................ 30
Management of Properties .......................................... 31
Reserves .......................................................... 31
Sale and Refinancing Policies ..................................... 31
Changes in Objectives and Policies ................................ 33
DISTRIBUTION POLICY ................................................ 34
BUSINESS AND PROPERTIES ............................................ 34
Business .......................................................... 35
Legal Proceedings ................................................. 36
Regulation ........................................................ 36
Properties Owned by The Company ................................... 36
Property Acquisition and Management
Compensation ..................................................... 37
MANAGEMENT ......................................................... 37
Directors and Officers ............................................ 37
Committees of Directors ........................................... 39
Director Compensation ............................................. 39
Indemnification and Insurance ..................................... 40
Officer Compensation .............................................. 40
Stock Incentive Plans ............................................. 40
The Incentive Plan ................................................ 40
Directors' Plan ................................................... 41
Stock Option Grants ............................................... 42
THE ADVISOR AND AFFILIATES ......................................... 43
General ........................................................... 43
The Advisory Agreement ............................................ 43
Apple Realty Group, Inc. .......................................... 44
Apple Residential Management Group, Inc. .......................... 45
Price Performance of Programs Sponsored by
Affiliates of the Advisor ........................................ 45
ii
<PAGE>
PAGE
------
PRINCIPAL AND MANAGEMENT STOCKHOLDERS ............................... 47
FEDERAL INCOME TAX
CONSEQUENCES ....................................................... 48
Federal Income Taxation of the
Company ........................................................... 48
Requirements for Qualification as a REIT ........................... 49
Organizational Requirements ....................................... 49
Income Tests ...................................................... 49
Asset Tests ....................................................... 51
Annual Distribution Requirement ................................... 51
Failure to Qualify as a REIT ...................................... 52
Federal Income Taxation of the Shareholders ........................ 52
Investment by Tax-Exempt Entities .................................. 53
Foreign Investors .................................................. 54
Foreign Shareholders .............................................. 54
Backup Withholding ................................................ 55
State and Local Taxes .............................................. 55
INVESTMENT BY TAX-EXEMPT ENTITIES ................................... 55
Unrelated Business Taxable Income .................................. 55
ERISA Considerations ............................................... 55
CAPITALIZATION ...................................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION .......................................................... 57
PLAN OF DISTRIBUTION ................................................ 57
DESCRIPTION OF CAPITAL STOCK ........................................ 59
General ............................................................ 59
Repurchase of Shares and Restrictions on
Transfer .......................................................... 59
Facilities for Transferring Shares ................................. 61
Transfer Agent and Registrar ....................................... 61
SUMMARY OF ORGANIZATIONAL DOCUMENTS ................................. 61
Board of Directors ................................................. 61
Responsibility of Board of Directors, Advisor,
Officers and Employees ............................................ 62
Issuance of Securities ............................................. 63
Redemption and Restrictions on Transfer ............................ 63
Amendment .......................................................... 64
Shareholder Liability .............................................. 64
SALES LITERATURE .................................................... 64
REPORTS TO SHAREHOLDERS ............................................. 64
LEGAL OPINIONS ...................................................... 65
EXPERTS ............................................................. 65
EXPERIENCE OF PRIOR PROGRAMS ........................................ 66
GLOSSARY ............................................................ 71
INDEX TO FINANCIAL STATEMENTS OF
THE COMPANY ........................................................ F-1
SUBSCRIPTION AGREEMENT ........................................ Exhibit A
iii
<PAGE>
SUMMARY OF THE OFFERING
The following is a summary of important information contained in this
Prospectus, but is not complete and is qualified in its entirety by reference to
the entire Prospectus. Certain capitalized terms used in this Prospectus are
defined, or are defined with more particularity, under "Glossary."
The Company. Apple Residential Income Trust, Inc. (the "Company") is a
Virginia corporation which will elect to be treated for federal income tax
purposes, and intends to qualify on a continuing basis, as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). The principal executive offices of the Company are located at 306
East Main Street, Richmond, Virginia 23219 (telephone: 804-643-1761). The
Company is newly-organized and has no significant assets.
The Advisor and Affiliates. Apple Residential Advisors, Inc. (the "Advisor")
is the advisor to the Company and will provide its day-to-day management under
an agreement (the "Advisory Agreement") between the Company and the Advisor. The
advisor is newly organized and has no significant assets. The property manager
for the Company will be Apple Residential Management Group, Inc. ("ARM").
Property acquisition and disposition services will be provided to the Company by
Apple Realty Group, Inc. ("ARG"). ARM and ARG are also newly-organized and have
no significant assets.
All of the common stock of the Advisor, ARM and ARG is owned by Glade M.
Knight. However, each of the Advisor and ARM has a class of preferred stock, all
of which will be owned by Cornerstone Realty Income Trust, Inc. ("Cornerstone").
Cornerstone is a real estate investment trust, originally organized by Mr.
Knight and certain of his Affiliates, engaged in the business of acquisition and
ownership of apartment communities in the mid-Atlantic and southeastern regions
of the United States.
Each of the Advisor, ARM and ARG will have its own officers and/or employees
to provide some of the services agreed to be provided by such companies to the
Company. In addition, however, Cornerstone has agreed to make available to the
Advisor and ARM its officers and employees to consult with and assist the
officers and employees of the Advisor and ARM in providing services to the
Company.
In addition to the foregoing, and as discussed under "Investment Objectives
and Policies -- Sale and Refinancing Policies," the Company has granted to
Cornerstone a right of first refusal to purchase properties owned by the Company
and proposed for sale, and a right of first refusal to become the acquiring
party if the Company proposes any disposition or transfer of the Company or
substantially all of its assets, stock or business (whether through sale,
exchange, merger, consolidation, lease, share exchange or otherwise).
Risk Factors. An investment in Shares involves certain risks (described more
fully under "Risk Factors"), including the following:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Accordingly, Shareholders may be required to hold their
Shares for an indefinite length of time. Shareholders may be unable to resell
their shares at all, or may be able to resell them only at a substantial
discount from the purchase price.
o Because the Company has no obligation and no specific plan to list the
Shares or sell its properties at any particular time, investors may not receive
a return of their investment for an indefinite period, if ever.
o Cornerstone's right of first refusal to purchase properties or other assets
of the Company may tend to decrease the price the Company is able to obtain for
its assets, since third parties may be reluctant to negotiate a purchase
transaction knowing that Cornerstone can substitute itself as purchaser. The
presence of the right of first refusal may, as a practical matter, result in the
Company selling assets to Cornerstone at a price below that which it could
obtain in a freely-negotiated sale to a third party.
1
<PAGE>
o The Advisor and its Affiliates will receive substantial compensation from
the Company. Such compensation has been established without the benefit of
arm's-length negotiation. See "Compensation." The payment of compensation to the
Advisor, its Affiliates and others from proceeds of the offering and property
revenues will reduce the amount of proceeds available for investment in
properties, or the cash available for distributions, and will therefore tend to
reduce the return on Shareholders' investments. In particular, the payment of
such compensation means that the investment return to Shareholders from the
Company will likely be less than could be obtained by a Shareholder's direct
acquisition and ownership of the same properties. The compensation is generally
payable regardless of Company profitability, and is generally payable prior to,
and without regard to whether the Company has sufficient cash for,
distributions.
o The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. Generally, such conflicts arise
because certain Directors and officers of the Company (i) are also principals in
or have relationships with other companies which will enter into contracts with
the Company, and (ii) are, and will in the future be, principals in other
programs which may compete with the Company. While certain policies and
procedures, described under "Conflicts of Interest," will be implemented to
ameliorate potential conflicts of interest, certain conflicts of interest cannot
be completely ameliorated. To the extent there are conflicts of interest, the
Advisor or its Affiliates may be inclined to favor there own interests over
those of the Company. The principal conflict of interest currently involving the
Company is that Glade M. Knight, who is a Director, Chairman of the Board and
the President of the Company, also owns the Advisor, Apple Residential
Management Group, Inc. and Apple Realty Group, Inc., all of which provide
services to the Company in exchange for compensation. The business and affairs
of the Company are controlled by the Company's Board of Directors, a majority of
whom are not Affiliated with the Advisor and its Affiliates. Prospective
Shareholders must rely upon the Board of Directors to supervise the relationship
between the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, to ensure that any adverse effect of any potential conflict of
interest is minimized. Prospective Shareholders should note, however, that Mr.
Knight could have influence on the Board of Directors disproportionate to his
voting power because he is engaged on a full-time basis in the operation of the
Company and its properties.
o Certain private partnerships sponsored by Affiliates of the Advisor have
experienced certain adverse business developments (bankruptcy reorganizations
and/or property foreclosures). See "The Advisor -- Prior Performance of Programs
Sponsored by Affiliates of the Advisor."
o Purchasers of the Shares offered hereby may experience dilution in the net
tangible book value of the Shares from the public offering price. In particular,
Shareholders will experience dilution if Glade M. Knight converts his Class B
Convertible Shares into Common Shares. See "Principal and Management
Stockholders."
o The investment in residential apartment communities (and other real
property, if any) involves many potential risks, including high vacancy rates,
competition for tenants, expenses (including those related to taxes, insurance
and property maintenance) exceeding income (which could necessitate borrowing to
fund deficits), on-site environmental problems, and possible uninsurable losses.
There can be no assurance that the Company's properties will operate profitably,
appreciate in value or generate cash for distribution.
o If the Company were to incur significant unanticipated cash expenditures,
the amount of cash available for distribution would decline. There can be no
assurance that the Company will maintain any specific level of distributions to
Shareholders.
o Neither the Company nor the Advisor has any operating history. The Company
may not operate successfully or achieve its objectives.
o There can be no assurance the Company will achieve significant
diversification in the properties it acquires. The fewer properties purchased,
the greater the risk that the Company's profitability will be affected by a
single unproductive property.
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o The Company may experience delays in finding suitable properties to
acquire, which could adversely impact the Company's profitability.
o The Company has not identified any properties to be acquired with the
proceeds from this offering of the Shares. Accordingly, prospective investors
may not have the opportunity to evaluate the assets to be acquired with the
proceeds of the offering before purchasing Shares.
o Although not anticipated, except on the limited interim basis described
under "Business and Properties-Properties Owned by the Company," borrowing by
the Company is permitted, subject to certain limitations. Company borrowing
would entail additional risks, including the risks that required principal and
interest payments would reduce distributions to Shareholders, and that the
Company could lose properties securing borrowings through foreclosure.
o The ability of the Company to operate as planned will depend upon its
continuing to qualify as a "real estate investment trust" for federal income tax
purposes. If the Internal Revenue Service (the "Service") were to determine that
the Company failed to meet the requirements for REIT status or if the Company
fails to maintain REIT status on a continuing basis, it will not be able to
achieve its investment objectives.
o Shareholders will not have any active participation in the management of
the Company and must rely on the management expertise provided by the Board of
Directors, the Advisor and its Affiliates. In such regard, the Board of
Directors has significant discretion to modify the investment objectives and
policies of the Company. Further, the Directors and officers of the Company and
the Advisor will benefit from certain provisions limiting their liability and
providing them with certain rights to indemnification with respect to actions
taken by them on behalf of the Company.
o The per-Share offering prices have been established arbitrarily and may
bear no relation to the actual value of the Company or the Shares.
o In order to help assure continued REIT qualification, the Company's Bylaws
generally prohibit ownership of more than 9.8% of the Company's outstanding
Shares by one investor. This provision may have the effect of precluding or
making more difficult changes in control of the Company, even if such changes
might otherwise be beneficial.
The Offering. The Shares are offered at $9 per Share until the Minimum
Offering of $15,000,000 in Shares is achieved. Thereafter, the Shares will be
offered at $10 per Share.
The offering made by this Prospectus will continue until all Common Shares of
the Company (the "Shares" or "Common Shares") offered under this Prospectus have
been sold or until one year from the date of this Prospectus, unless the Company
terminates the offering at an earlier date or extends it beyond such date for up
to an additional year. In some states, extension of the offering may not be
allowed or may be allowed only upon certain conditions. Closings will occur from
time to time during the offering period. The Shares are being offered through
David Lerner Associates, Inc. and other selected broker-dealers. All of the
Shares offered hereby are being sold by the Company.
If at least $15,000,000 in Shares (the "Minimum Offering") have not been sold
no later than one year after the date of this Prospectus, the offering will
terminate and all funds theretofore deposited by investors into the escrow
account (the "Escrow Account"), with First Union National Bank of North Carolina
as escrow agent, will be refunded promptly to investors, with any interest
earned thereon (less withholding of taxes in respect to payment of interest, if
applicable). A closing will occur after the Minimum Offering is achieved (the
"Initial Closing"). Thereafter, closings will occur from time to time during the
offering period. After the Minimum Offering amount is sold, there is no
requirement for an Escrow Account, and if there is an Escrow Account, there is
no limitation on the party which may act as escrow agent.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been
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accepted by a duly authorized representative of the Company. The Company will
either accept or reject each subscription within four business days from the
receipt of the subscription by the Managing Dealer or a Selected Dealer. The
Company intends to cause to be paid from any escrow account each investor's
share of net interest on escrowed funds, whether or not the investor's
subscription for Shares is accepted. The Company reserves the right to adopt
reasonable simplifying conventions or assumptions in determining each investor's
share of such net interest. Investors' subscriptions will be revocable by
written notice delivered to the escrow agent at least five days before the
applicable closing. Subject to the foregoing, an investor's subscription funds
may remain in escrow for an indefinite period of time.
The minimum investment for investors is $5,000 (approximately 555.56 Shares
at $9 per Share, and 500 Shares at $10 per Share), except that Qualified Plans
(defined as qualified employee pension or profit-sharing trusts, Keogh Plan
trusts and IRAs) may purchase a minimum of $2,000 (approximately 222.22 Shares
at $9 per Share and 200 Shares at $10 per Share). The record holders of the
Company's Shares will be the "Shareholders" of the Company.
As described under "Plan of Distribution," it is expected that investors
purchasing Shares in this offering will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." The Company estimates that approximately 400,000
Shares ($4,000,000 at $10 per Share) offered through this Prospectus will be
purchased through Shareholders' reinvestment of distributions in Shares pursuant
to the Additional Share Option, but the number of Shares which will be so
purchased cannot be determined at this time. Shares purchased pursuant to the
Additional Share Option will be at the same price per Share and on the same
terms applicable generally to subscriptions in this offering effective at the
time of reinvestment. Shareholders electing the Additional Share Option will be
taxed as if they received the reinvested distributions. See "Plan of
Distribution."
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or other equity or debt securities of the Company, on such
terms and for such consideration as it may deem advisable. Without limiting the
generality of the foregoing, the Board of Directors may, in its sole discretion,
issue Shares or other equity or debt securities of the Company, (1) to persons
from whom the Company purchases property, as part or all of the purchase price
of the property, or (2) to the Advisor or its Affiliates in lieu of cash
payments required under the Advisory Agreement or other contract or obligation.
The Board of Directors, in its sole discretion, may determine the value of any
Shares or other equity or debt securities issued in consideration of property or
services provided, or to be provided, to the Company, except that while Shares
are offered by the Company to the public, the public offering price of such
Shares shall be deemed to be their value. See "Summary of Organizational
Documents -- Issuance of Securities."
Affiliates of the Advisor. The term "Affiliate" used in this Prospectus,
which term is defined in the Glossary, refers generally to a person or entity
which is related to another specified person or entity through common control,
through significant (10% or more) equity ownership, or by serving as an officer
or director of (or in a similar capacity with) such specified entity. Affiliates
of the Advisor include Apple Realty Group, Inc., Apple Residential Management
Group, Inc. and Glade M. Knight, who owns all of the outstanding common stock of
the Advisor, Apple Realty Group, Inc. and Apple Residential Management Group,
Inc.
Glade M. Knight is a Director, Chairman of the Board and President of the
Company. Mr. Knight was also principally responsible for organizing Cornerstone
Realty Income Trust, Inc., and is a Director, Chairman of the Board, President
and shareholder of Cornerstone Realty Income Trust, Inc.
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The following diagram shows the relationship between the Company, on the one
hand, and the Advisor, certain Affiliates of the Advisor, and Cornerstorne
Realty Income Trust, Inc., on the other hand.
Shareholders
Common
Shares
The Company
(1) (2) (3)
Apple Residential Apple Residential Apple Realty
Advisors, Inc. Management Group, Inc. Group, Inc.
common preferred common preferred common
stock stock stock stock stock
Glade M. Cornerstone Glade M. Cornerstone Glade M.
Knight Realty Income Knight Realty Income Knight
Trust, Inc. Trust, Inc.
(1) Apple Residential Advisors, Inc. will be the Advisor to the Company under
an Advisory Agreement. See "The Advisor and Affiliates--The Advisory
Agreement."
(2) Apple Residential Management Group, Inc. will provide property management
services to the Company. See "Investment Objectives and
Policies--Management of Properties."
(3) Apple Realty Group, Inc. will provide to the Company services pertaining to
property acquisition and disposition. See "The Advisor and
Affiliates--Apple Realty Group, Inc."
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Estimated Use of Proceeds. The proceeds of the offering will be used (i) to
pay expenses and fees of selling the Shares; (ii) to invest in properties; (iii)
to pay expenses and fees associated with acquiring properties; and (iv) to
establish a working capital reserve. It is estimated that, if the Minimum
Offering is sold, the expenses and fees described in clauses (i) and (iii) of
the preceding sentence will aggregate 15% of the gross offering proceeds, that
the amount available to invest in properties will be 84.5% of the gross offering
proceeds, after establishing a working capital reserve equal to 0.5% of gross
offering proceeds. See "Estimated Use of Proceeds."
Compensation. The officers of the Company are not paid salaries by the
Company. Such officers are officers of the Advisor and its Affiliates, which
entities are entitled to certain fees for services rendered by them to the
Company. Thus, the officers of the Company are, in essence, compensated by the
Advisor or its Affiliates. Compensation and reimbursements payable to the
Advisor and its Affiliates are listed below. See "Compensation." Except as
indicated, the maximum dollar amount of such compensation and reimbursements is
not now determinable.
o The Advisor is entitled to receive an annual Asset Management Fee, based
upon the ratio of Funds from Operations to Total Contributions (such ratio is
called the "Return Ratio"), of between 0.1% and 0.25% of Total Contributions.
The percentage used to determine the Asset Management Fee will be 0.1% if the
Return Ratio for the preceding calendar quarter is 6% or less, 0.15% if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%, and 0.25% if the Return Ratio for the preceding calendar quarter is
more than 8%. ("Funds from Operations" is defined as net income (computed in
accordance with generally accepted accounting principles) excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation of real
property, and after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any. "Total Contributions" is
defined as the gross proceeds from the sale of the Shares.) See "The Advisor and
Affiliates -- The Advisory Agreement."
o Assuming the Minimum Offering amount ($15,000,000) is sold, the annual
Asset Management Fee would be between $15,000 and $37,500. Assuming the Maximum
Offering amount ($250,000,000) is sold, the annual Asset Management Fee would be
between $250,000 and $625,000. The Company believes that Funds from Operations
is an appropriate measure to use in determining the fees to be paid to the
Advisor because it ties compensation to an indicator of performance, namely an
industry-recognized measure of funds available from operations. "Funds from
Operations" is not the same as cash generated from operating activities in
accordance with generally accepted accounting principles, and, therefore, should
not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity.
o Apple Residential Management Group, Inc., an Affiliate of the Advisor, will
manage the Company's properties and will receive a property management fee equal
to 5% of the monthly gross revenues of the properties. In addition, the Company
will reimburse Apple Residential Management Group, Inc. for its expenses,
including salaries and related overhead expenses, associated with accounting and
financial reporting services rendered by Apple Residential Management Group,
Inc. under the property management agreements.
o Apple Realty Group, Inc., an Affiliate of the Advisor, will serve as the
real estate broker in connection with the Company's purchases and sales of
properties, and will receive fees from the Company of up to 2% of the gross
purchase price of each property and up to 2% of the gross sale prices. If the
person from whom the Company purchases or to whom the Company sells a property
pays any fee to Apple Realty Group, Inc., such amount will decrease the amount
of the Company's obligation to Apple Realty Group Inc. Apple Realty Group, Inc.
will not be entitled to any disposition fee in connection with a sale of a
property by the Company to Cornerstone Realty Income Trust, Inc. or any
Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs in
marketing such property. See "Investment Objectives and Policies - Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
o The Advisor and its Affiliates will be entitled to reimbursement for actual
costs incurred by them in connection with the offering of the Shares and the
operation of the Company.
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o The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to payment therefor.
Such conditions generally include the requirement that the transaction be
approved by the affirmative vote of a majority of the "Independent Directors,"
who are those Directors who are not Affiliated with the Advisor. There are
currently no plans for the providing of material services or property of the
type described in this paragraph.
Investment Objectives and Policies; Liquidity. The principal investment
objectives of the Company are to: (i) preserve and protect the capital of the
Company; (ii) provide quarterly distributions to the Shareholders, a portion of
which may constitute a nontaxable return of capital (rather than current taxable
income); and (iii) provide long-term capital appreciation in the value of the
Company's investments. The Company does not intend to make distributions from
borrowings or refinancings.
The Company anticipates that achievement of these objectives will enable it
to provide Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve these objectives. Attainment
of the objectives is contingent in part upon the Company's ability to acquire
suitable properties. See "Investment Objectives and Policies -- General."
The Company plans to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. Diversity in
geographic location will be a consideration for investment. See "Investment
Objectives and Policies -- Diversification."
The Company's management believes there is substantial opportunity for growth
from acquisitions of multi-family properties in Texas and the southwestern
region of the United States. Management believes that the current real estate
environment is conducive to advantageous acquisitions of existing multi-family
properties that meet the Company's investment criteria. In many instances, such
acquisitions may be made for less than the cost of new construction.
Prior to this offering there has been no public market for the Shares, and
initially such a market is not expected to develop. The Company does not plan to
cause the Shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While the Company, acting through its Board of Directors, may cause the
Shares to be so listed or quoted if the Board of Directors determines such
action to be prudent, there can be no assurance that such event will ever occur.
Prospective Shareholders should view the Shares as illiquid and must be prepared
to hold their investment for an indefinite length of time. Currently, the
Company expects that within approximately three (3) years from Initial Closing,
it will use its best efforts either (i) to cause the Shares to be listed on a
national securities exchange or quoted on the NASDAQ National Market System or
(ii) to cause the Company to dispose of substantially all of its properties in a
manner which will permit distributions to Shareholders of cash or marketable
securities. The taking of either type of action would be conditioned on the
Board of Directors determining such action to be prudent and in the best
interests of the Shareholders, and would be intended to provide Shareholders
with liquidity either by initiating the development of a market for the Shares
or by disposing of properties and distributing to Shareholders cash or other
securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period. See " Risk Factors --
Absence of Public Trading Market."
The Company intends to purchase its properties either on an all-cash basis or
using the limited interim borrowing described under "Business and Properties -
Properties Owned by the Company." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Shares and thereafter to hold its
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, the Company has the right, subject to the approval of the Board of
Directors, to borrow. See "Investment Objectives and Policies -- Borrowing
Policies." Subject to this limitation, the investment policies of the Company do
not restrict the Company to any one method
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of financing its operations. Therefore, it may purchase investment properties
subject to financing or mortgages existing before the date of purchase, use
either seller or new institutional financing or borrow from the Advisor or its
Affiliates. The Company's Bylaws prohibit the Company from incurring debt
(secured or unsecured) if such debt would result in aggregate debt exceeding
100% of "Net Assets" (defined generally to mean assets at cost), before
subtracting liabilities, unless the excess borrowing is approved by a majority
of the Independent Directors and disclosed to the Shareholders as required by
the Bylaws. The Bylaws also prohibit the Company from allowing aggregate
borrowings to exceed 50% of the Company's "Adjusted Net Asset Value" (defined
generally to mean assets at fair market value), before subtracting liabilities,
subject to the same exception. In addition, the Bylaws provide that the
aggregate borrowings of the Company must be reasonable in relation to the Net
Assets of the Company and must be reviewed quarterly by the Directors.
The investment return to Shareholders from the Company will likely be less
than could be obtained by a Shareholder's direct acquisition and ownership of
the same properties because (i) the Company will pay, partly to Affiliates of
Directors, substantial "front-end" fees (that is, fees paid directly from funds
received from sales of the Shares) to sell the Shares and acquire properties,
which will reduce the net proceeds available for investment in properties; and
(ii) the Company will likely pay, principally to the Advisor and its Affiliates,
substantial management and related compensation (which might be greater than the
fees for property management which a direct owner would incur), which will
reduce funds available for distribution to Shareholders. Thus, for example, if
only 84.5% of the gross proceeds of the offering are available for investment in
properties, revenues may be reduced by 15.5% compared to revenues in the absence
of such front-end fees. Similarly, any profit from appreciation in values of
properties could be commensurately reduced to the extent gross offering proceeds
are used to pay front-end fees.
Distribution Policy. The Company's policy and objective will be to pay to
Shareholders regular distributions. The timing and amounts of distributions will
be determined by the Board of Directors, acting in its sole discretion.
Business and Properties. The Company has been established to provide
Shareholders with a professionally managed portfolio of real estate equity
interests consisting primarily of existing residential apartment communities in
Texas and the southwestern region of the United States which have the potential
for current cash flow and capital appreciation.
Federal Income Tax Consequences. The Company will elect to be treated, and
intends to qualify on a continuing basis, as a REIT. The Company anticipates
that it will qualify as a REIT throughout its existence, but there can be no
assurance that the Company will so qualify. As a REIT, the Company will be
allowed a deduction for the amount of distributions paid to its Shareholders,
thereby subjecting the distributed net income of the Company to taxation only at
the Shareholder level. The Company's continued qualification as a REIT will
depend upon its compliance with numerous requirements, including requirements as
to the nature of its income. For a discussion of the risk that the Company may
fail to meet one or more of the requirements for REIT status, see "Risk Factors
- -- Federal Income Tax Risks." Each year, the Company will send to each
Shareholder a Form 1099 that will report the amount of income taxable to such
Shareholder for the preceding year.
As a REIT, the Company will deduct from its taxable income amounts
distributed to Shareholders and, therefore, will pay no tax on amounts
distributed to Shareholders. Distributions generally will be considered taxable
dividends to Shareholders to the extent of the Company's earnings and profits,
and, to such extent, will be considered portfolio rather than passive income for
purposes of Shareholders' use of investment expense deductions and passive
losses. Any distributions in excess of the Company's earnings and profits will
first reduce a Shareholder's basis in his or her Shares and, to the extent of
such reduction, will not be taxable to such Shareholder. Any distributions in
excess of both the Company's earnings and profits and the Shareholder's basis
will generally be treated as capital gain. Shareholders who are corporations
will not be eligible to claim the dividends-received deduction with respect to
any distributions paid by the Company. See "Federal Income Tax Consequences."
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Description of Capital Stock. The authorized capital stock of the Company
consists of 50,000,000 Common Shares, no par value and 200,000 Class B
Convertible Shares, no par value. As of the date of this Prospectus, there were
10 Common Shares of the Company issued and outstanding. All 200,000 authorized
Class B Convertible Shares are held by Glade M. Knight. See "Principal and
Management Stockholders."
The Common Shares will have the sole voting power to elect Directors. Holders
of the outstanding Common Shares will be entitled to one vote per Share on all
matters submitted to a vote of the Shareholders. In addition, the holders of the
Common Shares will be entitled to participate equally in distributions paid in
respect of the Shares if, when and as declared by the Board of Directors and in
distributions of the net assets of the Company upon its liquidation, dissolution
or winding up.
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RISK FACTORS
Investment in the Shares involves various risks. No assurance can be given
that the investment objectives of the Company will be achieved. In addition to
the information set forth elsewhere in this Prospectus, investors should
consider the following risks before making a decision to purchase the Shares.
ABSENCE OF PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Shares, and
initially such a market is not expected to develop. The Company does not plan to
cause the Shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While the Company, acting through its Board of Directors, may cause the
Shares to be so listed or quoted if the Board of Directors determines such
action to be prudent, there can be no assurance that such event will ever occur.
Prospective Shareholders should view the Shares as illiquid and must be prepared
to hold their investment for an indefinite length of time. Shareholders may be
unable to resell their Shares at all, or may be able to resell them only at a
substantial discount from the purchase price. Thus, the purchase of Shares
should be considered a long-term investment.
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
Many factors will bear on whether any such actions are prudent and feasible.
The feasibility of causing the Shares to be listed or quoted will depend upon
many factors, many of which are not presently determinable or are not within the
control of the Company. Such factors would include general economic and market
conditions, the Company's satisfaction of the legal listing or quotation
requirements in effect at such time, the economic performance of the Company
during the interim period, and the Company's financial condition at the time
listing or quotation is considered. In addition, the size of the Company (in
terms of its total assets and the diversification of its property portfolio),
which will reflect the number of Shares sold in this offering, will bear upon
the feasibility of listing or quoting the Shares for trading. In general, a
smaller Company size may make it less feasible to cause the listing or quotation
of the Shares.
Cornerstone Realty Income Trust, Inc., a REIT organized by Affiliates of the
Advisor, completed the initial closing of the public sale of its common shares
in May, 1993. As of October 1, 1996, such common shares had not been listed or
quoted on any national securities exchange, NASDAQ, or on any other established
market, although it is expected that such common shares will be listed on an
exchange by the end of 1996.
The feasibility of disposing of the Company's properties will also depend on
many factors, many of which are not presently determinable or are not within
control of the Company. General economic and market conditions will affect the
demand, if any, for the Company's properties and the prices which might be
offered for them. Adverse developments affecting a market or a Company property
after the Company's acquisition of a property may materially affect its market
value. Even if some properties are attractive to prospective purchasers, the
Company may determine that it is imprudent to dispose of only a portion of its
portfolio. Conversely, the larger the Company is, the less likely it is that it
will be able to dispose of substantially all of its properties within a
relatively short period of time. If the Company receives marketable securities
or other property, rather than cash, for the sale of its properties, it and any
subsequent holders of such property will bear the risk of decrease in the value
of such property.
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UNCERTAINTY REGARDING RETURN OF INVESTMENT
The Company is under no obligation and has no specific plans to list the
Shares on any exchange or in any market or to sell its properties at any
particular time. Since a Shareholder would generally recoup his original
investment, if at all, only through a sale of his Shares or receipt of
distributions from the Company's sale of its properties, a Shareholder may not
receive a return of his investment for an indefinite period, if ever.
As discussed below, under "Risk of Insufficient Cash Available for
Distribution," there is also no assurance that the Company will maintain any
specific level of distributions from operations to Shareholders.
RIGHT OF REFUSAL MAY AFFECT SALES
The Company has granted to Cornerstone Realty Income Trust, Inc. a right of
first refusal to purchase any property proposed for sale by the Company and a
right of first refusal to become the acquiring party in any transaction proposed
by the Company which would involve the sale or disposition of the Company or
substantially all of its assets, business or stock (whether such transaction is
structured as a sale, exchange, merger, consolidation, lease, share exchange or
otherwise). See "Investment Objectives and Policies -- Sale and Refinancing
Policies." Further, under its agreement with Cornerstone Realty Income Trust,
Inc., if the Company defaults on its obligation to grant to Cornerstone Realty
Income Trust, Inc. its right of first refusal to acquire a property or to become
the acquiring party in any such proposed transaction, the Company will be
obligated to pay to Cornerstone Realty Income Trust, Inc. as liquidated and
agreed-upon damages cash in the amount of 3% of the aggregate consideration
agreed to be paid for the property, assets, stock or business by any third party
in the transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price.
The presence of the right of first refusal held by Cornerstone Realty Income
Trust, Inc. with respect to various sale or disposition transactions which may
be sought or proposed by the Company may materially hamper the Company's ability
to obtain the highest possible price for its properties, assets, stock or
business from a third party. A third party may be reluctant to engage in
negotiations and due diligence with respect to a possible purchase or
acquisition transaction knowing that Cornerstone Realty Income Trust, Inc. can
substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although any sale of assets by the Company to
Cornerstone Realty Income Trust, Inc. will require the approval of a majority of
the Independent Directors of the Company, and such requirement is intended to
overcome any potential conflict of interest which might be involved in any such
transaction, there can be no assurance that a sale by the Company to Cornerstone
Realty Income Trust, Inc. would be on terms as favorable as a sale by the
Company to a third party, since there may be no alternative to selling assets to
Cornerstone Realty Income Trust, Inc.
COMPENSATION TO AFFILIATES IS PAYABLE BEFORE DISTRIBUTIONS AND WILL REDUCE
INVESTORS' RETURN
The Advisor and its Affiliates will receive substantial compensation from the
Company in exchange for various services they have agreed to render to the
Company. See "Compensation." This compensation has been established without the
benefit of arms-length negotiation, and the payment of such compensation from
proceeds of the offering and property revenues will reduce the amount of
proceeds available for investment in properties, or the cash available for
distribution, and will therefore tend to reduce the return on Shareholders'
investments. In addition, the compensation is generally payable regardless of
Company profitability, and is generally payable prior to, and without regard to
whether the Company has sufficient cash for distributions.
ACQUISITION, MANAGEMENT AND OTHER FEES AND EXPENSES WILL REDUCE RETURN
The investment return to Shareholders likely will be less than could be
obtained by a Shareholder's direct acquisition and ownership of the same
properties because (i) the Company will pay, principally to Affiliates of
Directors, substantial "front-end" fees and expenses to sell the Shares, and
acquire properties,
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which will reduce the net proceeds available for investment in properties; and
(ii) the Company will pay, principally to the Advisor and its Affiliates,
substantial management and related compensation (which might be greater than the
fees for property management that a direct owner would incur), which will reduce
cash available for distribution to Shareholder. Thus, for example, if only 84.5%
of the gross proceeds of the offering are available for investment in properties
revenues may be reduced by 15.5% compared to revenues in the absence of such
front-end fees. Similarly, any profit from appreciation in values of properties
could be commensurately reduced to the extent gross offering proceeds are used
to pay front-end fees.
CONFLICTS OF INTEREST
The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. See "Conflicts of Interest."
Generally, such conflicts of interest arise because certain Directors and
officers of the Company (i) are also principals in other companies which will
enter into contracts with the Company (principally for asset management and
property management, acquisition and disposition services), and (ii) are, and
will in the future be, principals in other real estate investment transactions
or programs which may compete with the Company. Other possible transactions
involving conflicts of interest would include the Company's acquisition of
properties from the Advisor or an Affiliate (which is permitted under the
conditions summarized in "Investment Objectives and Policies -- Investment
Criteria"), and the Company borrowing from the Advisor or an Affiliate (which is
permitted under the conditions summarized in "Investment Objectives and Policies
- -- Borrowing Policies").
The differing types of compensation payable to the Advisor and its Affiliates
present different potential conflicts of interest for such entities. Apple
Realty Group, Inc. is paid an acquisition fee in connection with each
acquisition of a property by the Company, and a disposition fee in connection
with certain property dispositions. As a consequence, Apple Realty Group, Inc.
may have an incentive to recommend the purchase or disposition of a property, in
order to receive a fee, rather than based upon the best interests of the
Company. Apple Residential Management Group, Inc. receives a property management
fee which is a percentage of gross revenues from each property owned by the
Company. This entity could, therefore, have an incentive to recommend that the
Company retain a property, rather than dispose of it, so that Apple Residential
Management Group, Inc. can continue to receive its property management
compensation. Apple Residential Advisors, Inc. receives a fee which is a
percentage of the total consideration received by the company with sale of
Shares and therefore could have an incentive, from a compensation standpoint, to
close the sales of Shares as rapidly as possible.
As discussed under "Conflicts of Interest," the Company has implemented
certain policies and procedures designed to eliminate or ameliorate the effects
of potential conflicts of interest. For example, the business and affairs of the
Company, including, without limitation, all of the relationships between the
Company, on the one hand, and the Advisor and its Affiliates, on the other hand,
are under the supervision and control of the Company's Board of Directors, a
majority of whom is not Affiliated with the Advisor or its Affiliates. In
evaluating the significance of a majority of the Board of Directors being
unaffiliated, prospective Shareholders should bear in mind that Mr. Knight may
have an influence on the Board of Directors disproportionate in relation to his
voting power, since he is engaged day-to-day in the management of the Company
and its properties. In general, if a person with responsibilities both to the
Company and to an entity contracting with the Company, or both to the Company
and to a program in competition with the Company, were to resolve a potential
conflict of interest in such dual capacity against the interest of the Company,
the operation of the Company could be adversely affected. However, in light of
the policies and procedures implemented to ameliorate the effects of potential
conflicts of interest, the Advisor and its Affiliates do not believe that the
potential conflicts of interest will have a material adverse effect upon the
Company's ability to realize its investment objectives, although there can be no
assurance to this effect.
PRIOR PERFORMANCE DIFFICULTIES OF CERTAIN AFFILIATES
Certain private partnerships previously organized by Affiliates of the
Advisor have experienced certain operating difficulties. These operating
difficulties led to (i) filings by certain partnerships for reorganization under
Chapter 11 of the United States Bankruptcy Code, some of which filings ended in
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foreclosures on partnership property, and (ii) certain other partnerships
consenting to negotiated foreclosures on their properties. Each such partnership
owned a single property, and the adverse business development affecting the
partnership therefore resulted in such partnership ceasing all cash
distributions to investors. See "The Advisor and Affiliates -- Prior Performance
of Programs Sponsored by Affiliates of the Advisor." The Advisor believes that
all of the investment vehicles experiencing such difficulties had investment
objectives and policies dissimilar to those of the Company, and that their
difficulties are attributable to a combination of factors (principally high
leverage, changes in tax laws, a general downturn in economic conditions and the
unavailability of favorable financing) which are not expected to be applicable
to the Company. In particular, the Company expects to acquire its properties on
an all-cash basis. However, prospective investors should consider the experience
of the Advisor and its Affiliates in evaluating an investment in the Company.
POTENTIAL DILUTION OF SHAREHOLDERS' INTERESTS
Glade M. Knight, who is a Director, Chairman of the Board and President of
the Company, holds certain Class B Convertible Shares which are convertible into
Common Shares, as described under "Principal and Management Stockholders." The
conversion by Mr. Knight of such Class B Convertible Shares into Common Shares
will result in dilution of the Shareholders' interests.
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or to raise capital through the issuance of options, warrants
and other rights, on such terms and for such consideration as the Board of
Directors in its sole discretion may determine. See "Summary of Organizational
Documents -- Issuance of Securities." Any such issuance could result in dilution
of the equity of the Shareholders. Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases property, as part or all of the purchase price of the
property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans." The effect of the
exercise of such options could be to dilute the value of the Shareholders'
investments to the extent of any difference between the exercise price of an
option and the value of the Shares purchased at the time of the exercise of the
option.
In addition, the Company expressly reserves the right to implement a dividend
reinvestment plan involving the issuance of additional Shares by the Company, at
an issue price determined by the Board of Directors.
UNCERTAINTY REGARDING REVENUES AND EXPENSES
The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and property operating expenses, which in
turn will be affected by property selection, property and Company management,
property location, and local and general economic conditions. The Company's
investment in residential apartment communities involves many potential risks
bearing on potential revenues and expenses, including high vacancy rates,
competition for tenants, expenses (including those related to taxes, insurance
and property maintenance) exceeding income (which could necessitate borrowing to
fund deficits), on-site environmental problems, and possible uninsurable losses.
Although the Company and the Advisor and its Affiliates will seek to minimize
the effect of factors such as these, some of such factors are beyond the control
of such persons. In addition, to the extent such factors are within the control
of such persons, the skill and ability of such persons to select, maintain and
operate such properties will largely determine whether the Company will operate
profitably. There can be no assurance that the Company's properties will operate
profitably, appreciate in value or generate cash for distribution.
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Equity real estate investments tend to limit the ability of the Company to
vary its portfolio promptly in response to changing economic, financial and
investment conditions. These investments will be subject to risks such as
adverse changes in general economic conditions or local conditions (for example,
excessive building resulting in an oversupply of available space, or a decrease
in employment, reducing the demand for real estate) as well as other factors
affecting real estate values (for example, increasing labor, materials and
energy costs, the attractiveness of the properties to tenants and the
attractiveness of the surrounding area). Investments will also be subject to
such risks as the inability of the Company to provide for adequate maintenance
of its properties. If the Company found it necessary to borrow, its operations
could be affected adversely by factors such as increased interest rates and
reduced availability of debt financing. However, to the extent that the
Company's investments are made on an all-cash basis, the risks relating to
interest rates and availability of long-term financing are not present.
The Company's investments will be primarily in existing residential apartment
communities. Some of the proceeds may be allocated to the repair and renovation
of such apartment communities. The Company's real estate equity investments will
be subject to the risk of inability to attract or retain tenants, and to the
risk of a decline in rental income as a result of adverse changes in economic
conditions, local real estate markets, or other factors. Also, certain
expenditures associated with equity investments (such as real estate taxes, the
costs of maintenance, renovations or improvements, insurance and utility costs)
are not necessarily decreased by events adversely affecting the Company's income
from those investments. Should any such events occur, the Company's cash
distributions to Shareholders may be impaired.
While it is the policy of the Company primarily to buy income-producing
properties at a price equal to or below their appraised values and below the
replacement cost of similar structures, there is no assurance that any Company
properties will operate at a profit, will appreciate in value, or will ever be
sold at a profit, or that distributions will be paid by the Company. The
marketability and value of any such properties will depend upon many factors
beyond the control of the Board of Directors and the Advisor.
If the Company does not operate profitably and exhausts its reserves, it
might be required to borrow funds or liquidate some of its investments to pay
fixed expenses of the Company which are not reduced by events which reduce
income.
ENVIRONMENTAL PROBLEMS AND LIABILITIES
While the Company intends to exercise due diligence by securing a report from
a qualified environmental engineer prior to the acquisition of any property,
there can be no assurance that hazardous substances or wastes will not be
discovered on investment properties subsequent to acquisition by the Company.
Federal law imposes liability on any owner of property or predecessor in title
for the presence on the premises of improperly disposed hazardous substances.
This liability is without regard to fault for or knowledge of the presence of
such substances and may be imposed jointly and severally upon all succeeding
landowners from the date of the first improper disposal. The laws of the states
in which the Company may acquire properties may have additional requirements. If
it is ever determined that hazardous substances are present on a property, the
Company could be required to pay all costs of any necessary cleanup work,
although under certain circumstances claims against other responsible parties
could be made by the Company.
COMPETITION FOR PROPERTIES AND TENANTS
The results of operations of the Company will depend upon the availability of
suitable opportunities for investment of its funds, which in turn depends to a
large extent on the type of investment involved, the condition of the financial
markets, the nature and geographical location of the property, and other
factors, none of which can be predicted with certainty. The Company will be
competing for acceptable investments with other financial institutions,
including insurance companies, pension funds and other institutions, real estate
investment trusts, and limited partnerships that have investment objectives
similar to those of the Company. Many of these competitors have greater
resources than the Company, and may have greater experience than the Board of
Directors, the Advisor and its Affiliates.
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In addition, when the Company owns a particular property it will be competing
for tenants with many other properties in the same market. Various competing
properties may be newer than the Company's property, or may offer superior
amenities, a superior location, perceived superior management or other
advantages over the Company's property. The adverse impact of competition may be
greater during times of local or general economic downturns. The general effect
of such competition may be a decrease in the occupancy rate at Company
properties, a decrease in rental rates at Company properties, or both, which in
turn will mean a decrease in Company income and lower, if any, distributions by
the Company to Shareholders.
UNINSURED LOSSES
The Advisor will arrange for comprehensive insurance, including fire,
liability, and extended coverage on all investment properties. However, there
are certain types of losses (generally of a catastrophic nature) which may be
either uninsurable or not economically insurable. These losses generally include
those resulting from war, earthquakes and floods, as well as punitive damages.
If any such loss occurs and is not covered by insurance, the Company might
suffer a loss of capital invested and any profits which might be anticipated
from the property in question. The Company from time to time will consider
whether to obtain earthquake and flood insurance for its properties to the
extent that it is economically available.
RISK OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION
If the Company were to incur significant unanticipated cash expenditures, the
amount of cash available for distribution would be affected. Furthermore, there
can be no assurance that the Company will in the future be able to acquire
properties that will generate sufficient cash from operations to enable the
Company to maintain distributions at a specific or any particular rate. See the
other risk factors in this section entitled "Risk Factors" for a discussion of
factors which could result in unanticipated cash expenditures, or which could
otherwise affect the Company's ability to make cash distributions to
Shareholders. There can be no assurance that the Company will maintain any
specific level of distributions to Shareholders.
LACK OF OPERATING HISTORY; NO ASSURANCE OF SUCCESS
Neither the Company nor the Advisor has any operating history. There is no
assurance that the Company will operate successfully or achieve its objectives.
SIZE OF OFFERING -- POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN
The Company initially will be funded with contributions of not less than
$15,000,000. The profitability of the Company could be affected by the number of
Shares sold. In the event the Company receives only the Minimum Offering, it
will invest in fewer properties. The fewer properties purchased, the greater the
potential adverse effect of a single unproductive property upon the Company's
profitability since a reduced degree of diversification will exist among the
Company's properties. In addition, the returns on those Shares sold will be
reduced as a result of allocating all Company expenses among the smaller number
of Shares. There is no limit on the amount or percentage of net proceeds from
the sale of Shares which may be invested in any single property.
DELAY IN INVESTMENT IN REAL PROPERTY
The Company may experience delays in finding suitable properties to acquire.
Pending investment of the proceeds of this offering in real estate, and to the
extent such proceeds are not invested in real estate as described herein, the
proceeds may be invested in certain permitted temporary investments. See
"Investment Objectives and Policies -- General." The rate of return on such
investments has fluctuated in recent years and may be different from the return
obtainable from real property.
NO SPECIFIED PROPERTIES
The specific properties in which the proceeds of this offering are to be
invested have not been identified as of the date of this Prospectus. A
prospective Shareholder will, therefore, have no information as to the
identification or location of specific properties to be purchased by the
Company, or as to
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the financing terms (if any) or other relevant economic and financial date
affecting those properties. However, when at any time during the offering period
the Company believes that there is a reasonable probability that any specific
property will be acquired, this Prospectus will be supplemented to provide a
description of the property and the anticipated terms of its purchase, financing
and management.
POSSIBLE BORROWING; DEBT FINANCING MAY REDUCE CASH FLOW AND INCREASE RISK OF
DEFAULT.
The Company intends to purchase its properties either on an all-cash basis or
using the limited interim borrowing described under "Business and Properties -
Properties Owned by the Company." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Shares and thereafter to hold its
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, the Company will have the right, subject to the approval of the
Board of Directors, to borrow. See "Investment Objectives and Policies --
Borrowing Policies."
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits of properties already owned. There can
be no assurance that the Company would be able to borrow on favorable terms, if
at all, if borrowing became necessary or desirable. Furthermore, the incurrence
of debt would entail certain additional risks for the Company, some of which are
summarized below. If the Company defaulted on secured indebtedness, the lender
could foreclose, and the Company could lose its investment in the property or
properties used as collateral.
The Company might obtain financing with variable rates and varying
maturities. Such rates normally provide cash flow benefits in an environment of
relatively low or declining interest rates, and a corresponding cash flow
detriment when interest rate increase. Alternatively, financings obtained by the
Company could have fixed rates and prepayment penalties.
The Company might obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or sale of the properties could cause the
maturity dates of the mortgages to be accelerated and the financing to become
due immediately. Thus, the Company could be required to sell its properties on
an all-cash basis or the purchaser might be required to obtain new financing in
connection with the sale. It cannot be predicted whether the holders of
mortgages encumbering the Company's investment properties will require such
acceleration, or whether other mortgage financing will be available. The
resolution of this issue would depend on the mortgage market, and on financial
and economic conditions existing at the time of the sale or refinancing. The
Company might obtain mortgages that involve balloon payments. Such mortgages
involve greater risks than mortgages with principal amounts amortized over the
term of the loan since the ability of the Company to repay the outstanding
principal amount at maturity may depend on the Company's ability to obtain
adequate refinancing or to sell the property, which will in turn depend on
economic conditions in general and the value of the underlying properties in
particular. There can be no assurance that the Company would be able to
refinance or repay any such mortgages at maturity. Further, a significant
decline in the value of the underlying property could result in a loss of the
property by the Company through foreclosure.
The Company does not intend to make distributions from borrowings or
refinancings. However, it is possible that the Company might, under certain
circumstances, find it necessary to borrow and distribute the borrowed funds to
comply with the distribution requirements for REITs under the Code. However, the
obligation to make principal payments on any such borrowings might adversely
affect the Company's ability to make the required distributions to maintain its
REIT status. See "Federal Income Tax Consequences -- Requirements for
Qualification as a REIT -- Annual Distribution Requirement." Since the REIT
distribution requirement is based on the Company's taxable income (with various
adjustments) rather than cash flow, the Company expects to be able to satisfy
the requirement without any borrowing. However, if such a borrowing were
necessary, the resulting distribution would not reflect a return on the
Shareholders' investments.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
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Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Except as set forth
in this paragraph, the Company is not limited in the amount of debt it can
incur.
Subject to the foregoing limitations on the permitted maximum amount of debt,
there is no limitation on the number of mortgages or deeds of trust which may be
placed against any particular property.
FEDERAL INCOME TAX RISKS
Failure to Achieve or Maintain REIT Status. The Company intends to conduct
its operations in a manner that will permit it to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service (the "Service") that it
will qualify as a REIT, it has received an opinion of its counsel, McGuire,
Woods, Battle & Boothe, L.L.P., that, based upon certain representations made by
the Company and assumptions described in "Federal Income Tax Consequences," it
will so qualify. However, investors should be aware that opinions of counsel are
not binding upon the Service. Furthermore, both the validity of the opinion and
the continued qualification of the Company for treatment as a REIT will depend
on its continuing ability to meet various requirements concerning, among other
things, the ownership of its Shares, the nature of i
ts assets, the sources of
its income and the amount of its distributions to Shareholders. Failure to meet
any of such requirements with respect to a particular taxable year could result
in termination of the Company's election to be a REIT, effective for the year of
such failure and the four succeeding taxable years.
To qualify as a REIT, the Company must distribute to the Shareholders an
amount equal to at least 95% of its "REIT taxable income" (plus certain other
items). In the event any Company expenditure, including a fee paid to the
Advisor, is disallowed for any reason, the asserted deductions could be
deferred, reduced or eliminated. Any retroactive increase in the Company's
taxable income resulting from the disallowance of a Company deduction could
result in (i) a failure of the Company to meet the income distribution
requirement, (ii) the imposition of Company-level taxation on additional amounts
of undistributed REIT income, or (iii) an increase in the amount of REIT income
on which an excise tax is imposed. However, if the Company makes distributions
in accordance with its stated policy, it does not expect that a
recharacterization of its expenses would have the effects described. See
"Federal Income Tax Consequences -- Requirements for Qualification as a REIT --
Annual Distribution Requirements."
In any year for which the Company failed to qualify as a REIT, it generally
would be subject to federal income taxation in the same manner as a regular
corporation. In such event, the Company would not be allowed a deduction for
earnings distributed to the Shareholders, thereby subjecting such earnings
(including gains from sales of properties) to taxation at both the Company and
Shareholder levels. The resulting tax liability to the Company would reduce
substantially the amount of Company cash available for distribution to the
Shareholders. Although the Company would be eligible to re-elect REIT status
after five years, the burden of double taxation might cause the Company to
liquidate before that time. See "Federal Income Tax Consequences -- Federal
Income Taxation of the Company," "-- Requirements for Qualification as a REIT"
and "-- Federal Income Taxation of the Shareholders."
Uncertainties in and Possible Changes to the Tax Law. The absence of Treasury
Regulations and other administrative interpretations with respect to many
provisions of the Code, combined with the highly technical and complex nature of
the rules governing REITs, gives rise to uncertainty concerning various tax
aspects of REITs generally and the tax consequences of an investment in the
Company in particular. Furthermore, the Company cannot predict whether or what
legislative, administrative, or judicial changes or developments may take place
in the future, any of which might impact the Company adversely, and perhaps
retroactively. Potential investors should consult their tax advisors concerning
the potential impact of any such changes or developments.
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REQUIRED RELIANCE ON MANAGEMENT
Shareholders will not have any active participation in management of the
Company or the investment of offering proceeds; rather, they must rely on the
management and acquisition expertise provided by the Board of Directors, the
Advisor and its Affiliates. Thus, no person should purchase any of the Shares
offered hereby unless he is willing to entrust all aspects of the management of
the Company to the Board of Directors, the Advisor and its Affiliates.
POSSIBLE CHANGES IN INVESTMENT OBJECTIVES AND POLICIES MAY NOT SERVE THE
INTERESTS OF CERTAIN SHAREHOLDERS
Subject to limited restrictions in the Company's Bylaws, the Articles of
Incorporation and applicable law, the Board of Directors has significant
discretion to modify the investment objectives and policies of the Company, as
stated in this Prospectus. See "Investment Objectives and Policies -- Changes in
Objectives and Policies." The Advisor believes that, since any such action by
the Board of Directors would be based upon the perceived best interests of the
Company and the Shareholders, the existence of such discretion to modify the
investment objectives and policies would generally be beneficial to the
Shareholders. However, the exercise of such discretion could result in the
Company adopting new investment objectives and policies which differ materially
from those described in this Prospectus.
RESPONSIBILITIES OF DIRECTORS, ADVISOR AND AFFILIATES -- POSSIBLE INADEQUACY
OF REMEDIES; DIRECTORS, ADVISOR AND AFFILIATES BENEFIT FROM EXCULPATION AND
INDEMNIFICATION PROVISIONS
The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries and consequently must exercise good faith and
integrity in handling the Company's affairs. This is a rapidly developing and
changing area of the law, and Shareholders who have questions concerning the
duties of the Directors and the Advisor should consult with their own counsel.
The Articles of Incorporation of the Company exculpate each Director and officer
in certain actions by or in the right of the Company from liability unless the
Director or officer has engaged in willful misconduct or a knowing violation of
the criminal law or of any federal or state securities laws. Further, the
Advisory Agreement exculpates the Advisor from liability unless the Advisor has
engaged in gross negligence or willful misconduct. The Articles of Incorporation
and the Advisory Agreement, respectively, also provide that the Company shall
indemnify a present or former Director or officer and the Advisor (and certain
Affiliates) against expense or liability in an action if the Directors (other
than the indemnified party) determine in good faith that the person to be
indemnified was acting in good faith within what he or it reasonably believed to
be the scope of his or its authority and for a purpose which he or it reasonably
believed to be in the best interests of the Company or its Shareholders and that
such liability was not the result of willful misconduct, bad faith, reckless
disregard of duties or knowing violation of the criminal law on the part of the
person to be indemnified. See "Summary of Organizational Documents."
As a result of the exculpation and indemnification provisions of the
Company's Articles of Incorporation and the Advisory Agreement, a Shareholder
may have a more limited right of action than such Shareholder would otherwise
have had in the absence of such provisions. The exculpation and indemnification
provisions in the Articles of Incorporation and the Advisory Agreement have been
adopted to help induce the beneficiaries of such provisions to agree to serve on
behalf of the Company or the Advisor by providing a degree of protection from
liability for alleged mistakes in making decisions and taking actions. Such
exculpation and indemnification provisions have been adopted, in part, in
response to a perceived increase generally in shareholders' litigation alleging
director and officer misconduct.
In the opinion of the Securities and Exchange Commission, indemnification for
liabilities arising out of the Securities Act is against public policy and,
therefore, unenforceable.
The Company intends to purchase insurance policies under which Directors,
officers and (if feasible) other agents of the Company will be insured against
liability or loss arising out of actual or asserted misfeasance or nonfeasance
in the performance of their duties, to the extent such insurance is available at
reasonable rates.
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ARBITRARY SHARE OFFERING PRICES
The per-Share offering prices ($9 until the Minimum Offering is achieved and
thereafter $10) have been established arbitrarily by the Company. Neither
prospective investors nor Shareholders should assume that the per-Share prices
reflect the intrinsic or realizable value of the Shares or otherwise reflects
the Company's value, earnings or other objective measures of worth. The increase
in the per- Share offering price from $9 to $10 once the Minimum Offering is
achieved is also not based upon or reflective of any objective indicia of
increased Company or Share value.
ADVISOR AND AFFILIATES MAY PURCHASE AND VOTE SHARES
The Advisor and Affiliates of the Advisor may purchase in this offering up to
2.5% of the total number of Shares of the Company sold in this offering, subject
to the restrictions on accumulation of Shares contained in the Company's Bylaws,
which generally prohibit accumulation by any person or entity of more than 9.8%
of all the Company's outstanding Shares. Any purchase of Shares in this offering
by the Advisor or its Affiliates must be for investment, and not for resale or
distribution.
In addition to the foregoing, the Company has adopted two stock incentive
plans for the benefit of the Directors of the Company and certain employees of
the Company and of the Advisor and Affiliates of the Advisor. See "Management --
Stock Incentive Plans."
Any such purchaser would possess the same voting power per Share as any other
purchaser. While it is not expected that the Advisor and its Affiliates will
purchase a substantial number of Shares, they will be permitted to vote any
Shares purchased by them in the same manner as other Shareholders.
ACCUMULATION RESTRICTIONS
The Company's Bylaws generally prohibit ownership of more than 9.8% of the
Company's outstanding Shares by one investor. See "Summary of Organizational
Documents -- Redemption and Restrictions on Transfer." That restriction is
designed to ensure that the Company does not violate certain share accumulation
restrictions imposed by the Code on REITs. The provisions restricting
concentrations of Share ownership also may have the effect of deterring the
acquisition of, or a change in, control of the Company. In addition, certain
states may impose investor suitability standards on the transfer of Shares.
JOINT VENTURE INVESTMENTS -- RISKS OF CONFLICTING INTERESTS AND IMPASSE
Under certain circumstances, the Company might participate with an entity
(including Affiliates of the Advisor) in jointly acquiring an investment
property. Any joint venture investment of the Company would be subject to the
same conditions, limitations and restrictions applicable to a Company investment
not undertaken as a joint venture, and the use of a joint venture structure
would not itself be designed to alter or expand the investment objectives and
policies of the Company. Investment through a joint venture could, for example,
permit the Company to invest in a property which is too large for the Company to
acquire by itself.
The investment by the Company through a joint venture could subject the
Company to risks not otherwise present, although the Company will endeavor to
structure any joint venture investment so as to minimize the number and
magnitude of risks not generally associated with a Company investment. Risks not
otherwise present could, however, include the possibility that the joint venture
participant will have economic interests different from the Company and that the
participant might be in a position to take actions contrary to the instructions
of the Company or contrary to the interests of the Company. In addition, in
joint venture investments there is a potential risk of impasse on decisions if
neither joint venture participant controls the venture. Conversely, if the
Company has a right of first refusal to purchase a joint venture participant's
interest, there is a potential risk that it may not have the resources to do so.
19
<PAGE>
ESTIMATED USE OF PROCEEDS
The Company intends to invest the net proceeds of this offering in equity
ownership interests in existing residential apartment communities in Texas and
the southwestern region of the United States. Pending such investment and to the
extent the proceeds are not invested in real estate as described herein, the
proceeds may be invested in certain permitted types of temporary investments.
See "Investment Objectives and Policies -- General." All proceeds of this
offering received by the Company must be invested or committed for investment in
properties or allocated to working capital reserves or used for other proper
Company purposes within the later of two years after commencement of the
offering or one year after termination of the offering; any proceeds not
invested or committed for investment or allocated to working capital reserves or
used for other proper Company purposes by the end of such time period shall be
returned to investors within 30 days after the expiration of such period, but
the Company may elect to return such proceeds earlier if, and to the extent,
required by applicable law (including to the extent necessary to avoid
characterization as an "investment company"). The proceeds of this offering will
be received and held in trust for the benefit of investors in compliance with
applicable securities laws, to be used only for the purposes set forth herein.
As described under "Compensation," the Company's Bylaws prohibit total
Organizational and Offering Expenses from exceeding 15% of Total Contributions.
"Organizational and Offering Expenses" means, generally, all expenses incurred
in organizing the Company and offering and selling the Shares, including selling
commissions and fees, legal fees and accounting fees, and federal, state and
other regulatory filing fees. The Bylaws also prohibit the total of all
Acquisition Fees (defined generally as all fees and commissions paid by any
party in connection with the Company's purchase of real property) and
Acquisition Expenses (defined generally as all expenses related to the selection
or acquisition of properties by the Company) paid in connection with an
acquisition of a property from exceeding 6% of the contract price for the
property (unless such excess is approved by the Board of Directors, as described
therein). Any Organizational and Offering Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
shall be payable by the Advisor immediately upon demand of the Company.
As indicated below, if the Minimum Offering is sold, the Company expects that
84.5% of the gross offering proceeds will be available for investment in
properties and 0.5% will be allocated to the Company's working capital reserve.
As indicated below, the Company expects that Organizational and Offering
Expenses will increase in dollar amount if more than the Minimum Offering amount
is sold. This reflects the Company's belief that the sale of Shares in excess of
the Minimum Offering amount will correspond to a relatively longer offering
period. The Company expects a relatively longer offering period to result in the
need for additional supplements and amendments to this Prospectus (including
possibly also post-effective amendments to the Company's registration statement)
and additional closings on the sale of Shares, which will result in increased
legal, accounting, printing and other fees and costs associated with the
offering of the Shares. However, the Company expects that the percentage which
Organizational and Offering Expenses comprise of gross proceeds will decrease if
and when more than the Minimum Offering amount is sold. The Advisor will pay
(without the right of reimbursement from the Company) any Organizational and
Offering Expenses which, exclusive of the Selling Commissions and Marketing
Expense Allowance, exceed 3% of gross offering proceeds.
As discussed under "Compensation," the Advisor and its Affiliates will be
entitled to reimbursement for expenses incurred by them in the operation of the
Company as well as, among other fees, a Real Estate Commission equal to 2% of
the proceeds of the offering used to pay each property's gross purchase price
(which does not include amounts budgeted for repairs and improvements), which
constitutes an "Acquisition Fee."
20
<PAGE>
The following table reflects the intended application of the proceeds from
the sale of the Common Shares.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
---------------------------- -----------------------------
% OF GROSS % OF GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Gross Proceeds (1)................................... $15,000,000 100.00% $250,000,000 100.00%
Less: ...............................................
Organizational and Offering Expenses (2)............ 450,000 3.00% 1,000,000 0.40%
Selling Commissions (3)............................. 1,125,000 7.50% 18,750,000 7.50%
Marketing Expense Allowance (3) .................... 375,000 2.50% 6,250,000 2.50%
-------------- ------------- --------------- -------------
Net Proceeds after Offering Costs.................... $13,000,000 87.00% $224,000,000 89.60%
Less Acquisition Fees and Expenses (4) .............. 300,000 2.00% 5,000,000 2.00%
-------------- ------------- --------------- -------------
Proceeds Available for Investment and Working
Capital............................................. $12,750,000 85.00% $219,000,000 87.60%
Less Working Capital Reserve (5) .................... 75,000 0.50% 1,250,000 0.50%
-------------- ------------- --------------- -------------
Net Amount Available for Investment in Properties
(6)................................................. $12,675,000 84.50% $217,750,000 87.10%
-------------- ------------- --------------- -------------
- ----------
</TABLE>
(1) The Shares are being offered on a "best-efforts" basis.
(2) These amounts reflect the Company's estimate of Organizational and Offering
Expenses, exclusive of the Selling Commissions and the Marketing Expense
Allowance payable to the Managing Dealer or the Selected Dealers. If such
expenses are greater than 3% of gross offering proceeds, the excess over 3%
will be paid by the Advisor (without the right of reimbursement from the
Company).
(3) Payable to the Managing Dealer or the Selected Dealers.
(4) These amounts include a Real Estate Commission payable to an Affiliate of
the Advisor in an amount equal to 2% of the proceeds of the offering used
to pay the purchase price of each property acquired (which does not include
amounts budgeted for repairs and improvements) plus the Company's estimates
of other expenses and fees which will be incurred in connection with
property acquisitions.
(5) Until used, amounts in the Company's working capital reserve, together with
any other proceeds not invested in properties or used for other Company
purposes, will be invested in certain permitted temporary investments, such
as U.S. Government securities or similar highly liquid instruments. See
"Investment Objectives and Policies -- General."
(6) The investment properties are expected to be existing residential apartment
communities in Texas and the southwestern regions of the United States. See
"Investment Objectives and Policies." In connection with each proposed
property acquisition, the Company expects to allocate a portion of proceeds
to repairs and improvements known to be needed at the property.
COMPENSATION
The table below describes the compensation and reimbursement which will be
paid to the Advisor and its Affiliates by the Company. The officers of the
Company are not paid salaries by the Company. Such officers are officers of the
Advisor and its Affiliates, which entities are entitled to certain fees for
services rendered by them to the Company. Thus, the officers of the Company are,
in essence, compensated by the Advisor or its Affiliates.
The Company will pay David Lerner Associates, Inc. Selling Commissions equal
to 7.5% of the purchase price of the Shares and a Marketing Expense Allowance
equal to 2.5% of the purchase price of the Shares. If the Minimum Offering is
sold, the Selling Commissions would be $1,125,000 and the Marketing Expense
Allowance would be $375,000. If the Maximum Offering is sold, the Selling
Commissions would be $18,750,000 and the Marketing Expense Allowance would be
$6,250,000. The Managing Dealer and the Advisor are not related and are not
Affiliates. See "Plan of Distribution."
21
<PAGE>
<TABLE>
<CAPTION>
PERSON
RECEIVING TYPE OF AMOUNT OF
COMPENSATION (1) COMPENSATION COMPENSATION (2)
---------------- ------------ ----------------
<S> <C> <C>
ACQUISITION PHASE
2% of the proceeds of the offering used to
Apple Realty Real Estate Commission for acquiring the pay the purchase prices of the properties
Group, Inc. ("ARG")............ Company's properties purchased by the Company. (3)
OPERATIONAL PHASE
The Advisor ................... Asset Management Fee for managing the Annual fee ranging from 0.1% of Total Contributions
Company's day-to-day operations to 0.25% of Total Contributions (payable quarterly)
-- a maximum of $37,500 per year if the Minimum
Offering is sold; a maximum of $625,000 per year if
the Maximum Offering is sold. (4)
Apple Residential Management Property Management Fee and expense 5% of the monthly gross revenues of the
Group, Inc. ("AMG") ........... reimbursement for managing the Company's properties plus expense reimbursement. (5)
properties
The Advisor, ARG and Reimbursement for costs and expenses Amount is indeterminate.
AMG ........................... incurred on behalf of the Company, as
described in Note (6)
DISPOSITION PHASE
ARG ........................... Real Estate Commission for selling the Up to 2% of the gross sales prices of the
Company's properties properties sold by the Company. (7)
ALL PHASES
The Advisor, ARG and
AMG............................ Payment for Services and Property (8) Amount is indeterminate.
</TABLE>
(1) As discussed in this Section and under "Conflicts of Interest," the Advisor
and its Affiliates will receive different types of compensation for
services rendered in connection with the acquisition, management and
disposition of properties, as well as the management of the day-to-day
operations of the Company. As discussed under "Conflicts of Interest," the
receipt of such fees could result in potential conflicts of interest for
persons who participate in decision making on behalf of both the Company
and such other entities.
(2) Except as otherwise indicated in this table (including these notes), the
specific amounts of compensation or reimbursement payable to the Advisor
and its Affiliates are not now known and generally will depend upon factors
determinable only at the time of payment. Compensation payable to the
Advisor and its Affiliates may be shared or reallocated among such
Affiliates in their sole discretion as they may agree. However,
compensation and reimbursements which would exceed specified limits or
ceilings cannot be recovered by the Advisor or its Affiliates through
reclassification into a different category.
(3) Under a Property Acquisition/Disposition Agreement with the Company, Apple
Realty Group, Inc. has agreed to serve as the real estate broker in
connection with both the Company's purchases and sales of properties. In
exchange for such services, such corporation will be entitled to a fee from
the Company of 2% of the gross purchase price (which does not include
amounts budgeted for repairs and improvements) of each property purchased
by the Company. If the person from whom the Company purchases or to whom
the Company sells a property pays any fee to Apple Realty Group, Inc., such
amount will decrease the amount of the Company's obligation to Apple Realty
Group, Inc. See "The Advisor and Affiliates -- Apple Realty Group, Inc."
(4) "Total Contributions" means the gross offering proceeds which have been
received from time to time from the sale of the Shares. Under its Advisory
Agreement with Apple Residential Advisors, Inc., the Company is obligated
to pay to the Advisor an Asset Management Fee which is a percentage of
Total Contributions. The applicable percentage used to calculate the Asset
Management Fee is based on the ratio of Funds from Oper-
22
<PAGE>
ations to Total Contributions (such ratio being referred to as the "Return
Ratio") for the preceding calendar quarter. The per annum Asset Management
Fee is initially equal to the following with respect to each calendar
quarter: 0.1% of Total Contributions if the Return Ratio for the preceding
calendar quarter is 6% or less; 0.15% of Total Contributions if the Return
Ratio for the preceding calendar quarter is more than 6% but not more than
8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. Assuming the Minimum Offering ($15,000,000)
is sold, the annual Asset Management Fee would be between $15,000 and
$37,500. Assuming the Maximum Offering ($250,000,000) is sold, the annual
Asset Management Fee would be between $250,000 and $625,000. See "The
Advisor and Affiliates."
(5) Apple Residential Management Group, Inc., an Affiliate of the Advisor, is
expected to provide property management services for each of the Company's
properties and in exchange therefor will receive a monthly fee equal to 5%
of the monthly gross revenues of the properties. Apple Residential
Management Group, Inc. is also expected to be responsible for the
accounting and financial reporting responsibilities for each of the
separate properties acquired by the Company. The Company will reimburse
Apple Residential Management Group, Inc. for its expenses, including
salaries and related overhead expenses, associated with providing such
accounting and financial reporting services. See "Investment Objectives and
Policies -- Management of Properties."
(6) The Advisor and its Affiliates will be reimbursed for all direct costs of
acquiring and operating the properties and of goods and materials used for
or by the Company and obtained from entities that are not Affiliated with
the Advisor. These costs and expenses include, but are not limited to,
legal fees and expenses, travel and communication expenses, expenses
relating to Shareholder communications, costs of appraisals, nonrefundable
option payments on property not acquired, accounting fees and expenses,
title insurance, compensation of on-site management personnel and leasing
agents (including any incentive compensation), maintenance and repair
expenses, advertising and promotional expenses, and all other fees, costs
and expenses directly attributable to the acquisition, ownership and
operation of the properties. In addition, Apple Residential Management
Group, Inc. will be reimbursed for salaries and related expenses and
overhead expenses associated with bookkeeping, accounting and financial
reporting services related to the properties. Operating Expenses
reimbursable to the Advisor or its Affiliates are subject to the overall
limitation on Operating Expenses discussed under "The Advisor and
Affiliates -- The Advisory Agreement," but the amount of reimbursement is
not otherwise limited.
(7) Under the Property Acquisition/Disposition Agreement described in note (3),
Apple Realty Group, Inc. also will be entitled to a fee from the Company in
connection with the Company's sale of each property equal to 2% of the
gross sales price of the property if, and only if, the sales price exceeds
the sum of (1) the Company's cost basis in the property (consisting of the
original purchase price plus any and all capitalized costs and expenditures
connected with the property) plus (2) 10% of such cost basis. For purposes
of such calculation, the Company's cost basis will not be reduced by
depreciation. See "The Advisor and Affiliates -- Apple Realty Group, Inc."
(8) The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to compensation
or payment therefor. The conditions, which are summarized under "Conflicts
of Interest -- Transactions with Affiliates and Related Parties," include
the requirement that each such transaction be approved by the affirmative
vote of a majority of the Independent Directors. Currently, there are no
arrangements or proposed arrangements between the Company, on the one hand,
and the Advisor or its Affiliates, on the other hand, for the provision of
such other services or property to the Company or the payment of
compensation or reimbursement therefor. If any such other arrangements
arise in the future, the terms of such arrangements, including the
compensation or reimbursement payable thereunder, will be subject to the
restrictions in the Company's Bylaws. Such compensation, reimbursement or
payment could take the form of cash or property, including Shares.
23
<PAGE>
CONFLICTS OF INTEREST
GENERAL
The Company may be subject to various conflicts of interest arising from its
relationship with the Advisor and its Affiliates and with certain Directors. The
Advisor and its Affiliates and the Directors are not restricted from engaging
for their own account in business activities of the type conducted by the
Company, and occasions may arise when the interests of the Company would be in
conflict with those of one or more of the Directors, the Advisor or their
Affiliates. The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling the Company's affairs.
The Advisor and its Affiliates will assist the Company in the acquisition,
organization, servicing, management and disposition of investments. At this
time, the Advisor will provide services exclusively to the Company, but the
Advisor may perform similar services for other parties, both affiliated and
unaffiliated, in the future.
The receipt of various fees from the Company by the Advisor and its
Affiliates may result in potential conflicts of interest for persons who
participate in decision making on behalf of both the Company and such other
entities. Thus, for example, because Apple Realty Group, Inc., an Affiliate of
the Advisor, will receive a 2% commission upon each purchase by the Company of a
property, and a commission of 2% upon each sale by the Company of a property if
certain conditions are met, its compensation will increase in proportion to the
number of properties purchased and sold by the Company and the properties'
purchase and sale prices. On the other hand, Apple Residential Management Group,
Inc., also an Affiliate of the Advisor, will receive a management fee equal to
5% of the monthly gross revenues of each property owned by the Company, plus an
expense reimbursement for accounting and financial reporting services rendered.
The management fee and expense reimbursement would cease to be payable if the
property being managed were sold. Since these entities receiving compensation
are Affiliates of the Advisor, which in turn will provide advice to the Company
concerning the acquisition, holding and disposition of properties, the Advisor
and its principals could have a conflict of interest in presenting investment
advice to the Company. The Advisor's Asset Management Fee is a percentage of
total Contributions (that is, total proceeds received from time to time by the
Company from the sales of its Shares). Accordingly, the Advisor has an incentive
to see that sales of Shares are closed as quickly as possible by the Company.
Affiliates of the Advisor who participate in decision making on behalf of the
Company will attempt to resolve or eliminate such conflicts of interest by
determining what is in the best interests of the Company and the Shareholders.
The Advisor and its Affiliates do not intend to take any action or make any
decision on behalf of the Company which is based, wholly or in part, upon a
consideration of the compensation payable to them as a consequence of such
action or decision. In addition, the presence on the Board of Directors of
Independent Directors is intended to ameliorate or eliminate the potential
impact of conflicts of interest for persons who participate in decision making
on behalf of both the Company and the Advisor or its Affiliates.
The Directors, the Advisor and its Affiliates will also be subject to the
various conflicts of interest described below. As described below, certain
policies and procedures will be implemented to eliminate or ameliorate the
effect of potential conflicts of interest. By way of illustration, the Bylaws
place certain limitations on the terms of contracts between the Company and the
Advisor or its Affiliates designed to ensure that such contracts are not less
favorable to the Company than would be available from an unaffiliated party.
However, certain potential conflicts of interest (such as the potential conflict
of interest experienced by an individual who has executive or management
responsibilities with respect to multiple entities) are not easily susceptible
to resolution. Prospective Shareholders are entitled to rely on the general
fiduciary duties of the Directors and the Advisor, as well as the specific
policies and procedures designed to eliminate or ameliorate potential conflicts
of interest described below. The Advisor and its Affiliates believe that general
legal principles dealing with fiduciary and similar duties of corporate officers
and directors, combined with specific contractual provisions in the agreements
between the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, will provide
24
<PAGE>
substantial protection for the interests of the Shareholders. Thus, the Advisor
and its Affiliates do not believe that the potential conflicts of interest
described herein will have a material adverse effect upon the Company's ability
to realize its investment objectives.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At the time of Initial Closing, the Board of Directors will consist of five
members, three of whom are Independent Directors and two of whom are not
Independent Directors. At all times on and after Initial Closing, a majority of
the Board of Directors must be Independent Directors. The Directors who are not
Independent Directors are Affiliated with the Advisor. Under the Company's
Bylaws, any transaction (whether a sale or acquisition of assets, any borrowing
or lending, any agreement for the provision of property or services, or
otherwise) between the Company, on the one hand, and the Advisor or any
Affiliate of the Advisor, on the other hand (excluding only the entering into,
and the initial term under, the Advisory Agreement, the Property
Acquisition/Disposition Agreement, and the Property Management Agreement for
each property, each of which agreement is described in this Prospectus) is
permitted only if such transaction has been approved by the affirmative vote of
a majority in number of all of the Independent Directors. In addition, under the
Bylaws, any such transaction must meet certain conditions, including that the
transaction be in all respects fair and reasonable to the Shareholders of the
Company. If any such proposed transaction involves the purchase of property, the
purchase must be on terms not less favorable to the Company than those
prevailing for arm's-length transactions concerning comparable property, and at
a price to the Company no greater than the cost of the asset to the seller
unless a majority of the Independent Directors determines that substantial
justification for such excess exists. Examples of substantial justification
might include, without limitation, an extended holding period or capital
improvements by the seller which would support a higher purchase price.
The Advisor and its Affiliates will receive compensation from the Company for
providing many different services. The fees payable and expenses reimbursable
are subject to the general limitation on Operating Expenses. See "Compensation."
The Board of Directors will have oversight responsibility with respect to any
such relationships and will attempt to ensure that they are structured to be no
less favorable to the Company than the Company's relationships with unrelated
persons or entities and are consistent with the Company's objectives and
policies.
COMPETITION BY THE COMPANY WITH AFFILIATES
Affiliates of the Advisor may form additional REITs, limited partnerships and
other entities to engage in activities similar to those of the Company, although
the Advisor and its Affiliates have no present intention of organizing any
additional REITs. However, until such time as more than 95% of the proceeds of
this offering are invested, the Advisor and its Affiliates shall present to the
Company any suitable investment opportunity before offering it to any other
Affiliated entity. The competing activities of the Advisor and its Affiliates
may involve certain conflicts of interest. For example, Affiliates of the
Advisor are interested in the continuing success of previously formed ventures
because they have fiduciary responsibilities to investors in those ventures,
they may be personally liable on certain obligations of those ventures and they
have equity and incentive interests in those ventures. Conflicts of interest
would also exist if properties acquired by the Company compete with properties
owned or managed by Affiliates of the Advisor. Conflicts of interest may also
arise in the future if the Company and other ventures developed by Affiliates of
the Advisor seek to sell, finance or refinance properties at the same time.
COMPETITION FOR MANAGEMENT SERVICES
Certain officers and directors of the Advisor are also officers or directors
of one or more entities Affiliated with the Advisor which engage in the
brokerage, sale, operation, or management of real estate. Affiliates of the
Advisor presently are acting as general partners in a number of limited
partnerships engaged in real estate investments. Accordingly, certain Directors
and the officers and directors of
25
<PAGE>
the Advisor may have conflicts of interest in allocating management time and
services between the Company and other entities. Also, employees of Cornerstone
Realty Income Trust, Inc., some of whom may assist officers of the Advisor and
Apple Residential Management Group, Inc., may have conflicts in allocating their
time.
LACK OF SEPARATE REPRESENTATION
The Company may retain the same independent accountants as are retained by
the Advisor and Affiliates of the Advisor. The law firm of McGuire, Woods,
Battle & Boothe, L.L.P., which is passing on the legality of the Shares for the
Company and is advising it as to the Company's status as a REIT for federal
income tax purposes, may act as counsel to the Company in other matters.
McGuire, Woods, Battle & Boothe, L.L.P. also renders and may continue to render
legal services to the Advisor and its Affiliates; however, such counsel would
recommend the engagement of independent counsel for the Company, the Advisor or
such Affiliates in circumstances in which the applicable canons of ethics would
so require.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. Pending such
investment, the proceeds of this offering may be invested in U.S. Government
securities, certificates of deposit from banks located in the United States
having a net worth of at least $50,000,000, bank repurchase agreements covering
the securities of the U.S. Government or U.S. governmental agencies issued by
banks located in the U.S. having a net worth of at least $50,000,000, bankers'
acceptances, prime commercial paper or similar highly liquid investments (such
as money market funds selected by the Company) or evidences of indebtedness. In
addition, to the extent the proceeds are not invested in real estate as
described herein, the Company has the ability to invest in such securities. All
proceeds of this offering received by the Company must be invested or committed
for investment in properties or allocated to working capital reserves or used
for other proper Company purposes within the later of two years after
commencement of the offering or one year after termination of the offering; any
proceeds not invested or committed for investment or allocated to working
capital reserves or used for other proper Company purposes by the end of such
time period shall be returned to investors, within 30 days after the expiration
of such period, but the Company may elect to return such proceeds earlier if,
and to the extent, required by applicable law (including to the extent necessary
to avoid characterization as an "investment company").
The principal investment objectives of the Company are:
(i) to preserve and protect the capital of the Company;
(ii) to provide quarterly distributions to Shareholders, a portion of which
may constitute a nontaxable return of capital (rather than current taxable
income); and
(iii) to provide long-term capital appreciation in the value of the
Company's investments.
The Company anticipates that achievement of such objectives will enable it to
provide the Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve such objectives. Attainment of
the objectives is contingent in part upon the Company's ability to acquire
suitable properties. To the extent such objectives cannot simultaneously be
pursued or achieved, the Company plans to pursue the objective of regular
quarterly distributions to Shareholders in preference to the objective of
long-term capital appreciation in the value of Company investments and in the
value of Shares.
The Company's primary business objectives are to increase distributions per
Share and the value of its properties by:
(i) increasing occupancy rates and rental income at properties;
(ii) implementing expense controls; and
26
<PAGE>
(iii) emphasizing regular maintenance and periodic renovations, including
additions to amenities.
The Company may make acquisitions of established apartment communities
involved in foreclosure proceedings when the Advisor and the Company believe the
property may have below market-rate leases, correctable vacancy problems or
other cash flow growth potential. In suitable situations, the Company also may
make acquisitions of properties from over-leveraged owners of such properties
and from governmental regulatory authorities and lending institutions which have
taken control of such properties, as well as mortgagees-in-possession and,
possibly, through bankruptcy reorganization proceedings.
In connection with the acquisition of Properties, the Company sets aside an
amount determined by it to be necessary to fund repairs and improvements which
the Company believes should be made at the Property, to make it competitive in
its market and, where appropriate, to permit rental increases.
The Company will seek to assure that its Properties remain attractive
residences for their tenants and are desirable locations for prospective
tenants. The maintenance, custodial and groundskeeping staff of Apple
Residential Management Group, Inc. performs regular maintenance and upkeep on
the properties to preserve and enhance their practical and aesthetic attributes.
The physical appearance of, and tenant satisfaction with, each Property are
evaluated on a regular basis by the Company's executive officers.
The Company's management places strong emphasis on the marketing and
promotion of its Properties. Marketing plans focus on each Property's specific
needs for maximizing occupancy. Marketing programs include television, radio and
newspaper advertising, all designed to attract tenants in each market.
The Board of Directors may, in its sole discretion, issue Shares, or other
equity or debt securities of the Company, to sellers of properties, as part or
all of the purchase price of the property. Shares or such other equity or debt
securities of the Company may also be issued, at the election of the Board of
Directors, to the Advisor or its Affiliates in lieu of cash payments required
under the Advisory Agreement or other contract or obligation. See "Summary of
Organizational Documents -- Issuance of Securities."
The Company will not issue any equity securities senior to the Shares unless
the holders of a majority of the outstanding Shares authorize such issuance by
an appropriate amendment to the Company's Articles of Incorporation.
The Company has no present intention of making any loans to other persons or
investing in the securities of other issuers for the purpose of exercising
control of such issuers. As described below, under "Types of Investments," the
Company is subject to certain limitations on its ability to make mortgage loans
or invest its assets in the securities of other issuers. Such limitations can
only be changed with the consent of the holders of a majority of the outstanding
Shares. Within such limitations, however, the Board of Directors, acting without
Shareholder approval, may set and change the Company's policy regarding the
making of loans and the investment in securities of other issuers.
Except with respect to the permitted temporary investment of proceeds from
the sales of Shares pending investments in properties (see "General" above), the
Company has no present intention of investing in the securities of or interests
in other persons, or engaging in the purchase and sale (or turnover) of
investments other than its real property investments. The Company may engage in
certain joint venture investments (see "Joint Venture Investments" below) and
may invest up to 20% of its total assets in the equity securities of other
issuers, although the Company has no present intention to engage in any such
activities. The Company has no plans to invest in the securities of other
issuers for the purpose of exercising control.
Although the Company has no present intention to do so, the Board of
Directors might cause the Company to invest a portion of its assets (subject to
the limitations set forth in the By-Laws, as described below under "Types of
Investments") in common stock or other equity securities of other REITs or
limited partnerships holding real estate. Such an investment, if undertaken,
would be based on a determination by the Board of Directors that investment in
such common stock or equity securities furthered the overall investment
objectives and policies of the Company in a way not furthered by the Company's
direct investment in real property. For example, although not presently
anticipated, the Company could decide to further its diversification objective
by acquiring an equity interest in a REIT owning properties in other regions of
the United States, rather than seeking to invest directly in real
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properties located in such other region. Any such decision would be based upon
the perceived best interests of the Company and the Shareholders at the time.
Furthermore, any such investment would be based upon a determination by the
Board of Directors, based upon advice of counsel to the Company, that such
investment would not adversely impact the Company's continued qualification as a
REIT for Federal income tax purposes. If the Company undertook any such
investment, such investment could be made in listed or publicly-traded equity
securities or, alternatively, in securities of a private issuer.
If undertaken at all, the Company would expect to invest only in a Company
engaged principally in the ownership and operation of multi-family apartment
communities. Subject to that limitation, the Company would not necessarily limit
itself to investments in other companies of any specific size or with any
specific period of prior operations.
INVESTMENT CRITERIA
The Advisor is charged with identifying and recommending to the Company
suitable investments. The Advisor will make such recommendations based upon such
relevant factors as (i) the potential for realizing capital appreciation; (ii)
current and projected cash flow and the ability to increase rental income
through capable management; (iii) neighborhood location, condition and design of
the property; (iv) historical and projected occupancy rates; (v) prospects for
liquidity through sale, financing or refinancing; (vi) economic conditions in
the community; (vii) geographic location and type of property in light of the
Company's diversification objectives; and (viii) the purchase price of the
property as it relates to prices of comparable properties in comparable
locations.
The Company's management believes there is substantial opportunity for growth
from acquisitions of multi-family properties in Texas and the southwestern
region of the United States. Management believes that the current real estate
environment is conducive to advantageous acquisitions of existing multi-family
properties that meet the Company's investment criteria. In many instances, such
acquisitions may be made for less than the cost of new construction.
Generally, the Advisor is not required to, and will not, advise the Company
on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
will make its own decisions with respect to such temporary securities
investments.
Apple Realty Group, Inc., an Affiliate of the Advisor, will receive a 2% real
estate commission upon each purchase by the Company of a property. See "The
Advisor and Affiliates -- Apple Realty Group, Inc."
Any property acquisition made with proceeds representing the Minimum Offering
amount ($15 million) will require the approval of the Executive Committee of the
Board of Directors. Otherwise the acquisition of any property with a contract
purchase price not greater than $15,000,000 may be undertaken by the President
acting alone (unless it is an acquisition from an Affiliate of the Advisor). Any
property acquisition with a contract purchase price exceeding $15,000,000 will
require the consent of the Executive Committee of the Board of Directors. Any
acquisition from an Affiliate of the Advisor will require the consent of a
majority of all Independent Directors and of the entire Board.
TYPES OF INVESTMENTS
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. The Company does not
intend to invest in undeveloped land except in connection with the acquisition
of an existing apartment community. The Company does not intend to make or
invest in any mortgage loans (except that the Company may hold purchase money
obligations secured by mortgages on properties sold by it). Except in connection
with permitted joint venture investments (see "Joint Venture Investments,"
below) and except with respect to permitted temporary investments (see "General"
above), the Company will not invest more than 20 percent of its total assets in
equity securities of or interests in other issuers for a period in excess of 18
months. Within certain limitations, the Board of Directors can change the
investment objectives and policies of the Company. See "Changes in Objectives
and Policies," below.
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In addition, the Company's Bylaws prohibit it from engaging in certain
investment and other activities, including: (i) investing more than 10 percent
of the total assets of the Company in unimproved real property or mortgage loans
on unimproved real property; (ii) investing in commodities or commodity future
contracts or effecting short sales of commodities or securities, except when
done solely for hedging purposes; (iii) investing in or making mortgage loans on
property unless the Company obtains a mortgagee's or owner's title insurance
policy or commitment as to the priority of the mortgage or the condition of the
title; (iv) investing in contracts for the sale of real estate unless they are
recordable in the chain of title; (v) making or investing in mortgage loans,
including construction loans, on any property if the aggregate amount of all
mortgage loans outstanding on the property (at the time the Company makes or
invests in its mortgage loan), including the loans of the Company, would exceed
85 percent of the appraised value of the property; (vi) investing in junior
mortgage loans (provided that this and the foregoing limitations shall not apply
to the Company taking back secured debt in connection with the sale of any
property); (vii) issuing securities that are redeemable; (viii) issuing debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known changes is sufficient properly to
service the higher level of debt or unless the cash flow of the Company (for the
last fiscal year) excluding extraordinary, nonrecurring items, is sufficient to
cover the debt service on all debt securities to be outstanding; (ix) investing
more than 20% of its total assets in the equity securities of any
non-governmental issuers, including other REITs or limited partnerships, for a
period in excess of 18 months; (x) issuing equity securities on a deferred
payment basis or other similar arrangement; (xi) incurring any indebtedness,
secured or unsecured, if such indebtedness would result in an aggregate amount
of indebtedness in excess of 100 percent of Net Assets, before subtracting
liabilities (unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws); (xii) allowing aggregate borrowings of the Company to exceed 50 percent
of the Adjusted Net Asset Value (before subtracting any liabilities) of the
Company unless the excess borrowing is similarly approved by the Independent
Directors and disclosed to the Shareholders; (xiii) engaging in any short sale
of or underwriting or distributing, as an agent, securities issued by others, or
engaging in trading, as compared with investment activities; and (xiv) acquiring
securities in any company engaging in activities or holding investments
prohibited by the above prohibitions, the Code or Virginia law.
DIVERSIFICATION
One of the Company's investment objectives is to own properties in various
geographic locations within Texas and the southwestern United States, thereby
minimizing the effects of changes in specific industries, local economic
conditions or similar risks. The extent of geographic diversification depends
upon the number of separate properties which can be purchased. There can be no
assurance that the Company will achieve significant diversification. There is no
limit on the amount or percentage of net proceeds from the sale of Shares which
may be invested in any single property.
JOINT VENTURE INVESTMENTS
Some of the Company's investments may be made through partnerships or joint
ventures. The Company's partner or joint venturer could be an Affiliate of the
Advisor. While each such partnership or joint venture agreement may vary in
form, depending on negotiations, in no case will the co-venturer have any legal
right to take action which would prevent the Company from carrying on its
business as described in this Prospectus. Any joint venture investment of the
Company would be subject to the same conditions, limitations and restrictions
applicable to a Company investment not undertaken as a joint venture, and the
use of a joint venture structure would not itself be designed to alter or expand
the investment objectives and policies of the Company. Investment through a
joint venture could, for example, permit the Company to invest in a property
which is too large for the Company to acquire by itself.
The Company anticipates that any joint venture investment it might undertake
would involve only the ownership and operation of apartment communities of the
same general type sought to be acquired directly by the Company. The Company
could, for example, use a joint venture investment to acquire one or more
apartment communities located outside of the regions in which the Company
normally operates with a view toward minimizing risks otherwise associated
entering new markets. Although the
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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.
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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.
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Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
At such time as the Company, acting through its Board of Directors,
determines that sale of a property is in the best interests of the Company, the
Company must first offer such property for sale to Cornerstone Realty Income
Trust, Inc. Cornerstone Realty Income Trust, Inc. is a Virginia corporation
which is a public real estate investment trust. Cornerstone Realty Income Trust,
Inc. was founded by Glade M. Knight, who currently serves as the Chairman of the
Board, President and a Director of that entity. Mr. Knight also serves as
Chairman of the Board, President and a Director of the Company. See
"Management-Directors and Officers." Any such sale of a property by the Company
to Cornerstone Realty Income Trust, Inc. would require the consent of a majority
of both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company.
The Company has also agreed with Cornerstone Realty Income Trust, Inc. that
if the Company proposes the sale or disposition of the Company or substantially
all of its assets, business or stock (whether such transaction is structured as
a sale, exchange, merger, consolidation, lease, share exchange or otherwise)
(any such transaction, a "Sale of the Company"), it will first offer Cornerstone
Realty Income Trust, Inc. the right to become the acquiring party in any such
proposed transaction before concluding the proposed Sale of the Company to a
third party. As in the case of a sale of an individual property by the Company
to Cornerstone Realty Income Trust, Inc., any such Sale of the Company to
Cornerstone Realty Income Trust, Inc. would require the consent of a majority of
both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company. Depending upon the form of any such
transaction, it might also require the consent of Shareholders owning a majority
of the outstanding Shares.
If the third party offers cash for the property, assets, stock or business of
the Company, Cornerstone Realty Income Trust, Inc. must offer cash if it wishes
to exercise its right of first refusal. If the third party offers property other
than cash, Cornerstone Realty Income Trust, Inc. will be permitted to offer
property of a like character with the same value. The value of the property
offered by the third party and Cornerstone Realty Income Trust, Inc. will be the
market value if the property has a readily ascertainable market value (such as
listed stock), and otherwise will be determined in good faith by agreement of
the boards of directors of the Company and Cornerstone Realty Income Trust,
Inc., or if such boards are unable to agree, by the average of two appraisals
undertaken by two qualified independent appraisers, one selected by each board
of directors.
If the Company defaults in its obligation to grant to Cornerstone Realty
Income Trust, Inc. a first right to acquire a property or to become the
acquiring party in a proposed Sale of the Company, the Company will be obligated
to pay Cornerstone Realty Income Trust, Inc. as liquidated and agreed-upon
damages cash in the amount of 3% of the aggregate consideration agreed to be
paid for the property, assets, stock or business by any third party in the
transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price. However, the presence of the right of first refusal
held by Cornerstone Realty Income Trust, Inc. with respect to the various sale
or disposition transactions which may be sought or proposed by the Company may
materially hamper the Company's ability to obtain the highest possible price for
its properties, assets, stock or business from a third party. A third party may
be reluctant to engage in negotiations and due diligence with respect to a
possible purchase or acquisition transaction knowing that Cornerstone Realty
Income Trust, Inc. can
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substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus, the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although the requirement for the approval of a
majority of the Independent Directors of the Company is intended to overcome any
potential conflict of interest which might be involved in any such sale to
Cornerstone Realty Income Trust, Inc., there can be no assurance that a sale by
the Company to Cornerstone Realty Income Trust, Inc. would be on terms as
favorable as a sale by the Company to a third party, since there may be no
alternative to selling assets to Cornerstone Realty Income Trust, Inc.
Unless required to maintain REIT status, the Company does not intend to
borrow or refinance to make distributions. Although not anticipated, in some
cases it might be advantageous for the Company to incur mortgage indebtedness
on, or finance or refinance, a property to further the Company's investment
objectives. If the original mortgage indebtedness, if any, on a property has
been significantly reduced and/or if a particular property has increased
substantially in value, then financing (or refinancing of existing
indebtedness), if achievable, may permit the Company to realize a portion of the
appreciation in value of the property and retain the property. See "Risk Factors
- -- Real Property Investment Risks -- Possible Borrowing; Debt Financing May
Reduce Cash Flow and Increase Risk of Default."
Under its Property Acquisition/Disposition Agreement with the Company, Apple
Realty Group, Inc., an Affiliate of the Advisor, may receive a 2% real estate
commission upon each sale by the Company of a property. Apple Realty Group, Inc.
will not be entitled to any disposition fee in connection with a sale of a
property by the Company to Cornerstone Realty Income Trust, Inc. or any
Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs in
marketing such property. See "Investment Objectives and Policies -- Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
It is also possible that Apple Realty Group, Inc., or an Affiliate, will
render services, and receive compensation, in connection with Company financings
and refinancings, although there are no specific agreements for such services as
of the date of this Prospectus. See "The Advisor and Affiliates -- Apple Realty
Group, Inc."
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the Articles of Incorporation, the Bylaws and
the Virginia Stock Corporation Act, the powers of the Company will be exercised
by or under the authority of, and the business and affairs of the Company will
be controlled by, the Board of Directors. The Board of Directors also has the
right and power to establish policies concerning investments and the right,
power and obligation to monitor the procedures, investment operations and
performance of the Company.
In general, the Articles of Incorporation and the Bylaws can be amended only
with the affirmative vote of a majority of the outstanding Common Shares, except
that the Bylaws may be amended by the Directors if necessary to comply with the
REIT provisions of the Code or with other applicable laws and regulations. The
Bylaws contain certain restrictions on the activities of the Company and
prohibit the Company from engaging in certain activities. See "Types of
Investments."
Within the express restrictions and prohibitions of the Bylaws, the Articles
of Incorporation and applicable law, however, the Board of Directors has
significant discretion to modify the investment objectives and policies of the
Company, as stated in this Prospectus. The Company has no present intention to
modify any of such investment objectives and policies, and it is anticipated
that any such modification would occur only if business and economic factors
affecting the Company made the Company's stated investment objectives and
policies unworkable or imprudent. By way of illustration only, owing to a
significant change in economic conditions, the Board of Directors could elect to
acquire apartment communities outside of Texas and the southwestern region of
the United States, or to acquire one or more commercial properties in addition
to residential properties.
Thus, while this Prospectus accurately and fully discloses the current
investment objectives and policies of the Company, prospective Shareholders must
be aware that the Board of Directors, acting consistently
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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."
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BUSINESS
The Company has been established to provide both taxable and tax-exempt
investors with a professionally managed portfolio of real estate equity
interests consisting primarily of existing residential apartment communities
that have the potential for current cash flow and capital appreciation. The
Company may hold its investment properties for an indefinite length of time. The
Company does not plan to cause the Shares to be listed on any securities
exchange or quoted on any system or in any established market either immediately
or at any definite time in the future. While the Company, acting through its
Board of Directors, may cause the Shares to be so listed or quoted if the Board
of Directors determines such action to be prudent, there can be no assurance
that such event will ever occur. Prospective Shareholders should view the Shares
as illiquid and must be prepared to hold their investment for an indefinite
length of time.
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
Many factors will bear on whether any such actions are prudent and feasible.
The feasibility of causing the Shares to be listed or quoted will depend upon
many factors, many of which are not presently determinable or are not within the
control of the Company. Such factors would include general economic and market
conditions, the Company's satisfaction of the legal listing or quotation
requirements in effect at such time, the economic performance of the Company
during the interim period, and the Company's financial condition at the time
listing or quotation is considered. In addition, the size of the Company (in
terms of its total assets and the diversification of its property portfolio),
which will reflect the number of Shares sold in this offering, will bear upon
the feasibility of listing or quoting the Shares for trading. In general, a
smaller Company size may make it less feasible to cause the listing or quotation
of the Shares.
The feasibility of disposing of the Company's properties will also depend on
many factors, many of which are not presently determinable or are not within
control of the Company. General economic and market conditions will affect the
demand, if any, for the Company's properties and the prices which might be
offered for them. Adverse developments affecting a market or a Company property
after the Company's acquisition of a property may materially affect its market
value. Even if some properties are attractive to prospective purchasers, the
Company may determine that it is imprudent to dispose of only a portion of its
portfolio. Conversely, the larger the Company is, the less likely its is that it
will be able to dispose of substantially all of its properties within a
relatively short period of time. If the Company receives marketable securities
or other property, rather than cash, for the sale of its properties, it and any
subsequent holders of such property will bear the risk of decrease in the value
of such property.
As described under "Investment Objectives and Policies -- Sale and
Refinancing Policies," the Company has granted to Cornerstone Realty Income
Trust, Inc. a right of first refusal to acquire assets proposed for sale by the
Company. As described therein, the presence of such right of first refusal may
hamper the ability of the Company to sell its properties to any party other than
Cornerstone Realty Income Trust, Inc. and may tend to decrease the price the
Company is able to obtain for its properties.
The Advisor continually reviews possible investment opportunities on behalf
of the Company. When at any time during the offering period the Company believes
that there is a reasonable probability that any specific property will be
acquired by the Company, this Prospectus will be supplemented to provide a
description of the property and the anticipated terms of its purchase, financing
and management. Such supplement will be filed pursuant to Rule 424(c) under the
Securities Act and all supplements will be
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consolidated into a post-effective amendment filed at least once every three
months, with the information contained in such amendment provided simultaneously
to the existing Shareholders. If any such expected investment relates to a
property that has an operating history, the Company will include in the
post-effective amendment the audited financial statements required by Rule 3-14
of Regulation S-X of the Securities and Exchange Commission, and, as required,
the Company will also provide the pro forma financial information required by
Rule 11-01(a)(5) of Regulation S-X.
The Company has elected to be taxed as a REIT under the Code and intends to
qualify as such on a continuing basis. However, no assurance can be given that
it will so qualify. For years in which the Company qualifies as a REIT, it will
not be subject to federal income tax on that portion of its taxable income that
is distributed annually to Shareholders. See "Risk Factors -- Federal Income Tax
Risks -- Failure to Achieve or Maintain REIT Status" and "Federal Income Tax
Consequences."
LEGAL PROCEEDINGS
The Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any material litigation threatened against the Company,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by liability insurance.
REGULATION
General. Apartment community properties are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas.
Americans with Disabilities Act. The properties and any newly-acquired or
developed multi-family properties must comply with Title III of the Americans
with Disabilities Act ("ADA") to the extent that such properties are "public
accommodations" or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public areas of the properties where such removal
is readily achievable. The ADA does not, however, consider residential
properties, such as multi-family properties, to be public accommodations or
commercial facilities, except to the extent portions of such facilities, such as
a leasing office, are open to the public. Although the Company intends to take
actions to ensure that its properties substantially comply with all requirements
under the ADA and applicable state laws, final regulations under the ADA have
not yet been promulgated. Noncompliance could result in imposition of fines or
an award of damages to private litigants. If required changes involve greater
expenditures than the Company currently anticipates, or if the changes must be
made on a more accelerated basis than it anticipates, the Company's ability to
make expected distributions could be adversely affected. The Company believes
that its competitors face similar costs to comply with the requirements of the
ADA.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of 1988
(the "FHA") requires multi-family properties first occupied after March 13, 1990
to be accessible to the handicapped. Noncompliance with the FHA could result in
the imposition of fines or an award of damages to private litigants. The Company
believes that it is in compliance with such law.
Rent Control Legislation. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from tenants increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions. The Company does not presently intend to develop or acquire
multi-family properties in markets that are either subject to rent control or in
which rent limiting legislation exists, although the Company is not precluded
from doing so.
PROPERTIES OWNED BY THE COMPANY
The Company owns no Properties as of the date of this Prospectus.
It is expected that the Company's Board of Directors will authorize the
Company's officers to cause the Company to borrow up to a specified principal
dollar amount (from time to time outstanding) on prevailing commercial terms
from suitable commercial lenders (and on either an unsecured or secured
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basis), to permit property acquisitions by the Company, as long as the offering
and sale of Shares is continuing and it is anticipated by the Company's officers
that proceeds from futures sales of Shares will be sufficient to repay the
amount of the borrowing. This borrowing authorization, if implemented, would be
in addition to any other borrowings authorized in the Company's Bylaws, and
should not be construed as limiting any of the Company's rights and powers
generally provided for in its Bylaws.
Such a line of credit would be designed to facilitate the timely acquisition
of properties by the Company and improve the regularity with which closings of
sales of Shares can be effected, without changing the Company's overall business
objective and policy of owning properties on an unleveraged or "debt-free"
basis. The rate at which Shares are sold is not necessarily consistent with the
manner in which prospective attractive property acquisitions become available to
the Company. The use of interim borrowings which are designed to be repaid with
subsequent sales of Shares could permit the Company to acquire properties
thought by management to be desirable, before Shares representing the full
purchase price of a particular property have been sold. Also the use of such
interim debt following sale of the Minimum Offering amount could have the effect
of reducing the period of time during which investors' funds are held in escrow
pending disbursement to the Company, since the Company would no longer be
required to match exactly proceeds from Share sales with property purchase
prices.
It is expected that the Company would utilize such interim borrowings only
if, and to the extent that, it is anticipated that future sales of Shares would
provide funds necessary to repay such borrowings. However, there would be no
assurance any such borrowings could, in fact, be repaid from future sales of
Shares. To the extent that Share sales are insufficient to repay any such
borrowings, the Company would have a remaining outstanding loan, which would
entail the types of risks and investment considerations described under "Risk
Factors-Possible Borrowing; Debt Financing May Reduce Cash Flow and Increase
Risk of Default" and "Investment Objectives and Policies-Borrowing Policies."
The Company would have a variety of potential means of addressing any such loan
remaining outstanding, including the repayment of such borrowing with cash from
operations or refinancing such borrowing with other debt, but such repayment
and/or refinancing would entail the types of effects on investors and the risks
described in such sections of this Prospectus.
PROPERTY ACQUISITION AND MANAGEMENT COMPENSATION
Each Property will be managed by Apple Residential Management Group, Inc.
under a property management agreement requiring payment by the Company of a
monthly management fee equal to five percent (5%) of the gross revenues of the
Property. In addition, the Company will reimburse Apple Residential Management
Group, Inc. for its expenses, including salaries and related overhead expenses,
associated with accounting and financial reporting services rendered by Apple
Residential Management Group, Inc. under the property management agreements.
Also, in consideration of services rendered to the Company in connection with
the selection and acquisition of each Property the Company will pay Apple Realty
Group, Inc. a property acquisition fee of two percent (2%) of the purchase
prices of the Properties. See "Compensation."
MANAGEMENT
DIRECTORS AND OFFICERS
The Directors of the Company have ultimate control over the management of the
Company and the conduct of its affairs, including the acquisition and
disposition of the Company's assets, but the Company has entered into an
Advisory Agreement with the Advisor to manage the Company's day-to-day affairs.
The Directors are charged with the responsibility of monitoring the relationship
between the Company and the Advisor. The Independent Directors are required to
make an annual determination that the Advisor's compensation is reasonable, that
total fees and expenses of the Company are reasonable and that the Company's
borrowings, if any, are appropriate.
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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-
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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 theUnited 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 or a Committee and in carrying on the business of the
Company.
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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.
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STOCK OPTIONS
An option granted under the Incentive Plan will not be transferrable by the
option holder except by will or by the laws of descent and distribution, and
will be exercisable only at such times as may be specified by the Committee.
During the lifetime of the option holder the option may be exercised only while
the option holder is in the employ of the Company or one of the Apple Companies,
or within 60 days after termination of employment. In the event the termination
is due to death or disability, the option will be exercisable for a 180-day
period thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the Shares as of the date of grant of the option.
The Committee has discretion to take such actions as it deems appropriate
with respect to outstanding options in the event of a sale of substantially all
of the stock or assets of the Company, a merger of the Apple Company by which an
option holder is employed, or the occurrence of similar events. Adjustments will
be made in the terms of options and the number of Shares which may be issued
under the Incentive Plan in the event of a future stock dividend, stock split or
similar pro rata change in the number of outstanding Shares or the future
creation or issuance to shareholders generally of rights, options or warrants
for the purchase of Shares.
Options granted under the Incentive Plan are non-qualified stock options, not
intended to qualify for favorable incentive stock option tax treatment under the
Code.
RESTRICTED STOCK
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (i) none of such Shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on such Shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (ii) if a holder of restricted stock
ceases to be employed by the Company or one of the Apple Companies, he will
forfeit any shares of restricted stock on which the restrictions have not lapsed
or been otherwise removed.
The Committee will establish as to each share of restricted stock issued
under the Incentive Plan the terms and conditions upon which the restrictions on
such Shares shall lapse. Such terms and conditions may include, without
limitation, the lapsing of such restrictions at the end of a specified period of
time, or as a result of the disability, death or retirement of the participant.
In addition, the Committee may, at any time, in its sole discretion, accelerate
the time at which any or all restrictions will lapse or remove any or all such
restrictions.
AMENDMENT OF THE INCENTIVE PLAN AND INCENTIVE AWARDS
The Board of Directors may amend the Incentive Plan in such respects as it
deems advisable; provided that the shareholders of the Company must approve any
amendment that would (i) materially increase the benefits accruing to
participants under the Incentive Plan, (ii) materially increase the number of
Shares that may be issued under the Incentive Plan, or (iii) materially modify
the requirements of eligibility for participation in the Incentive Plan.
Incentive awards granted under the Incentive Plan may be amended with the
consent of the recipient so long as the amended award is consistent with the
terms of the Plan.
DIRECTORS' PLAN
The Company has also adopted a stock option plan for Directors of the Company
who are not employees of the Company or the Apple Companies (the "Directors'
Plan"). Under the Directors' Plan, the number of Shares reserved for issuance is
equal to 45,000 Shares plus 1.8% of the number of Shares sold in the Offering in
excess of the Minimum Offering.
A Director is eligible to receive an option under the Directors' Plan if the
Director is not otherwise an employee of the Company or any Apple Company or any
subsidiary of the Company and was not an employee of any of such entities for a
period of at least one year before the date of grant of an option under the
Plan. Three members of the Board (all of the Directors except Messrs. Knight and
Smith) are expected initially to qualify to receive options under the Directors'
Plan.
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The Directors' Plan will be administered by the Board. Grants of stock
options to eligible Directors under the Plan will be automatic. However, the
Board has certain powers vested in it by the terms of the Plan, including,
without limitation, the authority (within the limitations described therein) to
prescribe the form of the agreement embodying awards of stock options under the
Plan, to construe the Plan, to determine all questions arising under the Plan,
and to adopt and amend rules and regulations for the administration of the Plan
as it may deem desirable. Any decision of the Board in the administration of the
Directors' Plan will be final and conclusive. The Board may act only by a
majority of its members in office, except members thereof may authorize any one
or more of their number, or any officer of the Company, to execute and deliver
documents on behalf of the Board.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the Shares, each eligible Director will
receive an option to purchase 5,500 Shares plus 0.0125% of the number of Shares
in excess of the Minimum Offering sold by the initial closing.
(2) As of each June 1 during the years 1997 through 2001 (inclusive), each
eligible Director shall automatically receive an option to purchase 0.02% of the
number of Shares issued and outstanding on that date.
(3) As of the election as a Director of any new person who qualifies as an
eligible Director, such eligible Director will automatically receive an option
to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating Directors' interests with those of the Shareholders.
The exercise price for each option granted under the Directors' Plan will be
100% of the fair market value on the date of grant; no consideration will be
paid to the Company for the granting of the option. Options granted under the
Directors' Plan will have a term of 10 years and will be fully exercisable six
months after the date of grant. If an optionee ceases to serve as a Director of
the Company prior to the expiration of the six-month period following the date
of grant, the option will terminate on the date of such termination of service
as a Director. If an optionee ceases to serve as a Director of the Company after
the expiration of the six-month period following the date of grant, the option
will terminate three years after the date of termination of service, or on
expiration of the option, whichever is earlier.
Options granted under the Directors' Plan are non-transferable other than by
will or the laws of descent and distribution upon the death of the optionee and,
during the lifetime of the optionee, are exercisable only by him. Payment upon
exercise of an option under the Directors' Plan may be made in cash or with the
Company's Shares of equivalent value.
The Board may suspend or discontinue the Directors' Plan or revise or amend
the Plan in any respect; provided, however, that without approval of the
Company's shareholders no revision or amendment may increase the number of
Shares subject to the Plan or materially increase the benefits accruing under
the Plan. In addition, the Directors' Plan may not be amended more than once
every six months other than to comply with changes in the Code or ERISA.
STOCK OPTION GRANTS
As of the date of this Prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
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THE ADVISOR AND AFFILIATES
GENERAL
Pursuant to the Advisory Agreement with the Company, the Advisor, among other
things, will seek to obtain, investigate, evaluate and recommend property
investment opportunities for the Company, serve as property investment advisor
and consultant in connection with investment policy decisions made by the
Directors and, subject to the direction of the Directors, supervise the
day-to-day operations of the Company. The Advisor is a Virginia corporation all
of the common stock of which is owned by Glade M. Knight. Cornerstone Realty
Income Trust, Inc., which might be deemed an Affiliate of the Advisor, will own
preferred stock in the Advisor. Glade M. Knight is the sole director of the
Advisor and also its sole officer (serving as its Chairman, Chief Executive
Officer, President and Secretary).
THE ADVISORY AGREEMENT
The current Advisory Agreement has a one-year term ending October 31, 1997,
and is renewable annually by the Directors. The Advisory Agreement provides that
it may be terminated at any time by a majority of the Independent Directors or
the Advisor upon 60 days' written notice. Under the Advisory Agreement, the
Advisor undertakes to use its best efforts (i) to supervise and arrange for the
day-to-day management of the Company and (ii) to assist the Company in
maintaining a continuing and suitable property investment program consistent
with the Company's investment policies and objectives. Under the Advisory
Agreement, generally the Advisor is not required to, and will not, advise the
Company on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
generally will make its own decisions with respect to such temporary securities
investments.
Pursuant to the Advisory Agreement, the Advisor will be entitled to an annual
Asset Management Fee. The Asset Management Fee is payable quarterly in arrears.
The amount of the Asset Management Fee is a percentage of Total Contributions.
The applicable percentage used to calculate the Asset Management Fee is based on
the ratio of Funds from Operations to Total Contributions (such ratio being
referred to as the "Return Ratio" for the preceding calendar quarter. The per
annum Asset Management Fee is initially equal to the following with respect to
each calendar quarter: 0.1% of Total Contributions if the Return Ratio for the
preceding calendar quarter is 6% or less; 0.15% of Total Contributions if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. See "Compensation." The Advisor or an Affiliate
thereof will also receive reimbursement for certain direct expenses and
allocable overhead incurred in connection with its provision of services to the
Company.
The Bylaws require the Independent Directors to monitor the Advisor's
performance of the Advisory Agreement and to determine at least annually that
the amount of compensation the Company pays the Advisor is reasonable, based on
such factors as they deem appropriate, including the amount of the Asset
Management Fee in relation to the size, composition and profitability of the
investments of the Company; the success of the Advisor in selecting
opportunities that meet the Company's investment objectives; the rates charged
by other investment advisors performing comparable services; the amount of
additional revenues realized by the Advisor and its Affiliates for other
services performed for the Company; the quality and extent of service and advice
furnished by the Advisor; the performance of the Company's investments and the
quality of the Company's investments in relation to any investments generated by
the Advisor for its own account.
The Company's Bylaws generally prohibit the Operating Expenses of the Company
(generally defined as all Company operating, general and administrative
expenses, but excluding depreciation and similar non-cash items and expenses of
raising capital, interest, taxes and costs related to asset acquisition,
operation and disposition) from exceeding in any year the greater of 2% of the
total Average Invested Assets of the Company (generally defined as the monthly
average of the aggregate book value of Company assets invested in real estate,
before deducting depreciation) or 25% of the Net Income of the Company
(generally defined as the revenues for any period, less expenses other than
depreciation or
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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
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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
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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
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Form 10-K filed by Cornerstone with the Securities and Exchange Commission. For
a reasonable fee, the Advisor will also provide copies of the exhibits to the
Report on Form 10-K.
Part II of the Company's Registration Statement (which is not a part of this
Prospectus) contains a more detailed summary of the 37 property acquisitions by
Cornerstone. The Advisor will provide a copy of such summary without charge upon
request of any investor or prospective investor.
Reference is also made to the additional information on prior performance
appearing under "Experience of Prior Programs" in this Prospectus.
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
Beneficial ownership of Shares of the Company's common stock, and options to
purchase Shares of the Company's common stock (exercisable currently or within
60 days), held by directors and officers of the Company as of the date of this
Prospectus, are indicated in the table below. Each person named in the table has
sole voting and investment powers as to such Shares, or shares such powers with
his spouse and minor children, if any.
PERCENT OF
NUMBER OF SHARES AGGREGATE
BENEFICIALLY OUTSTANDING
NAME OWNED SHARES OWNED
- --------------------------------- ------------------ --------------
Apple Residential Advisors, Inc. 10 100%
In addition to the foregoing, Glade M. Knight, who is a Director, Chairman of
the Board and President of the Company, owns 200,000 "Class B Convertible
Shares." The Class B Convertible Shares are convertible into Common Shares
pursuant to the formula and on the terms and conditions set forth below. The
Class B Convertible Shares were issued by the Company to Mr. Knight on November
14, 1996, in exchange for the payment by Mr. Knight of $0.10 per Class B
Convertible Share, or an aggregate of $20,000.
There are no dividends payable on the Class B Convertible Shares. On
liquidation of the Company, the holder of the Class B Convertible Shares is
entitled to a liquidation payment of $0.10 per Class B Convertible Share before
any distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B Convertible
Shares are convertible into Common Shares upon and for 180 days following the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services (the events
described in this clause (2), a "Self-Administration Conversion"). Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the offering made by this Prospectus according
to the following formula:
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NUMBER OF COMMON
SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE SHARE
- ------------------------------- -----------------------
$50 million.................... 1.0
$100 million................... 2.4
$150 million................... 4.2
$200 million................... 6.4
$250 million................... 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares.
The conversion into Common Shares of the Class B Convertible Shares will
result in dilution of the Shareholders' interests. However, if the Company
elects to issue Shares to the Advisor or Apple Residential Management Group,
Inc. in connection with a Self-Administration Conversion, the number of such
Shares otherwise issuable by the Company will be reduced by the number of Shares
which can then be acquired upon conversion of the Class B Convertible Shares.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of all material United States federal income tax
consequences applicable to the Company and its shareholders is based upon
current law, which is subject to change. Any such change could be retroactively
applied and alter significantly the tax considerations described herein. The
following discussion is not exhaustive of all possible tax considerations and
does not give a detailed discussion of any state, local or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a prospective Shareholder in light of his or
her particular circumstances or to certain types of Shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP, AND SALE OF SHARES OF THE COMPANY, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP
AND SALE, AND WITH RESPECT TO POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company will elect to be treated for federal income tax purposes as a
REIT and intends to conduct its operations in a manner that will permit it to
continue so to qualify. While the Board of Directors and the Advisor intend to
cause the Company to operate in a manner that will enable it to comply with the
REIT requirements, there can be no certainty that such intention will be
realized. Moreover, relevant law may change so as to make compliance with one or
more of the REIT requirements difficult or impracticable. Failure to meet any of
the REIT requirements with respect to a particular taxable year could result in
termination of the Company's election to be a REIT, effective for the year of
such failure and all succeeding years.
The Company has not requested, and does not intend to request, a ruling from
the Service that it will qualify as a REIT. However, the Company has received an
opinion of its counsel, McGuire, Woods, Battle & Boothe, L.L.P., that, based
upon various assumptions and certain representations made by the Company as to
factual matters, the Company currently qualifies as a REIT, and will continue so
to qualify if it conducts its operations in the manner assumed therein. However,
investors should be aware that opinions of counsel are not binding upon the
Service. Furthermore, both the validity of the opinion and the continued
qualification of the Company for treatment as a REIT will depend on its
continuing to meet various requirements concerning, among other things, the
ownership of its Shares, the nature of its assets, the sources of its income and
the amount of its distributions to Shareholders. McGuire,
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Woods, Battle & Boothe, L.L.P. will not review the actual annual operating
results of the Company. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy the
REIT requirements.
As long as the Company qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal income tax on any income or gain
that is distributed currently to Shareholders. However, any undistributed income
or gain will be taxed to the Company at regular corporate rates. In addition,
the Company may be subject to (i) a 100% tax on certain income from any
"prohibited transactions" (i.e., sales or other dispositions of property (other
than certain real estate assets held not less than four years) that is stock in
trade, inventory, or held primarily for sale to customers in the ordinary course
of business), (ii) a 100% tax on the greater of the amount, if any, by which it
fails the 75% income test or the 95% income test described below, multiplied by
a fraction intended to reflect the REIT's profitability, (iii) a tax at the
highest corporate rate on any net income relating to "dealer" activities with
respect to foreclosure property, (iv) a 4% excise tax on a portion of any
undistributed income, and (v) a minimum tax on any items of tax preference.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In order to qualify as a REIT, the Company must satisfy a variety of complex
tests relating to its organization, Share ownership, assets, income and
distributions. Those tests are summarized below.
Organizational Requirements. A REIT is defined in the Code as: (1) a
corporation, trust or association; (2) which is managed by one or more directors
or trustees; (3) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (4) which would
be taxable as a domestic corporation, but for Sections 856 through 860 of the
Code; (5) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (6) the beneficial ownership of which
is held by 100 or more persons; and (7) not more than 50% in value of the
outstanding stock of which is owned during the last half of each taxable year,
directly or indirectly, by or for five or fewer individuals (as defined in the
Code to include certain entities). In addition, the organization must meet
certain income and asset tests described below. Conditions (1) to (5),
inclusive, must be met during the entire taxable year and condition (6) must be
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. However, conditions
(6) and (7) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year will be the calendar year.
As a Virginia corporation, the Company satisfies the first and fourth
requirements. The Company also will be managed by a board of directors. The
Company has transferable shares and does not intend to operate as a financial
institution or insurance company. Additionally, the Company has more than 100
shareholders. To assure continued compliance with the 50% diversity of ownership
requirement, the Company's Bylaws prohibit any individual investor from
acquiring, directly or indirectly, more than 9.8% (by value) of the outstanding
Shares and provide restrictions regarding the transfer of Shares. Treasury
Regulations require the Company to maintain records of the actual ownership of
its Shares. In accordance with those regulations, the Company must demand from
record Shareholders written statements which disclose information concerning the
actual ownership of the Shares. Any record Shareholder who does not provide the
Company with required information concerning actual ownership of the Shares is
required to include certain specified information relating thereto in his income
tax return.
Income Tests. To maintain qualification as a REIT for any taxable year, three
gross income requirements must be met annually: the "75% income test," the "95%
income test," and the "30% income test." The 75% income test requires that the
Company derive, directly or indirectly, at least 75% of its gross income
(excluding gross income from prohibited transactions) from certain real estate
related sources, which include, but are not limited to: (i) certain types of
"rents from real property," (ii) "interest" on obligations secured by mortgages
on real property or interests in real property, (iii) income or
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gain from real property acquired through foreclosure or similar proceedings,
(iv) gains from the sale or other disposition of certain real property or
interests in real property that are not "dealer property" (i.e., property that
is stock in trade, inventory, or held primarily for sale to customers in the
ordinary course of business), (v) commitment fees with respect to mortgage
loans, (vi) income from stock or debt instruments that were acquired as a
temporary investment of new capital, if such income is received or accrued
during the first year after the Company receives the new capital ("qualified
temporary investment income"), (vii) dividends or other dividends on shares of
other qualified REITs, (viii) abatements and refunds of taxes on real property,
and (ix) gains from the sale or disposition of real estate assets which are not
prohibited transactions solely by reason of Section 857(b)(6) of the Code. The
95% income test requires that at least an additional 20% of the Company's gross
income for the taxable year consist either of income that qualifies under the
75% income test or certain types of passive income, which include, but are not
limited to: (i) dividends from companies other than REITs, (ii) interest on
obligations that are not secured by interests in real property, and (iii) gains
from the sale or other disposition of stock, securities, or real property, if
such assets are not dealer property. The 30% income test, unlike the other
income tests, prescribes a ceiling for certain types of income. The Company may
not derive more than 30% of its gross income from the sale or other disposition
of (i) stock or securities held for less than one year, (ii) property in a
transaction which is a prohibited transaction, and (iii) real property
(including interests in real property and interests in real property mortgages)
held for less than four years other than property compulsorily or involuntarily
converted within the meaning of Section 1033 of the Code or foreclosure
property.
In the case of a REIT that is a partner in a partnership, the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the assets and gross income of the partnership attributed to
the REIT retain the same character as in the hands of the partnership.
The Company expects that substantially all its gross income from its
properties will be considered "rents from real property." Rents received by the
Company will qualify as "rents from real property" for purposes of satisfying
the income tests described above only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits of
any person although rents generally will not be excluded merely because they are
based on a fixed percentage or percentages of receipts or sales. None of the
rents from properties that will be held by the Company are based on income or
profits of a kind that would disqualify such rents from being treated as rents
from real property. Second, rents received from a tenant will not qualify as
rents from real property if the REIT, or an owner of 10% or more of the REIT,
also directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). The Company does not anticipate receiving any rents from Related
Party Tenants. Third, if rent attributable to personal property that is leased
in connection with a lease of real property is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as rents from real property. The Company
anticipates that any rent attributable to personal property leased in connection
with a lease of real property will not be greater than 15% of the total rent
received under the lease. Finally, for rents to qualify as rents from real
property, the REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no income. However, the
Company may perform directly certain services customary in the geographic
markets in which it operates the property and customary to the type and class of
such property, provided that such services are not services which are considered
rendered to an occupant of the property. In this regard, the Company presently
intends to have Apple Residential Management Group, Inc., a corporation that
will qualify as an "independent contractor," manage and operate the Company's
real property assets.
The term "interest" generally does not include any amount determined, in
whole or in part, on the income or profits of any person, although an amount
generally will not be excluded from the term interest solely by reason of being
based on a fixed percentage or percentages of receipts or sales.
Any gross income derived from a prohibited transaction is taken into account
in applying the 30% income test necessary to qualify as a REIT (and the net
income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property
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(other than foreclosure property) that is held primarily for sale to customers
in the ordinary course of a trade or business. The Company believes that none of
its assets are held for sale to customers and that sale of any property will not
be in the ordinary course of business for the Company. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of business."
If the Company fails to satisfy one or both of the 75% or 95% income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if it
is eligible for relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule is not due to fraud with intent to evade
tax. It is not now possible to determine the circumstances under which the
Company may be entitled to the benefit of these relief provisions. If these
provisions apply, a 100% tax is imposed on the net income attributable to the
greater of the amount by which the Company failed the 75% income test or the 95%
income test. No analogous relief is available should the Company fail to satisfy
the 30% income test.
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy several tests relating to the nature and diversification of
its assets. First, at least 75% of the value of the Company's total assets must
be represented by real estate assets, cash, cash items (including receivables
arising in the ordinary course of the Company's operations) and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those includible in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the Company's
total assets. Finally, of the investments included in the 25% asset class, the
Company may not own more than 10% of any one issuer's outstanding voting
securities. The property in which the Company proposes to invest generally will
qualify largely or entirely as real estate assets under the 75% requirement
described above.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance.
Although not anticipated, the Company may organize and hold all of the stock
of one or more subsidiary corporations intended to qualify for treatment as a
"qualified REIT subsidiary." The Company's ownership of the stock of one or more
qualified REIT subsidiaries will not cause the Company to fail to satisfy the
asset tests described above. The Code provides that a corporation which is a
qualified REIT subsidiary will not be treated as a separate corporation, and,
for purposes of the asset and income tests, all assets, liabilities, and items
of income, deduction, and credit of a qualified REIT subsidiary will be treated
as assets, liabilities, and items of income, deduction and credit (as the case
may be) of the Company. Thus, in applying the income and asset tests described
above, the separate corporate existence of the Company's qualified REIT
subsidiary would be ignored in a manner analogous to an operating division of
the Company.
Annual Distribution Requirement. To qualify as a REIT, the Company is
required to make distributions (other than capital gain dividends) to its
Shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the after-tax net
income, if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. Such distributions must be
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paid in the taxable year to which they relate, or in the following taxable year
if declared before the Company timely files its tax return for such year and if
paid on or before the first regular distribution after such declaration. "REIT
taxable income" generally is computed in the same manner as taxable income of
ordinary corporations, with several adjustments, which include, but are not
limited to, the deduction allowed for dividends paid, but not for dividends
received. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its REIT
taxable income, as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Finally, as discussed above, the Company may be subject to
an excise tax if it fails to meet certain other distribution requirements.
The Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. Although not anticipated,
if such timing differences occur, the Company may find it necessary to arrange
for borrowings or, if possible, pay taxable stock dividends to meet the
distribution requirement.
The distribution requirement may be determined not to have been met by the
Company in a given year if the Service successfully challenges the deductibility
of a Company expenditure in an audit of that year. The Service also could
challenge the deductibility of the Asset Management Fee and other fees paid by
the Company. If a challenge by the Service were successful, the Company may be
able to rectify a resulting failure to meet the distribution requirement by
paying "deficiency dividends" to Shareholders in a later year, which may be
included in the Company's deduction for distributions paid for the earlier year.
Although the Company may be able, therefore, to avoid being taxed on amounts
distributed as deficiency dividends, it will be required to pay interest to the
Service based upon the amount of any deduction taken for deficiency dividends.
Failure to Qualify as a REIT. If the Company fails to qualify as a REIT for
any taxable year, and certain relief provisions do not apply, it will be subject
to federal income tax (including any applicable minimum tax) at regular
corporate rates and will not receive deductions for distributions paid to
Shareholders. As a result, the amount of after-tax earnings available for
distribution to Shareholders would decrease substantially. All distributions to
Shareholders would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and distributions received by corporate
Shareholders may be eligible for a dividends-received deduction. In addition,
the Company would not be eligible to elect REIT status for the four subsequent
taxable years, unless its failure to qualify was due to reasonable cause and not
to willful neglect, and certain other requirements were satisfied. In order to
renew its REIT qualification at the end of such a four-year period, the Company
would be required to distribute all of its current and accumulated earnings and
profits before the end of the period. Any such distributions would be taxable as
ordinary income to Shareholders. In addition, the Company would be subjected to
taxation on any unrealized gain inherent in its assets at such time. If the
Company were to lose REIT status, however, it expects that it would liquidate
over the period and in the manner that the Board of Directors deems to be in the
best interest of the Shareholders, and such liquidation likely would be
completed before the Company would be eligible to re-elect REIT status.
FEDERAL INCOME TAXATION OF THE SHAREHOLDERS
While the Company qualifies for taxation as a REIT, distributions made to the
Company's Shareholders from current or accumulated earnings and profits (and not
designated as capital gain dividends) will be includible by the Shareholders as
ordinary income for federal income tax purposes. None of these distributions
will be eligible for the dividends-received deduction for corporate
Shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the Shareholder has held his or her Shares in the Company.
Corporate Shareholders, however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
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Distributions in excess of current and accumulated earnings and profits will
not be taxable to a Shareholder to the extent that they do not exceed the
adjusted basis of the Shareholder's Shares. Shareholders will be required to
reduce the tax basis of their Shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a Shareholder who holds
its Shares as a dealer). The tax basis as so reduced will be used in computing
the capital gain or loss, if any, realized upon sale of the Shares. Any loss
upon a sale or exchange of Shares by a Shareholder who held such Shares for six
months or less (after applying certain holding period rules) generally will be
treated as a long-term capital loss to the extent that such Shareholder
previously received capital gain distributions with respect to such Shares. All
or a portion of any loss realized upon a taxable disposition of Shares of the
Company may be disallowed if other Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within 30 days before or after the
disposition.
Shareholders may not include in their individual federal income tax returns
any net operating losses or capital losses of the Company. In addition, any
distribution declared by the Company in October, November, or December of any
year payable to a Shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the Shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company no later than January 31 of the following year. The Company may be
required to withhold a portion of capital gain distributions to any Shareholders
who fail to certify their non-foreign status to the Company.
Those Shareholders who avail themselves of the Additional Share Option
(described under "Plan of Distribution") or a dividend reinvestment plan, if
implemented, will be deemed for federal income tax purposes to have received the
gross amount distributed on their behalf notwithstanding its reinvestment in
Shares. Such Shareholders will thus be taxed as if they had received such
distributions despite the fact that their distributions have been reinvested
and, as a result, they will not receive any cash with which to pay the resulting
tax liability associated with the distribution. Shares received pursuant to the
Additional Share Option will have a holding period which begins on the day after
purchase of the Shares. The tax basis of such Shares will generally be the gross
amount of the deemed distribution.
INVESTMENT BY TAX-EXEMPT ENTITIES
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has ruled that distributions by a REIT to
an exempt employee pension trust do not constitute UBTI. Based on such ruling
and assuming the Company conducts its activities as a REIT as described in this
Prospectus, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances the
acquisition of its Shares, a portion of its income from the Company may
constitute UBTI pursuant to the "debt-financed property" rules under Section 514
of the Code.
For taxable years beginning after December 31, 1993, qualified trusts that
hold more than 10% (by value) of the shares of a REIT may be required to treat a
percentage of REIT distributions as UBTI. The requirement applies only if (i)
the qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on the holding of REIT shares by five or fewer
individuals, including qualified trusts, (ii) the REIT is "predominantly held"
by qualified trusts, and (iii) the REIT assets would have generated significant
UBTI if the qualified trust held such assets directly. A REIT would be
predominantly held if either (i) a single qualified trust held more than 25% by
value of the interests in the REIT or (ii) one or more qualified trusts, each
owning more than 10% by value, held in the aggregate more than 50% of the
interests in the REIT. The percentage of any distribution paid (or treated as
paid) to the qualified trust that will be treated as UBTI is determined by the
amount of UBTI earned by the REIT (treating the REIT as if it were a qualified
trust, and therefore subject to tax on UBTI) as a percentage of the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5%. For these purposes, a qualified trust is any trust defined under
Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code.
The Company does not anticipate that it will be predominantly held by qualified
trusts.
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FOREIGN INVESTORS
Foreign Shareholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign Shareholders (collectively, "Non-U.S.
Shareholders") are complex. This discussion does not attempt to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of federal, state, and local
income tax laws with regard to an investment in the Shares, including any
reporting requirements, as well as the tax treatment of such an investment under
the laws in their country of residence.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividend distributions and
as ordinary income to the extent of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces or eliminates that tax. However, if income from the
investment in the Shares is treated as effectively connected with the Non-U.S.
Shareholder's conduct of a United States trade or business, the Non-U.S.
Shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. Shareholders are taxed with respect to such distributions (and
may also be subject to the 30% branch profits tax in the case of a Shareholder
that is a foreign corporation). The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions paid
to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and an
appropriate Form 1001 has been filed with the Company or (ii) the Non-U.S.
Shareholder files an Internal Revenue Service Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a Shareholder to the extent that they do not exceed the adjusted
basis of the Shareholder's Shares but rather will reduce the adjusted basis of
such Shares. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Shareholder's Shares, the excess will give rise to tax liability if
the Non-U.S. Shareholder otherwise would be subject to tax on any gain from the
sale or disposition of his or her Shares in the Company, as described below. If
it cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Thus, Non-U.S. Shareholders would be taxed at the normal capital gain
rates applicable to U.S. Shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate Shareholder not entitled
to treaty exemption. The Company is required by applicable Treasury Regulations
to withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is not reduced by any U.S. tax treaty but is,
however, creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It currently is anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of Shares will not
be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which
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case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals), except that the purchaser of such Shares may be
required to withhold a portion of the proceeds against such tax liability. In
addition, distributions that are treated as gain from the disposition of Shares
and are subject to tax under FIRPTA may also be subject to a 30% branch profits
tax when made to a foreign corporate Shareholder that is not entitled to treaty
exemptions.
THE FOREGOING DISCUSSION DOES NOT PURPORT TO DESCRIBE ANY FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY. NON-U.S. SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO ALL TAX ASPECTS OF AN INVESTMENT
IN THE COMPANY.
Backup Withholding. The Company will report to its Shareholders and the
Service the amount of distributions paid during each calendar year and the
amount of tax withheld, if any. Under the backup withholding rules, a
Shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) has provided a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A Shareholder that does
not provide the Company with a correct taxpayer identification number may also
be subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the Shareholder's income tax liability.
STATE AND LOCAL TAXES
Even if the Company qualifies on a continuing basis as a REIT for federal
income tax purposes, the Company and its Shareholders may be subject to certain
state and local taxes. This Prospectus does not purport to describe any state or
local tax consequences of an investment in the Company. State and local tax
treatment of the Company and the Shareholders may differ substantially from the
federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OR ITS OWN TAX ADVISOR WITH
REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
INVESTMENT BY TAX-EXEMPT ENTITIES
UNRELATED BUSINESS TAXABLE INCOME
As discussed above, distributions from the Company will not constitute UBTI
to most tax-exempt investors, except to the extent such investors finance the
purchase of their Shares. See "Federal Income Tax Consequences -- Federal Income
Taxation of the Shareholders -- Investment By Tax-Exempt Entities."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary responsibilities and other requirements regarding the
assets of an employee benefit plan ("Plan Assets"). For example, ERISA requires
that all Plan Assets shall be held in trust, that the plan shall avoid certain
prohibited transactions involving Plan Assets, and that investment management
responsibilities with respect to Plan Assets may be delegated only in certain
permitted manners. Although the matter is not entirely free from doubt, under
the relevant Department of Labor Regulations, the assets of the Company are not
expected to constitute Plan Assets because, subject to certain factual
determinations, the Shares should be treated as "publicly offered securities,"
i.e., securities that are widely held, freely transferable, and registered under
certain federal securities laws. In addition, the Company's assets would not
constitute Plan Assets to the extent that at least 75% of the Shares are held,
at all
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times, by investors other than "benefit plan investors." The term "benefit plan
investors" generally includes qualified employee pension or profit sharing
trusts and Keogh Plan trusts ("Employee Trusts"), individual retirement accounts
("IRAs"), and certain other entities.
The assets of the Company are expected to be exempt from the Plan Asset rules
for the reasons set forth above. However, this determination is based, in part,
on facts that cannot be ascertained at the present time. Consequently, there can
be no assurance that the Company's assets will not be treated as Plan Assets at
any given time. Nevertheless, the Advisor will use its best efforts to qualify
the Company's assets for exemption from the Plan Asset rules.
In considering the purchase of Shares and the number of Shares to be
purchased, a fiduciary with respect to an Employee Trust or other entity subject
to ERISA should consider, in addition to the foregoing, whether the investment
will satisfy: (i) the prudence requirement of Section 404(a)(1)(B) of ERISA,
considering the nature of an investment in, and the compensation structure of,
the Company, the fact that the Company has no history of operations and the fact
that the investments to be made by the Company have not been selected as of the
date of this Prospectus; (ii) the diversification requirement of Section
404(a)(1)(C) of ERISA; and (iii) the requirements that the fiduciary provide
benefits for the Plan participants and beneficiaries and value Plan Assets
annually.
In considering the purchase of Shares, a fiduciary with respect to an
Employee Trust should consider the trust requirement of ERISA. In addition, a
custodian or trustee of an IRA should consider the Code's prohibition against
the commingling of IRA assets with other property. Section 403(a) of ERISA
generally provides that the assets of employee benefit plans must be held in
trust. Section 408(a)(5) of the Code provides that an IRA must prohibit the
commingling of IRA assets with other property. The Department of the Treasury
and the Service have not issued any rulings or regulations that provide guidance
on the identification of the assets of an IRA for purposes of Section 408(a)(5)
of the Code.
If an IRA currently has insufficient funds to satisfy the minimum 200 Share
purchase requirement for an investment in the Company, it may be possible to
satisfy those requirements through contributions to the IRA by its owner
(concurrent with the investment in the Company) with respect to his prior and/or
current taxable year. In this regard, the owner of an IRA which is a prospective
investor should consult with his or her tax advisor.
Shares may not be purchased with Plan Assets by an Employee Trust or IRA with
respect to which the Board of Directors, the Advisor, or any of their Affiliates
(i) regularly gives investment advice, (ii) provides management services on a
discretionary basis, (iii) has an agreement, either written or unwritten, under
which information, recommendations, and advice used as a primary basis for
investment decisions is provided, (iv) has an agreement or understanding, either
written or unwritten, under which individualized investment advice is given, or
(v) is otherwise a fiduciary within the meaning of Section 3(21) of ERISA.
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CAPITALIZATION
The capitalization of the Company as of August 7, 1996, and as adjusted to
reflect the issuance and sale of the Shares offered hereby assuming the Minimum
Offering and Maximum Offering is as follows:
AS ADJUSTED
----------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- ------------- --------------
Common Shares; no par value; 10 shares
issued, 1,666,666.67 and 25,166,666.67
shares issued as adjusted,
respectively........................... $100 $15,000,100 $250,000,100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The Company was organized on August 7, 1996 and has had no operations to
date. The Company intends to invest primarily in existing residential apartment
communities located in Texas and the southwestern United States and to qualify
as a REIT under the Code.
The proceeds of this offering and the cash flow generated from properties the
Company acquires and short-term investments will be the Company's principal
sources of liquidity. In addition, although the Company has no current intention
to borrow funds, it reserves the right to do so, subject to approval of the
Board of Directors. See "Investment Objectives and Policies -- Borrowing
Policies." The Company generally will be obligated to distribute annually at
least 95% of its taxable income to its Shareholders to qualify as a REIT under
the Code. The Company anticipates that its cash flow will be adequate to cover
Operating Expenses and to permit the Company to meet its anticipated liquidity
requirements, including distribution requirements.
The effects of future inflation on the Company's operations may increase the
Company's operating costs, including interest costs on bank borrowings, if any.
The Company intends to establish initial working capital reserves of at least
0.5% of the proceeds of this offering. The Company also intends to maintain
ongoing working capital reserves in an amount equal to at least 0.5% of the
proceeds of the offering, subject to review and re-evaluation by the Board of
Directors. Such funds, in combination with income from investment properties and
short-term investments, are anticipated to be sufficient to satisfy its
liquidity requirements.
PLAN OF DISTRIBUTION
The Company is offering to sell the Shares using the service of David Lerner
Associates, Inc. as the Managing Dealer, and other broker-dealers selected by
the Managing Dealer ("Selected Dealers"). The Shares are being offered on a
"best efforts" basis, meaning that the Managing Dealer and Selected Dealers are
not obligated to purchase any Shares. No Shares will be sold unless at least the
Minimum Offering of $15,000,000 in Shares has been sold no later than one year
after the date of this Prospectus. If the Minimum Offering of Shares is not sold
by that date, the offering will terminate and all funds theretofore deposited by
investors into the Escrow Account will be promptly refunded in full, together
with each investor's share of any interest earned thereon (less withholding of
taxes in respect to payment of interest, if applicable). First Union National
Bank of North Carolina will act as escrow agent for the Escrow Account until the
Minimum Offering of Shares is sold.
The Shares are offered at $9 per Share until the Minimum Offering of
$15,000,000 in Shares is achieved. Thereafter, the Shares will be offered at $10
per Share.
The offering of Shares is expected to terminate when all Shares offered
hereby have been sold or one year from the date hereof, unless extended by the
Company for up to an additional year. In some states, extension of the offering
may not be allowed, or may be allowed only upon certain conditions.
Purchasers will be sold Shares at one or more closings. Following the sale of
the Minimum Offering, additional closings will be held from time to time during
the offering period as orders are received. The final closing will be held
shortly after the termination of the offering period or, if earlier, upon the
sale
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of all the Shares. It is expected that after the closing of the sale of the
Minimum Offering, purchasers will be sold Shares no later than the last day of
the calendar month following the month in which their orders are received. Funds
received during the offering but after the initial disbursement of funds may be
held in escrow for the benefit of purchasers until the next closing, and then
disbursed to the Company.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been accepted by a duly
authorized representative of the Company. The Company will either accept or
reject each subscription within four business days from the receipt of the
subscription by the Managing Dealer or a Selected Dealer. The Company intends to
cause to be paid from any escrow account each investor's share of net interest
on escrowed funds, whether or not the investor's subscription for Shares is
accepted. The Company reserves the right to adopt reasonable simplifying
conventions or assumptions in determining each investor's share of such net
interest. Investors' subscriptions will be revocable by written notice delivered
to the escrow agent at least five days before the applicable closing. Subject to
the foregoing, an investor's subscription funds may remain in escrow for an
indefinite period of time.
It is expected that Shareholders will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to herein as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per Share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. The
Company reserves the right to establish rules governing such reinvestment, as
well as the right to modify or terminate such Additional Share Option at any
time. The Company estimates that approximately 400,000 Shares ($4,000,000 at $10
per Share) offered through this Prospectus will be purchased through
Shareholders' reinvestment of distributions in Shares pursuant to the Additional
Share Option described in this paragraph, but the number of Shares which will be
so purchased cannot be determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a Shareholder his Shares, a Shareholder will
be able to elect the option by directing, on his Subscription Agreement, that
cash distributions be reinvested in additional Shares. Distributions
attributable to any calendar quarter will then be used to purchase Shares in
this offering. As described under "Federal Income Tax Consequences -- Federal
Income Taxation of the Shareholders," a Shareholder who elects the Additional
Share Option will be taxed as if he had received his distributions which are
used to purchase additional Shares. A Shareholder may elect to terminate his
participation in the Additional Share Option at any time by written notice sent
to the Company or to the broker-dealer through which the Shareholder initially
purchased Shares. The notice will be effective with respect to distributions
attributable to any calendar quarter if it is sent at least 10 days before the
end of such calendar quarter.
Funds not invested in real properties may be invested by the Company in
United States Government securities, certificates of deposit of banks located in
the United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States having
a net worth of at least $50,000,000, bankers' acceptances, prime commercial
paper or similar highly liquid investments (such as money market funds selected
by the Company) or evidences of indebtedness.
The Company will pay to the Managing Dealer Selling Commissions on all sales
made in an amount equal to 7.5% of the purchase price of the Shares ($0.675 per
Share purchased at $9 per Share and $0.75 per Share purchased at $10 per Share).
The Company will also pay to the Managing Dealer a Marketing Expense Allowance
equal to 2.5% of the purchase price of the Shares, as a non-accountable
reimbursement for expenses incurred by it in connection with the offer and sale
of the Shares. The Marketing Expense Allowance will equal $0.225 per Share
purchased at $9 per Share and $0.25 per Share purchased at $10 per Share. The
Selling Commissions and Marketing Expense Allowance are payable to the Managing
Dealer at the times of the issuance of Shares to purchasers.
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Prospective investors are advised that David Lerner Associates, Inc., and
other broker-dealers participating in this offering, reserve the right to
purchase Shares, on the same terms applicable generally to sales pursuant to
this Prospectus, for their own accounts, at any time and in any amounts, to the
extent not prohibited by relevant law.
The Agency Agreement among the Company, the Advisor, Apple Realty Group, Inc.
and the Managing Dealer permits the Managing Dealer to use the services of other
broker-dealers in offering and selling the Shares, subject to the Company's
approval. The Managing Dealer will pay the compensation owing to such
broker-dealers out of the Selling Commissions or Marketing Expense Allowance
payable to it. Sales by such broker-dealers would be carried on in accordance
with customary securities distribution procedures. The Managing Dealer may be
deemed to be an "underwriter" for purposes of the Securities Act in connection
with this offering. Purchasers' checks are to be made payable to "First Union
National Bank, Escrow Agent" or as otherwise directed by the Managing Dealer.
Purchasers are required to purchase a minimum of $5,000 in Shares ($2,000 in
Shares for Qualified Plans). The Advisor and Affiliates of the Advisor may
purchase in this offering up to 2.5% of the total number of Shares sold in the
offering, on the same terms and conditions as the public. If the Advisor or
Affiliates purchase any Shares, they will be permitted to vote on any matters
submitted to a vote of holders of the Shares. Any purchase of Shares in this
offering by the Advisor or Affiliates must be for investment, and not for resale
or distribution. The Shares described in this paragraph are exclusive of the
Shares which may be issued under the Company's stock incentive plans. See
"Management -- Stock Incentive Plans."
There has been no previous market for any of the Company's Shares. The
initial offering price for the Shares is arbitrary and was determined on the
basis of the proposed capitalization of the Company, market conditions and other
relevant factors.
The Company, the Advisor and Apple Realty Group, Inc. have agreed to
indemnify the Managing Dealer and other broker-dealers against certain
liabilities, including liabilities under the Securities Act. No indemnification
is provided for willful misfeasance, bad faith, gross negligence or reckless
disregard of duties under the Securities Act by any of such persons.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 Common
Shares, no par value and 200,000 Class B Convertible Shares, no par value. Each
Common Share will be fully paid and nonassessable upon issuance and payment
therefor. As of the date of this Prospectus, there were 10 Common Shares of the
Company issued and outstanding. All 200,000 authorized Class B Convertible
Shares are held by Glade M. Knight. See "Principal and Management Stockholders."
The Common Shares will have the sole voting power to elect Directors and
holders of the outstanding Common Shares will be entitled to one vote per Share
on all matters submitted to a vote of the Shareholders. Common Shares of the
Company have no preference, conversion, exchange, preemptive or cumulative
voting rights. No equity securities of the Company shall have greater voting
rights per share than those attributable to the Common Shares that will be sold
in this offering. Holders of Common Shares will be entitled to participate on a
per-Share basis in distributions paid in respect of the Shares if, when and as
declared by the Board of Directors and in the distribution of net assets of the
Company upon its liquidation, dissolution or winding up.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements for qualification for the tax benefits accorded a
REIT under the Code are that (i) at no time during the last half of each taxable
year may more than 50% in value of the outstanding Shares be owned, directly or
indirectly, by or for five or fewer individuals, and (ii) there must be at least
100 Shareholders for at least 335 days in any taxable year, or proportionate
part of any shorter taxable year, after its first taxable year. See "Federal
Income Tax Consequences."
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In order that the Company may meet these requirements at all times, the
Bylaws prohibit any person from acquiring or holding, directly or indirectly,
ownership of a number of Shares in excess of 9.8% of all the outstanding Shares.
Shares owned by a person in excess of such amounts will be referred to in the
Bylaws and herein as "Excess Shares." For this purpose the term "ownership" is
defined in accordance with the constructive ownership provisions of Section 544
of the Code (as modified by Section 856(h) of the Code). Accordingly, Shares
owned or deemed to be owned by a person who individually owns less than 9.8% of
the Shares outstanding nevertheless may be Excess Shares.
Holders of Excess Shares are not entitled to voting rights, dividends or
distributions. If, after the purported transfer or other event resulting in an
exchange of Common Shares for Excess Shares and before discovery by the Company
of such exchange, dividends or distributions are paid with respect to Common
Shares that were exchanged for Excess Shares, then such dividends or
distributions are to be repaid to the Company upon demand.
The Bylaws also provide that in the event any person acquires Excess Shares,
such Excess Shares may be redeemed by the Company, at the discretion of the
Board of Directors. Except as set forth below, the redemption price for redeemed
Excess Shares shall be the lesser of (i) the price paid for the Excess Shares
(or if no notice of such purchase price is given, at a price to be determined by
the Board of Directors, in its sole discretion, but no lower than the lowest
market price for the Common Shares during the year prior to the date the Company
exercises its purchase option) and (ii) the fair market value of such Excess
Shares, which shall be the fair market value of the Shares as determined in good
faith by the Board of Directors or, if the Shares are listed on a national
securities exchange, the closing price (average of closing bid and asked prices
if the Shares are quoted on the NASDAQ National Market System) on the last
business day prior to the redemption date. To redeem Excess Shares, the Board of
Directors must give a notice of redemption to the holder of such Excess Shares
not less than one week prior to the date fixed by the Board of Directors for
redemption. The holder may sell such Excess Shares before the date fixed for
redemption. If he does not, the redemption price for such Excess Shares shall be
paid on the redemption date fixed by the Board of Directors and included in such
notice. From and after the date fixed for redemption of Excess Shares, such
Shares shall cease to be entitled to any distributions and other benefits, other
than the right to payment of the redemption price for such Shares. Under certain
circumstances, the proceeds of redemption might be taxed as a distribution to
the recipient.
The redemption of Excess Shares, at the discretion of the Board of Directors,
is the only established Company procedure for the repurchase of Shares. The
Company has no other right or intent to repurchase the Shares, nor do the
Shareholders have any right to "put" the Shares to, or require redemption of
their Shares by, the Company.
The constructive ownership provisions applicable under Section 544 of the
Code (as modified by Section 856(h) of the Code) attribute ownership of
securities by a corporation, partnership, estate or trust proportionately to its
shareholders, partners or beneficiaries, attribute ownership of securities owned
by family members to other members of the same family, treat securities with
respect to which a person has an option to purchase as actually owned by that
person, and set forth rules as to when securities constructively owned by a
person are considered to be actually owned for the application of such
attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds Excess Shares, a person will be treated as
owning not only Shares actually or beneficially owned, but also any Shares
attributed to such person under the attribution rules described above. Ownership
of Shares through such attribution is generally referred to as constructive
ownership.
Under the Bylaws any acquisition of Shares of the Company that would result
in the disqualification of the Company as a REIT under the Code is void to the
fullest extent permitted by law, and the Board of Directors is authorized to
refuse to transfer Shares to a person if, as a result of the transfer, that
person would own Excess Shares. Prior to any transfer or transaction which, if
consummated, would cause a shareholder to own Excess Shares, and in any event
upon demand by the Board of Directors, a shareholder is required to file with
the Company an affidavit setting forth, as to that shareholder, the information
required to be reported in returns filed by shareholders under Treasury
Regulation Section
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1.857-9 and in reports filed under Section 13(d) of the Exchange Act.
Additionally, each proposed transferee of Common Shares, upon demand of the
Board of Directors, also may be required to file a statement or affidavit with
the Company setting forth the number of Shares already owned by the transferee
and any person to or from whom Shares may be attributed by or to the transferee.
The transfer or sale of Shares also will be subject to compliance with
applicable "Blue Sky" laws and federal securities laws.
FACILITIES FOR TRANSFERRING SHARES
The Managing Dealer may, but is not obligated to, assist Shareholders who
desire to transfer their Shares. In the event the Managing Dealer provides
assistance, it will be entitled to receive compensation as specified by the
Managing Dealer. Any assistance offered by the Managing Dealer may be terminated
or modified at any time without notice, and any fee charged for transfer
assistance may be modified or terminated at any time and without notice. The
Managing Dealer currently has no plans for rendering the type of assistance
referred to in this paragraph. Such assistance, if rendered, would likely
consist of informally matching isolated potential buyers and sellers, and would
not represent the creation of any "market" for the Shares.
No public market for the Shares currently exists. The Company does not plan
to cause the Shares to be listed on any securities exchange or quoted on any
system or in any established market either immediately or at any definite time
in the future. While the Company, acting through its Board of Directors, may
cause the Shares to be so listed or quoted if the Board of Directors determines
such action to be prudent, there can be no assurance that such event will ever
occur. Prospective Shareholders should view the Shares as illiquid and must be
prepared to hold their investment for an indefinite length of time. Currently,
the Company expects that within approximately three (3) years from Initial
Closing, it will use its best efforts either (i) to cause the Shares to be
listed on a national securities exchange or quoted on the NASDAQ National Market
System or (ii) to cause the Company to dispose of substantially all of its
properties in a manner which will permit distributions to Shareholders of cash
or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Shares will be selected by the Board
of Directors.
SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of the Company's
Articles of Incorporation and Bylaws, some of which may be described or referred
to elsewhere in this Prospectus. Neither this summary nor such descriptions
appearing elsewhere in this Prospectus purport to be, or should be considered, a
complete statement of the terms and conditions of the Articles of Incorporation
or Bylaws or any specific provision thereof, and this summary and all such
descriptions are qualified in their entirety by reference to, and the provisions
of, the Articles of Incorporation and Bylaws, which have been filed as exhibits
to the registration statement of which this Prospectus is a part. The Company's
Articles of Incorporation have been reviewed and approved unanimously by the
Directors.
BOARD OF DIRECTORS
The Board of Directors, subject to specific limitations in the Articles of
Incorporation and those imposed by law, has full, exclusive, and absolute power,
control and authority over the property and business of the Company. The Board
of Directors, without approval of the Shareholders, may alter the Company's
investment policies in view of changes in economic circumstances and other
relevant factors, subject to the
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investment restrictions set forth in the Bylaws. The Board of Directors named
under "Management" will serve until the first annual meeting of Shareholders, to
be held in the calendar year 1997. The term of each Director elected by the
Shareholders shall continue until the next annual meeting of Shareholders.
A Director may be removed (i) for cause by the vote or written consent of
all Directors other than the Director whose removal is being considered, or (ii)
with or without cause at a special meeting of the Shareholders by vote of a
majority of the outstanding Shares. "For cause" is defined as willful violations
of the Articles of Incorporation or Bylaws, or gross negligence in the
performance of a Director's duties. Any vacancies in the office of Director may
be filled by a majority of the Directors continuing in office or at a special
meeting of Shareholders by vote of a majority of the Shares present at a meeting
at which there is a quorum. Any Director so elected shall hold office for the
remainder of his predecessor's term. The number of Directors shall not be less
than three nor more than 15. At the time of Initial Closing, there will be five
Directors, a majority of whom are Independent Directors. See "Management." The
holders of the Common Shares are entitled to vote on the election or removal of
the Board of Directors, with each Share entitled to one vote.
The Board of Directors is empowered to fix the compensation of all officers
and the Board of Directors. Under the Bylaws, Directors may receive reasonable
compensation for their services as Directors and officers of the Company and
reimbursement of their expenses, and the Company may pay a Director such
compensation for special services, including legal and accounting services, as
the Board of Directors deems reasonable. The Board of Directors may delegate
certain of its powers to an Executive Committee, which must be comprised of at
least three Directors, the majority of whom are Independent Directors. At all
times a majority of the Directors and a majority of the members of any Board
committee shall be Independent Directors, except that upon the death, removal,
or resignation of an Independent Director such requirement shall not be
applicable for 60 days.
RESPONSIBILITY OF BOARD OF DIRECTORS, ADVISOR, OFFICERS AND EMPLOYEES
The Articles of Incorporation of the Company provide that the Directors and
officers of the Company shall have no liability to the Company or its
Shareholders in actions by or in the right of the Company unless such officer or
Director has engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities laws. The Advisory Agreement
provides that the Advisor shall have no liability to the Company or its
Shareholders unless the Advisor has engaged in gross negligence or willful
misconduct. Generally, claimants must look solely to the Company's property for
satisfaction of claims arising in connection with the affairs of the Company.
The Articles of Incorporation and the Advisory Agreement, respectively, provide
that the Company shall indemnify any present or former Director, officer,
employee or agent and the Advisor against any expense or liability in an action
brought against such person if the Directors (excluding the indemnified party)
determine in good faith that the Director, officer, employee or agent or the
Advisor was acting in good faith within what he or it reasonably believed to be
the scope of his or its employment or authority and for a purpose which he or it
reasonably believed to be in the best interests of the Company or its
Shareholders, and that the liability was not the result of willful misconduct,
bad faith, reckless disregard of duties or violation of the criminal law.
Indemnification is not allowed for any liability imposed by judgment, and costs
associated therewith, including attorneys' fees, arising from or out of a
violation of federal or state securities laws associated with the public
offering of the Common Shares unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee, or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
In the absence of the special exculpation and indemnification provisions in
the Company's Articles of Incorporation, the Directors and officers of the
Company would have greater accountability to the Company under Virginia
statutory law. In the absence of a special provision in the Articles of
Incorporation, a director or officer of a Virginia corporation would have
financial liability for misconduct equal to the greater of $100,000 or the
amount of cash compensation received by the director or officer from
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the corporation during the twelve preceding months. Virginia law permits, but
does not require, a corporation to indemnify a director if the director
conducted himself in good faith and believed that his conduct was in the best
interests (or in certain cases at least not opposed to the best interests) of
the corporation. As noted above, the Articles of Incorporation of the Company
require indemnification under the circumstances indicated, and therefore provide
rights more favorable to the Directors and officers than would be afforded by
Virginia law alone.
Although no Virginia court has passed upon the nature of the accountability
owed by an entity like the Advisor to an entity like the Company, it is almost
certain that the exculpation and indemnification provisions benefiting the
Advisor under the Advisory Agreement are more beneficial to the Advisor than
would be the result in the absence of such provisions. Since the Advisor has a
contractual relationship with the Company, in the absence of special exculpation
and indemnification provisions in the Advisory Agreement, a court would likely
hold that the Advisor is liable for ordinary negligence and ordinary misconduct,
in addition to the more egregious misconduct for which the Advisor is liable
under the Advisory Agreement.
The exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement have been adopted to help induce the
beneficiaries of such provisions to agree to serve on behalf of the Company or
the Advisor by providing a degree of protection from liability for alleged
mistakes in making decisions and taking actions. Such exculpation and
indemnification provisions have been adopted, in part, in response to a
perceived increase generally in shareholders' litigation alleging director and
officer misconduct. The exculpation and indemnification provisions in the
Articles of Incorporation and the Advisory Agreement may result in a Shareholder
or the Company having a more limited right of action against a Director, the
Advisor or its Affiliates than he or it would otherwise have had in the absence
of such provisions. See "Risk Factors -- Responsibilities of Directors, Advisor
and Affiliates -- Possible Inadequacy of Remedies." Conversely, the presence of
such provisions may have the effect of conferring greater discretion upon the
Directors, the Advisor and its Affiliates in making decisions and taking actions
with respect to the Company. Subject to the exculpation and indemnification
provisions in the Articles of Incorporation, the Advisory Agreement, and as
otherwise provided by law, the Advisor and the Directors and officers are
accountable to the Company and its Shareholders as fiduciaries and must exercise
good faith and integrity in handling the Company's affairs. As noted above,
however, the exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement represent a material change from the
accountability which would be imposed upon the Directors, officers, Advisor and
its Affiliates in the absence of such contractual provisions. Thus, such
fiduciary duties will be materially different from such fiduciary duties as they
would exist in the absence of the provisions of the Articles of Incorporation
and the Advisory Agreement.
ISSUANCE OF SECURITIES
The Board of Directors may in its discretion issue additional Shares or other
equity or debt securities of the Company, including options, warrants, and other
rights, on such terms and for such consideration as it may deem advisable. See
"Risk Factors -- Potential Dilution." Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases property, as part or all of the purchase price of the
property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans."
REDEMPTION AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of its
outstanding Shares may be owned directly or indirectly by five or fewer
individuals during the last half of any year other than the first year, and
after the first year all Shares of the Company must be owned by 100 or
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more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. As a means of attempting to ensure
compliance with these requirements, the Bylaws provide that the Company may
prohibit any person from directly or indirectly acquiring ownership (beneficial
or otherwise) of Excess Shares. See "Description of Capital Stock -- Repurchase
of Shares and Restrictions on Transfer."
AMENDMENT
The Articles of Incorporation and the Bylaws may be amended or altered or the
Company may be dissolved by the affirmative vote of the holders of a majority of
the outstanding Common Shares, with each Shareholder entitled to cast one vote
per Share held. The Company's Articles and Bylaws may not be amended unless
approved by the vote of the holders of a majority of the Common Shares of the
Company (except that the Directors may amend the Bylaws if they determine such
amendment to be necessary to comply with the REIT provisions of the Code or
other applicable laws and regulations or the requirements of any state
securities regulator or similar official). No amendment that would change any
rights with respect to any outstanding Common Shares of the Company, or diminish
or eliminate any voting rights pertaining thereto, may be made unless approved
by the vote of the holders of two-thirds of the outstanding Common Shares so
affected.
SHAREHOLDER LIABILITY
The holders of the Company's Shares shall not be liable personally on account
of any obligation of the Company.
SALES LITERATURE
The Company may use certain sales or marketing literature in connection with
the offering of the Shares. Sales or marketing materials which may be used
include a sales brochure highlighting the Company. The literature may also
include a brochure describing Affiliates of the Advisor, and a "tombstone"
advertisement, mailer and introductory letter. The Company may, from time to
time, also utilize brochures describing completed or proposed property
acquisitions, summaries of the Company or of the offering of the Shares, and
discussions of REIT investments generally.
The offering is, however, made only by means of this Prospectus. Except as
described herein, the Company has not authorized the use of other supplemental
literature in connection with the offering other than marketing bulletins to be
used internally by broker-dealers. Although the information contained in such
literature does not conflict with any of the information contained in this
Prospectus, such material does not purport to be complete, and should not be
considered as a part of this Prospectus or the registration statement of which
this Prospectus is a part, as incorporated in this Prospectus or the
registration statement by reference, or as forming the basis of the offering of
the Shares described herein.
REPORTS TO SHAREHOLDERS
Financial information contained in all reports to Shareholders will be
prepared in accordance with generally accepted accounting principles. The annual
report, which will contain financial statements audited by a nationally
recognized accounting firm, will be furnished within 120 days following the
close of each fiscal year. The annual report will contain a complete statement
of compensation and fees paid or accrued by the Company to the Advisor and its
Affiliates, together with a description of any new agreements with Affiliates.
Under the Bylaws, the Company is also obligated to send to the Shareholders
quarterly reports after the end of the first three calendar quarters of each
year. Such quarterly reports will include unaudited financial statements
prepared in accordance with generally accepted accounting principles, a
statement of fees paid during the quarter to the Advisor and its Affiliates, and
a reasonable summary of the activities of the Company during such quarter. The
Shareholders also have the right under applicable law to obtain other
information about the Company.
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The Company will file a report meeting the requirements of Form 8-K under the
Exchange Act if, after the termination of the offering, a commitment is made
involving the use of 10 percent or more of the net proceeds of the offering and
will provide the information contained in such report to the Shareholders at
least once each quarter after the termination of this offering.
LEGAL OPINIONS
Certain legal matters with respect to the legality of the Shares offered
hereby and certain federal income tax matters as set forth under "Risk
Factors--Federal Income Tax Risks" and "Federal Income Tax Consequences" will be
passed upon by McGuire, Woods, Battle & Boothe, L.L.P., Richmond, Virginia, as
counsel to the Company. McGuire, Woods, Battle & Boothe, L.L.P. also acts as
counsel to the Advisor and certain of its Affiliates.
EXPERTS
The balance sheet of Apple Residential Income Trust, Inc. at August 7, 1996,
appearing in this Prospectus and Registration Statement has been audited by
Ernst & Young, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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EXPERIENCE OF PRIOR PROGRAMS
The tables following this introduction set forth information with respect to
Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate investment
trust which was organized by Affiliates of the Advisor of Apple Residential
Income Trust, Inc. ("Apple"). These tables provide information for use in
evaluating Cornerstone, the results of the operations of Cornerstone, and
compensation paid by Cornerstone and certain other programs. In addition, Table
IV contains information on certain other programs organized by Affiliates of the
Advisor which completed operations in the last five years. Information in the
tables is current as of September 30, 1996. The tables are furnished solely to
provide prospective investors with information concerning the past performance
of entities formed by Affiliates of the Advisor. Regulatory filings and annual
reports of Cornerstone will be provided upon request for no cost (except for
exhibits thereto, for which there is a minimal charge). In addition, Part II of
Apple's Registration Statement contains detailed information on the property
acquisitions of Cornerstone and is available without charge upon request of any
investor or prospective investor. Please send all requests to Cornerstone Realty
Income Trust, Inc., 306 East Main Street, Richmond, VA 23219; telephone:
804-643-1761.
In the five years ending September 30, 1996, Affiliates of the Advisor of
Apple sponsored only Cornerstone, which has investment objectives similar to
those of Apple. Cornerstone was formed to invest in existing residential
properties on a substantially debt-free basis for the purpose of providing
regular quarterly distributions to shareholders and the possibility of long-term
appreciation in the value of properties and shares.
THE INFORMATION IN THE FOLLOWING TABLES SHOULD NOT BE CONSIDERED AS
INDICATIVE OF THE CAPITALIZATION OR OPERATIONS OF THE COMPANY. PURCHASERS OF
SHARES OFFERED BY THE OFFERING WILL NOT HAVE ANY INTEREST IN THE ENTITIES
REFERRED TO IN THE FOLLOWING TABLES OR IN ANY OF THE PROPERTIES OWNED BY THOSE
ENTITIES AS A RESULT OF THE ACQUISITION OF SHARES.
See "The Advisor and Affiliates -- Prior Performance of Programs Sponsored by
Affiliates of Advisor" in the Prospectus for additional information on certain
prior real estate programs sponsored by Affiliates of the Advisor and its
predecessors, including a description of the investment objectives which are
deemed by the Prior Program Sponsor to be similar and dissimilar to those of the
Company.
See the Glossary, beginning at page 71, for definitions of the following
terms used in this Section entitled "Experience of Prior Programs": Acquisition
Costs, Amount Remaining Invested in Properties at End of Year, Cash Generated
from Operations, GAAP, Percent Leverage, Recapture, Reserves, Return of Capital,
and Prior Program Sponsor.
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TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds by
Cornerstone, whose investment objectives are similar to those of the Company and
whose offering closed within three years ending September 30, 1996.
Dollar Amount Offered........................... 300,000,000
Dollar Amount Raised............................ 294,781,000
Less Offering Expenses:
Selling Commissions and Discounts ............. 7.50%
Organizational Expenses........................ 5.50%
Other.......................................... 0.00%
Reserves........................................ 3.00%
Percent Available for Investment................ 84.00%
Acquisition Costs:
Prepaid items and fees to purchase property.... 82.00%
Cash downpayment............................... 0.00%
Acquisition fees............................... 2.00%
Other.......................................... 0.00%
Total Acquisition Costs......................... 84.00%
Percent Leverage (excluding unsecured debt) .... 0.00%
Date offering began............................. May 1993
Length of offering (in months).................. 40
Months to invest amount available for
investment..................................... 40
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TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Prior Program Sponsor and
its Affiliates (i) by programs organized by it and closed within three years
ended September 30, 1996, and (ii) by all other programs during the three years
ended September 30, 1996.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE PROGRAMS
-------------- -------------
<S> <C> <C>
Date offering commenced ....................................... May 1993 Various
Dollar amount raised .......................................... $294,781,000 $ 35,483,175
Amounts paid to Prior Program Sponsor form proceeds of offering:
Acquisition fees
Real Estate commission ...................................... $ 4,241,237 $ 0
Advisory fees ............................................... $ 0 $ 0
Other ....................................................... $ 0 $ 0
Cash generated from operations before deducting payments
to Prior Program Sponsor...................................... $ 25,764,282 $ 7,521,808
Aggregate compensation to Prior Program Sponsor
Management fees .............................................. $ 3,063,590 $ 786,540
Accounting fees .............................................. $ 0 $ 161,496
Reimbursements ............................................... $ 2,717,655 $ 0
Leasing fees ................................................. $ 0 $ 0
Other fees ................................................... $ 659,930 $ 0
There have been no fees from property sales or refinancings
</TABLE>
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TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone,
the only offering closed in the five years ending September 30, 1996. Table III
is shown on both an income tax basis as well as in accordance with generally
accepted accounting principles, the only significant difference being the
methods of calculating depreciation.
<TABLE>
<CAPTION>
NINE MONTHS
--------------
1996 1995 1994 1993
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Capital contributions by year......... $171,666,206 $71,771,027 $23,496,784 $27,846,983
Gross revenue......................... $ 26,714,877 $16,300,821 $ 8,177,576 $ 1,784,868
Operating expenses................... $ 13,001,236 $ 8,260,723 $ 4,690,941 $ 1,079,517
Interest income (expense)............ $ (316,997) $ (21,565) $ 110,486 $ 46,633
Depreciation......................... $ 4,056,108 $ 2,788,818 $ 1,210,818 $ 255,338
Net income (loss) GAAP basis.......... $ 9,340,536 $ 5,229,715 $ 2,386,303 $ 496,646
Taxable income........................ $ 0 $ 0 $ 0 $ 0
Cash generated from operations ....... $ 14,501,763 $ 9,618,956 $ 3,718,086 $ 1,670,406
Less cash distributed to investors ... $ 10,313,604 $ 6,316,185 $ 2,977,136 $ 359,427
Cash generated after cash
distribution......................... $ 4,188,159 $ 3,302,771 $ 740,950 $ 1,310,979
Special items
Capital contributions, net .......... $171,666,206 $71,771,027 $23,496,784 $27,846,983
Fixed asset additions................ $194,557,133 $75,589,089 $28,557,568 $25,549,790
Line of credit....................... $ 18,300,000 $ 3,300,000 $ 5,000,000
Cash generated........................ $ (402,768) $ 2,784,709 $ 680,168 $ 3,608,172
End of period cash.................... $ 6,670,279 $ 7,073,047 $ 4,288,338 $ 3,608,172
Tax and distribution data per $1000
invested
Federal income tax results
Cornerstone Realty Income Trust is a
REIT and thus is not taxed at the
corporate level
Cash distributions to investors
Source (on GAAP basis)
Investment income................... $ 64 $ 72 $ 64 $ 37
Return of capital................... $ 14 $ 15 $ 16 $ 0
Source (on Cash basis)
Sales............................... $ 0 $ 0 $ 0 $ 0
Refinancings........................ $ 0 $ 0 $ 0 $ 0
Operations.......................... $ 68 $ 87 $ 80 $ 37
Other .............................. $ 0 $ 0 $ 0 $ 0
</TABLE>
69
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Affiliates of the Advisor
which completed operations in the five years ending September 30, 1996. All of
these programs had investment objectives dissimilar to those of the Company.
<TABLE>
<CAPTION>
COUNTY MOUNTAIN
GREEN VIEW WESTFIELD SUNSTONE FOXCROFT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Program Name
Dollar amount raised................ $1,595,125 $2,605,800 $1,825,600 $1,890,000 $1,025,500
Number of properties purchased...... 1 1 1 1 1
Date of closing of offering......... DEC 1983 OCT 1984 NOV 1984 JULY 1984 JUNE 1982
Date of first sale of property...... DEC 1993 AUG 1995 APR 1996 NOV 1995 NOV 1993
Date of final sale of property...... DEC 1993 AUG 1995 APR 1996 NOV 1995 NOV 1993
Tax and Distribution data per $1,000
investment through .................
Federal income tax results
Ordinary income
From operations.................... $ 327 $ 68 $ 80 $ 122 $ 172
From recapture..................... $ 1,165 $ 1,200 $ 1,302 $ 526 $ 1,414
Capital gain ....................... $ 0 $ 0 $ 0 $ 0 $ 0
Deferred gain
Capital............................ $ 0 $ 0 $ 0 $ 0 $ 0
Ordinary........................... $ 0 $ 0 $ 0 $ 0 $ 0
Cash distributions to investors
Source (On GAAP basis)
Investment income.................. $ 327 $ 68 $ 80 $ 122 $ 172
Return of capital.................. $ 333 $ 38 $ 233 $ 0 $ 0
Source (On cash basis)
Sales.............................. $ 333 $ 38 $ 233 $ 122 $ 172
Refinancing........................ $ 0 $ 0 $ 0 $ 0 $ 0
Operations......................... $ 327 $ 68 $ 80 $ 0 $ 0
Other.............................. $ 0 $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ ------------ ------------
Receivable on net purchase money
financing........................... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
Table V is not applicable. Cornerstone and its Affiliates have not sold or
disposed of any properties as required for inclusion in the Table (sale or
disposals of properties by programs with similar investment objectives within
the most recent three years).
70
<PAGE>
GLOSSARY
The following definitions are provided for information in reading this
Prospectus:
ACQUISITION COSTS (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Prepaid items and
fees related to purchase of property, cash down payment, acquisition fees,
legal, and other costs related to the acquisition of properties.
ACQUISITION EXPENSES. The total expenses, including but not limited to legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to selection and
acquisition of properties, whether or not acquired. Acquisition Expenses shall
not include Acquisition Fees.
ACQUISITION FEES. The total of all fees and commissions paid by any party in
connection with the purchase or development of real property by the Company,
except a development fee paid to a person not Affiliated with the Sponsor in
connection with the actual development of a project after acquisition of the
land by the Company. Included in the computation of such fees or commissions
shall be any real estate commission, selection fee, development fee,
nonrecurring management fee, or any fee of a similar nature, however designated.
ADDITIONAL SHARE OPTION. The option of Shareholders to reinvest distributions
from the Company in additional Shares so long as the registration statement of
which this Prospectus is a part remains effective.
ADJUSTED NET ASSET VALUE. The net assets of the Company (total assets before
deducting depreciation or non-cash reserves less total liabilities) valued at
fair market value as determined by qualified appraisals or valuations of the
assets.
ADVISOR. The person or entity responsible for directing or performing the
day-to-day business affairs of the Company, including a person or entity to
which the Advisor subcontracts substantially all such functions. The Company has
entered into an Advisory Agreement with Apple Residential Advisors, Inc., which
shall serve as the Advisor until it resigns such appointment or is replaced in
accordance with the provisions of the Bylaws.
ADVISORY AGREEMENT. The agreement between the Company and its Advisor, as the
same may be in effect from time to time.
AFFILIATE. Means (i) any person or entity directly or indirectly controlling,
controlled by or under common control with another person or entity, (ii) any
person or entity owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such other person or entity, (iii) any
officer, director, trustee or general partner of such person or entity, and (iv)
if such other person or entity is an officer, director, trustee or partner of
another entity, then the entity for which that person or entity acts in any such
capacity. AFFILIATED means being an Affiliate of a specified person or entity.
AMG. Apple Residential Management Group, Inc., a Virginia corporation, which
is an Affiliate of the Advisor.
AMOUNT REMAINING INVESTED IN PROPERTIES AT END OF YEAR (USED IN "EXPERIENCE
OF PRIOR PROGRAMS"). The ratio that acquisition costs of properties retained
bears to the total acquisition costs borne by the program.
ARG. Apple Realty Group, Inc., a Virginia corporation, which is an Affiliate
of the Advisor.
ARTICLES OF INCORPORATION. The Articles of Incorporation of the Company,
including all amendments, restatements or modifications thereof.
ASSET MANAGEMENT FEE. The fee payable to Apple Residential Advisors, Inc. as
the Advisor, pursuant to the Advisory Agreement.
71
<PAGE>
AVERAGE INVESTED ASSETS. The average of the aggregate book value of the
assets of the Company invested, directly or indirectly, in equity interests in
and loans secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, computed by taking the average of such
values at the end of each month during any period.
BOARD OF DIRECTORS. The Directors of the Company as of any particular time,
under the Articles of Incorporation, whether they be the Directors named therein
or additional or successor Directors.
BYLAWS. The Bylaws of the Company, including all amendments, restatements or
modifications thereof.
CASH GENERATED FROM OPERATIONS (USED IN "EXPERIENCE OF PRIOR PROGRAMS").
Excess or deficiency of operating cash receipts, including interest on
investments, over operating cash expenditures, including debt service.
CODE. The Internal Revenue Code of 1986, as amended from time to time,
including successor statutes thereto.
COMPANY. Apple Residential Income Trust, Inc., a Virginia corporation.
CORNERSTONE. Cornerstone Realty Income Trust, Inc., a Virginia corporation.
DIRECTORS. The persons holding such office, as of any particular time,
whether they be the directors named under the Articles of Incorporation or
additional or successor directors.
EMPLOYEE TRUSTS. Qualified employee pension or profit sharing trusts and
Keogh Plan trusts.
ERISA. The Employee Retirement Income Security Act of 1974, as amended.
ESCROW ACCOUNT. The account into which funds will be deposited and retained
prior to the Initial Closing, and may be deposited thereafter pending investment
in properties.
EXCESS SHARES. Shares owned, directly or indirectly (applying the rules of
Sections 544 and 856(h) of the Code), by a person in excess of 9.8% of the
Company's total outstanding Shares.
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
EXEMPT ORGANIZATIONS. Tax-exempt entities, including Employee Trusts and
IRAs.
FINAL CLOSING. The last closing of the sale of Shares offered by the
Prospectus.
FIRPTA. The Foreign Investment in Real Property Tax Act of 1980, as amended.
FUNDS FROM OPERATIONS. Net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property, and
after adjustments for significant non-recurring items and unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same
basis.
GAAP (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Generally accepted accounting
principles.
INDEPENDENT DIRECTORS. The Directors of the Company who are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or serving as an officer or director of, the Advisor or an Affiliated
business entity of the Advisor (other than as an Independent Director of up to
three other real estate investment trusts advised by the Advisor or an Affiliate
of the Advisor). An Independent Director may perform no other services for the
Company, except as a Director. Notwithstanding anything to the contrary herein,
any member of a law firm whose only material business or professional
relationship with the Company, the Advisor and their Affiliates is as legal
counsel to any of such entities shall constitute an Independent Director (unless
such person serves as a director for more than three REITs organized by the
Advisor and its Affiliates). An "indirect" affiliation shall be deemed to refer
to
72
<PAGE>
circumstances in which a member of the "immediate family" of a Director is
Affiliated with the Advisor, and a person's "immediate family" shall mean such
person's spouse, parents, children, siblings, mother and father-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
INITIAL CLOSING. The first closing which occurs after the Mimimum Offering is
achieved.
INITIAL OFFERING. The offering of Shares made pursuant to this Prospectus.
MANAGING DEALER. David Lerner Associates, Inc.
MARKETING EXPENSE ALLOWANCE. An amount equal to up to 2.5% of the purchase
price of the Shares payable by the Company to the Managing Dealer or the
Selected Dealers as a non-accountable reimbursement for expenses incurred by
them in connection with the offer and sale of the Shares.
MAXIMUM OFFERING. The sale of $250,000,000 in Shares by the Company in the
offering made by this Prospectus. If achieved, the Maximum Offering would be
comprised of $15,000,000 in Shares at $9 per Share (1,666,666.67 Shares) and
$235,000,000 in Shares at $10 per Share (23,500,000 Shares).
MINIMUM OFFERING. The sale of $15,000,000 in Shares at $9 per Share
(1,666,666.67 Shares) by the Company in the offering made by this Prospectus.
NET ASSETS OR NET ASSET VALUE. The total assets (other than intangibles) at
cost before deducting depreciation or other non-cash reserves less total
liabilities, calculated at least quarterly on a basis consistently applied.
NET INCOME. The total revenues of the Company for any period, less the
expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves.
OPERATING EXPENSES. All operating, general and administrative expenses of the
Company as determined under generally accepted accounting principles (including
regular compensation payable to the Advisor), excluding, however, the following:
(i) expenses of raising capital; (ii) interest payments; (iii) taxes; (iv)
non-cash expenditures, such as depreciation, amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any; and (vi) costs related directly
to asset acquisition, operation and disposition.
ORGANIZATIONAL AND OFFERING EXPENSES. Those expenses incurred in connection
with the formation and registration of the Company and in qualifying and
marketing the Shares under applicable federal and state law, and any other
expenses actually incurred and directly related to the qualification,
registration, offer, and sale of the Shares, including such expenses as (i) all
marketing expenses and payments made to broker-dealers as compensation or
reimbursement for all costs of reviewing the offering, including due diligence
investigations and fees and expenses of their attorneys, accountants, and other
experts; (ii) registration fees, filing fees, and taxes; (iii) the costs of
printing, amending, supplementing and distributing the registration statement
and Prospectus; (iv) the costs of obtaining regulatory clearances of, printing,
and distributing sales materials used in connection with the offer and sale of
the Shares; (v) the costs related to investor and broker-dealer sales meetings
concerning the offering; and (vi) accounting and legal fees incurred in
connection with any of the foregoing.
PERCENT LEVERAGE (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Mortgage financing
divided by the total acquisition costs including such mortgage financing.
PLAN ASSETS. The assets of an employee benefit plan.
PRIOR PROGRAM SPONSOR (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Apple
Residential Advisors, Inc. and its predecessor and affiliated corporations.
PROPERTIES. All properties owned by the Company from time to time.
73
<PAGE>
PROSPECTUS. The final version of this prospectus of the Company in connection
with the registration of the Shares by registration statement filed with the
Securities and Exchange Commission on Form S-11, as amended and supplemented.
QUALIFIED PLANS. Employee Trusts and IRAs.
RECAPTURE (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). The portion of taxable
income from property sales or other dispositions taxed as ordinary income.
REIT. "REIT" and "real estate investment trust" shall mean a real estate
investment trust as described in Sections 856 through 860 of the Code, as now
enacted or hereafter amended, including successor statutes and regulations
promulgated thereunder.
RESERVES (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Offering proceeds
designated at the time of acquisition of each property for certain repairs and
renovations and offering proceeds not committed for expenditure and held for
potential unforeseen cash requirements.
RETURN OF CAPITAL (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Distributions to
investors in excess of net income.
RETURN RATIO. For any period, the ratio of Funds from Operations to Total
Contributions.
SECURITIES ACT. The Securities Act of 1933, as amended.
SELECTED DEALERS. Broker-dealers (other than the Managing Dealer) which offer
and sell Shares on behalf of the Company.
SELLING COMMISSIONS. Selling Commissions payable to the Managing Dealer or
the Selected Dealers in an amount equal to up to 7.5% of the purchase price of
the Shares.
SERVICE. The Internal Revenue Service.
SHAREHOLDERS. Those persons who, at any particular time, are shown as the
holders of record of the Common Shares.
SHARES OR COMMON SHARES. The Common Shares of the Company, no par value, and
all other Common Shares of the Company issued in this or any subsequent
offering.
s
SPONSOR. Any person directly or indirectly instrumental in organizing, wholly
or in part, the Company or any person who will manage or participate in the
management of the Company, and any Affiliate of any such person, but not
including a person who is an Independent Director or whose only relationship
with the Company is as that of an independent property manager, whose only
compensation is as such. Sponsor also does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. No Independent Director shall be deemed to be a
Sponsor.
UBTI. Unrelated Business Taxable Income, as defined in the Code.
TOTAL CONTRIBUTIONS. The gross offering proceeds which have been received by
the Company from time to time from the sale or sales of the Shares.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
PAGE
----
Report of Independent Auditors .......................................... F-2
Balance Sheet at August 7, 1996 ......................................... F-3
Notes to the Balance Sheet .............................................. F-4
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Residential Income Trust, Inc.
We have audited the accompanying balance sheet of Apple Residential Income
Trust, Inc., as of August 7, 1996. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Apple Residential Income Trust
Inc., at August 7, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Richmond, Virginia
August 12, 1996
except for Note 5, as to which
the date is November 14, 1996
F-2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEET
AUGUST 7, 1996
Assets
Cash.............................................. $100
======
Stockholder's Equity
Common stock, no par value, Authorized 50,000,000
shares; issued and outstanding 10 shares ......... $100
======
See accompanying notes to balance sheet.
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO THE BALANCE SHEET
AUGUST 7, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Residential Income Trust, Inc. (the "Company") is a Virginia corporation
that intends to qualify as a real estate investment trust ("REIT") for federal
income tax purposes. The Company, which has no operating history, was formed to
invest primarily in existing residential apartment communities in Texas and
southwestern regions of the United States. Initial capitalization occurred on
August 7, 1996.
Apple Residential Advisors, Inc. (the "Advisor"), which owns 100% of the
outstanding common stock of Apple Residential Income Trust, Inc., is the advisor
to the Company and will provide its day-to-day management under a proposed
agreement between the Company and the Advisor.
SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Company intends to make an election to be treated, and expects to qualify
as, a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company will be allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company to
taxation only at the shareholder level. The Company's continued qualification as
a REIT will depend on its compliance with numerous requirements, including
requirements as to the nature of its income and assets and distribution of
dividends.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. OFFERING OF SHARES
The Company intends to raise capital through a "best-efforts" offering of shares
by David Lerner Associates, Inc. (the "Managing Dealer"), which will receive
selling commissions and a marketing expense allowance based on proceeds of the
shares sold.
A minimum offering of 1,666,667 shares ($15,000,000) must be sold no later than
one year after the date of the Prospectus, or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
3. RELATED PARTIES
The Company has negotiated, but not signed, a Property Management Agreement with
Apple Residential Management Group, Inc. to manage property to be acquired by
the Company for a management fee equal to 5% of gross rental collections, plus
reimbursement of certain expenses.
The Company has negotiated, but not signed, a Property Acquisition and
Disposition Agreement with Apple Realty Group, Inc. to acquire and dispose of
real estate assets for the Company. A fee of 2% of the purchase or sale price of
the property will be payable for this service.
The Company has negotiated, but not signed, an Advisory Agreement with the
Advisor to provide management of the Company and its assets. An annual fee of
.1% -- .25% of total contributions received by the Company, as defined, will be
payable for this service.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
Notes to the Balance Sheet - (Continued)
Apple Residential Management Group, Inc., Apple Realty Group, Inc. and ApplE
Residential Advisors, Inc. are all 100% owned by Glade M. Knight, Chairman and
President of Apple Residential Income Trust, Inc.
Affiliates of the Company have incurred organization and offering costs on
behalf of the Company. Upon successful completion of the offering, the Company
will reimburse the affiliates for these organizational and offering costs. The
Company is not responsible for these costs in the event that the offering is not
successfully completed.
4. STOCK INCENTIVE PLANS
The Company intends to adopt two stock incentive plans (the "Incentive Plan" and
"Directors' Plan") to provide incentives to attract and retain directors,
officers and key employees. The plans provide for the grants of options to
purchase a specified number of shares of common stock ("Options") or grants of
restricted shares of common stock ("Restricted Stock") to selected employees and
directors of the Company and certain affiliates. Following consummation of the
offering, a Compensation Committee ("Committee") will be established to
implement and administer the plans. The Committee will be responsible for
granting Options and shares of Restricted Stock and for establishing the
exercise price of Options and the terms and conditions of Restricted Stock.
5. SUBSEQUENT EVENTS
On November 14, 1996, the Company issued 200,000 shares of Class B Convertible
Shares to Mr. Knight for $.10 per share or $20,000 in aggregate.
There are no dividends payable on the Class B Convertible Shares. On
liquidation of the Company, the holder of the Class B Convertible Shares is
entitled to a liquidation payment of $0.1 per Class B Convertible Share before
any distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B Convertible
Shares are convertible into Common Shares upon and for 180 days following the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services (the events
described in this clause (2), a "Self-Administration Conversion"). Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the offering made by this Prospectus according
to the following formula:
NUMBER OF COMMON
SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE SHARE
- ------------------------------- -----------------------
$50 million.................... 1.0
$100 million................... 2.4
$150 million................... 4.2
$200 million................... 6.4
$250 million................... 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares.
F-5
<PAGE>
[SPECIMEN]
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Residential Income
Trust, Inc. ("REIT") at a purchase price of and 00/100 Dollars ($ .00) per
Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Residential
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of Kentucky and
North Carolina purchasers); and, in either event, further represent that the
purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion. The REIT
will either accept or reject this subscription within four business days from
the receipt of the subscription by the Managing Dealer or Selected Dealer. To
the extent permitted by applicable law, the REIT intends to assert the foregoing
representations as a defense to any claim based on factual assertions contrary
to those set forth above.
It is understood that until the Minimum Offering of $15 million in Shares is
sold, subscription payments will be held in an Escrow Account with First Union
National Bank of North Carolina as escrow agent. After the Minimum Offering
amount is sold, there is no requirement for an Escrow Account, and if there is
an Escrow Account, there is no limitation on the party which may act as escrow
agent.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT ANY
BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE THE
FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR RULINGS
BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE
CLASS ACTION WHO HAS OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS
ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS
DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM
THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE
SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
[SPECIMEN]
APPLE RESIDENTIAL INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)___________________________________________________
Tax ID Number(s)____________________________________________________________
Account # (If applicable)___________________________________________________
2. Name(s) in which shares are to be registered:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for _________________________________________________________
[]For Estate of ____________________________________________________________
[]Other ____________________________________________________________________
4. Address for correspondence _________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as a
United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified plans).
Make check payable to: First Union National Bank, Escrow Agent (or as otherwise
instructed). |B* Liquidate funds from money market |B* Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x _____________________________________________________________________________
Signature Date
x _____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
___________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
___________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
___________________________________ __________________________________________
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative hereby
certifies: I have reasonable grounds to believe, based on information obtained
from the investor(s) concerning investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the REIT is suitable for such investor(s) in light of financial
position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Agreed and accepted by:
Signature page will not be an Apple Residential Income Trust, Inc.
effective agreement until it is By ___________________________________
signed by a duly authorized agent of Date _________________________________
Apple Residential Income Trust, Inc.
<PAGE>
SUBSCRIPTION AGREEMENT
To: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Residential Income
Trust, Inc. ("REIT") at a purchase price of and 00/100 Dollars ($ .00) per
Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Residential
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of Kentucky or North
Carolina purchasers); and, in either event, further represent that the purchase
amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion. The REIT
will either accept or reject this subscription within four business days from
the receipt of the subscription by the Managing Dealer or Selected Dealer. To
the extent permitted by applicable law, the REIT intends to assert the foregoing
representations as a defense to any claim based on factual assertions contrary
to those set forth above.
It is understood that until the Minimum Offering of $15 million in Shares is
sold, subscription payments will be held in an Escrow Account with First Union
National Bank of North Carolina as escrow agent. After the Minimum Offering
amount is sold, there is no requirement for an Escrow Account, and if there is
an Escrow Account, there is no limitation on the party which may act as escrow
agent.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT
DISCLOSE THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR RULINGS
BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE
CLASS ACTION WHO HAS OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS
ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS
DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM
THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE
SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)__________________________________________________
Tax ID Number(s)____________________________________________________________
Account # (If applicable)___________________________________________________
2. Name(s) in which shares are to be registered:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for _________________________________________________________
[]For Estate of ____________________________________________________________
[]Other ____________________________________________________________________
4. Address for correspondence _________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as a
United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified plans).
Make check payable to: First Union National Bank, Escrow Agent (or as otherwise
instructed). |B* Liquidate funds from money market |B* Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x _____________________________________________________________________________
Signature Date
x _____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
___________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
___________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
___________________________________ __________________________________________
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative hereby
certifies: I have reasonable grounds to believe, based on information obtained
from the investor(s) concerning investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the REIT is suitable for such investor(s) in light of financial
position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Agreed and accepted by:
Signature page will not be an Apple Residential Income Trust, Inc.
effective agreement until it is By ___________________________________
signed by a duly authorized agent of Date _________________________________
Apple Residential Income Trust, Inc.
<PAGE>
================================================================================
No dealer, salesman or other person
has been authorized to give any
information or to make any
representations other than those
contained in this Prospectus in
connection with the offering made by
this Prospectus, and, if given or
made, such other information or
representations must not be relied
upon. This Prospectus does not
constitute an offer in any state in
which such offer may not legally be
made. The delivery of this
Prospectus at any time does not
imply that information herein has
not changed as of any time
subsequent to its date.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information..............i
Summary of the Offering ...........1 APPLE RESIDENTIAL
Risk Factors .....................10 INCOME TRUST,
Estimated Use of Proceeds ........20 INC.
Compensation .....................21
Conflicts of Interest ............24
Investment Objectives and
Policies........................26
Distribution Policy ..............34
Business and Properties ..........34
Management .......................37
The Advisor and Affiliates .......43
Principal and Management
Stockholders ...................47 PROSPECTUS
Federal Income Tax Consequences ..48
Investment by Tax-Exempt Entities 55
Capitalization ...................57
Management's Discussion and
Analysis of Financial Condition.57
Plan of Distribution .............57
Description of Capital Stock .....59
Summary of Organizational
Documents ......................61
Sales Literature .................64
Reports to Shareholders ..........64
Legal Opinions ...................65
Experts ..........................65
Experience of Prior Programs .....66
Glossary .........................71 DAVID LERNER ASSOCIATES, INC.
Index to Financial Statements of
the Company ...................F-1
Subscription Agreement ....Exhibit A
Until February 17, 1997, all
dealers effecting transactions in
the Shares, whether or not
participating in this distribution,
may be required to deliver a copy of
this Prospectus. This is in addition
to the obligations of dealers to November 19, 1996
deliver a Prospectus when acting as
underwriters and with respect to
their unsold allotments or
subscriptions.
================================================================================
<PAGE>
SUPPLEMENT NO. 11 DATED JULY 31, 1998
TO PROSPECTUS DATED NOVEMBER 19, 1996
(INCORPORATING SUPPLEMENTS NO. 1, NO. 2, NO. 3, NO. 4,
NO. 5, NO. 6, NO. 7, NO. 8, NO. 9 AND NO. 10)
APPLE RESIDENTIAL INCOME TRUST, INC.
The following information supplements the Prospectus of Apple Residential
Income Trust, Inc. dated November 19, 1996 and is part of such Prospectus.
Prospective investors should carefully review the Prospectus and this
Supplement. THIS SUPPLEMENT NO. 11 INCORPORATES AND THEREBY REPLACES SUPPLEMENT
NO. 1 DATED FEBRUARY 10, 1997, SUPPLEMENT NO. 2 DATED APRIL 28, 1997,
SUPPLEMENT NO. 3 DATED JUNE 24, 1997, SUPPLEMENT NO. 4 DATED JULY 30, 1997,
SUPPLEMENT NO. 5 DATED OCTOBER 31, 1997, SUPPLEMENT NO. 6 DATED DECEMBER 11,
1997, SUPPLEMENT NO. 7 DATED FEBRUARY 2, 1998, SUPPLEMENT NO. 8 DATED FEBRUARY
13, 1998, SUPPLEMENT NO. 9 DATED APRIL 30, 1998 AND SUPPLEMENT NO. 10 DATED
JUNE 2, 1998.
TABLE OF CONTENTS TO SUPPLEMENT NO. 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Status of the Offering .................................................................. S-2
Developments Involving Cornerstone Realty Income Trust, Inc ............................. S-2
Developments Affecting Directors; Committee Members. .................................... S-4
Compensation of Executive Officers and Directors ........................................ S-4
Unsecured Line of Credit ................................................................ S-5
Property Acquisitions ................................................................... S-5
Security Ownership of Certain Beneficial Owners and Management .......................... S-55
Selected Financial Data ................................................................. S-56
Management's Discussion and Analysis of Financial Condition and Results of Operations ... S-57
Ownership of Assets in Subsidiary Partnerships .......................................... S-61
Federal Income Tax Developments ......................................................... S-64
Experts ................................................................................. S-65
Update on Experience of Prior Programs .................................................. S-67
Index to Financial Statements ........................................................... F-1
</TABLE>
The Prospectus and Supplement thereto contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such forward-looking statements include, without
limitation, statements as to anticipated renovations to Company properties and
anticipated improvements in property operations from completed and planned
property renovations, and the possible acquisition by Cornerstone Realty Income
Trust, Inc. of Shares in the Company or the business or assets of the Company.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Such factors include, among other things, unanticipated adverse business
developments affecting the Company, the properties or Cornerstone Realty Income
Trust, Inc., as the case may be, adverse changes in the real estate markets and
general and local economic and business conditions. Investors should review the
more detailed risks and uncertainties set forth under the caption "Risk Factors"
in the Prospectus and the information in this Supplement. Although the Company
believes that the assumptions underlying the forward-looking statements
contained in the Prospectus and the Supplement are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that
the forward-looking statements included in the Prospectus and Supplement will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in the Prospectus or the Supplement, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the results or conditions described in such
forward-looking statements or the objectives and plans of the Company will be
achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
As of June 30, 1998, the Company (as the context requires, the term
"Company" used herein shall be deemed to include Apple Residential Income Trust,
Inc. and its subsidiaries, Apple General Inc., Apple Limited, Inc., Apple REIT
Limited Partnership, Apple REIT II Limited Partnership, Apple REIT III Limited
Partnership, Apple REIT IV Limited Partnership, Apple REIT V Limited Partnership
and Apple REIT VI Limited Partnership. See "Ownership of Assets in Subsidiary
Partnerships") had closed the sale to investors of 2,084,444 Shares at $9 per
Share, and 18,025,254 Shares at $10 per Share, representing aggregate gross
proceeds to the Company of $199,008,936, and proceeds net of selling commissions
and marketing expense allowance of $179,484,042. These totals include 417,778
Shares purchased by Cornerstone Realty Income Trust, Inc., as described below
under "Developments Involving Cornerstone Realty Income Trust, Inc. --
Authorization For Additional Share Issuance."
There is currently no established public market in which the Company's
Shares are traded. The Company's transfer agent and registrar is First Union
National Bank.
As of June 30, 1998, there were approximately 8,000 shareholders of the
Company's Shares, and there were 20,109,698 Shares outstanding.
DEVELOPMENTS INVOLVING CORNERSTONE REALTY INCOME TRUST, INC.
AUTHORIZATION FOR ADDITIONAL SHARE ISSUANCE. On February 10, 1997, in
response to a request from Cornerstone Realty Income Trust, Inc.
("Cornerstone"), the Company's Board of Directors authorized the grant to
Cornerstone of a continuing right to purchase such number of Shares of the
Company as would, following any such purchase, be up to but not in excess of
9.8% of the total number of Shares of the Company then outstanding. This right
will continue for so long as the Company's Initial Offering continues, and the
purchase price for such Shares under such right will be the current public
offering price less the Selling Commissions and Marketing Expense Allowance
payable with respect thereto. Shares sold to Cornerstone pursuant to this right
would be in addition to, and not part of, the public offering made by the
Prospectus.
The Company elected to grant to Cornerstone this ongoing right because it
determined that the issuance of Shares in this manner would represent an
appropriate and financially prudent method of raising additional equity for the
Company. Glade M. Knight, who is a Director and the Chairman and President of
the Company, also serves as a Director, and the Chairman and Chief Executive
Officer of Cornerstone. To the extent that Cornerstone exercises its right to
acquire up to 9.8% of the outstanding Shares of the Company, Cornerstone may
become one of the largest, or perhaps the largest, shareholder of the Company,
with commensurate voting power.
On April 25, 1997, Cornerstone exercised the right described above and
purchased 417,778 Shares of the Company for approximately $3.76 million.
Cornerstone owns approximately 2.1% of the Shares of the Company outstanding on
June 30, 1998.
POSSIBLE ACQUISITION OF THE COMPANY BY CORNERSTONE. As described in the
Prospectus, under "Investment Objectives and Policies-Sale and Refinancing
Policies," the Company has granted to Cornerstone a right of first refusal to
purchase the properties and business of the Company. Cornerstone has, from time
to time, stated its intention to evaluate the acquisition of the Company and, if
the Board of Directors of Cornerstone determines it is in the best interests of
Cornerstone and its shareholders, to offer to acquire the Company or its assets.
Any decision to combine the Company and Cornerstone can only be made by the
respective Boards of Directors, and depending on the structure of the
transaction, the respective shareholders, of the two companies. Accordingly,
there can be no assurance that Cornerstone will seek to acquire the Company or
its assets or that any proposal by Cornerstone to acquire the Company or its
assets would be consummated. Nevertheless, prospective investors in the Company
should consider and evaluate the possibility of Cornerstone acquiring the
Company or its assets in making an investment decision relative to the Company.
S-2
<PAGE>
Early in 1997, Cornerstone stated its intention to evaluate the possible
acquisition of the Company by the end of 1997. The Company has been informed (by
Cornerstone) that Cornerstone, with the assistance of certain professional
advisors, evaluated the desirability to Cornerstone and its shareholders of
acquiring the Company in 1997, and determined that it was not in the best
interest of Cornerstone and its shareholders to seek to acquire the Company at
that time. However, the Company has been informed (by Cornerstone) that
Cornerstone expects to reevaluate the desirability of seeking to acquire the
Company from time to time in the future.
PROVIDING OF CERTAIN SERVICES BY CORNERSTONE. As described in the
Prospectus under "The Advisor and Affiliates," the Company entered into
contracts with Apple Residential Advisors, Inc. ("ARA"), Apple Residential
Management Group, Inc. ("ARMG"), and Apple Realty Group, Inc. ("ARG"), pursuant
to which ARA, ARMG and ARG, respectively, agreed to provide certain Company
management, property management and property acquisition and disposition
services to the Company in exchange for certain compensation described therein.
ARA and ARMG, effective March 1, 1997, entered into subcontracts with
Cornerstone, each of which subcontracts has been approved by the Company,
pursuant to which Cornerstone has agreed to provide to the Company the services
previously agreed to be provided by ARA and ARMG in exchange for the
compensation previously agreed to be paid by the Company to ARA and ARMG.
Further, Cornerstone has, effective March 1, 1997, acquired all the assets of
ARG (consisting principally of ARG's contract with the Company), whose sole
owner at that time was Glade M. Knight, for consideration totalling $2 million
(consisting of $350,000 in cash and $1,650,000 in Cornerstone common shares
(150,000 Cornerstone common shares valued at $11 per Cornerstone common share)),
and pursuant to such acquisition has assumed the obligations of ARG to the
Company in exchange for the compensation previously agreed to be paid by the
Company to ARG.
The effect of the foregoing transactions is that Cornerstone now renders to
the Company services previously agreed to be rendered by ARA, ARMG and ARG, in
exchange for the compensation previously agreed to be paid by the Company. As an
entity rendering services to the Company in exchange for certain fees and
expense reimbursements, Cornerstone has an interest in keeping such agreements
in effect. If Cornerstone were to acquire the Company or its properties (as
discussed above under "Developments Involving Cornerstone Realty Income Trust,
Inc. -- Possible Acquisition of the Company by Cornerstone"), these agreements
and the fees received by Cornerstone under the agreements would cease.
Accordingly, Cornerstone could be subject to conflicting considerations in
deciding whether or not to seek to acquire Apple or its properties at any
particular point in time. See the discussion under "Security Ownership of
Certain Beneficial Owners and Management" herein for an explanation of why the
ownership of Class B Convertible Shares in the Company by Mr. Knight and others
could also provide an incentive to delay a proposed acquisition by Cornerstone
of the Company.
Prior to March 1, 1997, Mr. Knight was the sole owner of ARMG and ARA. For
the period prior to March 1, 1997, the Company paid to ARMG a management fee
plus reimbursement of certain expenses in the amount of $52,375 and to ARA an
advisory fee in the amount of $14,894. For the period March 1, 1997 through
December 31, 1997, the Company paid to Cornerstone $822,934 in management and
advisory fees and $214,961 in certain reimbursable items. For the period prior
to March 1, 1997, the Company paid to ARG fees in the amount of $624,382. For
the period from March 1, 1997 through December 31, 1997, the Company paid to
Cornerstone approximately $1,116,566 under the property acquisition and
disposition agreement with the Company. For the three months ended March 31,
1998, the Company paid to Cornerstone $351,534 in management and advisory fees
and in certain reimbursable items and $490,500 under the property acquisition
and disposition agreement.
CORNERSTONE OPERATIONS. Through December 31, 1997, Cornerstone had sold
approximately $349 million in common shares to approximately 14,000 investors,
and had acquired 51 apartment communities in Virginia, North Carolina, South
Carolina and Georgia. The aggregate cost of the 51 properties (including capital
improvements thereto) was approximately $488 million. The purchase price of all
such properties was paid either using the proceeds from the sale of 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 December 31, 1997, approximately $146 million remained unpaid on such line of
credit. See also "Update on Experience of Prior Programs" herein. Cornerstone's
common shares were first listed and began trading on the New York Stock Exchange
on April 18, 1997.
S-3
<PAGE>
DEVELOPMENTS AFFECTING DIRECTORS; COMMITTEE MEMBERS
The Company's four Directors currently are Glade M. Knight, Penelope W.
Kyle, Bruce H. Matson and Lisa B. Kern. Ms. Kyle is also a member of the Board
of Directors of Cornerstone. Information with respect to Messrs. Knight and
Matson and Ms. Kyle can be found in the Prospectus under the heading
"Management." Information on Ms. Kern is set forth below.
LISA B. KERN. Ms. Kern, age 37, 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.
Effective February 4, 1998, Ted W. Smith ceased to serve as a Director of
the Company. Mr. Smith also ceased to serve as an officer of ARMG.
The current members of the Company's Executive Committee are Glade M.
Knight (age 53), Penelope W. Kyle (age 50), and Bruce H. Matson (age 40). The
current members of the Audit Committee are Penelope W. Kyle, Lisa B. Kern, and
Bruce H. Matson. The current members of the Compensation Committee are Bruce H.
Matson and Penelope W. Kyle. For a description of the functions of the
Executive, Audit and Compensation Committees, see the Prospectus under the
headings "Management-Committees of Directors," and "Management-The Incentive
Plan."
The 1998 Annual Meeting of Shareholders of the Company was held at the
Company's executive offices at 306 East Main Street, Richmond, Virginia 23219,
on Tuesday, May 12, 1998, beginning at 10:00 a.m. The sole item on the agenda
for consideration was the re-election of the four current Directors to an
additional term of one year each. The holders of Shares of record at the close
of business on March 20, 1998 were entitled to vote at the meeting. A quorum was
present, and therefore the four candidates receiving the greatest number of
affirmative votes of Shares were elected Directors of the Company. At the close
of business on the record date, the Company had 16,708,817 Shares outstanding
and entitled to vote.
At the Annual Meeting of Shareholders of the Company, held on May 12, 1998,
the following four persons, already serving as directors, were duly nominated
for election as Directors of the Company, received the number of votes set forth
opposite their respective names, and were therefore re-elected to one-year
terms:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NAME VOTES RECEIVED VOTES WITHHELD
---- -------------- --------------
<S> <C> <C>
Lisa B. Kern ............. 14,906,853 61,993
Glade M. Knight .......... 14,906,853 61,993
Penelope W. Kyle ......... 14,906,853 61,993
Bruce H. Matson .......... 14,906,853 61,993
</TABLE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The Company did not pay a salary to its sole executive officer (Glade M.
Knight) for the year ending December 31, 1997. The Company operates as an
"externally-advised" and "externally-managed" REIT.
During 1997, independent Directors (Mss. Kern and Kyle and Mr. Matson)
received annual directors' fees of $5,000 plus $500 for each meeting of the
Board and $100 for each committee meeting attended; however, independent
Directors did not receive any compensation for attending a committee meeting if
it occurred on the same day as a meeting of the entire Board of Directors.
Non-independent Directors received no compensation from the Company for their
service as Directors. All Directors were reimbursed by the Company for their
travel and other out-of-pocket expenses incurred in attending meetings of the
Directors or a committee and in conducting the business of the Company.
S-4
<PAGE>
In addition, in 1997, each independent Director received an option to
purchase 6,850 Shares, and in 1998 each independent Director received an option
to purchase 4,022 shares, all exercisable at $10 per Share. Independent
Directors will receive additional Share options in future years under the
Company's Non-Employee Directors Stock Option Plan.
In 1997, no Share options or restricted Shares were issued to the Company's
officers or employees. The Compensation Committee expects that it may issue
Share options and/or restricted Shares to selected Company officers and
employees in 1998 and in future years. The Compensation Committee intends to
propose and recommend grants that reward officers and employees for actions that
benefit the Company and its shareholders and that align the interests of the
officers and employees with those of the Company and its shareholders.
In December 1997 the Compensation Committee approved and adopted a plan
pursuant to which certain employees of the Company would be eligible for grants
of options to purchase up to 87,000 Shares (in the aggregate for all such
employees) based upon such employees and/or the Company meeting or exceeding
performance goals for 1998 as specified by the Chairman. If such performance
goals are met, such options are expected to be issued to eligible persons (who
are still employees) in the early part of 1999.
UNSECURED LINE OF CREDIT
As contemplated by the discussion in the Prospectus under the heading
"Business and Properties - Properties Owned by the Company," in 1997 the Board
of Directors authorized, and the Company obtained, an unsecured line of credit,
which was designed to facilitate the timely acquisition of properties deemed
attractive by management. The unsecured line of credit the ("Unsecured Line of
Credit") was from First Union National Bank of Virginia. The Unsecured Line of
Credit was used to facilitate several property acquisitions in 1997, as
described under "Property Acquisitions" herein, and all amounts borrowed under
the Unsecured Line of Credit were subsequently repaid using proceeds from the
sale of Shares.
As of the date of this Supplement, the documents evidencing the Unsecured
Line of Credit have not been amended to extend the original maturity date or to
reflect the reorganization transactions described below in this Supplement under
"Ownership of Assets in Subsidiary Partnerships." Unless and until such
documents are so amended, with the consent of the lender, the Unsecured Line of
Credit will not be available for further use by the Company.
The Company has also obtained a line of credit from First Union National
Bank of Virginia in the amount of $1 million for general corporate purposes.
PROPERTY ACQUISITIONS
As of the date of this Supplement, the Company owns the following
properties (the "Properties"):
<TABLE>
<CAPTION>
NUMBER OF DATE OF
NAME LOCATION UNITS ACQUISITION
---- -------- ----- -----------
<S> <C> <C> <C>
Brookfield Dallas, TX 232 1-28-97
Eagle Crest Irving, TX 484 1-30-97
Aspen Hill (formerly Tahoe) Arlington, TX 240 1-31-97
Mill Crossing Arlington, TX 184 2-21-97
Polo Run Arlington, TX 224 3-31-97
Wildwood Euless, TX 120 3-31-97
Toscana Dallas, TX 192 3-31-97
Arbors on Forest Ridge Bedford, TX 210 4-25-97
Pace's Cove Dallas, TX 328 6-24-97
Remington Hills Irving, TX 362 8-6-97
Copper Crossing Fort Worth, TX 200 11-24-97
Main Park Duncanville, TX 192 2-4-98
Timberglen Dallas, TX 304 2-13-98
Copper Ridge Fort Worth, TX 200 3-31-98
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF DATE OF
NAME LOCATION UNITS ACQUISITION
---- -------- ----- -----------
<S> <C> <C> <C>
Silver Brook (formerly Bitter Creek) Grand Prairie, TX 472 5-8-98
Summer Tree North Dallas, TX 232 6-2-98
Park Village Bedford, TX 238 7-1-98
Cottonwood Crossing Arlington, TX 200 7-9-98
Pace's Point Lewisville, TX 300 7-17-98
Pepper Square North Dallas, TX 144 7-17-98
Emerald Oaks Grapevine, TX 250 7-24-98
Hayden's Crossing Grand Prairie, TX 170 7-24-98
Newport Austin, TX 200 7-24-98
Estrada Oaks Irving, TX 248 7-27-98
</TABLE>
In connection with each of its Property acquisitions, the Company obtains a
Phase I Environment Report and such additional environmental reports and surveys
as are necessitated by such preliminary report. Based on such reports, the
Company is not aware of any environmental situations requiring remediation at
its Properties, which have not been or are not currently being remediated as
necessary.
S-6
<PAGE>
Additional information on the Properties is provided below.
BROOKFIELD APARTMENTS
DALLAS, TEXAS
On January 28, 1997, the Company purchased the Brookfield Apartments, a
232-unit apartment complex having an address of 4060 Preferred Place, Dallas,
Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,458,485, which was paid entirely in cash
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. The following information is based in part upon information
provided by the Dallas Chamber of Commerce.
The Property is located in south Dallas, within the Dallas/Fort Worth
Consolidated Metropolitan Statistical area, or as it is called locally, "The
Metroplex." The Dallas/Fort Worth Metroplex is in the north-central part of
Texas and is composed of nine counties. The 1996 population of The Metroplex was
approximately 4,400,000. Dallas is the second largest city in the state, behind
Houston.
The economy of the Dallas/Fort Worth area is complex and diversified. Key
economic factors include a large manufacturing base (including as products
military hardware, electronics, automobiles, industrial equipment, oil-field
parts, food products and chemicals), banking, insurance services,
communications, oil and gas production and air transportation. Major employers
in the area include Texas Instruments, Southwestern Bell, General Motors, J. C.
Penney, NationsBank and Vought Aircraft Company.
The Metroplex is also an established transportation center for the nation.
The Dallas/Fort Worth International Airport occupies approximately 17,800 acres
of land between the two cities. It is the largest commercial airport in the
United States in terms of land area, and is the fourth busiest airport in the
world, with 1,700 daily arrivals and departures.
The area also has a well-established system of interstate highways and
supporting secondary routes. The Metroplex is located at the hub of Interstates
35, 45, 20 and 30. Two outer loops, Interstate 635 in Dallas and Interstate 820
in Fort Worth, surround the respective cities.
The many institutions of higher learning in the area include Southern
Methodist University, the University of Texas at Dallas, the University of Texas
at Arlington, the University of North Texas, and Texas Christian University.
The Property is located in a well-established area of Dallas near the Red
Bird Mall. The area is characterized by various retail centers, restaurants and
businesses. Downtown Dallas is an approximately 15-minute drive from the
Property. The Property is an approximately 25-minute drive from Dallas/Fort
Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 232 garden-style
apartments located in 15 two- and three-story buildings on approximately seven
acres of land. The Property was completed in 1984.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $350,000 (and as of June 30, 1998 had expended approximately
$321,000) for repairs and improvements, including clubhouse renovation,
painting, wood replacement, parking lot repair, interior upgrades (including new
appliances) and pool improvements.
S-7
<PAGE>
The Property offers seven different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
39 One bedroom, one bath 578 $450
9 One bedroom, one bath (view) 578 460
36 One bedroom, one bath w/sunroom 658 470
12 One bedroom, one bath w/sunroom (view) 658 480
24 One bedroom, one bath w/WD connections 669 485
48 One bedroom, one bath w/WD connections,
FP, bookshelves 661 495
64 Two bedrooms, two baths w/WD connections,
FP, bookshelves 913 650
</TABLE>
The apartments provide a combined total of approximately 165,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased gradually. As an
example, a two-bedroom, two-bath apartment rented for $520 in 1993, $530 in
1994, $545 in 1995, $565 in 1996, and $650 in 1997. The average effective annual
rental per square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was
$7.11, $7.24, $7.45, $7.72 and $8.12, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard exteriors on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles on plywood.
The Property has an outdoor swimming pool with a large deck, a hot tub, a
controlled access entrance and exit gate, and covered parking for approximately
232 vehicles. The Property also includes a clubhouse with a leasing office.
There is also uncovered paved parking for residents.
Apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment unit has a television hook-up,
miniblinds, drapes on sliding glass doors and individually controlled heating
and air-conditioning unit. Each kitchen is equipped with a refrigerator/freezer
with ice maker, electric range and oven, dishwasher and garbage disposal. Also,
as indicated in the table above, some units have a wood-burning fireplace, a
utility area with washer/dryer connections, bookshelves, ceiling fans or a
sunroom. The owner of the Property pays for cold water, sewer service, gas usage
for hot water and trash removal. Tenants pay for their electricity service,
which includes cooking, lighting, heating and air-conditioning.
There are at least 10 apartment properties which compete with the Property.
All offer similar amenities and generally have rents that are higher when
compared with those of the Property. Based on a recent market survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 95% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1992, 93% in 1993, 93% in 1994, 94% in
1995 and 97% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 99%. On June 30, 1998, the Property was 96%
occupied. The residents are a mix of blue-collar and white-collar workers,
students and retired persons.
S-8
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
County of Dallas ......... $5,605,190 $ 0.44307 $ 24,834.92
City of Dallas ........... 5,605,190 2.11213 118,388.90
-------------
Total ................... $ 143,223.82
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $4,531,091 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Internal Revenue Code of 1986, as amended (the
"Code"). Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
The Advisor and the Company believe that the Property is and will be
continue to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $109,170. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
EAGLE CREST I & II APARTMENTS
IRVING, TEXAS
On January 30, 1997, the Company purchased the Eagle Crest I & II
Apartments, a 484-unit apartment complex having an address of 4013 West
Northgate, Irving, Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $15,650,000, which the Company paid entirely
in cash using proceeds from the sale of Shares. Title to the Property was
conveyed to the Company by limited warranty deed.
LOCATION. See above under "Brookfield Apartments" for a description of the
greater Dallas/Fort Worth Consolidated Metropolitan Statistical Area, which
includes Irving, Texas.
Irving is approximately eight miles west of the Dallas central business
district and approximately 25 miles east of downtown Fort Worth. Irving is a
relatively young city with a majority of its development occurring during the
latter half of this century. The location of Irving between Dallas and Fort
Worth, and near Dallas/Fort Worth International Airport, has enabled it to
garner a large portion of the area's recent commercial and industrial
development.
Irving is the site of Las Colinas, one of the nation's largest
master-planned real estate developments. The development occupies approximately
12,500 acres and includes residential developments, office space, research,
distribution and light industrial facilities, four golf courses, the Las Colinas
Sports Club and an equestrian center.
Las Colinas is targeted to large employers and is the home of numerous
regional and national businesses. The Irving employment sector is primarily
white-collar. Significant employers in Las Colinas include Exxon, GTE, Aetna,
Abbott Laboratories, Boeing, US Sprint, Computer Associates, Allstate Insurance,
Zale Jewelers and the Federal Home Loan Bank Board. In addition, Columbia/HCA
Health Care Corporation recently signed an agreement to buy approximately 28
acres in the development. The plans for the land include a community hospital
with medical office complex and a full-service acute-care facility.
S-9
<PAGE>
Irving has a well-defined highway system. The city is connected to Dallas
by State Highway 114 on the northeast, State Highway 183 in its central portion
and Interstate 30 on the south.
The Property is located off of Belt Line Road in Irving. The immediate
neighborhood includes other multi-family communities, and residential,
commercial and retail development. The Property is conveniently located near
restaurants, businesses, schools, and churches, and is readily accessible from
Highways 161 and 183. The Property is an approximately 5-minute drive from
Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 484 apartment units
in 31 two- and three-story buildings on approximately 18 acres of land. There
are 296 apartment units in Phase I, which was built in 1983, and 188 apartment
units in Phase II, which was built in 1985.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $1,255,000 (and as of June 30, 1998 had expended approximately
$1,235,000) for repairs and improvements, including clubhouse renovations,
structural repair of shrink/swell soil conditions, painting, wood replacement,
interior upgrades (including new appliances), parking lot resurfacing,
landscaping and pool improvements.
The Property offers a wide range of units types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
116 One bedroom, one bath 698 $555
120 One bedroom, one bath 796 580
4 One bedroom, one bath, sunroom, bar 798 615
48 One bedroom, one bath 896 660
24 Two bedrooms, one bath 912 660
63 Two bedrooms, two baths 1023 710
80 Two bedrooms, two baths 1089 750
1 Two bedrooms, two baths, sunroom 1123 770
4 Two bedrooms, two baths, sunroom, bar 1189 810
21 Two bedrooms, two baths 1124 790
3 Two bedrooms, two baths, sunroom 1224 850
</TABLE>
The apartments provide a combined total of approximately 429,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased gradually. As an
example, a one-bedroom, one-bath apartment rented for $445 in 1993, $445 in
1994, $469 in 1995, $485 in 1996, and $550 in 1997. The average effective annual
rental per square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was
$7.17, $7.17, $7.56, $7.81 and $8.00, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard siding on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles over plywood.
The Property has three outdoor swimming pools, two jacuzzis, three laundry
facilities, a fitness building, gas grills and ice machines. The Property also
has a clubhouse with a leasing office. There is ample paved parking for
residents.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, double stainless
steel sink, a dishwasher and garbage disposal. All apartment units include
washer/dryer connections for full-sized appliances. Some apartment units feature
additional amenities, such as linen closets, a fireplace with mantle, ceiling
fans, a pantry closet, a dry bar, an entertainment center, vaulted ceilings, a
sunroom
S-10
<PAGE>
and greenhouse windows. The owner of the Property pays for cold water, gas for
hot water, sewer service, and trash removal. The tenants pay for their
electricity usage, which includes cooking, lighting, heating and
air-conditioning.
There are at least four apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 97% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1992, 94% in 1993, 95% in 1994, 95% in
1995 and 97% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 94%. On June 30, 1998, the Property was 95%
occupied. The tenants are a mix of white-collar and blue-collar workers.
The following tables set forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
PHASE I
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
County of Dallas ............... $8,959,260 $ 0.44307 $ 39,195.79
City of Irving ................. 8,959,260 0.49300 44,169.15
Irving School District ......... 8,959,260 1.64840 147,684.44
-------------
Total ......................... $ 231,549.38
</TABLE>
<TABLE>
<CAPTION>
PHASE II
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
County of Dallas ............... $5,763,450 $ 0.44307 $ 25,536.12
City of Irving ................. 5,763,450 0.49300 28,413.81
Irving School District ......... 5,763,450 1.64840 95,004.71
-------------
Total ......................... $ 148,954.64
-------------
Grand Total ................... $ 380,504.02
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $13,168,390 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will be
continue to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $313,000. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
ASPEN HILL APARTMENTS
ARLINGTON, TEXAS
On January 31, 1997, the Company purchased the Tahoe Apartments, a 240-unit
apartment complex having an address of 2308 Fair Oaks Drive, Arlington, Texas
(the "Property"). The Company has renamed the Property the "Aspen Hill
Apartments."
S-11
<PAGE>
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,690,560, which was paid entirely in cash
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. See above under "Brookfield Apartments" for a description of the
greater Dallas/Fort Worth Consolidated Metropolitan Statistical Area, which
includes Arlington, Texas.
The Property is located in the city of Arlington, which is located between
Dallas and Fort Worth. Arlington is approximately 13 miles east of the Fort
Worth Central Business district and approximately 20 miles west of the Dallas
Central Business District.
Owing in large part to its location between Dallas and Fort Worth,
Arlington has become a focus of business development in the area. Major
employers include General Motors, National Semiconductor, Johnson & Johnson,
Doskocil Manufacturing Company and Arlington Memorial Hospital. The area is also
the site of several large warehousing and distribution companies whose primary
market is the Metroplex.
The University of Texas at Arlington has an enrollment of approximately
23,000 students. Arlington also serves as a major medical center for its own
population and for residents of outlying communities as well. Arlington Memorial
Hospital has a staff of approximately 1,680 and HCA South Arlington Medical
Center has approximately 640 employees, making both of them among the largest
employers in the city.
The immediate area surrounding the Property consists of other multifamily
housing, residential, commercial and retail development. The Property is
conveniently located near restaurants, businesses, schools and churches, and is
readily accessible from Interstate 20 and Interstate 30.
DESCRIPTION OF THE PROPERTY. The Property consists of 240 garden-style
apartment units in 18 two- and three-story buildings on approximately 9.8 acres
of land. The Property was built in 1979.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $1,350,000 (and as of June 30, 1998 had expended approximately
$1,288,000) for repairs and improvements including clubhouse renovation,
retaining wall repairs, landscaping, exterior painting and exterior siding
replacement, interior upgrades (including new appliances), parking lot
resurfacing and landscaping.
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
64 One bedroom, one bath 480 $435
64 One bedroom, one bath 575 465
48 One bedroom, one bath 634 500
32 Two bedrooms, two baths 941 665
32 Two bedrooms, two baths 1,027 720
</TABLE>
The apartments provide a combined total of approximately 161,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
one bedroom, one bath apartment rented for $345 in 1993, $365 in 1994, $394 in
1995, $404 in 1996, and $430 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.91,
$7.31, $7.89, $8.09 and $8.44, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard exteriors on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles over plywood.
S-12
<PAGE>
The Property has an outdoor swimming pool, a hot tub, two laundry
facilities, a fitness center, a sand volleyball court and covered parking for
approximately 32 vehicles. The Property also has a clubhouse with a leasing
office. There is also uncovered paved parking for residents.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds, vertical blinds and an individually controlled heating and
air-conditioning unit. Each kitchen is equipped with a refrigerator/freezer with
icemaker, electric range and oven, dishwasher, microwave and garbage disposal.
Some units have a wood-burning fireplace and washer/dryer connections. The owner
of the Property pays for cold water, sewer service, natural gas for hot water
and trash removal. Tenants pay for their electricity service, which includes
cooking, lighting, heating and air-conditioning.
There are at least four apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are higher
when compared with those of the Property. Based on a recent telephone survey,
the Advisor estimates that occupancy in nearby competing properties averaged
approximately 92% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1992, 93% in 1993, 95% in 1994, 89% in
1995 and 94% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 91%. On June 30, 1998, the Property was 89%
occupied. The tenants are a mix of white-collar and blue-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
County of Tarrant ......... $5,451,821 $ 1.995196 $ 108,774.52
City of Arlington ......... 5,451,821 0.638000 34,782.62
-------------
Total .................... $ 143,557.14
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $4,812,374 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $113,800. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
MILL CROSSING APARTMENTS
ARLINGTON, TEXAS
On February 21, 1997, the Company purchased the Mill Crossing Apartments, a
184-unit apartment complex having an address of 2713 North Collins, Arlington,
Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $4,544,121, which was paid entirely in cash
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
S-13
<PAGE>
LOCATION. The Property is located in the city of Arlington, Texas, which
is part of "The Metroplex." For information on The Metroplex, see "Brookfield
Apartments" herein. For information on Arlington, see "Tahoe Apartments"
herein.
The immediate area surrounding the Property consists of other multifamily
housing, residential, commercial and retail development. The Property is
conveniently located near restaurants, businesses, schools and churches, and is
readily accessible from Interstate 20 and Interstate 30.
DESCRIPTION OF THE PROPERTY. The Property consists of 184 garden-style
apartment units in 14 two-story buildings on approximately eight acres of land.
The Property was built in 1979.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $525,000 (and as of June 30, 1998 had expended approximately
$505,000) for repairs and improvements, including painting, clubhouse
renovations, parking lot repair, interior upgrades (including new appliances),
landscaping and pool improvements.
The Property offers several different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
24 Efficiency 452 $405
48 One bedroom/one bath 553 445
24 One bedroom/one bath downstairs 652 480
24 One bedroom/one bath upstairs 652 490
24 Two bedrooms/two baths downstairs 860 630
24 Two bedrooms/two baths upstairs 860 650
8 Two bedrooms/two baths 1,075 750
8 Two bedrooms/two baths/view 1,075 760
</TABLE>
The apartments provide a combined total of approximately 127,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates of the past five years have generally increased. As an example, a
one bedroom, one bath apartment rented for $360 in 1993, $380 in 1994, $385 in
1995, $395 in 1996 and $425 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.95,
$7.33, $7.43 $7.62 and $8.34, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard exteriors on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles over plywood.
The Property has an outdoor swimming pool, clubhouse with leasing office,
and two laundry facilities. There is ample paved parking for the tenants.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher, microwave and garbage disposal. Certain units also feature a
wood-burning fireplace, bookshelves or vaulted ceilings, and all two-bedroom
units have washer/dryer connections for full-sized appliances. The owner of the
Property pays for cold water, natural gas for hot water, sewer service and trash
removal. Tenants pay for their electricity usage, which includes cooking,
lighting, heating and air conditioning.
There are at least six apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are higher when
compared with those at the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 92% at June 30, 1998.
S-14
<PAGE>
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1992, 93% in 1993, 94% in 1994, 93% in
1995 and 94% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 93%. On June 30, 1998, the Property was 92%
occupied. The tenants are a mix of white-collar and blue-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE TAX RATE TAX
------------ ----- -------- ---
<S> <C> <C> <C>
County of Tarrant ......... $4,200,000 $ 1.995196 $ 83,798.24
City of Arlington ......... 4,200,000 0.638000 26,796.00
------------
Total .................... $ 110,594.24
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,921,032 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $90,882. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
POLO RUN APARTMENTS
ARLINGTON, TEXAS
On March 31, 1997, the Company purchased the Polo Run Apartments, a
224-unit apartment complex having an address of 901 Greenway Glen Drive,
Arlington, Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $6,858,974, which was paid entirely using the
Unsecured Line of Credit. The Company subsequently repaid this borrowed amount
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. The Property is located off of Road to Six Flags in Arlington,
Texas, which is part of "The Metroplex." For information on The Metroplex, see
"Brookfield Apartments" herein. For information on Arlington, see "Tahoe
Apartments" herein.
The immediate area surrounding the Property consists of other multi-family
housing and residential, commercial and retail development. The Property is
located near restaurants, businesses, schools and churches, and is readily
accessible from Interstates 20 and 30. The Property is an approximately 20- to
25-minute drive from both downtown Dallas and downtown Fort Worth, as well as
the Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 224 garden-style
apartment units located in 23 two-story buildings on approximately 9.2 acres of
land. The Property was completed in 1984.
The Company believes that the Property has generally been well maintained
and is generally in very good condition. However, the Company currently has
budgeted approximately $500,000 (and as of June 30, 1998 had expended
approximately $471,000) for repairs and improvements, including painting, siding
repairs, pool renovations, clubhouse renovations and interior upgrades
(including new appliances).
S-15
<PAGE>
The Property offers four units types. The unit mix and rents being charged
new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
56 One bedroom, one bathroom w/fireplace 656 $505
16 One bedroom, one bathroom w/fireplace and dining
room 720 550
88 Two bedrooms, two bathrooms w/fireplace and dining
room 913 640
64 Two bedrooms, two bathrooms w/fireplace, dining
room and vanity 981 660
</TABLE>
The apartments provide a combined total of approximately 191,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bath apartment rented for $495 in 1993, $510 in 1994, $530 in
1995, $560 in 1996, and $620 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.55,
$6.75, $7.01, $7.41 and $7.64, respectively.
The buildings are wood frame construction with combination brick veneer
and masonite hardboard exteriors on reinforced concrete slab foundations. Roofs
are sloped fiberglass shingled on plywood.
The Property has two outdoor swimming pools and a clubhouse with weight
room, party room (with full bar and kitchen), billiards, steam rooms and a
leasing office. There is ample paved parking for tenants.
Apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, microwave oven, dishwasher and garbage disposal. Each unit also includes a
wood-burning fireplace and a washer and dryer. The owner of the Property pays
for cold water, sewer service, gas usage for hot water and trash removal.
Tenants pay for their electricity service, which includes cooking, lighting,
heating and air conditioning.
There are at least six apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 95% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1992, 95% in 1993, 93% in 1994, 94% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 94%. On June 30, 1998, the Property was 95%
occupied. The residents are a mix of white-collar and blue-collar workers,
students and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
County of Tarrant ......... $5,173,615 $ 1.995196 $ 103,223.77
City of Arlington ......... 5,173,615 0.638000 33,007.66
-------------
Total .................... $ 136,231.43
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $6,264,984 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
S-16
<PAGE>
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $137,179.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
WILDWOOD APARTMENTS
EULESS, TEXAS
On March 31, 1997, the Company purchased the Wildwood Apartments, a
120-unit apartment complex having an address of 200 West Bear Creek, Euless,
Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $3,963,519, which was paid entirely using the
Unsecured Line of Credit. The Company subsequently repaid such borrowing on the
Unsecured Line of Credit using proceeds from the sale of Shares. Title to the
Property was conveyed to the Company by limited warranty deed.
LOCATION. The Property is located in Euless, within Tarrant County, which
is a part of "The Metroplex." For information on The Metroplex see "Brookfield
Apartments" herein.
The Property is located in the northern portion of Euless. Euless is
located between Dallas and Fort Worth, approximately 17 miles east of the Fort
Worth central business district and approximately 20 miles west of the Dallas
central business district.
The immediate area surrounding the Property consists of other multi-family
housing and residential, commercial and retail development. The Property is
located near restaurants, businesses, schools and churches.
DESCRIPTION OF THE PROPERTY. The Property consists of 120 garden-style
apartments located in 10 two-story buildings on approximately 10 acres of land.
The Property was built in 1984.
The Company believes that the Property has generally been well maintained
and is generally in very good condition. However, the Company currently has
budgeted approximately $324,000 (and as of June 30, 1998 had expended
approximately $287,000) for certain repairs and improvements, including
painting, siding repair, pool renovations and clubhouse renovations.
The Property offers eight different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
17 One bedroom, one bathroom 525 $510
7 One bedroom, one bathroom (upgraded) 525 510
12 One bedroom, one bathroom 650 564
12 One bedroom, one bathroom (upgraded) 650 564
13 One bedroom, one bathroom 750 625
19 One bedroom, one bathroom (upgraded) 750 625
16 Two bedrooms, two bathrooms 900 795
24 Two bedrooms, two bathrooms 1,000 845
</TABLE>
The apartments provide a combined total of approximately 90,000 square feet
of net rentable area.
S-17
<PAGE>
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example a
one-bedroom, one-bath apartment rented for $340 in 1993, $355 in 1994, $395 in
1995, $420 in 1996, and $469 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.96,
$7.27, $8.09, $8.60 and $9.32, respectively.
The buildings are wood frame construction with a combination of brick
veneer and wood siding on concrete slab foundations. Roofs are pitched and
covered with composition shingles.
The Property has an outdoor swimming pool with a waterfall, a jacuzzi,
covered picnic areas, a playground, a sand volleyball court, basketball courts,
a laundry room and a health club. The Property also has a clubhouse. There is
ample paved parking for tenants, and there are 124 covered parking spaces.
Apartments units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment has a cable television hook-up,
miniblinds and an individually controlled heating and air conditioning unit.
Units also include ceiling fans, intrusion alarms, private balconies and
door-to-door trash and recycling service. Each kitchen is equipped with a
refrigerator-freezer, electric range and oven, dishwasher, microwave oven and
garbage disposal. All but 24 of the units have a fireplace and all of the
two-bedroom units include full-sized washer/dryer connections. The Property also
has valet laundry service with free delivery for tenants without washers and
dryers. The owner of the Property pays for gas usage for hot water and trash
removal. Tenants pay for their electricity service, which includes cooking,
lighting, heating and air conditioning. Historically, the owner of the Property
was responsible for water and sewer charges. However, in February, 1997, the
Property was converted to individually-metered water and sewer service. As
leases are renewed or replaced, the tenants will become responsible for these
charges.
There are at least six apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable when compared with those of the Property. Based on a recent telephone
survey, the Advisor estimates that occupancy in nearby competing properties
averaged approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 93% in 1992, 94% in 1993, 94% in 1994, 95% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 94%. On June 30, 1998, the Property was 97%
occupied. The residents are a mix of white-collar and blue-collar workers,
students and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
County of Tarrant ................. $3,680,000 $ 1.08135 $ 39,793.68
Grapevine School District ......... 3,680,000 1.53779 56,590.67
------------
Total ............................ $ 96,384.35
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,314,933 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property,
S-18
<PAGE>
or $79,270. Cornerstone Realty Income Trust, Inc. will serve as property
manager for the Property and for its services will be paid by the Company a
monthly management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
TOSCANA APARTMENTS
DALLAS, TEXAS
On March 31, 1997, the Company purchased the Toscana Apartments, a 192-unit
apartment complex having an address of 17910 Kelly Boulevard, Dallas, Texas (the
"Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,854,531. The Company paid all but $125,000
in cash using proceeds from the sale of Shares, and the balance was paid using
the Unsecured Line of Credit. The borrowed amount was subsequently repaid using
proceeds from the sale of Shares. Title to the Property was conveyed to the
Company by limited warranty deed.
LOCATION. The Property is located near the intersection of Kelly and
Frankford in the north section of Dallas, Texas, which is part of "The
Metroplex." For information on The Metroplex, see "Brookfield Apartments,"
herein.
The area surrounding the Property consists principally of other
multi-family housing and residential, commercial and retail development. The
Property is approximately a 20-minute drive from downtown Dallas and an
approximately 20-minute drive from the Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 192 garden-style
apartment units in six two-story buildings on approximately four acres of land.
The Property was completed in 1986.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $555,000 (and as of June 30, 1998 had expended approximately
$529,000) for repairs and improvements, including painting, clubhouse
renovations, parking area repair and interior upgrades.
The Property offers six different units types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
64 Efficiency 500 $470
52 One bedroom, one bathroom 600 550
12 One bedroom, one bathroom 650 560
8 One bedroom, one bathroom 650 560
42 One bedroom, one bathroom 700 580
14 One bedroom, one bathroom (upgraded) 700 595
</TABLE>
The apartments provide a combined total of approximately 115,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
650 square-foot apartment rented for $395 in 1993, $425 in 1994, $470 in 1995,
$490 in 1996, and $540 in 1997. The average effective annual rental per square
foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $7.68, $8.26,
$9.13, $9.52 and $9.82, respectively.
The buildings are wood frame construction with a combination of brick
veneer, stucco and painted wood siding on concrete slab foundations. Roofs are
sloped fiberglass shingles on plywood.
S-19
<PAGE>
The Property has an outdoor swimming pool with a fountain, a jacuzzi and
cabana, a volleyball area, an exercise/weights room, a sauna, three tanning
beds, an aerobics room with aerobics classes offered, a billiard room, limited
access gates and covered parking. The Property also includes a clubhouse. There
is ample paved parking for tenants.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer with icemaker,
electric range and oven, microwave, dishwasher and garbage disposal. Each unit
also includes a wood burning fireplace, a stacked washer/dryer unit, ceiling
fans, alarm system and vaulted ceilings. The owner of the Property pays for cold
water, sewer service, gas usage for hot water and trash removal. Tenants pay for
their electricity usage, which includes cooking, lighting, heating and air
conditioning.
There are at least four apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1992, 95% in 1993, 94% in 1994, 96% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 96%. On June 30, 1998, the Property was 94%
occupied. The residents are primarily white-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
County of Denton ................. $4,775,529 $ 0.25590 $ 12,220.58
City of Dallas ................... 5,972,590 0.65160 38,917.40
Carrollton-Farmers School District 5,972,590 1.49619 89,361.20
------------
Total ........................... 140,499.18
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $5,273,108 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $117,091.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
THE ARBORS ON FOREST RIDGE APARTMENTS
BEDFORD, TEXAS
On April 25, 1997, the Company purchased The Arbors on Forest Ridge
Apartments, a 210-unit apartment complex having an address of 2200 Forest Ridge
Drive, Bedford, Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $7,748,907. The Company borrowed the entire
purchase price under the Unsecured Line of Credit and subsequently repaid this
borrowed amount using proceeds from the sale of Shares. Title to the Property
was conveyed to the Company by limited warranty deed.
S-20
<PAGE>
LOCATION. The Property is located in Bedford within Tarrant County, which
is part of "The Metroplex." For information on The Metroplex see "Brookfield
Apartments" herein.
Bedford is located between Dallas and Fort Worth, being approximately 15
miles east of the Fort Worth central business district and approximately 20
miles west of the Dallas central business district. The immediate area
surrounding the Property consists of other multi-family and single-family
housing and commercial and retail development. The Property is located near
restaurants, businesses, schools and churches, and is readily accessible from
Interstates 121 and 183. The Property is an approximately 10-minute drive from
the Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 210 garden-style
apartment units located in 19 two-story buildings on approximately 8.9 acres of
land. The Property was completed in 1986.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However the Company currently has budgeted
$365,000 (and as of June 30, 1998 had expended approximately $308,000) for
repairs and improvements, including painting, siding repairs, pool renovations,
clubhouse renovations, interior upgrades and landscaping.
The Property offers a variety of unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
8 Contemporary One Bedroom/One Bath Basic 581 $550
10 Contemporary One Bedroom/One Bath w/Fireplace 581 550
2 Contemporary One Bedroom/One Bath large 604 550
8 Contemporary One Bedroom/One Bath large 615 550
w/Fireplace
9 Luxury One Bedroom/One Bath Down 684 625
9 Luxury One Bedroom/One Bath Up 684 625
14 Luxury One Bedroom/One Bath Down w/Fireplace 684 625
14 Luxury One Bedroom/One Bath Up w/Fireplace 684 625
8 Luxury One Bedroom/One Bath w/View 684 635
12 Luxury One Bedroom/One Bath w/View w/Fireplace 684 635
8 Conventional One Bedroom/One Bath Lofted Study 716 625
11 Conventional One Bedroom/One Bath Lofted Study 716 625
w/Fireplace
9 Conventional One Bedroom/One Bath Lofted Study 750 625
Large w/Fireplace
12 Executive One Bedroom/One Bath Down 775 650
12 Executive One Bedroom/One Bath Up 775 650
12 Executive One Bedroom/One Bath Down w/Fireplace 775 650
12 Executive One Bedroom/One Bath Up w/Fireplace 775 650
10 Executive One Bedroom/One Bath Study Down 871 700
10 Executive One Bedroom/One Bath Study Up 893 700
4 Executive One Bedroom/One Bath Study Down 871 700
w/Fireplace
4 Executive One Bedroom/One Bath Study Up 893 700
w/Fireplace
6 Executive One Bedroom/One Bath Study 871 710
Down w/View
6 Executive One Bedroom/One Bath Study Up w/View 893 710
</TABLE>
The apartments provide a combined total of approximately 169,000 square
feet of net rentable area.
S-21
<PAGE>
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
one-bedroom, one-bath apartment ("executive-down") rented for $460 in 1993, $500
in 1994, $545 in 1995, $560 in 1996, and $600 in 1997. The average effective
annual rental per square foot at the Property for 1993, 1994, 1995, 1996 and
1997 was $6.65, $7.52, $7.88, $8.10 and $9.85, respectively.
The buildings are wood frame construction with a combination of brick
veneer and wood siding on concrete slab foundations. Roofs are pitched
composition shingles.
The Property includes a swimming pool and deck, hot tub/whirlpool, weight
room, sand volleyball court, basketball court, gas grills, picnic area, laundry
room, curb-side trash pick-up and access gates. The Property also has a
clubhouse. There is ample paved parking for tenants, each of whom is assigned
one covered parking space and one uncovered parking space.
Each apartment unit has wall-to-wall carpeting in the living area and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and an individually controlled heating and air conditioning unit. Each
apartment has ceiling fans and a private balcony or patio, and maid service is
available for an extra charge. Each kitchen has a refrigerator/freezer with ice
maker, electric range and oven, dishwasher, microwave and garbage disposal. All
the apartment units except the junior one bedroom units have a fireplace. Some
units also feature decorator bookcases, pass through bar, vaulted ceilings and
washer/dryer connections. Currently, the owner of the Property pays for cold
water, sewer service and trash removal. The tenants pay for their electricity
service, which includes cooking, lighting, heating, hot water and air
conditioning. The apartment units have recently been separately metered for
water and sewer charges, and it is expected that tenants will bear these charges
as leases are renewed or new leases are entered into.
There are at least five apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 93% in 1992, 94% in 1993, 96% in 1994, 95% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 96%. On June 30, 1998, the Property was 99%
occupied. The residents are a mix of white-collar and blue-collar workers and
retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
County of Tarrant ......... $6,200,000 $ 2.531853 $ 156,978.88
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,359,867 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $154,978.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
S-22
<PAGE>
PACE'S COVE APARTMENTS
DALLAS, TEXAS
On June 24, 1997, the Company purchased the Pace's Cove Apartments, a
328-unit apartment complex at 13100 Pandora Drive in Dallas, Texas (the
"Property"). The seller was unaffiliated with the Company, the Advisor, and
their Affiliates. The purchase price was $9,277,355. The Company borrowed the
entire purchase price under the Unsecured Line of Credit and subsequently repaid
this borrowed amount using proceeds from the sale of Shares. Title to the
Property was conveyed to the Company by limited warranty deed.
LOCATION. The Property is located in the northern portion of Dallas within
"The Metroplex." For information on The Metroplex see "Brookfield Apartments"
herein.
The neighborhood surrounding the Property consists of other multi-family
and single-family housing and commercial and retail development. The Property is
an approximately 20-minute drive from Dallas/Fort Worth International Airport
and an approximately 15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 328 garden-style
apartment units located in 19 two- and three-story buildings on approximately 13
acres of land. The Property was constructed in 1982.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company initially budgeted
approximately $279,000 (and as of June 30, 1998 had expended approximately
$232,000) for certain repairs and improvements, including clubhouse renovations
and interior upgrades.
The Property offers a variety of unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
42 One bedroom/one bath 504 $455
42 One bedroom/one bath upstairs 504 460
40 One bedroom/one bath 572 480
40 One bedroom/one bath upstairs 572 490
42 One bedroom/one bath w/fireplace 690 550
42 One bedroom/one bath w/fireplace upstairs 690 560
20 One bedroom/one bath/den w/fireplace 757 660
30 Two bedrooms/two baths w/fireplace 925 690
30 Two bedrooms/two baths w/fireplace 1,026 715
</TABLE>
The apartments provide a combined total of approximately 220,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
downstairs one-bedroom, one-bath apartment (504 square feet) rented for $330 in
1993, $370 in 1994, $390 in 1995, $420 in 1996, and $440 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
and 1996 was $7.14, $7.14, $8.01, $8.44, $9.09 and $9.80, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and stucco with painted trim on concrete slab foundations. Roofs are
pitched and covered with asphalt shingles on plywood sheathing.
The Property has two outdoor swimming pools, a hot tub and jacuzzi,
volleyball area, fitness center, laundry facility and covered parking for
approximately 328 vehicles. The Property also includes a clubhouse with a
leasing office. There is also ample uncovered paved parking for residents.
S-23
<PAGE>
Each apartment unit has wall-to-wall carpeting in the living area and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds, and an individual heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Each unit has full-sized washer/dryer connections and a
security alarm. The owner of the Property pays for cold water, sewer charges and
trash removal. The tenants pay for electricity service, which includes cooking,
lighting, heating, hot water and air-conditioning.
There are at least seven apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are lower
when compared with those of the Property. Based on a recent telephone survey,
the Advisor estimates that occupancy at nearby competing properties averaged
approximately 97% at June 30, 1998.
According to information provided by the Seller, physical occupancy at the
Property averaged approximately 92% in 1992, 91% in 1993, 93% in 1994, 94% in
1995, and 93% in 1996. Based in part on information provided by seller, physical
occupancy in 1997 averaged 94%. As of June 30, 1998, the Property was 94%
occupied. The residents are a mix of white-collar and blue-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property.
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
City of Dallas ........... $9,448,220 $ 0.443070 $ 41,862.23
County of Dallas ......... 9,448,220 2.112130 199,558.69
------------
Total ................... $ 241,420.92
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,624,404 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property will be adequately
covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. The Company paid Cornerstone
Realty Income Trust, Inc. a property acquisition fee equal to 2% of the
purchase price of the Property, or $185,547. Cornerstone Realty Income Trust,
Inc. will also serve as property manager for the Property and for its services
will be paid by the Company a monthly management fee equal to 5% of the gross
revenues of the Property plus reimbursement of certain expenses.
REMINGTON HILLS AT LAS COLINAS
IRVING, TEXAS
On August 6, 1997, the Company purchased the Chaparosa and Riverhill
Apartments ("Chaparosa" and "Riverhill," respectively, and, collectively, the
"Property") located at 1201 Meadow Creek Drive and 1101 Meadow Creek Drive,
respectively, in Irving, Texas. Chaparosa and Riverhill are adjacent to each
other and the Company now operates them as a combined community under the new
name "Remington Hills at Las Colinas." The Property comprises 362 apartment
units. The purchase price for the Property was $13,100,000 (allocated $5,825,000
to Chaparosa and $7,275,000 to Riverhill), and the sellers were unaffiliated
with the Company, the Advisor and their Affiliates. The Company borrowed the
entire purchase price under the Unsecured Line of Credit and subsequently repaid
this borrowed amount using proceeds from the sale of Shares. Title to the
Property was conveyed to the Company by limited warranty deed.
LOCATION. The Property is located in the city of Irving, Texas, which is
part of "The Metroplex." For information on The Metroplex, see "Brookfield
Apartments" herein. For information on Irving, see "Eagle Crest I & II
Apartments" herein.
S-24
<PAGE>
The Property is located in the area of Las Colinas. The immediate area
surrounding the Property consists of other multi-family and single-family
housing, and commercial and retail development. The Property is an approximately
15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 362 garden- and
townhouse-style apartment units in 38 two- and three-story buildings on
approximately 16.8 acres of land. Chaparosa was built in 1984 and Riverhill was
built in 1985.
The portion of the Property formerly known as Chaparosa offers five
different unit types. The unit mix and rents being charged new tenants as of
July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
42 One bedroom/one bath 713 $690
32 One bedroom/one bath 830 735
42 Two bedrooms/two baths 1,077 885
34 Two bedrooms/two baths 1,148 895
20 Two bedrooms/two baths TH 1,222 995
</TABLE>
The portion of the Property formerly known as Riverhill offers six
different unit types. The unit mix and rents being charged new tenants as of
July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
32 One bedroom/one bath 665 $645
36 One bedroom/one bath 773 715
16 One bedroom/1.5 baths TH w/den 928 860
24 Two bedrooms/two baths 974 840
48 Two bedrooms/two baths 1,062 900
36 Two bedrooms/2.5 baths TH 1,176 940
</TABLE>
The apartments collectively provide a total of approximately 346,000 square
feet of net rentable area.
The Company believes that Chaparosa and Riverhill were generally well
maintained and are in good condition. However, the Company currently has
budgeted approximately $2,000,000 (and as of June 30, 1998 had expended
approximately $1,182,000) for repairs and improvements to the Property,
including foundation repairs, painting, wood replacement, clubhouse renovation
and appliance and carpet replacement.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bath apartment (1,222 square feet) at Chaparosa rented for $615
in 1993, $715 in 1994, $725 in 1995, $750 in 1996, and $905 in 1997. A
one-bedroom, one-bath apartment (665 square feet) at Riverhill rented for $465
in 1993, $485 in 1994, $505 in 1995, $525 in 1996, and $650 in 1997. The average
effective annual rental per square foot at Chaparosa for 1993, 1994, 1995, 1996
and 1997 was $6.53, $7.59, $7.70, $7.96 and $9.10, respectively. The average
effective annual rental per square foot at Riverhill for 1993, 1994, 1995, 1996
and 1997 was $7.29, $7.61, $7.92, $8.24 and $8.72, respectively.
Buildings are wood-frame construction with crawl spaces. Roofs are pitched
and covered with red tiles. Exteriors are stucco and brick veneer.
The portion of the Property formerly known as Chaparosa features an outdoor
swimming pool and hot tub, a lighted tennis court, a central laundry facility,
and a clubhouse with a rental office and lounge.
S-25
<PAGE>
The portion of the Property formerly known as Riverhill features an outdoor
swimming pool and enclosed whirlpool spa, a lighted tennis court, and a
clubhouse with a kitchen, lounge, game room and rental office. The Property has
access to Canal Park and ample paved parking for tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and baths, as well as cable television hook-ups and
individually controlled heating and air-conditioning units. Each apartment unit
has washer/dryer connections, a wood-burning fireplace and outside storage. Each
kitchen is equipped with a refrigerator/freezer with icemaker, electric range
and oven, microwave, dishwasher and garbage disposal. The owner of the property
pays for cold water, sewer service, cable television, alarm service and trash
removal. The tenants pay for their electricity service, which includes heat, hot
water, air-conditioning, cooking and lights.
There are at least five apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are higher
when compared to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at
Chaparosa averaged approximately 94% in 1992, 94% in 1993, 95% in 1994, 97% in
1995 and 97% in 1996. According to information provided by the seller, physical
occupancy at Riverhill averaged approximately 94% in 1992, 96% in 1993, 95% in
1994, 96% in 1995 and 96% in 1996. Based in part on information provided by the
seller, physical occupancy in 1997 averaged 95% at both Chaparosa and Riverhill.
As of June 30, 1998, occupancy at the Property was 96%. Tenants at the
Property are principally white-collar workers.
The following tables set forth the 1997 real estate tax information on the
Property:
CHAPAROSA
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
County of Dallas ............... $6,053,350 $ 0.44307 $ 26,820.58
City of Irving ................. 6,053,350 0.49300 29,843.02
Carrollton Farmers Branch School
District ...................... 6,053,350 1.49619 90,569.62
------------
Total ......................... $ 147,233.22
</TABLE>
RIVERHILL
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ---
<S> <C> <C> <C>
County of Dallas ............... $7,206,540 $ 0.44307 $ 31,930.02
City of Irving ................. 7,206,540 0.49300 35,528.24
Carrollton Farmers Branch School
District ...................... 7,206,540 1.49619 107,823.53
------------
Total ......................... $ 175,281.79
------------
Grand Total ................... $ 322,515.01
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $10,428,572 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
S-26
<PAGE>
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property, or $116,500
for Chaparosa and $145,500 for Riverhill. Cornerstone Realty Income Trust, Inc.
will serve as property manager for the Property and for its services will be
paid by the Company a monthly management fee equal to 5% of the gross revenues
of the Property plus reimbursement of certain expenses.
COPPER CROSSING
FORT WORTH, TEXAS
On November 24, 1997, the Company purchased the Copper Crossing Apartments
located at 5644 Riverwalk Drive in Fort Worth, Texas (The "Property"). The
Company now operates the Property in conjunction with the Copper Ridge
Apartments.
The Property comprises 200 apartment units. The purchase price for the
Property was $4,750,000. The seller was Copper Crossing Investors, Ltd., a Texas
limited partnership which is not affiliated with the Company, the Advisor or
their Affiliates. The entire purchase price was paid using proceeds from the
sale of Shares. Title to the Property was conveyed to the Company by limited
warranty deed.
LOCATION. The Property is located off of Bryant-Irvin Highway in Fort
Worth, Texas, in Tarrant County, which is part of the greater Dallas/Fort Worth
Consolidated Metropolitan Statistical Area, or as it is called locally, "The
Metroplex." For information on The Metroplex, see "Brookfield Apartments"
herein.
The immediate area surrounding the Property consists of other multi-family
housing, single-family housing, commercial and retail development. The Property
is located near restaurants, businesses, schools, and churches, and is readily
accessible from Interstate 20, Highway 183 and Interstate 820, which are the
major highways in the area.
The Property is close to Hulen Mall, a major regional mall. This regional
mall has spurred significant construction and corresponding retail growth in the
Hulen Mall/Benbrook area. The Property is an approximately 30-minute drive from
the Dallas/Fort Worth International Airport, an approximately 15-minutes drive
from the Fort Worth central business district and an approximately 30-minute
drive from the Dallas central business district.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 garden-style
apartment units in 13 two-story buildings on approximately 6.9 acres of land.
The Property was constructed in 1981.
The Property offers four different unit types. The unit mix and rents
currently being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------- ------
<S> <C> <C> <C>
56 One bedroom/one bathroom 563 $410
40 One bedroom/one bathroom 663 435
32 One bedroom/one bathroom 745 500
72 Two bedrooms/two bathrooms 915 590
</TABLE>
The apartments provide a total of approximately 148,000 square feet of net
rental area.
The Company believes that the Property has generally been well maintained
and is in good condition. According to the seller, in the past two years the
seller spent over $400,000 in capital improvements to the exterior of the
Property, including new roofs, exterior rehabilitation, and repair and
replacement of awnings.
S-27
<PAGE>
The Company currently has budgeted approximately $425,000 (and as of June
30, 1998 had expended approximately $358,000) for additional capital
improvements to the Copper Crossing Apartments, including the separate property
originally acquired and known as the Copper Ridge Apartments. These improvements
will include clubhouse renovations, exterior painting and wood replacement, and
upgrading the landscaping at the Property.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have both increased and decreased. As an
example, a one-bedroom, one-bathroom apartment unit (563 square feet) rented for
$300 in 1993, $299 in 1994, $315 in 1995, $345 in 1996, and $425 in 1997. The
average effective annual rental per square foot at the Property for 1993, 1994,
1995, 1996 and 1997 was $5.74, $5.72, $6.03, $6.60 and $7.08, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and masonite hardboard on reinforced concrete slab foundations. Roofs
are sloped fiberglass shingled on plywood.
The Property has an outdoor swimming pool with a large deck, a fitness
center, a laundry facility, a sand volleyball court and picnic areas. There is
also a clubhouse which includes an entertainment area and a leasing office.
There is ample paved parking for the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and an individually controlled heating and air conditioning unit. Each
kitchen is equipped with a refrigerator/freezer, electric range and oven,
dishwasher and garbage disposal. Each apartment unit has a wood-burning
fireplace, a screened porch or balcony, ceiling fans, mini blinds and vertical
blinds. The largest one-bedroom units and the two-bedroom units include
full-sized washer/dryer connections. The owner of the Property pays for cold
water, gas usage for hot water, sewer service and trash removal. Tenants pay for
their own electricity service, which includes cooking, lighting, heating and air
conditioning.
There are at least five apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in the nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the Seller, physical occupancy at the
Property averaged approximately 85% in 1992, 87% in 1993, 96% in 1994, 95% in
1995, 94% in 1996, and 95% during 1997. As of June 30, 1998, the Property
(including the former Copper Ridge Apartments) was 93% occupied The tenants are
a mix of white-collar workers, blue-collar workers, students and retired
persons.
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
County of Tarrant ......... $3,300,000 $ 2.01160 $ 66,382.67
City of Benbrook .......... 3,300,000 0.78500 25,905.00
------------
Total .................... $ 92,287.67
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,993,650 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property,
S-28
<PAGE>
or $95,000. Cornerstone Realty Income Trust, Inc. will serve as property
manager for the Property and for its services will be paid by the Company a
monthly management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
MAIN PARK APARTMENTS
DUNCANVILLE, TEXAS
On February 4, 1998, Apple REIT Limited Partnership purchased the Main Park
Apartments located at 1303 South Main Street in Duncanville (southwest of
Dallas), Texas (The "Property").
The Property comprises 192 apartment units. The purchase price for the
Property was $8,000,000. The seller was MGW Apartments Partnership, a Texas
limited partnership which is not affiliated with the Company, the Advisor or
their Affiliates. The entire purchase price was paid using proceeds from the
sale of Shares. Title to the Property was conveyed to the Company by limited
warranty deed.
LOCATION. The Property is located on South Main Street in Duncanville,
southwest of Dallas, within the greater Dallas/Fort Worth Consolidated
Metropolitan Statistical Area, or as it is called locally, "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments."
The immediate area surrounding the Property consists of other multi-family,
single-family, commercial and retail development. The Property is located near
restaurants, businesses, schools, and churches, and is readily accessible from
Interstate 20 and Highway 67. The Property is an approximately 20-minute drive
from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 192 garden-style
apartment units in 24 two-story buildings on approximately 10.4 acres of land.
The Property was constructed in 1984.
The Property offers eight different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
-------- ---- -------------- ------
<S> <C> <C> <C>
49 One bedroom/one bathroom 757 $599
11 One bedroom/one bathroom (view) 757 619
22 One bedroom/one bathroom w/den 901 709
8 One bedroom/one bathroom w/den (view) 901 725
39 Two bedrooms/two bathrooms 1,056 769
15 Two bedrooms/two bathrooms (view) 1,056 785
38 Two bedrooms/two bathrooms 1,058 789
10 Two bedrooms/two bathrooms (view) 1,058 799
</TABLE>
The apartments provide a total of approximately 180,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. The Company has budgeted approximately $144,000 (and
as of June 30, 1998 had expended approximately $81,000) for additional capital
improvements to the Property. These improvements will include clubhouse
renovations, exterior painting and interior upgrades.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bathroom apartment unit (1,058 square feet) rented for $608 in
1993, $618 in 1994, $655 in 1995, $683 in 1996 and $702 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
1996 and 1997 was $7.08, $7.20, $7.63, $7.96, and $8.18, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and masonite hardboard siding on reinforced concrete slab
foundations. Roofs are sloped fiberglass shingles on plywood.
S-29
<PAGE>
The Property has two outdoor swimming pools, a jacuzzi, two laundry
facilities and a wooded creek view. There is also a clubhouse which includes a
kitchen, entertainment area and leasing office. There is ample paved parking for
the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen, bath, entry and utility areas. Each apartment unit
has a cable television hook-up and an individually controlled heating and air
conditioning unit. Each kitchen is equipped with a refrigerator/freezer,
electric range and oven, dishwasher and garbage disposal. Each apartment unit
has a fireplace, washer/dryer connections, miniblinds, exterior storage and a
private balcony or patio. All upstairs units have vaulted ceilings. The owner of
the Property pays for cold water, gas usage for hot water, sewer service and
trash removal. Tenants pay for their own electricity service, which includes
cooking, lighting, heating and air conditioning.
There are at least four apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in the nearby competing properties averaged
approximately 97% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1993, 95% in 1994, 96% in 1995, 96% in
1996, and 96% in 1997. As of June 30, 1998, the Property was 96% occupied. The
tenants are a mix of white-collar workers, blue-collar workers, students and
retired persons.
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
County of Dallas ......... $6,850,180 $ 2.80107 $ 191,878.34
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,642,926 at the time of acquisition) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property, or $160,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
TIMBERGLEN APARTMENTS
DALLAS, TEXAS
On February 13, 1998, Apple REIT Limited Partnership purchased the
Timberglen Apartments located at 3773 Timberglen Road in Dallas, Texas (The
"Property"). The Property comprises 304 apartment units.
The purchase price for the Property was $12,000,000. The seller was
Timberglen Apartments, Ltd., a Texas limited partnership which is not affiliated
with the Company, the Advisor or their Affiliates. The entire purchase price was
paid using proceeds from the sale of Shares. Title to the Property was conveyed
to the Company by limited warranty deed.
S-30
<PAGE>
LOCATION. The Property is located in the north area of Dallas, within the
greater Dallas/Fort Worth Consolidated Metropolitan Statistical Area, or as it
is called locally, "The Metroplex." For information on The Metroplex, see under
"Brookfield Apartments."
The immediate area surrounding the Property consists of other multi-family,
commercial and retail development. The Property is located near restaurants,
businesses, schools, and churches, and is readily accessible from Interstate 35,
the North Dallas Tollway, Central Expressway and LBJ Freeway. The Property is an
approximately 15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 304 garden and
townhouse style apartment units in 28 two-story and three-story buildings on
approximately 10.5 acres of land. The Property was constructed in 1984.
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
-------- ---- -------------- ------
<S> <C> <C> <C>
120 One bedroom/one bathroom 512 $495
80 One bedroom/one bathroom 743 585
32 One bedroom/one bathroom w/den 841 680
48 Two bedrooms/two bathrooms 983 740
24 Two bedrooms/two bathrooms/studio TH 1,100 850
</TABLE>
The apartments provide a total of approximately 221,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. The Company has budgeted approximately $395,000 (and
as of June 30, 1998 had expended approximately $344,000) for additional capital
improvements to the Property. These improvements will include clubhouse
renovations, landscaping and interior upgrades.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
one-bedroom, one-bathroom apartment unit (743 square feet) rented for $410 in
1993, $420 in 1994, $440 in 1995, $485 in 1996 and $510 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
1996 and 1997 was $6.97, $7.14, $7.48, $8.25, and $8.67, respectively.
The buildings are wood-frame construction with a combination of brick
veneer, stucco and masonite hardboard siding on reinforced concrete slab
foundations. Roofs are sloped fiberglass shingles on plywood.
The Property has a two-tiered outdoor swimming pool, two laundry facilities
and an access gate to the Property. The is also a clubhouse which includes a
kitchen, entertainment area and a leasing office. There is ample payed parking
for the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and baths. Each apartment until has a cable
television hook-up and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher, microwave and garbage disposal. Each apartment unit (other
than the smallest one-bedroom unit) has a fireplace and washer/dryer
connections. Sixteen units substitute a dryer bar for the fireplace. Each
apartment unit (other than the largest two-bedroom unit) has a large patio with
exterior storage. All of the upper level units have vaulted ceilings. The owner
of the Property pays for cold water, gas usage for hot water, sewer service and
trash removal. Tenants pay for their own electricity service, which includes
cooking, lighting, heating and air conditioning.
There are at least 10 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy in the nearby competing properties averaged approximately 96% at
June 30, 1998.
S-31
<PAGE>
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1993, 95% in 1994, 97% in 1995, 97% in
1996, and 97% in 1997. As of June 30, 1998, the Property was 93% occupied. The
tenants are a mix of white-collar workers, blue-collar workers, students and
retired persons.
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ ----- ---- ---
<S> <C> <C> <C>
City of Dallas ........................ $9,423,870 $ 0.65160 $ 61,405.94
County of Denton ...................... 9,500,000 0.25590 24,310.50
Carrollton-Farmers Branch ISD ......... 9,423,870 1.49610 140,990.52
------------
Total ................................ $ 226,706.96
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $9,824,675 at the time of acquisition) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property, or $240,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
COPPER RIDGE APARTMENTS
FORT WORTH, TEXAS
On March 31, 1998, Apple REIT Limited Partnership purchased the Copper
Ridge Apartments located at 5643 Bellaire Drive South in Fort Worth, Texas (the
"Property"). The Property comprises 200 apartment units. The purchase price for
the Property was $4,525,000. The seller was Copper Limited Partnership, a
Missouri limited partnership which was not affiliated with the Company, the
Advisor or their Affiliates. The entire purchase price as paid using proceeds
from the sale of Shares. Title to the Property was conveyed to the Company by
limited warranty deed.
The Property is adjacent to the Copper Crossing Apartments, which were
purchased by the Company in November 1997. These two properties are operated by
the Company as a single community under the name "Copper Crossing Apartments."
LOCATION. The Property is located off of Bryant-Irvin Highway in Fort
Worth, Texas, in Tarrant County, which is part of the greater Dallas/Fort Worth
Consolidated Metropolitan Statistical Area, or as it is called locally, "The
Metroplex." For information on The Metroplex, see "Brookfield Apartments"
herein. For information on the neighborhood in which the Property is located,
see "Copper Crossing" herein.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 garden-style
apartment units in 15 two-story buildings on approximately seven acres of land.
The Property was constructed in 1980.
S-32
<PAGE>
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------------- ------------ --------
<S> <C> <C> <C>
64 One bedroom, one bathroom 651 $410
48 One bedroom, one bathroom 732 435
16 One bedroom, one bathroom with den 878 490
32 Two bedrooms, two bathrooms 918 540
24 Two bedrooms, two bathrooms 945 555
16 Two bedrooms, two bathrooms with den 1,110 650
</TABLE>
The apartments provide a total of approximately 160,000 square feet of net
rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bathroom apartment unit (918 square feet) rented for $420 in
1993, $430 in 1994, $440 in 1995, $450 in 1996, and $450 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
1996, 1997, was $5.73, $5.87, $6.01, $6.14, and $6.14, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and hardboard ship-lap siding on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles on plywood.
The Property has an outdoor swimming pool, laundry facility and barbecue
areas. There is also a clubhouse with a leasing office. There is ample paved
parking for the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bathrooms. Each apartment unit has a cable
television hook-up and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher and garbage disposal. Each apartment unit has a woodburning
fireplace, a screened patio or balcony, ceiling fans, miniblinds and a
pass-through bar, and some of the apartment units have washer/ dryer
connections. The owner of the Property pays for cold water, gas usage for hot
water, sewer service and trash removal. Tenants pay for their own electricity
service, which includes cooking, lighting, heating and air conditioning.
There are at least five other apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in the nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1996 and 91% in 1997. Information for
earlier periods is not available. As of June 30, 1998, the Property (including
the Copper Crossing Apartments) was 93% occupied. The tenants are a mix of
white-collar workers, blue-collar workers, students and retired persons.
S-33
<PAGE>
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Tarrant ......... $3,537,000 $ 2.01160 $ 71,150.15
City of Benbrook .......... 3,537,000 0.78500 27,765.45
------------
Total .................... $ 98,915.60
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,796,661 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $90,500.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
SILVER BROOK APARTMENTS
GRAND PRAIRIE, TEXAS
On May 8, 1998, Apple REIT Limited Partnership purchased the Bitter Creek
Apartments located at 2934 Alouette in Grand Prairie, Texas (the "Property").
The Company has renamed the Property the "Silver Brook Apartments."
The Property comprises 472 apartment units. The purchase price for the
Property was $13,505,000. The seller was Bitter Creek, L.P., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
Affiliates. The purchase price was paid entirely in cash using proceeds from the
sale of Shares of the Company. Title to the Property was conveyed to the Company
by limited warranty deed.
LOCATION. The Property is located on Highway 360 in Grand Prairie, Texas,
in Tarrant County, which is part of the greater Dallas/Fort Worth Consolidated
Metropolitan Statistical Area, or as it is called locally, "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments" in this
Supplement.
The immediate area surrounding the Property consists of other multi-family
housing, single-family housing, commercial and retail development. The Property
is an approximately 10-minute drive from the Dallas/Fort Worth International
Airport, an approximately 20-minute drive from downtown Fort Worth and an
approximately 20-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 472 apartment units
in 36 buildings on approximately 20.7 acres of land. The Property was
constructed in 1982.
S-34
<PAGE>
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- -------------- ------------------------------- ------------ --------
<S> <C> <C> <C>
48 One bedroom, one bathroom 600 $439
192 One bedroom, one bathroom 720 469
128 Two bedrooms, two bathrooms 950 549
72 Two bedrooms, two bathrooms 1,000 599
32 Three bedrooms, two bathrooms 1,150 719
</TABLE>
All unit types are available with a fireplace for an extra $10 per month.
The apartments provide a total of approximately 397,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$354,000 for repairs and improvements to the Property. These repairs and
improvements will include clubhouse renovations, exterior painting and wood
replacement, interior upgrades and a new fitness center. As of June 30, 1998 the
Company had spent approximately $37,000 on such repairs and improvements.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 92% in 1994, 91% in 1995, 92%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a two-bedroom, two-bathroom apartment (1,000 square
feet) rented for $499 in 1993, $509 in 1994, $519 in 1995, $529 in 1996 and $539
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.83, $6.96, $7.10, $7.24, and $7.37,
respectively.
The Property has two outdoor swimming pools with fountains, a tennis court,
four laundry facilities and a sand volleyball court. There is also a clubhouse
with a kitchen, entertainment area and a leasing office. There is ample paved
parking for tenants.
The buildings are wood-frame construction with a combination of brick
veneer and masonite hardboard on concrete slab foundations. Roofs are pitched
and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and an individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Each unit (except the smallest one-bedroom unit) has
full-sized washer/dryer connections. A total of 232 units have woodburning
fireplaces, and each second-floor unit has vaulted ceilings. Each unit has
walk-in closets, outside storage, a covered balcony or patio and ceiling fans.
The owner of the Property pays for cold water, sewer charges, gas (for hot
water) and trash removal. The tenants pay for electricity service, which
includes cooking, lighting, heating and air-conditioning.
There are at least 12 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy at nearby competing properties averaged approximately 95% on June
30, 1998.
As of June 30, 1998, the Property was approximately 97% occupied. The
tenants are a mix of white-collar and blue-collar workers.
S-35
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- ------------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
County of Tarrant ............. $8,700,000 $ 1.99520 $ 173,582.05
City of Grand Prairie ......... 8,929,790 0.68000 60,722.40
-------------
Total ........................ $ 234,304.45
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $10,526,521 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $270,100.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
SUMMER TREE APARTMENTS
NORTH DALLAS, TEXAS
On June 2, 1998, Apple REIT Limited Partnership purchased the Summer Tree
Apartments located at 13250 Emily Road in North Dallas, Texas (the "Property").
The Property comprises 232 apartment units. The purchase price for the
Property was $5,700,000. The seller was Sunrise Enterprises, Inc., a Texas
corporation which was not affiliated with the Company, the Advisor or their
Affiliates. The purchase price was paid entirely in cash using proceeds from the
sale of Shares of the Company. Title to the Property was conveyed to the Company
by limited warranty deed.
LOCATION. The Property is located on Emily Road on the north side of
Interstate 635 (L.B.J. Freeway), and just west of U.S. Highway 75 (Central
Expressway) in North Dallas, Texas. The Property is located within "The
Metroplex." For information on The Metroplex, see under "Brookfield Apartments"
in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is located approximately one-quarter mile from a
multi-billion-dollar Texas Instruments facility. The Property is proximate to
other businesses, restaurants, schools and churches, and is readily accessible
from Interstate 635 and Highway 75. The Property is an approximately 20-minute
drive from the Dallas/Fort Worth International Airport and an approximately
15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 232 garden-style
apartment units in 11 two- and three-story buildings on approximately six acres
of land. The Property was constructed in 1980.
S-36
<PAGE>
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------- ------------ --------
<S> <C> <C> <C>
96 One bedroom, one bathroom 481 $449
48 One bedroom, one bathroom 575 474
72 One bedroom, one bathroom 622 494
16 Two bedrooms, two bathrooms 933 669
</TABLE>
The apartments provide a total of approximately 133,500 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$348,000 for repairs and improvements to the Property, to include clubhouse
renovations, exterior painting, pool renovations, sign replacement and interior
upgrades. As of June 30, 1998, the Company had spent approximately $13,000 on
such repairs and improvements.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 94% in 1994, 96% in 1995, 96%
in 1996 and 97% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (622 square
feet) rented for $390 in 1993, $424 in 1994, $444 in 1995, $454 in 1996 and $484
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.97, $8.67, $9.07, $9.28, and $9.89,
respectively.
The Property has an outdoor swimming pool, a fitness center, a laundry
facility and card-accessed entrance gates. The Property also has a clubhouse
with a kitchen, entertainment area and leasing office. There is ample paved
parking for tenants.
The buildings are wood-frame construction with a combination of brick
veneer, stucco and wood lap siding on concrete slab foundations. Roofs are
pitched and covered with asphalt shingles on plywood sheathing.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher,
microwave oven and garbage disposal. All units have washer/dryer connections and
all units except the smallest one-bedroom units have a wood-burning fireplace.
The owner of the Property pays for cold water, sewer charges, gas (for hot
water) and trash removal. The tenants pay for their electricity service, which
includes cooking, lighting, heating and air-conditioning.
There are at least eight apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 95% on June 30, 1998.
As of June 30, 1998, the Property was approximately 98% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers.
S-37
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas ........... $4,423,510 $ 0.44307 $ 19,599.25
City of Dallas ............. 4,423,510 0.65160 28,823.59
Richardson I.S.D. .......... 4,423,510 1.60000 70,776.16
------------
Total ..................... $ 119,199.00
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $2,738,537 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $114,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
PARK VILLAGE APARTMENTS
BEDFORD, TEXAS
On July 1, 1998, Apple REIT Limited Partnership purchased the Park Village
Apartments located at 2401 L. Don Dodson Drive, in Bedford, Texas (the
"Property").
The Property comprises 238 apartment units. The purchase price for the
Property was $7,000,000. The seller was Park Village Investment Partnership, a
Texas limited partnership which was not affiliated with the Company, the Advisor
or their affiliates. The purchase price was paid entirely in cash using proceeds
from the sale of Shares of the Company. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. The Property is located on L. Don Dodson Drive off of Central
Drive just north of Airport Freeway (Highway 183) in Bedford, Texas. The
Property is located within the greater Dallas/Fort Worth metropolitan
statistical area, or as it is called locally, "The Metroplex." See above under
"Brookfield Apartments" for a description of "The Metroplex."
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is proximate to businesses, restaurants, schools and churches and
is readily accessible from Interstates 121, 360 and 183. The Property is an
approximately 10-minute drive from Dallas/Fort Worth International Airport and
an approximately 20-minute drive from either downtown Dallas or Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 238 garden-style
apartment units in 23 two story buildings on approximately ten acres of land.
The Property was constructed in 1983.
S-38
<PAGE>
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------- ------------ --------
<S> <C> <C> <C>
48 One Bedroom/One Bath 456 $401
64 One Bedroom/One Bath 521 449
62 One Bedroom/One Bath 669 515
32 One Bedroom/One Bath/Den 841 614
16 Two Bedrooms/Two Baths 920 672
16 Two Bedrooms/Two Baths 983 718
</TABLE>
The apartments provide a total of approximately 154,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$238,000 for repairs and improvements to the Property to include clubhouse
renovations, exterior painting, sign replacement and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 95% in 1993, 97% in 1994, 97% in 1995, 96%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a two-bedroom, two-bathroom apartment (983 square
feet) rented for $560 in 1993, $560 in 1994, $580 in 1995, $605 in 1996 and $630
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.58, $7.58, $7.85, $8.14, and $8.53,
respectively.
The Property has an outdoor swimming pool, hot tub and two laundry
facilities. The Property also has a clubhouse with a leasing office. There is
ample paved parking for tenants.
The buildings are wood frame construction with a combination of brick
veneer, stucco and wood siding on concrete slab foundations. Roofs are pitched
composition.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has smoke detectors, a
cable television hook-up and individually controlled heating and
air-conditioning unit. Each kitchen has a refrigerator/freezer, electric range
and oven, dishwasher, and garbage disposal. All units except the smallest
one-bedroom units have washer/dryer connections and a wood-burning fireplace.
The owner of the Property pays for cold water, sewer charges, gas (for hot
water) and trash removal. The tenants pay for their electricity service, which
includes cooking, lighting, heating and air-conditioning.
There are at least seven apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 94% on July 1, 1998.
As of July 1, 1998, the Property was approximately 98% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers and retired
persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
County of Tarrant .......... $5,392,450 $ 0.264836 $ 14,281.15
City of Bedford ............ 5,392,450 0.369000 19,898.14
T C Hospital ............... 5,392,450 0.234070 12,622.11
T C Jr. College ............ 5,392,450 0.057690 3,110.90
H-E-B I.S.D. ............... 5,392,450 1.606257 86,616.61
------------
Total ..................... $ 136,528.91
</TABLE>
S-39
<PAGE>
The basis of the depreciable residential real property portion of the
Property (approximately $6,165,062 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Internal Revenue Code of 1986, as amended (the
"Code"). Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the property, or $140,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
COTTONWOOD CROSSING APARTMENTS
GRAND PRAIRIE, TEXAS
On July 9, 1998, Apple REIT Limited Partnership purchased the Cottonwood
Crossing Apartments located at 2105 Cottonwood Club, in Arlington, Texas (the
"Property").
The Property comprises 200 apartment units. The purchase price for the
Property was $5,700,000. The seller was Cottonwood Realty Associates, a New York
general partnership which was not affiliated with the Company, the Advisor or
their affiliates. The purchase price was paid using proceeds from the sale of
Shares of the Company. Title to the Property was conveyed to the Company by
limited warranty deed.
LOCATION. The Property is located on Cottonwood Club off of Pioneer Parkway
(Spur 303), a major east/west thoroughfare in Arlington, Texas. The Property is
located within the greater Dallas/Forth Worth metropolitan statistical area, or
as it is called locally, "The Metroplex." For information on The Metroplex, see
under "Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is conveniently located near fine restaurants, businesses, schools
and churches and is readily available from Interstates 360, 20 and 30, the
Arlington area interstates. The Property is an approximately 20-minute drive
from Dallas/Fort Worth International Airport, an approximately 15-minute drive
from downtown Fort Worth and an approximately 30-minute drive from downtown
Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 apartment units
in 10 buildings on approximately 6.8 acres of land. The Property was
constructed in 1985.
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------------- ------------ --------
<S> <C> <C> <C>
100 One bedroom, one bathroom 628 $400
52 One bedroom, one bathroom w/den 868 545
8 Two bedrooms, one bathroom 868 555
40 Two bedrooms, two bathrooms 883 575
</TABLE>
The apartments provide a total of approximately 150,000 square feet of net
rentable area.
S-40
<PAGE>
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$300,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting, landscaping and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 92% in 1993, 94% in 1994, 95% in 1995, 96%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (868 square
feet) rented for $440 in 1993, $455 in 1994, $455 in 1995, $465 in 1996 and $475
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.19, $6.40, $6.40, $6.54, and $6.68,
respectively.
The Property has an outdoor swimming pool with a fountain and a clubhouse
with a leasing office. The buildings are wood framed construction with a
combination of brick veneer and wood siding on concrete slab foundations. Roofs
are pitched composition.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All of the units include ceiling fans, french patio doors,
full size washer/dryer connections, fireplace, a patio or balcony and outside
storage. The owner of the Property pays for cold water, sewer charges, gas (for
hot water) and trash removal. The tenants pay for their electricity service,
which includes cooking, lighting, heating and air-conditioning.
There are at least three apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 97% on June 30, 1998.
As of June 30, 1998, the Property was approximately 89% occupied. The
tenants are primarily a mix of blue-collar and white-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- ---------------------------------- ------------- ----------- ---------------
<S> <C> <C> <C>
County of Tarrant ......... $4,700,000 $ 1.995 $ 93,774.21
City of Arlington ......... 4,700,000 0.638 29,986.00
------------
Total .................... $ 123,760.21
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $5,248,575 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $114,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
S-41
<PAGE>
PACE'S POINT APARTMENTS
LEWISVILLE, TEXAS
On July 17, 1998, Apple REIT V Limited Partnership purchased the Pace's
Point Apartments located at 247 East Corporate Drive, in Lewisville, Texas (the
"Property").
The Property comprises 300 apartment units. The purchase price for the
Property was $11,405,000. The seller was Corporate Drive, L.P., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $3,691,383 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $7,713,617 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $7,836,000 held by the Federal National Mortgage
Association ("Fannie Mae"). On July 17, 1998, the outstanding principal balance
of the mortgage loan was $7,713,616.57. The interest on the mortgage loan is
8.555% per annum; amortization is based on a 30-year amortization term; and
prepayments are permitted upon notice and payment of a prepayment premium based
on a yield maintenance formula contained in the loan documents. The maturity
date of the mortgage loan is July 1, 2003, and the balance due at maturity,
assuming no payment has been made on principal in advance of its due date, is
$7,307,129.73.
LOCATION. The Property is located on East Corporate Drive in Lewisville,
Texas. The Property is located within "The Metroplex." For information on The
Metroplex, see under "Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately 15-minute drive from Dallas/Fort Worth
International Airport, an approximately 25-minute drive from downtown Dallas and
an approximately 20-minute drive from downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 300 apartment units
in 14 buildings on approximately 12.6 acres of land. The Property was
constructed in 1985.
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------ ------------ -----------
<S> <C> <C> <C>
36 One bedroom, one bathroom 535 $479 - 499
24 One bedroom, one bathroom 581 499 - 519
84 One bedroom, one bathroom 683 539 - 559
40 One bedroom, one bathroom with den 779 599 - 519
56 Two bedrooms, two bathrooms 875 649 - 669
60 Two bedrooms, two bathrooms 966 689 - 709
</TABLE>
The apartments provide a total of approximately 229,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$225,000 for repairs and capital improvements to the Property to include
clubhouse renovations, additional landscaping and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 95% in 1994, 96% in 1995, 96%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (581 square
feet) rented for $400 in 1993, $449 in 1994, $449 in 1995, $449 in 1996 and $469
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.36, $8.26, $8.26, $8.26, and $8.63,
respectively.
S-42
<PAGE>
The Property has two outdoor swimming pools, a jacuzzi, a sand volleyball
court, a fitness center, a sauna, 23 carports and two laundry facilities. The
Property also has a clubhouse with a leasing office.
The buildings are wood framed construction with a combination of brick
veneer and painted horizonal wood siding on concrete slab foundations. Roofs are
pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All units have full-sized washer/dryer connections. Some of
the units have wood-burning fireplaces, vaulted ceilings and alarm systems. Each
unit has walk-in closets, outside storage, a covered balcony or patio and
ceiling fans. The owner of the Property pays for cold water, sewer charges, gas
(for hot water) and trash removal. The tenants pay for their electricity
service, which includes cooking, lighting, heating and air-conditioning.
There are at least 15 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy at nearby competing properties averaged approximately 95% on June
30, 1998.
As of June 30, 1998, the Property was approximately 95% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ------------------------------------ ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Denton ............ $9,389,517 $ 0.25590 $ 24,027.77
City of Lewisville .......... 9,389,517 1.51600 142,345.08
Lewisville I.S.D. ........... 9,389,517 0.48949 45,960.75
------------
Total ....................... $ 212,333.60
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $9,633,257 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $228,100. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $3,691,383, and 2% of that amount was approximately $72,828. The
balance of the property acquisition fee will be paid if, when and as the
indebtedness taken subject to at closing is repaid by the Company.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
S-43
<PAGE>
PEPPER SQUARE APARTMENTS
NORTH DALLAS, TEXAS
On July 17, 1998, Apple REIT VI Limited Partnership purchased the Pepper
Square Apartments located at 6069 Beltline Road, in North Dallas, Texas (the
"Property").
The Property comprises 144 apartment units. The purchase price for the
Property was $5,205,000. The seller was Pepper Square Associates, Ltd., a Texas
limited partnership which was not affiliated with the Company, the Advisor or
their affiliates. The purchase price was paid through a combination of (i)
approximately $1,561,576 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $3,643,424 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $3,701,000 held by Fannie Mae. On July 17, 1998,
the outstanding principal balance of the mortgage loan was $3,643,423.53. The
interest on the mortgage loan is 8.575% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted upon notice and payment
of a prepayment premium based on a yield maintenance formula contained in the
loan documents. The maturity date of the mortgage loan is July 1, 2006, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $3,312,543.23.
LOCATION. The Property is located in North Dallas, Texas. The Property is
located within "The Metroplex." For information on The Metroplex, see under
"Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately five-minute drive from Preston Mall, the
Galleria Mall and Valley View Mall. The Property is an approximately 25-minute
drive from Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 144 apartment units
in 15 buildings on approximately 5.9 acres of land. The Property was
constructed in 1978.
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------------- ------------ --------
<S> <C> <C> <C>
24 One bedroom, one bathroom 622 $449
32 One bedroom, one bathroom 777 499
24 One bedroom, one bathroom 888 559
32 Two bedrooms, two bathrooms 948 659
30 Two bedrooms, two bathrooms 1,044 679
2 Two bedrooms, two bathrooms with sun room 1,185 799
</TABLE>
The apartments provide a total of approximately 126,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$288,000 for repairs and capital improvements to the Property to include
clubhouse renovations, siding repair and replacement, exterior painting,
landscaping and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 93% in 1994, 95% in 1995, 93%
in 1996 and 95% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (777 square
feet) rented for $459 in 1993, $479 in 1994, $489 in 1995, $489 in 1996 and $499
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.30, $7.61, $7.77, $7.77, and $7.93,
respectively.
S-44
<PAGE>
The Property has an outdoor swimming pool, a weight room, a jogging trail,
63 carports and a laundry facility. The Property also has a clubhouse with a
leasing office.
The buildings are wood framed construction with a combination of brick
veneer and painted stucco and shingled wood exterior walls on concrete slab
foundations. Roofs are pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Some units have a wood burning fireplace or full-sized
washer/dryer connections. Each unit has walk-in closets, outside storage, a
covered balcony or patio and ceiling fans. The owner of the Property pays for
cold water, sewer charges, gas (for hot water) and trash removal. The tenants
pay for their electricity service, which includes cooking, lighting, heating and
air-conditioning.
There are at least 13 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy at nearby competing properties averaged approximately 94% on June
30, 1998.
As of June 30, 1998, the Property was approximately 94% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas .......... $4,059,090 $ 0.44307 $ 17,984.61
City of Dallas ............ 4,059,090 0.65160 26,449.03
Dallas I.S.D. ............. 4,059,090 1.46053 59,284.23
------------
Total ..................... $ 103,717.87
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,607,225 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $104,100. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $1,561,576, and 2% of that amount was approximately $31,232. The
balance of the property acquisition fee will be paid if, when and as the
indebtedness taken subject to at closing is repaid by the Company.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
S-45
<PAGE>
EMERALD OAKS APARTMENTS
GRAPEVINE, TEXAS
On July 24, 1998, Apple REIT II Limited Partnership purchased the Emerald
Oaks Apartments located at 2100 Grayson Drive, in Grapevine, Texas (the
"Property").
The Property comprises 250 apartment units. The purchase price for the
Property was $10,930,000. The seller was Newemerald Texas, Ltd., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $4,244,294 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $6,685,706 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $9,650,000 held by Fannie Mae. On July 24, 1998,
the outstanding principal balance of the mortgage loan was $6,685,706.08. The
interest on the mortgage loan is 6.75% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted under the following
circumstances: after May 1, 2001 to April 30, 2002 at 102% of the principal
balance of the mortgage loan, from May 1, 2002 to April 30, 2003 at 101% of the
principal balance, and from May 1, 2003 and thereafter at 100% of the principal
balance. The maturity date of the mortgage loan is April 1, 2007, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $5,509,607.59.
In connection with the original financing of the Property, the previous
owner of the Property agreed to certain restrictions on the use of the Property
set forth in a special warranty deed and deed restrictions. In connection with
the purchase of the Property and the assumption of the mortgage loan, the
Company entered into an assumption of the special warranty deed and deed
restrictions. Among the restrictions agreed to by the Company is that at least
20% of the apartment units must be occupied by persons who, at the time of
initial occupancy of the apartment units, are "low or moderate income tenants."
The term low or moderate income tenants is defined, generally, as one or more
persons who occupy an apartment unit whose aggregate anticipated income does not
exceed 80% of the median income for the area where the Property is located.
LOCATION. The Property is located on Grayson Drive, within Tarrant County,
northwest of the City of Dallas and near the Dallas/Fort Worth International
Airport. The Property is located within "The Metroplex." For Information on The
Metroplex, see under "Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately 10-minute drive from Dallas/Fort Worth
International Airport, an approximately 25-minute drive from downtown Dallas,
and an approximately 15-minute drive from downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 250 apartment units
in 19 buildings on approximately 13.5 acres of land. The Property was
constructed in 1986.
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------ ------------ --------
<S> <C> <C> <C>
28 One bedroom, one bathroom 600 $479
92 One bedroom, one bathroom 750 569
70 One bedroom, one bathroom with den 900 669
44 Two bedrooms, two bathrooms 1,018 779
16 Three bedrooms, two bathrooms 1,186 899
</TABLE>
The apartments provide a total of approximately 213,000 square feet of net
rentable area.
S-46
<PAGE>
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$250,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting, installation of new gutters and
downspouts and paving repairs.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 90% in 1993, 94% in 1994, 94% in 1995, 92%
in 1996 and 93% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (750 square
feet) rented for $425 in 1993, $450 in 1994, $480 in 1995, $519 in 1996 and $549
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.76, $7.16, $7.64, $8.26, and $8.74,
respectively.
The Property has two outdoor swimming pools with picnic areas and grills,
a jacuzzi, a sand volleyball court, 19 carports and two laundry facilities. The
Property also has a clubhouse with a leasing office.
The buildings are wood framed construction with a combination of brick
veneer, stucco and painted wood siding on concrete slab foundations. Roofs are
pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher, and
garbage disposal. All units (except for the smallest one-bedroom unit) have
full-sized washer/dryer connections. Each upstairs unit has a fireplace and each
downstairs unit has a built-in bookcase and nine-foot ceilings. The owner of the
Property pays for cold water, sewer charges, gas (for hot water) and trash
removal. The tenants pay for their electricity service, which includes cooking,
lighting, heating and air-conditioning.
There are at least three apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 96% on June 30, 1998.
As of June 30, 1998, the Property was approximately 92% occupied. The
tenants are primarily a mix of white-collar workers, students and retired
persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ----------------------------------- ---------------- ----------- ---------------
<S> <C> <C> <C>
County of Tarrant .......... $7,850,000 $ 0.556 $ 43,692.79
City of Grapevine .......... 7,850,000 1.942 152,501.95
------------
Total ...................... $ 196,194.74
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $10,224,983 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $218,600. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corre-
S-47
<PAGE>
sponding to the portion of the purchase price of the property paid in cash by
the Company. The cash portion of the purchase price was approximately
$4,244,294, and 2% of that amount was approximately $84,886. The balance of the
property acquisition fee will be paid if, when and as the indebtedness taken
subject to at closing is repaid by the Company.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
HAYDEN'S CROSSING APARTMENTS
GRAND PRAIRIE, TEXAS
On July 24, 1998, Apple REIT III Limited Partnership purchased the Hayden's
Crossing Apartments located at 2802 South State Highway 360, in Grand Prairie,
Texas (the "Property").
The Property comprises 170 apartment units. The purchase price for the
Property was $4,705,000. The seller was Hayden's Crossing, Ltd., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $1,632,601 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $3,072,399 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $5,550,000 held by Fannie Mae. On July 24, 1998,
the outstanding principal balance of the mortgage loan was $3,072,399.07. The
interest on the mortgage loan is 6.47% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted under the following
circumstances: after May 1, 2001 to April 30, 2002 at 102% of the principal
balance of the mortgage loan, from May 1, 2002 to April 30, 2003 at 101% of the
principal balance, and from May 1, 2003 and thereafter at 100% of the principal
balance. The maturity date of the mortgage loan is April 1, 2004, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $2,743,814.97.
In connection with the original financing of the Property, the previous
owner of the Property agreed to certain restrictions on the use of the Property
set forth in a special warranty deed and deed restrictions. In connection with
the purchase of the Property and the assumption of the mortgage loan, the
Company entered into an assumption of the special warranty deed and deed
restrictions. Among the restrictions agreed to by the Company is that at least
20% of the apartment units must be occupied by persons who, at the time of
initial occupancy of the apartment units, are "low or moderate income tenants."
The term low or moderate income tenants is defined, generally, as one or more
persons who occupy an apartment unit whose aggregate anticipated income does not
exceed 80% of the median income for the area where the Property is located.
LOCATION. The Property is located on South State Highway 360 in Grand
Prairie, Texas and is adjacent to Bitter Creek Apartments which were purchase by
the Company on May 8, 1998. The Property is located within "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments" in this
Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately 10-minute drive from Dallas/Fort Worth
International Airport and an approximately 20-minute drive from either downtown
Dallas or downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 170 apartment units
in 12 buildings on approximately 7.1 acres of land. The Property was
constructed in 1984.
S-48
<PAGE>
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------- ------------ --------
<S> <C> <C> <C>
56 One bedroom, one bathroom 556 $429
52 One bedroom, one bathroom 716 469
36 Two bedrooms, two bathrooms 878 549
26 Two bedrooms, two bathrooms 1,000 620
</TABLE>
All unit types are available with a fireplace for an extra $10 per month.
The apartments provide a total of approximately 126,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$340,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting, wood replacement and a new fitness
center.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 93% in 1993, 92% in 1994, 96% in 1995, 96%
in 1996 and 95% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a two-bedroom, two-bathroom apartment (878 square
feet) rented for $449 in 1993, $474 in 1994, $484 in 1995, $489 in 1996 and $509
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.54, $6.91, $7.05, $7.13, and $7.42,
respectively.
The Property has an outdoor swimming pool, a jacuzzi, a tennis court and a
laundry facility The Property also has a clubhouse with a kitchen, entertainment
area and leasing office.
The buildings are wood framed construction with a combination of brick
veneer and hardboard ship-lap siding on concrete slab foundations. Roofs are
pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. The largest one-bedroom and the largest two-bedroom units have
full-sized washer/dryer connections. A total of 92 units have a wood-burning
fireplace and each second-floor unit has vaulted ceilings. Each unit has walk-in
closets, outside storage and a covered balcony or patio and ceiling fans. The
owner of the Property pays for cold water, sewer charges, gas (for hot water)
and trash removal. The tenants pay for their electricity service, which includes
cooking, lighting, heating and air-conditioning.
There are at least eight apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 95% on June 30, 1998.
As of June 30, 1998, the Property was approximately 89% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
S-49
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------------------- ---------------- ----------- ---------------
<S> <C> <C> <C>
County of Tarrant .............. $3,150,000 $ 1.995 $ 62,848.67
City of Grand Prairie .......... 3,312,000 0.680 22,522.08
---------- -------- ------------
Total .......................... $ 85,370.75
============
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,739,211 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $94,100. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $1,632,601, and 2% of that amount was approximately $32,652. The
balance of the property acquisition fee will be paid if, when and as the
indebtedness taken subject to at closing is repaid by the Company.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
NEWPORT APARTMENTS
AUSTIN, TEXAS
On July 24, 1998, Apple REIT IV Limited Partnership purchased the Newport
Apartments located at 1930 West Rundberg Lane, in Austin, Texas (the
"Property").
The Property comprises 200 apartment units. The purchase price for the
Property was $6,330,000. The seller was Newemerald Texas, Ltd., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $3,286,127 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $3,043,873 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $6,275,000 held by Fannie Mae. On July 24, 1998,
the outstanding principal balance of the mortgage loan was $3,043,873.04. The
interest on the mortgage loan is 6.675% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted under the following
circumstance: after May 1, 2001 to April 30, 2002 at 102% of the principal
balance of the mortgage loan, from May 1, 2002 to April 30, 2003 at 101% of the
principal balance, and from May 1, 2003 and thereafter at 100% of the principal
balance. The maturity date of the mortgage loan is December 1, 2005, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $2,614,373.31.
In connection with the original financing of the Property, the previous
owner of the Property agreed to certain restrictions on the use of the Property
set forth in a special warranty deed and deed restrictions. In connection with
the purchase of the Property and the assumption of the mortgage loan, the
Company entered into an assumption of the special warranty deed and deed
restrictions. Among the restrictions agreed to by the Company is that at least
20% of the apartment units must be occupied by
S-50
<PAGE>
persons who, at the time of initial occupancy of the apartment units, are "low
or moderate income tenants." The term low or moderate income tenants is defined,
generally, as one or more persons who occupy an apartment unit whose aggregate
anticipated income does not exceed 80% of the median income for the area where
the Property is located.
LOCATION. The Property is located on West Rundberg Lane in Austin, Texas,
which is the capital of Texas. The following information on Austin is based in
part on information provided by the greater Austin Chamber of Commerce.
The economy of the greater Austin metropolitan area is diversified, with
key economic factors being the semiconductor and computer industries,
manufacturing, real estate and higher education. The rapid development of the
semiconductor and computer industries has been accompanied by rapid developments
in the transportation, finance, insurance, communications and utilities
capabilities of the area.
The Metropolitan Statistical Area that includes Austin had a 1995
population that exceeded one million and is expected to have a population of
approximately 1.1 million by the end of 1998. Much of the recent population
growth in the area is due to relocations from other parts of the country,
although the percentage of total population growth represented by relocated
persons is expected to decrease over the coming years. Currently, job gains in
the Austin metropolitan area are at approximately four percent per year.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
Newport Apartments are located near The Colonade Mall and Northcross Mall, and
are an approximately 20-minute drive from an IBM facility and a Texas
Instruments facility. This property is within a few blocks of a new Dell
Computer facility and is a 15-minute drive from the downtown Austin business
district.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 apartment units
in 15 buildings on approximately 10 acres of land. The Property was constructed
in 1988.
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------ ------------ --------
<S> <C> <C> <C>
60 One bedroom, one bathroom 510 $469
60 One bedroom, one bathroom 710 549
40 One bedroom, one bathroom 875 629
40 One bedroom, one bathroom with den 1,000 699
</TABLE>
The apartments provide a total of approximately 148,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$400,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting and siding replacement and interior
upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 97% in 1993, 96% in 1994, 95% in 1995, 93%
in 1996 and 88% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (1,000 square
feet) rented for $426 in 1993, $465 in 1994, $669 in 1995, $679 in 1996 and $689
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $5.66, $6.18, $8.90, $9.03, and $9.16,
respectively.
The Property has an outdoor swimming pool, a lighted tennis court, a
picnic area and two laundry facilities. The Property also has a clubhouse with
a leasing office.
S-51
<PAGE>
The buildings are wood framed construction with a combination of brick
veneer and wood siding on concrete slab foundations. Roofs are pitched and
covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All units have full-sized washer/dryer connections and all
upper-level units have vaulted ceilings. Some of the units have wood-burning
fireplaces, dry bars and private patios or decks. Each unit has walk-in closets,
outside storage and ceiling fans. The owner of the Property pays for cold water,
sewer charges, gas (for hot water) and trash removal. The tenants pay for their
electricity service, which includes cooking, lighting, heating and
air-conditioning.
There are at least four apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 96% on June 30, 1998.
As of June 30, 1998, the Property was approximately 93% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------------- ---------------- ------------ ---------------
<S> <C> <C> <C>
County of Travis .......... $6,600,000 $ 0.4938 $ 32,590.80
City of Austin ............ 6,600,000 0.5401 35,646.60
Austin I.S.D. ............. 6,600,000 1.4010 92,466.00
ACC (Travis) .............. 6,600,000 0.0500 3,300.00
------------
Total ..................... $ 164,003.40
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $5,920,449 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $126,600. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $3,286,127, and 2% of that amount was approximately $65,723. The
balance of the property acquisition fee will be paid if, when and as the
indebtedness taken subject to at closing is repaid by the Company.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
S-52
<PAGE>
ESTRADA OAKS APARTMENTS
IRVING, TEXAS
On July 27, 1998, Apple REIT Limited Partnership purchased the Estrada Oaks
Apartments located at 2115 Estrada Parkway, in Irving, Texas (the "Property").
The Property comprises 248 apartment units. The purchase price for the
Property was $9,350,000. The seller was Dallas - Fort Worth Properties, L.P., a
Texas limited partnership which was not affiliated with the Company, the Advisor
or their affiliates. The purchase price was paid using proceeds from the sale of
Shares of the Company. Title to the Property was conveyed to the Company by
limited warranty deed.
LOCATION. The Property is located on Estrada Parkway south of Airport
Freeway (SH 183) and west of Belt Line Road in Irving, Texas. The Property is
located within "The Metroplex." For information on The Metroplex, see under
"Brookfield Apartments" in this supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The property is conveniently located near fine restaurants, businesses, schools
and churches and is readily accessible from highways 181 and 163, two major
highways in Irving, Texas. The Property is an approximately 5-minute drive from
Dallas/Fort Worth International Airport, an approximately 25-minute drive from
downtown Dallas and downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 248 apartment units
in 14 buildings on approximately 10.1 acres of land. The Property was
constructed in 1983.
The Property offers ten different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------------------------- ------------ --------
<S> <C> <C> <C>
24 One bedroom, one bathroom 490 $480
56 One bedroom, one bathroom 608 510
60 One bedroom, one bathroom 744 565
10 One bedroom, one bathroom tennis court view 744 575
10 One bedroom, one bathroom pool view 744 580
24 Two bedrooms, one bathroom 886 670
30 Two bedrooms, two bathrooms 942 715
2 Two bedrooms, two bathrooms pool view 942 730
30 Two bedrooms, two bathrooms 1081 770
2 Two bedrooms, two bathrooms pool view 1081 785
</TABLE>
The apartments provide a total of approximately 191,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$248,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting and wood replacement.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 94% in 1994, 95% in 1995, 96%
in 1996 and 95% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (744 square
feet) rented for $430 in 1993, $470 in 1994, $470 in 1995, $470 in 1996 and $490
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.16, $7.82, $7.82, $7.82, and $8.16,
respectively.
The Property has an outdoor swimming pool, a jacuzzi, lighted tennis
courts, a fitness center, a laundry facility and 80 covered parking spaces. The
Property also has a clubhouse with a leasing office.
S-53
<PAGE>
The buildings are wood framed construction with a combination of brick
veneer and painted wood siding on concrete slab foundations. Roofs are high
sloped with asphalt shingles.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. All of
the units include ceiling fans, intrusion alarm systems, patio/balcony and
outside storage. All of the units, except the two smallest one bedroom floor
plans, include full size washer/dryer connections and all of the units, except
the smallest one bedroom floor plan, include wood burning fireplaces with
mantels. Select units includes microwaves, icemakers and double french patio
doors. All kitchens are equipped with a frost free refrigerator/freezer,
self-cleaning electric range and oven, dishwasher and garbage disposal. The
owner of the Property pays for cold water, sewer charges, gas (for hot water)
and trash removal. The tenants pay for their electricity service, which includes
cooking, lighting, heating and air-conditioning.
There are at least three apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 98% on June 30, 1998.
As of July 27, 1998, the Property was approximately 97% occupied. The
tenants are primarily a mix of blue-collar and white-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas .......... $7,009,660 $ 0.44307 $ 31,057.70
City of Irving ............ 7,009,660 0.49300 34,557.62
Irving I.S.D. ............. 7,009,660 1.64840 115,547.24
------------
Total .................. 181,162.56
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,579,500 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $187,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
S-54
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As described above under "Developments Involving Cornerstone Realty Income
Trust - Authorization for Additional Share Issuance," on June 30, 1998,
Cornerstone owned approximately 2.1% of the Company's outstanding Shares.
Cornerstone's address is 306 East Main Street, Richmond, Virginia 23219. As of
June 30, 1998, no person was the beneficial owner of more than five percent of
any class of the registrant's voting securities.
Beneficial ownership of Shares held by Directors and executive officers of
the Company as of June 30, 1998 is indicated in the table below. Each person
named in the table and included in the Director/ officer group has sole voting
and investment powers as to such Shares, or shares such powers with his or her
spouse and minor children, if any.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENT OF CLASS
- ----------------------------------------------------- ----------------------- -----------------
<S> <C> <C>
Lisa B. Kern . ...................................... 10,872.00 *
Glade M. Knight ..................................... 6,117.05 *
Penelope W. Kyle .................................... 11,372.00 *
Bruce H. Matson ..................................... 10,872.00 *
All Directors and executive officers as a group ..... 39,233.05 *
</TABLE>
- ----------
* Less than one percent of outstanding Shares.
(1) Includes Shares that may be acquired upon the exercise of stock options, as
follows: Mss. Kern and Kyle and Mr. Matson -- 10,872 Shares each at $10
per Share.
In addition, at June 30, 1998, Glade M. Knight owned 170,000 Class B
Convertible Shares of the Company, and each of Debra A. Jones and Stanley J.
Olander, Jr. owned 15,000 Class B Convertible Shares, constituting collectively
all of the Company's issued and outstanding Class B Convertible Shares.
Information on the Class B Convertible Shares of the Company is set forth under
the caption "Principal and Management Stockholders" in the Prospectus. Ms. Jones
and Mr. Olander are executive officers of Cornerstone.
As discussed in such section of the Prospectus, the number of Shares of the
Company into which the Class B Convertible Shares are convertible increases as
the Company sells additional Shares in its ongoing public offering. Thus, the
holders of the Class B Convertible Shares could derive a benefit if the
Company's public offering continues and the exchange ratio of Shares per Class B
Convertible Share correspondingly increases. Accordingly, the holders of the
Class B Convertible Shares could benefit if any acquisition of the Company by
Cornerstone were delayed. However, many other factors could make an acquisition
of the Company by Cornerstone undesirable or impracticable, including such
factors as Cornerstone perceiving that an acquisition of the Company or its
properties is not in Cornerstone's best interest or the inability to obtain
necessary director or shareholder approval on behalf of either company. In
addition, while Glade M. Knight is an executive officer of both the Company and
Cornerstone, and Mr. Olander and Ms. Jones are executive officers of
Cornerstone, they do not necessarily control the decisions of either company
concerning any possible acquisition of the Company by Cornerstone. As noted
above, prospective investors in the Company should consider and evaluate the
possibility of Cornerstone acquiring the Company or its assets in making an
investment decision relative to the Company, but there can be no assurance that
Cornerstone will seek to acquire the Company or its assets or that any proposal
by Cornerstone to acquire the Company or its assets would be consummated, or
would be consummated on terms deemed favorable by a particular investor in the
Company.
S-55
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the consolidated financial statements and
related notes of the Company included elsewhere in this Supplement.
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
----------------- ---------------------------
1998 1997 1996
----------------- ----------------- -------
<S> <C> <C> <C>
OPERATING RESULTS
Rental Income ........................................ $ 4,928,751 $ 12,005,968 --
Net Income ........................................... $ 1,959,718 $ 3,499,194 --
Distributions Declared and Paid ...................... $ 2,038,051 $ 3,249,098 --
PER SHARE
Net Income ........................................... $ .14 $ .54 --
Distributions ........................................ $ .203 $ .60 --
Distributions Representing Return of Capital ......... -- 0% --
Weighted Average Shares Outstanding .................. 13,882,117 6,493,114
BALANCE SHEET DATA
Investment in Rental Property ........................ $ 116,567,803 $ 89,634,348 --
Total Assets ......................................... $ 151,246,420 $ 112,485,520 $100
Shareholders' Equity ................................. $ 148,230,587 $ 109,340,555 $100
Shares Outstanding ................................... 16,708,806 12,371,829 10
OTHER DATA Cash Flows from:
Operating Activities ............................... $ 2,274,018 $ 7,075,025 --
Investing Activities ............................... $ (26,755,525) $ (88,753,814) --
Financing Activities ............................... $ 36,920,045 $ 105,841,261 --
Number of Communities Owned at Period-End . 16 11 --
FUNDS FROM OPERATIONS CALCULATION
Net Income ......................................... $ 1,959,718 $ 3,499,194 --
Depreciation of Real Estate ....................... $ 889,545 $ 1,898,003 --
------------- ------------- ----
Funds from Operations(a) ............................. $ 2,849,263 $ 5,397,197 --
</TABLE>
The Company was formed in 1996 and did not commence operations until January,
1997.
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT). The Company
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of the Company's operating performance and liquidity.
Funds from operations, which may not be comparable to other similarly titled
measures of other REITs, does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs.
S-56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon the unaudited financial statements
of the Company as of March 31, 1998 and the financial statements of the Company
as of December 31, 1997. The information should be read in conjunction with the
Company's financial statements and notes thereto and the pro forma financial
statements and notes thereto of the Company included elsewhere in the
Prospectus, and this Supplement No. 11. The Company is operated and has elected
to be treated as a REIT for federal income tax purposes.
FOR THE THREE MONTHS ENDED MARCH 31, 1998
RESULTS OF OPERATIONS
Income and occupancy
The Company's property operations for three months ended March 31, 1998
reflect the operations from the properties acquired before 1998 and from the
three properties acquired in 1998 from their respective acquisition dates. The
increase in rental income and operating expenses from the first quarter 1997 to
first quarter 1998 is primarily due to a full quarter of operation of the 1997
acquisitions as well as the incremental effect of the 1998 acquisitions.
Substantially all of the Company's income is from the rental operation of
apartment communities. Rental income for the first three months increased to
$4,928,751 in 1998 from $1,154,400 in 1997 due to the factors stated above.
Overall economic occupancy for the Company's properties was 94% and 92% at
the three months ended March 31, 1998 and 1997. Overall, the average rental
rates for the portfolio increased 13% to $588 from $516 per month for the three
months ended March 31, 1998 and 1997, respectively. The increase is primarily
due to rental increases.
The Company's other source of income is the investment of its cash and cash
reserves. Interest income for the three months ended March 31, 1998 and 1997 was
$336,387 and $84,935, respectively. The increase during the three months ended
March 31, 1998 is due to the Company's investment balance held pending
acquisitions. It is anticipated the interest income will decrease with future
acquisitions.
Expenses
Total expenses for the first three months increased to $3,292,919 in 1998
from $678,913 in 1997. The increase is due largely to the increase in the number
of apartments. The operating expense ratio (the ratio of rental expenses,
excluding general and administrative, amortization and depreciation expense, to
rental income) was 45% and 40% for the three months ended March 31, 1998 and
1997, respectively. The increase from the first quarter of 1997 to the first
quarter of 1998 is primarily due to a full quarter of operation of the 1997
acquisitions.
General and administrative expenses totaled 3% of total rental income for
the three months ended March 31, 1998 and 6% for the same period in 1997. This
percentage is expected to decrease as the Company's asset base and rental income
grow. These expenses represent the administrative expenses of the Company as
distinguished from the operations of the Company's properties.
Depreciation expense for the three months has increased to $889,545 in 1998
from $137,689 in 1997. The increase is directly attributable to the acquisition
of additional apartment communities in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
There was a significant change in the Company's liquidity during the three
months ended March 31, 1998, as the Company continued to acquire properties.
During the three months ended March 31, 1998, the Company closed the sale to
investors of 4,336,988 shares representing gross proceeds to the Company of
$43,369,884 and net proceeds after payment of brokerage fees and other
offering-related costs of $38,973,479.
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Using proceeds from the sale of shares, the Company acquired 696 apartment
units in three residential rental communities during first quarter of 1998. The
following is information on these three acquisitions:
<TABLE>
<CAPTION>
PROPERTY NAME DATE ACQUIRED UNITS PURCHASE PRICE LOCATION
- ---------------------------------- --------------- ------- ---------------- ----------------
<S> <C> <C> <C> <C>
Main Park Apartments ............. February 1998 192 $ 8,000,000 Duncanville, TX
Timberglen Apartments ............ February 1998 304 12,000,000 Dallas, TX
Copper Ridge Apartments .......... March 1998 200 4,525,000 Fort Worth, TX
</TABLE>
Notes payable
The Company generally seeks to hold all of its properties on an unsecured
basis, although it is not prohibited from incurring secured debt. The Company's
$20 million unsecured line of credit expired on March 31, 1998 and was not
amended to extend the maturity date. As of March 31, 1998, there was no
outstanding balance on the unsecured line of credit.
Cash and cash equivalents
Cash and cash equivalents totaled $36,601,110 at March 31, 1998. During the
first quarter in 1998, the Company distributed $2,038,051 to its shareholders,
of which $1,246,809 was reinvested in additional shares through the Additional
Share Option. The reinvested funds netted the Company $1,122,128 after payment
of brokerage fees. During this quarter, the Company distributed $84,808 to
Cornerstone on shares that had been purchased by Cornerstone.
Capital requirements
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition, the Company is
always assessing potential acquisitions and intends to acquire additional
properties during 1998. On May 8, 1998, the Company purchased Bitter Creek
Apartments, a 472-unit apartment community located in Grand Prairie, Texas for
$13,505,000. As of May 9, 1998, no material definitive commitments existed for
the purchase of additional properties. The potential sources to fund the
improvements and additional acquisitions include additional equity, cash
reserves, and debt provided by its line of credit.
The Company capitalized $1.6 million of improvements to its various
properties during the first quarter of 1998. It is anticipated that some $6
million in additional capital improvements will be completed during the next
year on the current portfolio, which are expected to be funded through cash
reserves and dividend reinvestment.
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the properties
supplies sufficient cash to provide for the payment of these operating expenses
and distributions.
Capital resources are expected to grow with the future sale of the
Company's common shares and the cash flow from its operations. Approximately 55%
of all first quarter 1998 distributions ($1,122,128) were reinvested in
additional common shares. In general, the Company's liquidity and capital
resources are expected to be adequate to meet its cash requirements in 1998.
FOR THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
Income and Occupancy
As operations of the Company commenced in January 1997, a comparison of the
years ended December 31, 1996 and December 31, 1997 is not possible. The results
of the Company's property operations for the year ended December 31, 1997
include the results of operations from the 11 properties acquired in 1997 from
their respective acquisition dates. Substantially all of the Company's revenue
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is from the rental operation of its apartment communities. Rental income was
$12,005,968 in 1997. Overall average economic occupancy was 93% in 1997. The
average rental rate for the portfolio was $555 at December 31, 1997.
Expenses
Total expenses were $8,271,066 in 1997. The operating expense ratio (the
ratio of expenses, excluding depreciation, amortization, and general and
administrative expenses, to rental income) was 50% in 1997. The Company
contracts its property management to a third party (see Note 6 to the
consolidated financial statements). General and administrative expenses totaled
3% of revenues in 1997. These expenses represent the administrative expenses of
the Company as distinguished from the operations of the Company's properties.
The percentage of general and administrative expenses is expected to decrease as
the Company's operations grow. Depreciation of real estate was $1,898,003.
Interest and Investment
The Company earned interest income of $222,676 in 1997 from the investment
of its cash and cash reserves. The weighted-average interest rate earned on
short-term investments was 4%. The Company incurred $458,384 of interest expense
in 1997, associated with short-term borrowings under its line of credit to fund
acquisitions. The weighted-average interest rate on the line of credit during
1997 was 7.8%.
LIQUIDITY AND CAPITAL RESOURCES
Equity
There was a significant change in the Company's liquidity during the year
ended December 31, 1997 as the Company commenced operations and thereafter
continued to grow. During 1997, the Company sold 12,371,819 shares of its common
stock to its investors (including 417,778 shares purchased by Cornerstone Realty
Income Trust, Inc. ("Cornerstone") and 197,496 common shares sold through the
Company's additional share option), bringing the total number of shares
outstanding to 12,371,829. The total gross proceeds from the shares sold were
$121,633,733, which netted $109,090,359 to the Company after the payment of
brokerage fees and other offering-related costs.
Using proceeds from the sale of common shares and supplemented by
short-term borrowings when necessary, the Company acquired 2,776 apartment units
in 12 residential rental communities during 1997. Riverhill Apartments and
Chaparosa Apartments are adjoining properties and are operated as one apartment
community (subsequently renamed Remington Hills).
During 1997, the company made the following 12 acquisitions:
<TABLE>
<CAPTION>
INITIAL NUMBER DATE
DESCRIPTION LOCATION ACQUISITION COST OF UNITS ACQUIRED
- ---------------------------- ---------------- ------------------ ---------- --------------
<S> <C> <C> <C> <C>
Brookfield Dallas, TX $ 5,458,485 232 January 1997
Eagle Crest Irving, TX 15,650,000 484 January 1997
Tahoe Arlington, TX 5,690,560 240 January 1997
Mill Crossing Arlington, TX 4,544,121 184 February 1997
Wildwood Euless, TX 3,963,519 120 March 1997
Toscana Dallas, TX 5,854,531 192 March 1997
Polo Run Arlington, TX 6,858,974 224 March 1997
The Arbors on Forest Ridge Bedford, TX 7,748,907 210 April 1997
Pace's Cove Dallas, TX 9,277,355 328 June 1997
Chaparosa Irving, TX 5,825,000 170 August 1997
River Hill Irving, TX 7,275,000 192 August 1997
Copper Crossing Fort Worth, TX 4,750,000 200 November 1997
</TABLE>
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Notes Payable
The Company seeks to hold all of its properties on an unsecured basis. The
Company obtained a $20 million unsecured line of credit with a commercial bank.
The line expires on March 31, 1998. The line bears interest at LIBOR plus 200
basis points. The line of credit is used to fund acquisitions on a short-term
basis and is sought to be repaid, generally within 60 days, with proceeds from
the offering. The Company plans to continue to use its $20 million unsecured
line of credit to facilitate the timely acquisition of properties, if proceeds
from the Company's "best efforts" offering are unavailable at the time of a
proposed acquisition. It is anticipated that any borrowings will be curtailed
through the sale of additional shares, although there can be no assurance that
such sales will be sufficient to repay such borrowings. If the future sale
proceeds were insufficient, the Company could seek to extend the maturity date
or pay the balance of the loan due from its rental operations or cash reserves.
At year-end, there were no outstanding balances on the acquisition line of
credit.
Cash and Cash Equivalents
Cash and cash equivalents totaled $24,162,572 at December 31, 1997. During
the year, the Company distributed $3,249,098 to its shareholders, of which
$1,974,949 was reinvested in additional shares under the terms of the Company's
Additional Share Option. The reinvested funds netted the company $1,777,454
after payment of brokerage fees. During the year, the Company distributed
$168,364 to Cornerstone on shares that had been purchased by Cornerstone.
Capital Requirements
The Company has an ongoing capital commitment to fund its renovation
program for acquired properties. In addition, the Company expects to acquire new
properties during the year. The Company anticipates that it will continue to
operate as it did in 1997 and fund these cash needs from a variety of sources
including equity, cash reserves, and debt provided by its line of credit.
The Company continues to renovate its properties. In connection with these
renovations, the Company capitalized improvements of $3.6 million in 1997.
Approximately $5 million of additional capital improvements are budgeted for
1998 on the existing property portfolio which are expected to be funded through
cash reserves and dividend reinvestment.
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the properties
supplies ample cash to provide for the payment of these operating expenses and
the payment of distributions to shareholders. The Company is operated as, and
annually elects to be taxed as, a real estate investment trust under the
Internal Revenue Code. As a result, the Company has no provision for taxes, and
thus there is no effect on the Company's liquidity.
Capital resources are expected to grow with the future sale of its shares
and from cash flow from operations. Approximately 61% of all 1997 distributions
were reinvested in additional common shares. In general, the Company's liquidity
and capital resources are believed to be more than adequate to meet its cash
requirements during 1998.
The Company is expecting to continue with significant growth during 1998.
The company plans to have monthly equity closings in 1998, until the offering is
fully funded, or until such time as the Company may opt to discontinue it. It is
anticipated that the equity funds will be invested in additional apartment
communities. Since year-end 1997, the Company purchased two additional apartment
properties, using share sale proceeds, and is evaluating other potential
acquisitions.
In addition to shares sold in the public offering, as of December 31, 1997,
Cornerstone owned 417,778 common shares of the Company at a cost of $3,760,000
which represents approximately 3% of the Company's common shares outstanding at
December 31, 1997. These shares are purchased outside of the above-referenced
offering. In 1997, the Company granted Cornerstone a continuing right to own up
to 9.8% of the common shares of Apple at the market price, net of selling
commissions.
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The Company also has granted Cornerstone a "first right of refusal" to
purchase the properties or business of Apple. Cornerstone has stated in its
public filings its intent to make periodic evaluations on the feasibility of
purchasing the Company.
IMPACT OF YEAR 2000
Some computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system miscalculation causing disruptions
of operations. The Company has completed an assessment of its programs and has
begun to modify or replace portions of its software, so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost will be expensed as incurred and is
not expected to have a material effect on the results of operations. This
project is estimated to be completed by December 31, 1998, which is prior to any
impact on the Company's systems.
IMPACT OF INFLATION
The Company does not believe that inflation had any significant impact on
the operation of the Company in 1997. Future inflation, if any, would likely
cause increased operating expenses, but the company believes that increases in
expenses would be more than offset by increases in rental revenues. Continued
inflation may also cause capital appreciation of the Company's properties over
time, as rental rates and replacement costs increase.
OWNERSHIP OF ASSETS IN SUBSIDIARY PARTNERSHIPS
Originally, the Company's Properties were acquired and owned directly by
the Company without the interposition or use of any subsidiary companies. In
1997, Company management determined that the direct ownership of its Properties
could inhibit in certain respects the Company's flexibility in planning certain
transactions or acquisitions. For example, the direct-ownership structure makes
it difficult, if not impossible, for potential sellers of properties to exchange
their properties for equity interests in the Company in a manner that could
defer tax liabilities for the sellers. Company management felt that this lack of
flexibility could hinder the Company's acquisition of desirable properties from
sellers seeking such tax deferral. Furthermore, Company management believed that
the direct-ownership structure tended to maximize the Company's exposure to
certain franchise taxes.
Based upon the foregoing, Company management proposed to the Board of
Directors, and the Board of Directors adopted and submitted for approval by the
Shareholders, a proposal the effect of which would be to transfer the apartment
properties of the Company owned as of the end of 1997 to a newly-organized
limited partnership indirectly wholly-owned by the Company.
The Board of Directors approved and submitted to the Shareholders (with its
recommendation for adoption) the following resolutions (collectively, the
"Reorganization Proposal");
RESOLVED, that the Company transfer any and all of the Company's
multifamily rental apartment communities (including all assets associated
therewith) to a partnership to be created by the Company, the partners of
which will be the Company or entities wholly-owned, directly or indirectly,
by the Company; and
RESOLVED, that the following be added as a new Article XIII to the
Company's Bylaws:
ARTICLE XIII
CONDUCT OF BUSINESS THROUGH SUBSIDIARIES
13.1 Subsidiaries. To the extent permitted by the Articles of
Incorporation, these Bylaws (excluding Section 9.1(i) hereof, which shall not
be construed to prohibit anything contemplated by this Article XIII) and
applicable law (including any required consent of the Directors and
Shareholders under applicable law), the Company may conduct its business
through subsidiary companies owned or controlled by the Company (or its
subsidiaries). Any such subsidiary company is referred to as a
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"Subsidiary Company" and collectively such subsidiary companies are referred
to as the "Subsidiary Companies." It is specifically acknowledged that the
conduct of the Company's business through a Subsidiary Company or Subsidiary
Companies may be effected and undertaken by the transfer by the Company of
properties to, the acquisition of properties by, and the ownership and
operation of properties in, a partnership all of whose interests are
initially owned by the Company and/or a Subsidiary Company or Subsidiary
Companies. However, the transfer described in the preceding sentence shall
not constitute an event permitting conversion of the Company's Class B
Convertible Shares.
13.2 Interpretation and Application of Bylaws. If and to the extent (i)
the Company conducts its business through Subsidiary Companies, or (ii) there
are properties which, in the absence of Subsidiary Companies, would be owned
and operated by the Company but such properties are instead owned and
operated by Subsidiary Companies, restrictions on the power of the Company to
engage in certain transactions and restrictions on the authority of Directors
and officers of the Company in these Bylaws, and in particular the
restrictions contained in Articles VIII, IX and X of these Bylaws, shall be
interpreted and applied to Subsidiary Companies in the same manner as they
apply by their terms to the Company to the extent necessary to ensure that
the Bylaw provision is given the effect intended notwithstanding that the
Company's business is conducted through Subsidiary Companies instead of by
the Company directly. The Company shall exercise any rights and powers it has
as an owner or partner (directly or indirectly) of a Subsidiary Company
consistently with this provision.
13.3 Certain Shareholder Consents. If a transaction involving the
proposed sale or other transfer, whether by sale, exchange, merger,
consolidation, lease, share exchange or otherwise, by a Subsidiary Company
would require pursuant to applicable law the consent or approval of
Shareholders if the Company owned directly, and were proposing the sale or
other transfer of, the relevant assets, the Company shall not approve,
undertake or effectuate any such proposed sale or other transfer through such
Subsidiary Company without first obtaining the consent or approval of the
Shareholders of the Company.
Pursuant to notice duly given, to all Shareholders of record on October 31,
1997, in a Proxy Statement dated November 26, 1997, a Special Meeting of
Shareholders of the Company was held at 3:00 p.m. on Wednesday, December 17,
1997, at the offices of McGuire, Woods, Battle & Boothe, L.L.P., Richmond,
Virginia. At the Special Meeting, Shareholders were asked to consider and vote
on the Reorganization Proposal. There being insufficient votes to approve the
Reorganization Proposal at that time, the meeting was adjourned and then
reconvened after adjournment on December 19, 1997 at 2:00 p.m. A vote was then
taken on the Reorganization Proposal. As of the record date, there were
10,108,598 Common Shares outstanding and entitled to vote. A total of 6,845,381
Common Shares were present in person or by proxy. A total of 6,823,288 Common
Shares voted in favor of the Reorganization Proposal. A total of 11,785 Common
Shares voted against the Reorganization Proposal and a total of 10,308 Common
Shares abstained. The Reorganization Proposal was adopted, as 67.5%, or more
than two-thirds, of the Common Shares outstanding and entitled to vote approved
the Reorganization Proposal.
REORGANIZATION
In light of the foregoing and as further described herein, the Company
transferred the Properties owned as of the end of 1997 to a Virginia limited
partnership, the partners of which were two newly created, wholly-owned
subsidiaries of the Company.
The Company formed the two wholly-owned subsidiaries, Apple Limited, Inc.
and Apple General, Inc., as Virginia corporations. The Company then transferred
an undivided 99 percent interest in the Properties to Apple Limited, Inc. and
an undivided 1 percent interest in the Properties to Apple General, Inc. Apple
Limited, Inc. and Apple General, Inc. together formed the limited partnership,
Apple REIT Limited Partnership (the "Partnership"), as a Virginia limited
partnership. Apple Limited, Inc. contributed its 99% interest in the Properties
to the Partnership in exchange for a 99% limited partnership interest in the
Partnership. Apple General, Inc. contributed its 1% interest in the Properties
to the Partnership in exchange for a 1% general partnership interest in the
Partnership. The Properties were transferred to the Partnership on December 29,
1997.
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SUBSEQUENT PROPERTY ACQUISITIONS
Generally, the Company expects to acquire, and has acquired, additional
properties by purchase directly by Apple REIT Limited Partnership. However, as
described above under "Property Acquisitions," the Company acquired five
Properties in July 1998 that involved the assumption of mortgage indebtedness.
The lender in each case required that each Property be purchased by a separate
("single-purpose") entity. Accordingly, the Company organized five additional
Virginia limited partnerships identical in structure and ownership to Apple REIT
Limited Partnership for the purpose of purchasing these five Properties.
The following diagram sets forth the manner in which the Company owns its
Properties. It is expected that additional Properties will be purchased by Apple
REIT Limited Partnership, unless special circumstances requiring the use of
additional subsidiaries arise in particular cases. All of the Company's
subsidiary limited partnerships are sometimes referred to herein as the
"Subsidiary Partnerships."
[GRAPHIC OMITTED]
EFFECT OF USE OF SUBSIDIARY PARTNERSHIP AND BYLAW AMENDMENTS
The Company owns 100% of Apple Limited, Inc., which owns a 99% interest in
each Subsidiary Partnership, and owns 100% of Apple General, Inc., which owns a
1% interest in each Subsidiary Partnership. Apple General, Inc., as general
partner of each Subsidiary Partnership, will manage the affairs of the
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Subsidiary Partnership. The Company, as sole shareholder of Apple General, Inc.,
will be entitled to exercise the rights of a 100%-shareholder with respect to
Apple General, Inc., including the election and removal of directors of that
company. At the present time, Glade M. Knight, Chairman of the Board and Chief
Executive Officer of the Company, is the sole director and President of Apple
General, Inc. No substantive change in the rights of the Shareholders is
intended to occur as a result of the holding of the Properties in the Subsidiary
Partnerships. To give effect to this intent, there are now in effect amendments
to the Company's Bylaws (set forth above) designed to retain existing Bylaw
restrictions on the Company and its directors and officers, and to retain
certain existing Shareholder rights, notwithstanding the technical changes in
legal ownership effected by the use of Subsidiary Partnerships.
FEDERAL INCOME TAX DEVELOPMENTS
This discussion does not purport to deal with all of the aspects of federal
income taxation that may be relevant to a prospective investor in light of his
or her personal investment or tax circumstances, or to certain types of
investors who are subject to special treatment under the federal income tax
laws. For a discussion of material federal income tax consequences applicable to
distributions to shareholders and the Company's election to be taxed as a REIT,
see "Federal Income Tax Consequences" in the accompanying Prospectus.
PROSPECTIVE PURCHASERS OF SHARES ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASERS OF THE
PURCHASE, OWNERSHIP, AND SALE OF SHARES.
Prospective investors should be aware that the Taxpayer Relief Act of 1997
(the "1997 Act") made numerous changes to the Code, including reducing the
maximum tax rate imposed on net capital gains from the sale of assets held for
more than 18 months by individuals, trusts and estates. The 1997 Act also makes
certain changes to the requirements to qualify as a REIT and to the taxation of
REITs and their shareholders.
The 1997 Act provides that for gains realized after July 28, 1997, and
subject to certain exceptions, the maximum rate of tax on net capital gains has
been reduced to 20%. For taxpayers who would be subject to a maximum tax rate of
15%, the rate on net capital gains is reduced to 10%. The maximum tax rate for
net capital gains attributable to the sale of depreciable real property held for
more than 18 months is 25% to the extent of the deductions for depreciation with
respect to such property. Long-term capital gain allocated to a shareholder by
the Company will be subject to the 25% rate to the extent that the gain does not
exceed depreciation on real property sold by the Company. Under the 1997 Act the
maximum rate of capital gains tax on the sale or exchange of capital assets held
more than one year but not more than 18 months remains at 28%. Under Internal
Revenue Service Notice 97-64, a REIT may designate (subject to certain limits)
whether a capital gains dividend or an amount designated as retained capital
gains is taxable to U.S. shareholders (other than corporations) as a 20% rate
gain distribution, a 28% rate gain distribution, or a 25% rate section 1250 gain
distribution.
On July 22, 1998, President Clinton signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the IRS Reform Act). Among the
provisions included in the IRS Reform Act is a provision eliminating the
18-month holding period requirement imposed by the 1997 Act in order to obtain
lower capital gain rates for non-corporate holders. The IRS Reform Act reduces
the holding period for long-term capital gains from 18 to 12 months effective
for sales of capital assets after December 31, 1997.
The 1997 Act includes several provisions that are intended to simplify the
taxation of REITs. These provisions are effective for taxable years beginning
after the date of enactment of the 1997 Act which, as to the Company, is its
taxable year commencing January 1, 1998. First, in determining whether a REIT
satisfies certain income tests, a REIT's rental income from a property will not
cease to qualify as "rents from real property" merely because the REIT performs
services for a tenant other than permitted customary services if the amount that
the REIT is deemed to have received as a result of performing impermissible
services does not exceed one percent of all amounts received directly or
indirectly by the REIT with respect to that property. For this purpose, the
amount that a REIT will be deemed to have received for performing impermissible
services is at least 150% of the direct cost to the REIT of pro-
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viding those services. Second, certain non-cash income, including income from
cancellation of indebtedness and original issue discount, will be excluded from
income in determining the amount of dividends that a REIT is required to
distribute. However, the REIT will still be subject to tax on this income to the
extent it is not offset by the dividends-paid deduction. Third, a REIT may elect
to retain and pay income tax on any net long-term capital gains and require its
shareholders to include such undistributed net capital gains in their income. If
a REIT makes such an election, the REIT's shareholders would receive a tax
credit attributable to their shares of capital gains tax paid by a REIT on the
undistributed net capital gains that was included in the shareholders' income,
and such shareholders would receive an increase in the basis of their share in
the amount of undistributed net capital gain included in their income reduced by
the amount of the credit. Fourth, the 1997 Act repeals the requirement that a
REIT receive less than 30% of its gross income from the sale or disposition of
stock or securities held for less than one year, gain from prohibited
transactions, and gain from certain sales of real property held less than four
years. Finally, the 1997 Act contains a number of technical provisions that
reduce the risk that a REIT will inadvertently cease to qualify as a REIT.
EXPERTS
The consolidated financial statements of Apple Residential Income Trust,
Inc. at December 31, 1997 and 1996, and for the year in the period ended
December 31, 1997, appearing in this Prospectus and Post-Effective Amendment No.
7 to the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The following Statements of Income and Direct Operating Expenses of
properties, included herein, have been included herein in reliance on the
reports of L.P. Martin & Company, P.C., independent certified public
accountants, also included herein, and upon the authority of said firm as
experts in accounting and auditing: (1) A report dated March 19, 1997 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property
Brookfield Apartments for the twelve-month period ended December 31, 1996 (2) a
report dated March 27, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Eagle Crest Apartments for the twelve-month period
ended December 31, 1996 (3) a report dated April 11, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Tahoe Apartments
for the twelve-month period ended December 31, 1996, (4) a report dated April
29, 1997 with respect to the statement of income and direct operations expenses
exclusive of items not comparable to the proposed future operations of the
property Mill Crossing Apartments for the twelve-month period ended January 31,
1997 (5) a report dated May 21, 1997 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Polo Run Apartments for the twelve-month
period ended February 28, 1997, (6) a report dated June 4, 1997 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Wildwood Apartments
for the twelve-month period ended February 28, 1997, (7) a report dated June 4,
1997 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property Toscana Apartments for the twelve-month period ended February 28, 1997,
(8) a report dated June 4, 1997 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property The Arbors on Forest Ridge Apartments for the
twelve-month period ended February 28, 1997, (9) a report dated July 22, 1997
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property Paces
Cove Apartments for the twelve-month period ended May 31, 1991, (10) a report
dated September 24, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Chaparosa Apartments for the twelve-month period
ended June 30, 1997, (11) a report dated September 24, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Riverhill
Apartments for the twelve-month period ended June 30, 1997, (12) a report dated
De-
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cember 16, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Crossing Apartments for the twelve-month period ended
October 31, 1997, (13) a report dated March 25, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Main Park
Apartments for the twelve-month period ended December 31, 1997, (14) a report
dated April 6, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Timberglen Apartments for the twelve-month period ended December
31, 1997, (15) a report dated April 14, 1998 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Copper Ridge Apartments for the
twelve-month period ended February 28, 1998, (16) a report dated May 14, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property Bitter
Creek Apartments for the twelve-month period ended March 31, 1998, (17) a report
dated July 16, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments for the twelve-month period ended May 31,
1998, (18) a report dated July 17, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Park Village Apartments for the twelve-month
period ended May 31, 1998, (19) a report dated July 21, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Cottonwood Crossing
Apartments for the twelve-month period ended May 31, 1998, (20) a report dated
May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Point Apartments for the twelve-month period ended March 31,
1998, (21) a report dated May 14, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Pepper Square Apartments for the twelve-month
period ended March 31, 1998, (22) a report dated May 14, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Emerald Oaks
Apartments for the twelve-month period ended March 31, 1998, (23) a report dated
May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Hayden's Crossing Apartments for the twelve-month period ended
March 31, 1998, (24) a report dated May 14, 1998 with respect to the statement
of income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Newport Apartments for the
twelve-month period ended March 31, 1998, and (25) a report dated July 15, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property
Estrada Oaks Apartments for the twelve-month period ended June 30, 1998.
S-66
<PAGE>
UPDATE ON EXPERIENCE OF PRIOR PROGRAMS
The following tables set forth updated information (through December 31,
1997) on Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate
investment trust which was organized by Affiliates of the Advisor of Apple
Residential Income Trust, Inc. Please refer to "Experience of Prior Programs" on
pages 66 through 70 of the Prospectus for additional information, including the
definition of terms used herein.
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds
by Cornerstone, whose investment objectives are similar to those of the Company
and whose offering closed within three years ending December 31, 1997.
<TABLE>
<S> <C>
Dollar Amount Offered .................................... $368,536,368
Dollar Amount Raised ..................................... $368,536,368
Less Offering Expenses:
Selling Commissions and Discounts ...................... 7.19%
Organizational Expenses ................................ 3.42%
Other .................................................. 0.00%
Reserves ................................................. 3.00%
Percent Available for Investment ......................... 86.39%
Acquisition Costs:
Prepaid items and fees to purchase property ............ 85.12%
Cash down payment ...................................... 0.00%
Acquisition fees ....................................... 1.27%
Other .................................................. 0.00%
Total Acquisition Costs .................................. 86.39%
Percent Leverage (excluding unsecured debt) .............. 0.00%
Date offering began ...................................... May 1993
Length of offering (in months) ........................... 54
Months to invest amount available for investment ......... 54
</TABLE>
S-67
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Prior Program Sponsor and
its Affiliates (i) by programs organized by it and closed within three years
ended December 31, 1997, and (ii) by all other programs during the three years
ended December 31, 1997.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE PROGRAM
--------------- ---------------
<S> <C> <C>
Date offering commenced ................................... May 1993 Various
Dollar amount raised ...................................... $368,536,368 $ 35,483,175
Amounts paid to Prior Program Sponsor from proceeds of of-
fering:
Acquisition fees
Real Estate commission ................................. $ 4,075,337 $ 0
Advisory fees .......................................... $ 515,689 $ 0
Other .................................................. $ 0 $ 0
Cash generated from operations before deducting payments to
Prior Program Sponsor .................................... $ 67,583,917 $ 9,069,403
Aggregate compensation to Prior Program Sponsor
Management and accounting fees ........................... $ 3,088,348 $ 1,137,934
Reimbursements ........................................... $ 2,717,655 $ 0
Leasing fees ............................................. $ 0 $ 0
Other fees ............................................... $ 0 $ 0
There have been no fees from property sales or refinancings
</TABLE>
S-68
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for
Cornerstone, the only offering closed in the five years ending December 31,
1997. Table III is shown on both an income tax basis as well as in accordance
with generally accepted accounting principles, the only significant difference
being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1997 1996 1995 1994
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Capital contributions by year .................. $ 63,485,868 $ 176,885,206 $71,771,027 $23,496,784
Gross revenue .................................. $ 71,970,624 $ 40,352,955 $16,300,821 $ 8,177,576
Operating expenses ............................. $ 29,948,366 $ 18,696,781 $ 8,180,016 $ 4,690,941
Interest income (expense) ...................... $ (7,230,205) $ (1,140,667) $ (68,061) $ 110,486
Depreciation ................................... $ 15,163,593 $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis ................... $ 19,225,553 $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income ................................. $ 0 $ 0 $ 0 $ 0
Cash generated from operations ................. $ 34,973,533 $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributed to investors ............. $ 31,324,870 $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash distribution ......... $ 3,648,663 $ 4,227,875 $ 3,302,771 $ 740,950
Special items
Capital contributions, net .................... $ 63,485,868 $ 144,798,035 $71,771,027 $23,496,784
Fixed asset additions ......................... $ 157,859,343 $ 194,519,406 $75,589,089 $28,557,568
Line of credit ................................ $ 96,166,141 $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated ................................. $ 1,331,335 $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash ............................. $ 4,513,986 $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1,000 in-
vested ........................................
Federal income tax results
Cornerstone Realty Income Trust is a
REIT and thus is not taxed at the cor-
porate level
Cash distributions to investors
Source (on GAAP basis)
Investment income ........................... $ 77 $ 85 $ 80 $ 70
Return of capital ........................... $ 23 $ 14 $ 16 $ 19
Source (on Cash basis)
Sales ....................................... $ 0 $ 0 $ 0 $ 0
Refinancings ................................ $ 0 $ 0 $ 0 $ 0
Operations .................................. $ 100 $ 99 $ 96 $ 89
Other ....................................... $ 0 $ 0 $ 0 $ 0
</TABLE>
S-69
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COMPANY FINANCIAL STATEMENTS
Report of Independent Auditors .......................................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 ............... F-4
Consolidated Statement of Operations for the Year Ended December 31, 1997 ............... F-5
Consolidated Statement of Shareholders' Equity for the Year Ended December 31, 1997 ..... F-5
Consolidated Statement of Cash Flows for the Year Ended December 31, 1997 ............... F-6
Notes to Consolidated Financial Statements .............................................. F-7
COMPANY INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets -- March 31, 1998 and December 31, 1997 ..................... F-14
Consolidated Statements of Operations -- Three Months Ended March 31, 1998 and March
31, 1997 .............................................................................. F-15
Consolidated Statement of Shareholders' Equity -- Three Months Ended March 31, 1998 ..... F-16
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1998 and March
31, 1997 .............................................................................. F-17
Notes to Consolidated Financial Statements .............................................. F-18
PROPERTY FINANCIAL STATEMENTS
Brookfield Apartments:
Independent Auditors' Report .......................................................... F-21
Historical Statement of Income and Direct Operating Expenses .......................... F-22
Eagle Crest I & II Apartments:
Independent Auditors' Report .......................................................... F-23
Historical Statement of Income and Direct Operating Expenses .......................... F-24
Aspen Hill (formerly Tahoe Apartments):
Independent Auditors' Report .......................................................... F-25
Historical Statement of Income and Direct Operating Expenses .......................... F-26
Mill Crossing Apartments:
Independent Auditors' Report .......................................................... F-27
Historical Statement of Income and Direct Operating Expenses .......................... F-28
Polo Run Apartments:
Independent Auditors' Report .......................................................... F-29
Historical Statement of Income and Direct Operating Expenses .......................... F-30
Wildwood Apartments:
Independent Auditors' Report .......................................................... F-31
Historical Statement of Income and Direct Operating Expenses .......................... F-32
Toscana Apartments:
Independent Auditors' Report .......................................................... F-33
Historical Statement of Income and Direct Operating Expenses .......................... F-34
Arbors on Forest Ridge Apartments:
Independent Auditors' Report .......................................................... F-35
Historical Statement of Income and Direct Operating Expenses .......................... F-36
Pace's Cove Apartments:
Independent Auditors' Report .......................................................... F-37
Historical Statement of Income and Direct Operating Expenses .......................... F-38
Remington Hills at Las Colinas (formerly, Chaparosa and Riverhill Apartments):
Independent Auditors' Report (Chaparosa Apartments) ................................... F-39
Historical Statement of Income and Direct Operating Expenses (Chaparosa Apartments).... F-40
Independent Auditors' Report (Riverhill Apartments) ................................... F-41
Historical Statement of Income and Direct Operating Expenses (Riverhill Apartments) ... F-42
Copper Crossing Apartments:
Independent Auditors' Report .......................................................... F-43
Historical Statement of Income and Direct Operating Expenses .......................... F-44
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Main Park Apartments:
Independent Auditors' Report ........................................................ F-45
Historical Statement of Income and Direct Operating Expenses ........................ F-46
Timberglen Apartments:
Independent Auditors' Report ........................................................ F-47
Historical Statement of Income and Direct Operating Expenses ........................ F-48
Copper Ridge Apartments:
Independent Auditors' Report ........................................................ F-49
Historical Statement of Income and Direct Operating Expenses ........................ F-50
Silver Brook (formerly Bitter Creek Apartments):
Independent Auditors' Report ........................................................ F-51
Historical Statement of Income and Direct Operating Expenses ........................ F-52
Summer Tree Apartments:
Independent Auditors' Report ........................................................ F-53
Historical Statement of Income and Direct Operating Expenses ........................ F-54
Park Village Apartments:
Independent Auditors' Report ........................................................ F-55
Historical Statement of Income and Direct Operating Expenses ........................ F-56
Cottonwood Crossing Apartments:
Independent Auditors' Report ........................................................ F-57
Historical Statement of Income and Direct Operating Expenses ........................ F-58
Pace's Point Apartments:
Independent Auditors' Report ........................................................ F-59
Historical Statement of Income and Direct Operating Expenses ........................ F-60
Pepper Square Apartments:
Independent Auditors' Report ........................................................ F-61
Historical Statement of Income and Direct Operating Expenses ........................ F-62
Emerald Oaks Apartments ...............................................................
Independent Auditors' Report ........................................................ F-63
Historical Statement of Income and Direct Operating Expenses ........................ F-64
Hayden's Crossing Apartments:
Independent Auditors' Report ........................................................ F-65
Historical Statement of Income and Direct Operating Expenses ........................ F-66
Newport Apartments:
Independent Auditors' Report ........................................................ F-67
Historical Statement of Income and Direct Operating Expenses ........................ F-68
Estrada Oaks Apartments:
Independent Auditors' Report ........................................................ F-69
Historical Statement of Income and Direct Operating Expenses ........................ F-70
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Consolidated Statement of Operations for Three Months Ended March 31, 1998
(Unaudited) ......................................................................... F-71
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1997
(Unaudited) ......................................................................... F-72
Pro Forma Consolidated Balance Sheet as of March 31, 1998 (Unaudited) ................. F-75
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Apple Residential Income Trust, Inc.
We have audited the accompanying consolidated balance sheets of Apple
Residential Income Trust, Inc. (the "company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended December 31, 1997. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Apple Residential Income Trust, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Richmond, Virginia
February 13, 1998
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1997 1996
---------------- ------------
<S> <C> <C>
Assets
Investment in rental property ..........................................
Land .................................................................. $ 15,396,823
Building and improvements ............................................. 73,113,886 --
Furniture and fixtures ................................................ 1,123,639 --
------------ --
89,634,348 --
Less accumulated depreciation .......................................... (1,898,003) --
------------ --
87,736,345
Cash and cash equivalents .............................................. 24,162,572 $ 100
Prepaid expenses ....................................................... 142,581 --
Other assets ........................................................... 444,022 --
------------ ---------
24,749,175 100
------------ ---------
Total Assets ........................................................... $112,485,520 $ 100
============ =========
Liabilities and Shareholders' Equity
Accounts payable ....................................................... $ 536,324 --
Accrued expenses ....................................................... 2,143,888 --
Rents received in advance .............................................. 70,051 --
Tenant security deposits ............................................... 394,702 --
------------ ---------
Total Liabilities ...................................................... 3,144,965 --
Shareholders' Equity
Common stock, no par value, authorized 50,000,000 shares; issued
and outstanding 12,371,829 shares and 10 shares, respectively ......... 109,090,459 $ 100
Class B convertible stock, no par value, authorized 200,000 shares;
issued and outstanding 200,000 shares ................................. 20,000 20,000
Receivable from officer-shareholder .................................... (20,000) (20,000)
Net income greater than distributions .................................. 250,096 --
------------ ---------
109,340,555 100
------------ ---------
Total Liabilities and Shareholders' Equity ............................. $112,485,520 $ 100
============ =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
Revenue
Rental income ...................................... $12,005,968
Expenses
Property and maintenance ........................... 3,571,484
Taxes and insurance ................................ 1,765,741
Property management ................................ 656,267
General and administrative ......................... 351,081
Amortization ....................................... 28,490
Depreciation of rental property .................... 1,898,003
-----------
Total expenses ...................................... 8,271,066
Income before interest income (expense) ............. 3,734,902
Interest income .................................... 222,676
Interest expense ................................... (458,384)
-----------
Net income .......................................... $ 3,499,194
===========
Basic and diluted earnings per common share ......... $ 0.54
===========
</TABLE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE CLASS B
COMMON STOCK STOCK
---------------------------- ----------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ...... 10 $ 100 200,000 $20,000
Net proceeds from the sale of
shares ........................... 11,756,545 103,552,905 -- --
Net income ........................ -- -- -- --
Cash distributions declared to
shareholders ($.60 per share) .... -- -- -- --
Shares issued to Cornerstone Re-
alty Income Trust, Inc. .......... 417,778 3,760,000 -- --
Shares issued through Additional
Share Option ..................... 197,496 1,777,454 -- --
---------- ------------ ------- -------
Balance December 31, 1997 ......... 12,371,829 $109,090,459 200,000 $20,000
========== ============ ======= =======
<CAPTION>
RECEIVABLE
FROM NET INCOME TOTAL
PRINCIPAL GREATER THAN SHAREHOLDERS'
SHAREHOLDER DISTRIBUTIONS EQUITY
------------- --------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1996 ...... $ (20,000) $ 0 $ 100
Net proceeds from the sale of
shares ........................... -- -- 103,552,905
Net income ........................ -- 3,499,194 3,499,194
Cash distributions declared to
shareholders ($.60 per share) .... -- (3,249,098) (3,249,098)
Shares issued to Cornerstone Re-
alty Income Trust, Inc. .......... -- -- 3,760,000
Shares issued through Additional
Share Option ..................... -- 1,777,454
--------- ------------
Balance December 31, 1997 ......... $ (20,000) $ 250,096 $109,340,555
========= ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
From operating activities:
Net income ........................................................ $ 3,499,194
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 1,926,493
Amortization of deferred loan costs ............................... 60,490
Changes in operating assets and liabilities:
Prepaid expenses .................................................. (142,581)
Other assets ...................................................... (533,002)
Accounts payable .................................................. 536,324
Accrued expenses .................................................. 1,631,776
Rent received in advance .......................................... 70,051
Tenant security deposits .......................................... 26,280
-------------
Net cash provided by operating activities ........................ 7,075,025
From investing activities:
Acquisitions of rental property, net of liabilities assumed ....... (85,147,726)
Capital improvements .............................................. (3,606,088)
-------------
Net cash used in investing activities ............................ (88,753,814)
From financing activities:
Proceeds from short-term borrowings ............................... 39,640,000
Repayments of short-term borrowings ............................... (39,640,000)
Net proceeds from issuance of shares .............................. 109,090,359
Cash distributions paid to shareholders ........................... (3,249,098)
-------------
Net cash provided by financing activities ........................ 105,841,261
Increase in cash and cash equivalents ............................ 24,162,472
Cash and cash equivalents, beginning of year ........................ 100
-------------
Cash and cash equivalents, end of year .............................. $ 24,162,572
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BUSINESS
Apple Residential Income Trust, Inc., together with its subsidiaries Apple
Limited, Inc., Apple General, Inc., and Apple REIT Limited Partnership, (the
"company"), is an externally advised real estate investment trust formed on
August 7, 1996 as a Virginia corporation. The company is an owner of residential
apartment communities in Texas. All of the company's apartment communities are
located in the Dallas/ Fort Worth, Texas metropolitan area. All operations
commenced in January, 1997; therefore, no statements of operations or cash flows
are presented for periods prior to January 1997. The accompanying consolidated
financial statements include the accounts of Apple Residential Income Trust,
Inc. and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with original maturities of
three months or less. The fair market value of cash and cash equivalents
approximate their carrying value.
INVESTMENT IN REAL ESTATE
The investment in rental property is recorded at the depreciated cost and
includes real estate brokerage commissions paid to Apple Realty Group, Inc. and
Cornerstone Realty Income Trust, Inc. (See Note 6 to the consolidated financial
statements).
The company records impairment losses on rental property used in the operations
if indicators of impairment are present and the undiscounted cash flows
estimated to be generated by the respective properties are less than their
carrying amount. Impairment losses are measured as the difference between the
asset's fair value and its carrying value.
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets which are 27.5 years for buildings and major improvements and a range
from five to ten years for furniture and fixtures.
INCOME RECOGNITION
Rental, interest, and other income are recorded on an accrual basis. The
company's properties are leased under operating leases that, typically, have
terms that do not exceed one year.
DEFERRED FINANCING COSTS
Deferred financing costs are generally amortized over a period not to exceed the
term of the related debt. Amortization of deferred financing costs is classified
as interest expense in the consolidated statements of operations.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
STOCK INCENTIVE PLANS
The company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. As discussed in
Note 5, the alternative fair value accounting provided for under FASB State-
F-7
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -(CONTINUED)
ment No. 123, "Accounting for Stock-Based Compensation," ("FASB 123") requires
use of option valuation models that were developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
ADVERTISING COSTS
Costs incurred for the production and distribution of advertising are expensed
as incurred.
INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods that have
been presented are to conform to the requirements of Statement 128.
FEDERAL INCOME TAX
The company is operated as, and annually elects to be taxed as, a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, a real estate investment trust, which complies with the
provisions of the Code and distributes at least 95% of its taxable income to its
shareholders, does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes.
For income tax purposes, distributions paid to shareholders consist of ordinary
income and return of capital or a combination thereof. Distributions per share
were $.60 for the year ended December 31, 1997. In 1997, the total distribution
was taxable as ordinary income.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The following is a summary of rental property owned at December 31, 1997:
<TABLE>
<CAPTION>
INITIAL TOTAL ACCUMULATED DATE
DESCRIPTION ACQUISITION COST INVESTMENT* DEPRECIATION ACQUIRED
- ------------------------------------ ------------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Brookfield ......................... $ 5,458,485 $ 5,946,299 $ 166,694 January 1997
Eagle Crest ........................ 15,650,000 17,299,740 483,740 January 1997
Tahoe .............................. 5,690,560 6,641,227 199,049 January 1997
Mill Crossing ...................... 4,544,121 5,046,908 136,519 February 1997
Polo Run ........................... 6,858,974 7,545,163 191,302 March 1997
Wildwood ........................... 3,963,519 4,389,742 98,645 March 1997
Toscana ............................ 5,854,531 6,222,223 147,776 March 1997
The Arbors on Forest Ridge ......... 7,748,907 8,315,672 187,034 April 1997
Pace's Cove ........................ 9,277,355 9,536,559 141,850 June 1997
Remington at Las Colinas ........... 13,100,000 13,815,064 133,271 August 1997
Copper Crossing .................... 4,750,000 4,875,751 12,123 November 1997
----------- ----------- ----------
$82,896,452 $89,634,348 $1,898,003
</TABLE>
- ----------
* Includes real estate commissions, closing costs, and improvements capitalized
since the date of acquisition.
F-8
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- NOTES PAYABLE
During 1997, the company entered into an agreement with a commercial bank to
obtain an unsecured, revolving line of credit not to exceed $20 million to
facilitate the timely acquisition of properties. The unsecured line of credit
expires on March 31, 1998. Borrowings under the agreement are evidenced by an
unsecured promissory note and bear interest at one-month LIBOR plus 200 basis
points. The company also obtained a $1 million unsecured line of credit for
general corporate purposes. The terms of such borrowings are the same as under
the unsecured line of credit for acquisitions. No interest was capitalized in
1997. The company paid interest of $458,384 in 1997. At December 31, 1997, there
were no outstanding borrowings under the lines of credit. The weighted-average
interest rate incurred under the lines of credit was 7.8% in 1997.
NOTE 4 -- SHAREHOLDERS' EQUITY
The company is raising equity 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. The company received gross proceeds of $121,633,733 from the
sale of 2,084,445 shares at $9 per share and 10,287,384 shares at $10 per share,
including shares sold through the reinvestment of distributions for the year
ended December 31, 1997. The underwriter received selling commissions and a
marketing expense allowance equal to 7.5% and 2.5%, respectively, of the gross
proceeds of shares sold. During 1997, the underwriter earned $11,787,399. The
net proceeds of the offering, after deducting selling commissions and other
offering expenses, were $109,090,359. These totals include 417,778 shares
purchased by Cornerstone for $3.76 million. Cornerstone owned approximately
3.38% of the company's outstanding shares on December 31, 1997 (See Note 6 to
the consolidated financial statements).
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:
<TABLE>
<CAPTION>
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>
F-9
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 4 -- SHAREHOLDERS' EQUITY -(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 conversion
of the Class B Convertible Shares.
The company provides a plan which allows shareholders to reinvest distributions
in the purchase of additional shares of the company ("Additional Share Option
Plan"). Of the total proceeds raised from common shares during the year ended
December 31, 1997, $1,974,949 (net $1,777,454) was provided through the
reinvestment of distributions.
NOTE 5 -- STOCK INCENTIVE PLANS
Based on the outstanding shares, under the 1997 Incentive Option Plan, a maximum
of 1,121,875 options could be granted, at the discretion of the Board of
Directors, to certain officers and key employees of the company. Also under the
Directors Plan, a maximum of 468,000 options could be granted to the directors
of the company.
In 1997, the company granted 20,550 options to purchase shares under the
Directors Plan and no options under the Incentive Plan. Both of the plans
generally provide, among other things, that options be granted at exercise
prices not lower than the market value of the shares on the date of grant. Under
the Incentive Plan, at the earliest, options become exercisable at the date of
grant. The optionee has up to 10 years from the date on which the options first
become exercisable during which to exercise the options. Activity in the
company's share option plans during the year ended December 31, 1997 is
summarized in the following table:
<TABLE>
<CAPTION>
1997
WEIGHTED-AVERAGE
---------------------------
OPTIONS EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding, beginning of year
Granted .............................. 20,550 $ 10.00
Exercised ............................ -- --
Forfeited ............................ -- --
------ --------
Outstanding, end of year ............. 20,550 $ 10.00
Exercisable at end of year ........... 20,550 $ 10.00
====== ========
Weighted-average fair value of options
granted during the year ............. -- $ .83
</TABLE>
Pro forma information regarding net income and earnings per share is required by
FASB 123 under the fair value method described in that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions, for 1997:
risk-free interest rates of 6.7%; a dividend yield of 7.0%; volatility factor of
the expected market price of the company's common stock of .161; and a
weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-10
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 5 -- STOCK INCENTIVE PLANS -(CONTINUED)
For purposes of FASB 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. As the options
are immediately exercisable, the full impact of the pro forma is disclosed
below:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Pro forma FASB 123 net income .................. $3,482,138
As reported net income ......................... 3,499,194
Pro forma FASB 123 earnings per share .......... .54
As reported net income per share ............... .54
</TABLE>
NOTE 6 -- RELATED-PARTY TRANSACTIONS
The company had contracted with Apple Residential Management Group, Inc. (the
"Management Company") to manage the acquired properties; Apple Residential
Advisors, Inc. (the "Advisor") to advise and provide the company with
day-to-day management; and Apple Realty Group, Inc. to acquire and dispose of
real estate assets held by the company. The Management Company, Advisor, and
Apple Realty Group, Inc. were initially owned by Glade M. Knight. Mr. Knight
also serves as chairman of the board and chief executive officer of the company
and Cornerstone Realty Income Trust, Inc. Before the transaction described
below, during 1997, the company paid the Management Company a management fee
equal to 5% of rental income plus reimbursement of certain expenses in the
amount of $52,375. The company paid the Advisor a fee equal to .1% to .25% of
total contributions received by the company in the amount of $14,894. The
company paid Apple Realty Group, Inc. a fee of 2% of the purchase price of the
acquired properties in the amount of $624,382.
During 1997, with the approval of the company, Cornerstone entered into
subcontract agreements with the Management Company and the Advisor, whereby
Cornerstone will provide advisory and property management services to the
company in exchange for fees and expense reimbursement on the same terms
described above. As of December 31, 1997, the company had paid Cornerstone
$822,934 in management and advisory fees and $214,961 for certain reimbursable
items.
During 1997, with the consent of the company, Cornerstone acquired all the
assets of Apple Realty Group, Inc. The sole material asset of Apple Realty
Group, Inc. was the acquisition/disposition agreement with the company.
Cornerstone paid $350,000 in cash and issued 150,000 common shares in exchange
for the assignment of the rights to the acquisition/disposition agreement.
Cornerstone is entitled, under the terms of the acquisition/disposition
agreement, to a real estate commission equal to 2% of the gross purchase price
of the company's properties plus reimbursement of certain expenses. As of
December 31, 1997, Cornerstone had earned approximately $1,116,566 under the
agreement.
During the first quarter of 1997, the company granted Cornerstone a continuing
right to acquire up to 9.8% of the common shares of the company at market price,
net of selling commissions. In April 1997, Cornerstone purchased 417,778 shares
of the company for approximately $3.76 million. Cornerstone owns approximately
3.38% of the total common shares of the company outstanding on December 31,
1997.
The company also has granted Cornerstone a "first right of refusal" to purchase
the properties or business of Apple. Cornerstone has stated in its public
filings its intent to make periodic evaluations of the feasibility of purchasing
the company.
F-11
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The first three quarters of 1997 earnings per share amounts have been restated
to comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". The following is a summary of quarterly results of operations for
the year ended December 31, 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue .................................. $1,155,766 $2,826,712 $3,789,266 $4,234,224
Income before interest income (ex-
pense) .................................. 471,321 971,198 1,070,504 1,221,879
Net income ............................... 556,255 831,469 856,729 1,254,741
Basic and diluted earnings per share ..... .16 .15 .12 .12
Distributions per share .................. -- .20 .20 .20
</TABLE>
NOTE 8 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Numerator:
Net income numerator for basic and di-
luted earnings ............................. $3,499,194
Denominator:
Denominator for basic earnings per share-
weighted-average shares .................... 6,493,114
Effect of dilutive securities: stock options --
----------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions .................... 6,493,114
----------
Basic and diluted earnings per share ......... .54
----------
</TABLE>
NOTE 9 -- SUBSEQUENT EVENT
In January 1998, the company declared and paid a cash distributions to
shareholders of $1,953,243, of which $1,246,809 was reinvested through the
Additional Share Option. The company also closed the sale to investors of
2,905,289 shares at $10 per share, representing net proceeds after payment of
brokerage fees to the company of $26,147,598. In February 1998, the company
purchased Main Park Apartments, a 192-unit apartment community, and Timberglen
Apartments, a 304-unit apartment community. Both properties are located in
Dallas, Texas. Their purchase prices were $8 million and $12 million,
respectively.
F-12
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the year ended December 31,
1997 is presented as if (a) The company had qualified as a REIT, distributed all
of its taxable income and, therefore, incurred no federal income tax expense
during the period; and (b) The company had used proceeds from its best efforts
offering to acquire the properties. The pro forma information does not purport
to represent what the company's results of operations would have been if such
transactions, in fact, had occurred on January 1, 1997, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA TOTALS 1997
- -------------------------------------------- --------------
<S> <C>
Revenue ........................... $17,398,526
Net income ........................ 5,047,475
Basic earnings per share .......... .53
-----------
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of all the 1997 acquisitions for the respective period in 1997
prior to acquisition by the company. Net income has been adjusted as follows:
(1) Property management and advisory expenses have been adjusted based on the
company's contractual arrangements; and (2) Depreciation has been adjusted based
on the company's basis in the properties.
F-13
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Investment in rental property
Land ............................................................. $ 19,242,535 $ 15,396,823
Building and improvements ........................................ 95,914,449 73,113,886
Furniture and fixtures ........................................... 1,410,819 1,123,639
------------ ------------
116,567,803 89,634,348
Less accumulated depreciation ..................................... (2,787,548) (1,898,003)
------------ ------------
113,780,255 87,736,345
------------ ------------
Cash and cash equivalents ......................................... 36,601,110 24,162,572
Prepaid expenses .................................................. 90,784 142,581
Other assets ...................................................... 774,271 444,022
------------ ------------
37,466,165 24,749,175
------------ ------------
Total Assets ...................................................... $151,246,420 $112,485,520
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable .................................................. $ 355,938 $ 536,324
Accrued expenses .................................................. 2,143,818 2,143,888
Rents received in advance ......................................... 23,902 70,051
Tenant security deposits .......................................... 492,175 394,702
------------ ------------
Total Liabilities ................................................. 3,015,833 3,144,965
Shareholders' Equity
Common stock, no par value, authorized 50,000,000 shares; issued
and outstanding 16,708,817 shares and 12,371,829 shares, respec-
tively ........................................................... 148,058,824 109,090,459
Class B convertible stock, no par value, authorized 200,000 shares;
issued and outstanding 200,000 shares ............................ 20,000 20,000
Receivable from officer-shareholder ............................... (20,000) (20,000)
Net income greater than distributions ............................. 171,763 250,096
------------ ------------
148,230,587 109,340,555
------------ ------------
Total Liabilities and Shareholders' Equity ........................ $151,246,420 $112,485,520
============ ============
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
REVENUE:
Rental income ...................................... $4,928,751 $1,154,400
EXPENSES:
Property and maintenance ........................... 1,236,828 292,652
Taxes and insurance ................................ 738,151 106,098
Property management ................................ 257,038 60,663
General and administrative ......................... 162,873 73,335
Amortization ....................................... 8,484 8,476
Depreciation of rental property .................... 889,545 137,689
---------- ----------
Total expenses ................................... 3,292,919 678,913
---------- ----------
Income before interest income (expense) ............. 1,635,832 475,487
Interest income .................................... 336,387 84,935
Interest expense ................................... (12,501) (4,167)
---------- ----------
Net income .......................................... $1,959,718 $ 556,255
========== ==========
Basic and diluted earnings per common share ......... $ 0.14 $ 0.16
========== ==========
Distributions per common share ...................... $ 0.20 $ --
========== ==========
</TABLE>
See accompanying notes to financial statements
F-15
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE CLASS B
COMMON STOCK STOCK
---------------------------- ----------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
------------ --------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 .......... 12,371,829 $109,090,459 200,000 $20,000
Net proceeds from the sale of shares 4,212,296 37,846,237 -- --
Net income ........................... -- -- -- --
Cash distributions declared to
shareholders ($.203 per share) ...... -- -- -- --
Shares issued through reinvestment
of distributions .................... 124,681 1,122,128 -- --
---------- ------------ ------- -------
Balance at March 31, 1998 ............. 16,708,806 $148,058,824 200,000 $20,000
========== ============ ======= =======
<CAPTION>
RECEIVABLE
FROM NET INCOME TOTAL
PRINCIPAL GREATER THAN SHAREHOLDERS'
SHAREHOLDER DISTRIBUTIONS EQUITY
------------- --------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1997 .......... $ (20,000) $ 250,096 $109,340,555
Net proceeds from the sale of shares -- -- 37,846,237
Net income ........................... -- 1,959,718 1,959,718
Cash distributions declared to
shareholders ($.203 per share) ...... -- (2,038,051) (2,038,051)
Shares issued through reinvestment
of distributions .................... -- -- 1,122,128
--------- ------------- ------------
Balance at March 31, 1998 ............. $ (20,000) $ 171,763 $148,230,587
========= ============= ============
</TABLE>
See accompanying notes to financial statments.
F-16
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 1,959,718 $ 556,255
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ..................................... 898,029 146,165
Amortization of deferred financing costs .......................... 12,501 4,167
Changes in operating assets and liabilities:
Prepaid expenses .................................................. 51,797 (132,486)
Other assets ...................................................... (351,234) (751,257)
Accounts payable .................................................. (180,386) 508,843
Accrued expenses .................................................. (69,296) 589,338
Rent received in advance .......................................... (46,149) 19,241
Tenant security deposits .......................................... (962) 599
------------- -------------
Net cash provided by operating activities ........................ 2,274,018 940,865
Cash flow from investing activities:
Acquisitions of rental property, net of liabilities assumed ......... (25,160,351) (49,240,262)
Capital improvements ................................................ (1,595,174) (210,600)
------------- -------------
Net cash used in investing activities ............................ (26,755,525) (49,450,862)
Cash flow from financing activities:
Proceeds from short-term borrowings ................................. -- 10,000,000
Net proceeds from issuance of shares ................................ 38,958,096 39,893,637
Cash distributions paid to shareholders ............................. (2,038,051) --
------------- -------------
Net cash provided by financing activities ........................ 36,920,045 49,893,637
Increase in cash and cash equivalents ............................ 12,438,538 1,383,640
Cash and cash equivalents, beginning of period ....................... 24,162,572 100
------------- -------------
Cash and cash equivalents, end of period ............................. $ 36,601,110 $ 1,383,740
============= =============
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. These financial statements should
be read in conjunction with the Company's December 31, 1997 Annual Report on
Form 10-K.
All earnings per share amounts for all periods have been presented and where
appropriate, restated to conform to the Statement 128 requirements.
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company does not currently have any items of comprehensive income
requiring separate reporting and disclosure.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The Company purchased three properties located in the Dallas/Fort Worth area of
Texas for $24,525,000. The following is a summary of rental property acquired
during the three months ended March 31, 1998:
<TABLE>
<CAPTION>
INITIAL
DESCRIPTION ACQUISITION COST DATE
- ---------------------- ------------------ ---------------
<S> <C> <C>
Main Park ............ $ 8,000,000 February, 1998
Timberglen ........... 12,000,000 February, 1998
Copper Ridge ......... 4,525,000 March, 1998
</TABLE>
NOTE 3 -- NOTES PAYABLE
During 1997, the Company entered into an agreement with a commercial bank for an
unsecured revolving line of credit not to exceed $20 million to facilitate the
timely acquisition of properties. The line of credit expired on March 31, 1998
and has not been amended to extend the maturity date. Borrowings under the
agreement were evidenced by an unsecured promissory note and bore interest at
one-month LIBOR plus 200 basis points. As of March 31, 1998 there were no
outstanding borrowings under the line of credit.
F-18
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 4 -- RELATED PARTIES
Prior to March 1, 1997, the Company had contracted with Apple Residential
Management Group, Inc. (the "Management Company") to manage the acquired
properties, Apple Residential Advisors, Inc. (the "Advisor") to advise and
provide the Company with day to day management, and Apple Realty Group, Inc. to
acquire and dispose of real estate assets held by the Company. The Company paid
the Management Company a management fee equal to 5% of rental income plus
reimbursement of certain expenses in the amount of $52,375. The Company paid the
Advisor a fee equal to .25% of total contributions received by the Company in
the amount of $14,894. The Company paid Apple Realty Group, Inc. a fee of 2% of
the purchase price of the acquired properties in the amount of $624,382.
Effective March 1, 1997, with the approval of the Company, Cornerstone Realty
Income Trust Inc. ("Cornerstone"), for which Glade M. Knight (Chief Executive
Officer and Chairman of the Board of the Company) also serves as Chief Executive
Officer and Chairman, entered into subcontract agreements with the Management
Company and Advisor whereby Cornerstone will provide advisory and property
management services to the Company in exchange for fees and expense
reimbursement per the same terms described above. For the three months ended
March 31, 1998, the Company paid Cornerstone $351,534 under the agreements.
During 1997, with the consent of the Company, Cornerstone acquired all the
assets of Apple Realty Group, Inc. The sole material asset of the company was
the acquisition/disposition agreement with the Company. Cornerstone paid
$350,000 in cash and issued 150,000 common shares (valued at $11 per common
share for a total of $1,650,000) in exchange for the assignment of the rights to
the acquisition/disposition agreement. Cornerstone is entitled, under the terms
of the acquisition/disposition agreement, to a real estate commission equal to
2% of the gross purchase price of the Company's properties. For the three months
ended March 31, 1998, the Company paid Cornerstone approximately $490,500 under
the agreement.
During the first quarter of 1997, the Company granted Cornerstone a continuing
right to acquire up to 9.8% of the common shares of the Company at the market
price, net of selling commissions. In April 1997, Cornerstone purchased 417,778
common shares of the Company at $9 per share for approximately $3.76 million.
Cornerstone owns approximately 2.5% of the total common shares of the Company
outstanding as of March 31, 1998. Cornerstone intends to make periodic
evaluations of the advisability of purchasing additional common shares of the
Company and may make such purchases, if such purchases are deemed by the
Cornerstone board of directors to be in the best interests of Cornerstone and
its shareholders.
NOTE 5 -- EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1998 1997
--------------- --------------
<S> <C> <C>
Numerator:
Net income ..................................................... $ 1,959,718 $ 556,255
Numerator for basic and diluted earnings ....................... 1,959,718 556,255
Denominator:
Denominator for basic earnings per share-weighted average shares 13,882,117 3,403,759
Effect of dilutive securities:
Stock options .................................................. -- --
------------ -----------
Denominator for diluted earnings per share-adjusted weighted
average shares and assumed conversions ......................... 13,882,117 3,403,759
------------ -----------
Basic and diluted earnings per common share ..................... $ 0.14 $ 0.16
------------ -----------
</TABLE>
F-19
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 6 -- SUBSEQUENT EVENTS
During April 1998, the Company distributed to its shareholders approximately
$2,753,213 (20.4 cents per share) of which approximately $1,746,082 was
reinvested in the purchase of additional shares through the Additional Share
Option. During April 1998, the Company also closed the sale to investors of
933,431 shares at $10 per share representing net proceeds to the Company after
payment of brokerage fees of $8,400,876.
During May 1998, the Company purchased Bitter Creek Apartments, a 472-unit
apartment community located in Grand Prairie, Texas for $13,505,000.
NOTE 7 -- ACQUISITIONS
The following unaudited pro forma information for the three months ended March
31, 1998 and 1997 assumes the property acquisitions made during 1998 and 1997
were made by the Company on January 1 of the respective year and is presented as
if (a) the Company had qualified as a REIT, distributed at least 95% of its
taxable income and, therefore incurred no federal income tax expense during the
period, and (b) the Company had used proceeds from its best efforts offering to
acquire the properties. The pro forma information does not purport to represent
what the Company's results of operations would actually have been if such
transactions, in fact, had occurred on January 1, 1997, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, MARCH 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Rental income ................ $ 5,442,733 $ 5,432,343
Net income ................... $ 2,048,501 $ 1,761,932
Net income per share ......... $ .13 $ .13
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of the three acquisitions made in 1998 and the 12 acquisitions
made in 1997 for the respective periods in 1998 and 1997 prior to their
acquisition by the Company. Net income has been adjusted as follows: (1)
property management and advisory expenses have been adjusted based on the
Company's contractual arrangements of 5% of revenues from rental income plus
reimbursement of certain monthly expenses estimated to be $2.50 per unit; (2)
advisory expenses have been adjusted based on the Company's contractual
arrangement of .25% of annual gross proceeds of common stock raised; and (3)
depreciation has been adjusted based on the Company's allocation of purchase
price to buildings over an estimated useful life of 27.5 years.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Brookfield Apartments located in Dallas, Texas for the twelve month
period ended December 31, 1996. This statement is the responsibility of the
management of Brookfield Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Brookfield Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 19, 1997
F-21
<PAGE>
BROOKFIELD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,198,543
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 122,269
Insurance ...................................... 18,936
Repairs and Maintenance ........................ 174,233
Taxes, Property ................................ 133,700
Utilities ...................................... 92,664
----------
Total Direct Operating Expenses .............. 541,802
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 656,741
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Brookfield Apartments is a 232 unit residential garden style apartment complex
located on 6.936 acres in Dallas, Texas. Living space totals 165,544 square
feet.
During the financial statement period, the assets comprising the property were
owned by Paragon Group, L.P., an entity non-affiliated with Apple Residential
Income Trust, Inc. Apple Residential Income Trust, Inc. purchased the property
in January, 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization and
management fees.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Eagle Crest Apartments located in Irving, Texas for the twelve
month period ended December 31, 1996. This statement is the responsibility of
the management of Eagle Crest Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Eagle Crest Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 27, 1997
F-23
<PAGE>
EAGLE CREST APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $3,196,618
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 212,613
Insurance ...................................... 93,379
Repairs and Maintenance ........................ 379,120
Taxes, Property ................................ 345,167
Utilities ...................................... 305,101
----------
Total Direct Operating Expenses ............... 1,335,380
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ..................................... $1,861,238
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Eagle Crest Apartments is a residential garden style apartment complex
consisting of two phases totaling 484 units located on 17.88 acres in Irving,
Texas. Living space totals 429,300 square feet.
During the financial statement period, the assets comprising the property were
owned by entities not affiliated with Apple Residential Income Trust, Inc.
Apple Residential Income Trust, Inc. purchased the property on January 30,
1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization, legal and
professional and management fees.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Tahoe Apartments located in Arlington, Texas for the twelve month
period ended December 31, 1996. This statement is the responsibility of the
management of Tahoe Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Tahoe Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 11, 1997
F-25
<PAGE>
TAHOE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,200,270
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 118,781
Insurance ...................................... 30,606
Repairs and Maintenance ........................ 351,750
Taxes, Property ................................ 114,578
Utilities ...................................... 149,166
----------
Total Direct Operating Expenses ............... 764,881
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ..................................... $ 435,389
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Tahoe Apartments is a 240 unit residential garden style apartment complex
located on 17.88 acres in Arlington, Texas. Living space totals 160,928 square
feet.
During the financial statement period, the assets comprising the property were
owned by two separate entities, neither of which was affiliated with Apple
Residential Income Trust, Inc. Apple Residential Income Trust, Inc. purchased
the property on January 31, 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees and management
fees. Also, excluded are certain employee bonuses which one of the former owners
paid when they sold the apartment project.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Mill Crossing Apartments located in Arlington, Texas for the twelve
month period ended January 31, 1997. This statement is the responsibility of the
management of Mill Crossing Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Mill Crossing Apartments
(as defined above) for the twelve month period ended January 31, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 29, 1997
F-27
<PAGE>
MILL CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED JANUARY 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $ 908,336
---------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 102,522
Insurance ...................................... 23,714
Repairs and Maintenance ........................ 216,500
Taxes, Property ................................ 91,663
Utilities ...................................... 148,270
---------
Total Direct Operating Expenses ................ 582,669
---------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ....................................... $ 325,667
=========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Mill Crossing Apartments is a 184 unit garden style apartment complex located on
8 acres in Arlington, Texas. Living space totals 127,168 square feet.
During the financial statement period, the assets comprising the property were
owned by two separate entities, neither of which was affiliated with Apple
Residential Income Trust, Inc. Apple Residential Income Trust, Inc. purchased
the property in February 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization, legal fees
and management fees.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Polo Run Apartments located in Arlington, Texas for the twelve
month period ended February 28, 1997. This statement is the responsibility of
the management of Polo Run Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Polo Run Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
May 21, 1997
F-29
<PAGE>
POLO RUN APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,304,547
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 101,400
Insurance ...................................... 28,521
Repairs and Maintenance ........................ 257,602
Taxes, Property ................................ 133,509
Utilities ...................................... 128,924
----------
Total Direct Operating Expenses ................ 649,956
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ....................................... $ 654,591
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Polo Run Apartments is a 224 unit residential garden style apartment complex
located on 9.15 acres in Arlington, Texas.
During the financial statement period, the assets comprising the property were
owned by A V Polo Run Associates, Ltd. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation and management fees.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Wildwood Apartments located in Euless, Texas for the twelve month
period ended February 28, 1997. This statement is the responsibility of the
management of Wildwood Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Wildwood Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-31
<PAGE>
WILDWOOD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $ 809,555
---------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 110,035
Insurance ...................................... 15,246
Repairs and Maintenance ........................ 123,470
Taxes, Property ................................ 85,616
Utilities ...................................... 78,937
---------
Total Direct Operating Expenses ................ 413,304
---------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ....................................... $ 396,251
=========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Wildwood Apartments is a 120 unit garden style apartment complex located on
10.01 acres in Euless, Texas.
The assets comprising the property were owned by Western Rim Investors 1991-4,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Toscana Apartments located in Dallas, Texas for the twelve month
period ended February 28, 1997. This statement is the responsibility of the
management of Toscana Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Toscana Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-33
<PAGE>
TOSCANA APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,083,249
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 128,884
Insurance ...................................... 18,985
Repairs and Maintenance ........................ 117,117
Taxes, Property ................................ 123,710
Utilities ...................................... 84,886
----------
Total Direct Operating Expenses ................ 473,582
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ....................................... $ 609,667
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Toscana Apartments is a 192 unit garden style apartment complex located on 3.975
acres in Dallas, Texas.
The assets comprising the property were owned by Western Rim Investors 1993-2,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Arbors on Forest Ridge Apartments located in Bedford, Texas for
the twelve month period ended February 28, 1997. This statement is the
responsibility of the management of The Arbors on Forest Ridge Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Arbors on Forest Ridge
Apartments (as defined above) for the twelve month period ended February 28,
1997, in conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-35
<PAGE>
ARBORS ON FOREST RIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,381,014
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 111,636
Insurance ...................................... 34,263
Repairs and Maintenance ........................ 109,577
Taxes, Property ................................ 147,923
Utilities ...................................... 85,182
----------
Total Direct Operating Expenses ................ 488,581
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ....................................... $ 892,433
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Arbors on Forest Ridge Apartments is a 210 unit garden style apartment
complex located on 8.913 acres in Bedford, Texas.
The assets comprising the property were owned by Western Rim Investors 1992-5,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Cove Apartments located in Dallas, Texas for the twelve
month period ended May 31, 1997. This statement is the responsibility of the
management of Pace's Cove Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Pace's Cove Apartments (as
defined above) for the twelve month period ended May 31, 1997, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C. Richmond,
Virginia
July 22, 1997
F-37
<PAGE>
PACE'S COVE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ............................ $1,832,695
DIRECT OPERATING EXPENSES
Administrative and Other ........................... 237,030
Insurance .......................................... 42,627
Repairs and Maintenance ............................ 273,102
Taxes, Property .................................... 213,985
Utilities .......................................... 118,907
----------
Total Direct Operating Expenses .................... 885,651
----------
Operating income exclusive of items not comparable
to the proposed future operations of the property... $ 947,044
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Pace's Cove Apartments is a 328 unit garden style apartment complex located on
12.97 acres in Dallas, Texas. The assets comprising the property were owned by
Intercapital Portfolio 944 I Limited Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc. during the financial statement period.
Apple Residential Income Trust, Inc. subsequently purchased the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal and professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items of items not comparable to the proposed future
operations of the property Chaparosa Apartments located in Irving, Texas for the
twelve month period ended June 30, 1997. This statement is the responsibility of
the management of Chaparosa Apartments, Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Chaparosa Apartments (as
defined above) for the twelve month period ended June 30, 1997, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
September 24, 1997
F-39
<PAGE>
CHAPAROSA APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .......................... $1,374,365
----------
DIRECT OPERATING EXPENSES
Administrative and Other ......................... 187,182
Insurance ........................................ 18,284
Repairs and Maintenance .......................... 226,512
Taxes, Property .................................. 148,416
Utilities ........................................ 78,209
Total Direct Operating Expenses .................. 658,603
----------
Operating income exclusive of items not comparable
to the proposed future operations of the property. $ 715,762
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Chaparosa Apartments is a 170 unit garden and townhouse style apartment complex
located on 7.48 acres in Irving, Texas. The assets comprising the property were
owned by Hutton/Con Am Realty Pension Investors, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property in August, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are property depreciation and management
fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Riverhill Apartments located in Irving, Texas for the twelve month
period ended June 30, 1997, This statement is the responsibility of the
management of Riverhill Apartments, Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards,
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Riverhill Apartments (as
defined above) for the twelve month period ended June 30, 1997, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C. Richmond,
Virginia
September 24, 1997
F-41
<PAGE>
RIVERHILL APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................. $1,529,649
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................. 210,774
Insurance ................................ 20,274
Repairs and Maintenance .................. 254,466
Taxes, Property .......................... 192,345
Utilities ................................ 115,741
Total Direct Operating Expenses .......... 793,600
Operating income exclusive of items not
comparable to the proposed future
operations of the property................ $ 736,049
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Riverhill Apartments is a 192 unit garden and townhouse style apartment complex
located on 9.33 acres in Irving, Texas. The assets comprising the property were
owned by Riverhill Apartments Limited Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property in August, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property, Excluded expenses are property depreciation and management
fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period, Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Crossing Apartments located in Fort Worth, Texas for the
twelve month period ended October 31, 1997. This statement is the responsibility
of the management of Copper Crossing Apartments. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Copper Crossing Apartments
(as defined above) for the twelve month period ended October 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
December 16, 1997
F-43
<PAGE>
COPPER CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 987,109
---------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 138,305
Insurance .............................................. 32,363
Repairs and Maintenance ................................ 210,279
Taxes, Property ........................................ 92,700
Utilities .............................................. 109,793
---------
Total Direct Operating Expenses ........................ 583,440
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property ......... $ 403,669
=========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 1 -- ORGANIZATION
Copper Crossing Apartments is a 200 unit garden style apartment complex located
on 6.91 acres in Fort Worth, Texas. The assets comprising the property were
owned by Cooper Crossing Investors, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. subsequently purchased the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulations S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Main Park Apartments located in Duncanville, Texas for the twelve
month period ended December 31, 1997. This statement is the responsibility of
the management of Main Park Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Main Park Apartments (as
defined above) for the twelve month period ended December 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 25, 1998
F-45
<PAGE>
MAIN PARK APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $1,469,496
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 86,833
Insurance .............................................. 32,072
Repairs and Maintenance ................................ 242,402
Taxes, Property ........................................ 193,492
Utilities .............................................. 206,855
----------
Total Direct Operating Expenses ........................ 761,654
----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ......... $ 707,842
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION
Main Park Apartments is a 192 unit garden style apartment complex located on
10.44 acres in Duncanville, Texas. The assets comprising the property were owned
by an entity unaffiliated with Apple Residential Income Trust, Inc. during the
financial statement period. Apple Residential Income Trust, Inc.
purchased the property in February, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Timberglen Apartments located in Dallas, Texas for the twelve month
period ended December 31, 1997. This statement is the responsibility of the
management of Timberglen Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Timberglen Apartments (as
defined above) for the twelve month period ended December 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
April 6, 1998
F-47
<PAGE>
TIMBERGLEN APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .............................. $1,954,938
----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................. 164,562
Insurance ............................................ 31,252
Repairs and Maintenance .............................. 178,931
Taxes, Property ...................................... 226,907
Utilities ............................................ 134,278
----------
Total Direct Operating Expenses ...................... 735,930
----------
Operating income exclusive of items not comparable
to the proposed future operations of the property..... $1,219,008
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION
Timberglen Apartments is a 304 unit garden style apartment complex located on
10.47 acres in Dallas, Texas. The assets comprising the property were owned by
Timberglen Apartments, Ltd., an entity unaffiliated with Apple Residential
Income Trust, Inc., during the financial statement period. Apple Residential
Income Trust, Inc. purchased the property in February, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Ridge Apartments located in Fort Worth, Texas for the twelve
month period ended February 28, 1998. This statement is the responsibility of
the management of Copper Ridge Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Copper Ridge Apartments
(as defined above) for the twelve month period ended February 28, 1998, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 14, 1998
F-49
<PAGE>
COPPER RIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $914,447
--------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 147,011
Insurance ...................................... 19,847
Repairs and Maintenance ........................ 282,042
Taxes, Property ................................ 99,861
Utilities ...................................... 160,565
--------
Total Direct Operating Expenses ................ 709,326
--------
Operating income exclusive of items not
comparable to the proposed future operations of
the property ................................... $205,121
========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1998
NOTE 1 -- ORGANIZATION
Copper Ridge Apartments is a 200 unit garden style apartment complex located on
approximately 7.0 acres in Fort Worth, Texas. The assets comprising the property
were owned by Copper Limited Partnership, an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. purchased the property March 31, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Repairs and maintenance includes $25,963 paid to an affiliate for various work
performed at the property by the affiliate's employee staff.
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Bitter Creek Apartments located in Grand Prairie, Texas for the
twelve month period ended March 31, 1998. This statement is the responsibility
of the management of Bitter Creek Apartments. Our responsibility is to express
an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Bitter Creek Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-51
<PAGE>
BITTER CREEK APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 2,629,983
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 198,607
Insurance .............................................. 61,497
Repairs and Maintenance ................................ 392,935
Taxes, Property ........................................ 234,304
Utilities .............................................. 334,671
-----------
Total Direct Operating Expenses ........................ 1,222,014
-----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ......... $ 1,407,969
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Bitter Creek Apartments is a 472 unit garden style apartment complex located on
approximately 20.7 acres in Grand Prairie, Texas. The assets comprising the
property were owned by Bitter Creek L. P., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. purchased the property in May, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal and professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments located in Dallas, Texas for the twelve
month period ended May 31, 1998. This statement is the responsibility of the
management of Summer Tree Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Summer Tree Apartments (as
defined above) for the twelve month period ended May 31, 1998, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 16, 1998
F-53
<PAGE>
SUMMER TREE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................................. $ 1,212,080
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ................................. 163,234
Insurance ................................................ 32,628
Repairs and Maintenance .................................. 217,870
Taxes, Property .......................................... 118,845
Utilities ................................................ 104,723
-----------
Total Direct Operating Expenses ......................... 637,300
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property .............. $ 574,780
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
NOTE 1 -- ORGANIZATION
Summer Tree Apartments is a 232 unit garden style apartment complex located on
approximately 5.97 acres in Dallas, Texas. The assets comprising the property
were owned by Sunrise Enterprises, Inc., a Texas Corporation unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property on June 1, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal fees, management fees and franchise taxes.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Park Village Apartments located in Bedford, Texas for the twelve
month period ended May 31, 1998. This statement is the responsibility of the
management of Park Village Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Park Village Apartments
(as defined above) for the twelve month period ended May 31, 1998, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 17, 1998
F-55
<PAGE>
PARK VILLAGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MAY 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $1,282,097
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 133,724
Insurance .................................. 23,639
Repairs and Maintenance .................... 196,698
Taxes, Property ............................ 136,061
Utilities .................................. 118,510
----------
Total Direct Operating Expenses ............ 608,632
----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ............................ $ 673,465
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
NOTE 1 -- ORGANIZATION
Park Village Apartments is a 238 unit garden style apartment complex located on
approximately 9.97 acres in Bedford, Texas. The assets comprising the property
were owned by Park Village Investment Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property on July 1, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Cottonwood Crossing Apartments located in Arlington, Texas for the
twelve month period ended May 31, 1998. This statement is the responsibility of
the management of Cottonwood Crossing Apartments. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Cottonwood Crossing
Apartments (as defined above) for the twelve month period ended May 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 21, 1998
F-57
<PAGE>
COTTONWOOD CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MAY 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ............................. $1,130,293
----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................ 152,528
Insurance ........................................... 21,082
Repairs and Maintenance ............................. 171,801
Taxes, Property ..................................... 127,051
Utilities ........................................... 109,392
----------
Total Direct Operating Expenses ..................... 581,854
----------
Operating income exclusive of items not comparable to
the proposed future operations
of the property ..................................... $ 548,439
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
NOTE 1 -- ORGANIZATION
Cottonwood Crossing Apartments is a 200 unit garden style apartment complex
located on approximately 6.77 acres in Arlington, Texas. The assets comprising
the property were owned by Cottonwood Realty Associates, an entity unaffiliated
with Apple Residential Income Trust, Inc., during the financial statement
period. Apple Residential Income Trust, Inc. purchased the property July 9,
1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation
and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Point Apartments located in Lewisville, Texas for the twelve
month period ended March 31, 1998. This statement is the responsibility of the
management of Pace's Point Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Pace's Point Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-59
<PAGE>
PACE'S POINT APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $ 2,001,209
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 159,320
Insurance .................................. 33,013
Repairs and Maintenance .................... 275,296
Taxes, Property ............................ 212,334
Utilities .................................. 164,368
-----------
Total Direct Operating Expenses ............ 844,331
-----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ............................ $ 1,156,878
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 --- ORGANIZATION
Pace's Point Apartments is a 300 unit garden style apartment complex located on
approximately 12.623 acres in Lewisville, Texas. The assets comprising the
property were owned by Corporate Drive, L. P., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pepper Square Apartments located in Dallas, Texas for the twelve
month period ended March 31, 1998. This statement is the responsibility of the
management of Pepper Square Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Pepper Square Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
Richmond, Virginia
May 14, 1998
F-61
<PAGE>
PEPPER SQUARE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 915,474
---------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 81,772
Insurance .............................................. 26,467
Repairs and Maintenance ................................ 130,420
Taxes, Property ........................................ 103,718
Utilities .............................................. 55,426
---------
Total Direct Operating Expenses ........................ 397,803
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property ......... $ 517,671
=========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Pepper Square Apartments is a 144 unit garden style apartment complex located on
approximately 5.96 acres in Dallas, Texas. The assets comprising the property
were owned by Pepper Square Associates, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Emerald Oaks Apartments located in Grapevine, Texas for the twelve
month period ended March 31, 1998. This statement is the responsibility of the
management of Emerald Oaks Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Emerald Oaks Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-63
<PAGE>
EMERALD OAKS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 1,793,934
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 145,666
Insurance .............................................. 33,368
Repairs and Maintenance ................................ 185,844
Taxes, Property ........................................ 196,202
Utilities .............................................. 156,835
-----------
Total Direct Operating Expenses ........................ 717,915
-----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ......... $ 1,076,019
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Emerald Oaks Apartments is a 250 unit garden style apartment complex located on
approximately 13.55 acres in Grapevine, Texas. The assets comprising the
property were owned by New Emerald Texas, Ltd., an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Hayden's Crossing Apartments located in Grand Prairie, Texas for
the twelve month period ended March 31, 1998. This statement is the
responsibility of the management of Hayden's Crossing Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Hayden's Crossing
Apartments (as defined above) for the twelve month period ended March 31, 1998,
in conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-65
<PAGE>
HAYDEN'S CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $920,520
--------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 100,602
Insurance .................................. 20,159
Repairs and Maintenance .................... 123,227
Taxes, Property ............................ 85,371
Utilities .................................. 99,152
--------
Total Direct Operating Expenses ............ 428,511
--------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ............................ $492,009
========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Hayden's Crossing Apartments is a 170 unit garden style apartment complex
located on approximately 7.11 acres in Grand Prairie, Texas. The assets
comprising the property were owned by Hayden's Crossing Ltd., an entity
unaffiliated with Apple Residential Income Trust, Inc., during the financial
statement period. Apple Residential Income Trust, Inc. purchased the property in
1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-66
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Newport Apartments located in Austin, Texas for the twelve month
period ended March 31, 1998. This statement is the responsibility of the
management of Newport Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Newport Apartments (as
defined above) for the twelve month period ended March 31, 1998, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-67
<PAGE>
NEWPORT APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $1,177,562
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 142,510
Insurance .................................. 23,904
Repairs and Maintenance .................... 155,564
Taxes, Property ............................ 164,453
Utilities .................................. 104,973
----------
Total Direct Operating Expenses ............ 591,404
----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ............................ $ 586,158
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Newport Apartments is a 200 unit garden style apartment complex located on
approximately 6.64 acres in Austin, Texas. The assets comprising the property
were owned by New Emerald Texas, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-68
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Estrada Oaks Apartments located in Irving, Texas for the twelve
month period ended June 30, 1998. This statement is the responsibility of the
management of Estrada Oaks Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Estrada Oaks Apartments
(as defined above) for the twelve month period ended June 30, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 15, 1998
F-69
<PAGE>
ESTRADA OAKS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $1,650,389
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 136,212
Insurance .................................. 28,334
Repairs and Maintenance .................... 247,734
Taxes, Property ............................ 185,695
Utilities .................................. 98,819
----------
Total Direct Operating Expenses ............ 696,794
----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ............................ $ 953,595
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED JUNE 30, 1998
NOTE 1 -- ORGANIZATION
Estrada Oaks Apartments is a 248 unit garden style apartment complex located on
approximately 10.12 acres in Irving, Texas. The assets comprising the property
were owned by Dallas-Fort Worth Properties, Limited Partnership, an entity
unaffiliated with Apple Residential Income Trust, Inc., during the financial
statement period. The owner has contracted to sell the property to Apple
Residential Income Trust, Inc.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-70
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1998 (UNAUDITED)
The Unaudited Pro Forma Consolidated Statement of Operations for the three month
period ended March 31, 1998 is presented as if the three property acquisitions
on or prior to March 31, 1998, and the ten property acquisitions after March 31,
1998, had occurred on January 1, 1998. The Unaudited Pro Forma Consolidated
Statement of Operations assumes the Company qualifying as a REIT, distributing
at least 95% of its taxable income, and, therefore, incurring no federal income
tax liability for the period presented. In the opinion of management, all
adjustments necessary to reflect the effects of these transactions have been
made.
The Unaudited Pro Forma Consolidated Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
results of the Company would have been for the three month period ended March
31, 1998 if the acquisitions had occurred at the beginning of the period
presented, nor does it purport to be indicative of the results of operations in
future periods. The Unaudited Pro Forma Consolidated Statement of Operations
should be read in conjunction with, and is qualified in its entirety by, the
Company's respective historical financial statements and notes thereto.
<TABLE>
<CAPTION>
COPPER BITTER
HISTORICAL MAIN PARK TIMBERGLEN RIDGE CREEK
STATEMENT OF PRO FORMA PRO FORMA PRO FORMA PRO FORMA
OPERATIONS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
-------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION -- 2/4/98 2/13/98 3/31/98 5/8/98
- ------------------------------ -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income ................ $ 4,928,751 $ 122,458 $ 162,912 $ 228,612 $ 657,496
Rental expenses:
Property and mainte-
nance ....................... 1,236,828 44,674 39,814 147,405 231,553
Taxes and insurance ......... 738,151 18,797 21,513 29,927 73,950
Property management ......... 257,038 -- -- -- --
General and administra-
tive ........................ 162,873 -- -- -- --
Amortization ................ 8,484 -- -- -- --
Depreciation of rental
property .................... 889,545 -- -- -- --
----------- --------- --------- --------- ---------
Total expenses ............... 3,292,919 63,471 61,327 177,332 305,503
Income before interest in-
come (expense) .............. 1,635,832 58,987 101,585 51,280 351,993
Interest income .............. 336,387 -- -- -- --
Interest expense ............. (12,501) -- -- -- --
----------- --------- --------- --------- ---------
Net income ................... $ 1,959,718 $ 58,987 $ 101,585 $ 51,280 $ 351,993
Basic and diluted earnings
per common share ............ $ 0.14
Wgt. avg. number of com-
mon shares outstanding....... 13,882,117
<CAPTION>
SUMMER PARK HAYDEN'S PACE'S PEPPER
TREE VILLAGE COTTONWOOD CROSSING POINT SQUARE NEWPORT
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION 6/1/98 7/1/98 7/9/98 7/24/98 7/17/98 7/17/98 7/24/98
- ------------------------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income ................ $ 303,020 $ 320,524 $ 282,573 $ 230,130 $ 500,302 $ 228,869 $ 294,391
Rental expenses:
Property and mainte-
nance ....................... 121,457 112,233 108,430 80,745 149,746 66,905 100,762
Taxes and insurance ......... 37,868 39,925 37,033 26,383 61,337 32,546 47,089
Property management ......... -- -- -- -- -- -- --
General and administra-
tive ........................ -- -- -- -- -- -- --
Amortization ................ -- -- -- -- -- -- --
Depreciation of rental
property .................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total expenses ............... 159,325 152,158 145,463 107,128 211,083 99,451 147,851
Income before interest in-
come (expense) .............. 143,695 168,366 137,110 123,002 289,219 129,418 146,540
Interest income .............. -- -- -- -- -- -- --
Interest expense ............. -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income ................... $ 143,695 $ 168,366 $ 137,110 $ 123,002 $ 289,219 $ 129,418 $ 146,540
Basic and diluted earnings
per common share ............
Wgt. avg. number of com-
mon shares outstanding.......
<CAPTION>
EMERALD
OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- -------------------- -------------
DATE OF ACQUISITION 7/24/98 7/27/98 -- --
- ------------------------------ ------------- ------------- -------------------- -------------
<S> <C> <C> <C> <C>
Rental income ................ $ 448,484 $ 412,597 -- $ 9,121,119
Rental expenses:
Property and mainte-
nance ....................... 122,086 120,691 -- 2,683,329
Taxes and insurance ......... 57,393 53,507 -- 1,275,419
Property management ......... -- -- $ 230,763 (A) 487,801
General and administra-
tive ........................ -- -- 42,625 (B) 205,498
Amortization ................ -- -- -- 8,484
Depreciation of rental
property .................... -- -- 683,457 (C) 1,573,002
--------- --------- ------------- -----------
Total expenses ............... 179,479 174,198 956,845 6,233,533
Income before interest in-
come (expense) .............. 269,005 238,399 (956,845) 2,887,586
Interest income .............. -- -- (300,000)(D) 36,387
Interest expense ............. -- -- (458,277)(E) (470,778)
--------- --------- ------------- -----------
Net income ................... $ 269,005 $ 238,399 ($ 1,715,122) $ 2,453,195
Basic and diluted earnings
per common share ............ $ 0.13
Wgt. avg. number of com-
mon shares outstanding....... 5,080,448 (F) 18,962,565
</TABLE>
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period not owned by the Company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, for the period of time
not owned by the Company. The weighted average life of the property
depreciated was 27.5 years.
(D) Represents reduction of interest income to reflect use of cash ($24
million) used to purchase properties, based on Company's actual investment
income rate of 5%.
(E) Represents the interest expense for 5 of the 13 properties for the period
in which the properties were not owned for the three months period ended
March 31, 1998, interest was computed based on interest rates on the
properties debt that was assumed at acquisition.
(F) Represents additional common shares, after consideration of cash, assuming
the properties were acquired on January 1, 1998 with the net proceeds from
the "best efforts" offering of $10 per share (net $8.70 per share) (Also
see note D).
F-71
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1997 (UNAUDITED)
The Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 is presented as if the 12 property acquisitions during 1997
and the 13 property acquisitions during 1998 had occurred on January 1, 1997.
The Unaudited Pro Forma Consolidated Statement of Operations assumes the Company
qualifying as a REIT, distributing at least 95% of its taxable income, and,
therefore, incurring no federal income tax liability for the period presented.
In the opinion of management, all adjustments necessary to reflect the effects
of these transactions have been made.
The Unaudited Pro Forma Consolidated Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
results of the Company would have been for the year ended December 31, 1997 if
the acquisitions had occurred at the beginning of the period presented, nor does
it purport to be indicative of the results of operations in future periods. The
Unaudited Pro Forma Consolidated Statement of Operations should be read in
conjunction with, and is qualified in its entirety by, the Company's respective
historical financial statements and notes thereto.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
STATEMENT OF 1997 PRO FORMA BEFORE 1998
OPERATIONS ACQUISITIONS(F) ADJUSTMENTS ACQUISITIONS
-------------- ----------------- -------------------- --------------
DATE OF ACQUISITION
- --------------------------------------------
<S> <C> <C> <C> <C>
Rental income .............................. $12,005,968 $ 5,392,558 -- $17,398,526
Rental expenses:
Property and maintenance .................. 3,571,484 1,982,189 -- 5,553,673
Taxes and insurance ....................... 1,765,741 706,939 -- 2,472,680
Property management ....................... 656,267 -- $ 295,813 (A) 952,080
General and administrative ................ 351,081 -- 67,262 (B) 418,343
Amortization .............................. 28,490 -- -- 28,490
Depreciation of rental property ........... 1,898,003 -- 792,074 (C) 2,690,077
----------- ----------- ----------- -----------
Total expenses ............................. 8,271,066 2,689,128 1,155,149 12,115,343
Income before interest income (expense) 3,734,902 2,703,430 (1,155,149) 5,283,183
Interest income ............................ 222,676 -- -- 222,676
Interest expense ........................... (458,384) -- -- (458,384)
----------- ----------- ----------- -----------
Net income ................................. $ 3,499,194 $ 2,703,430 ($ 1,155,149) $ 5,047,475
Basic and diluted earnings per common
share ..................................... $ 0.54 $ 0.53
-----------
Wgt. avg. number of common shares out-
standing .................................. 6,493,114 3,106,405 (E) 9,599,519
<CAPTION>
COPPER BITTER SUMMER
MAIN PARK TIMBERGLEN RIDGE CREEK TREE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTEMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- -------------- ------------- ------------- --------------
DATE OF ACQUISITION 2/4/98 2/13/98 3/31/98 5/8/98 6/1/98
- -------------------------------------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income .............................. $ 1,469,496 $ 1,954,938 $ 914,447 $ 2,629,983 $ 1,212,080
Rental expenses:
Property and maintenance .................. 536,090 477,771 589,618 926,213 485,827
Taxes and insurance ....................... 225,564 258,159 119,708 295,801 151,473
Property management ....................... -- -- -- -- --
General and administrative ................ -- -- -- -- --
Amortization .............................. -- -- -- -- --
Depreciation of rental property ........... -- -- -- -- --
----------- ----------- --------- ----------- -----------
Total expenses ............................. 761,654 735,930 709,326 1,222,014 637,300
Income before interest income (expense) 707,842 1,219,008 205,121 1,407,969 574,780
Interest income ............................ -- -- -- -- --
Interest expense ........................... -- -- -- -- --
----------- ----------- --------- ----------- -----------
Net income ................................. $ 707,842 $ 1,219,008 $ 205,121 $ 1,407,969 $ 574,780
Basic and diluted earnings per common
share .....................................
Wgt. avg. number of common shares out-
standing ..................................
</TABLE>
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period not owned by the Company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, for the period of time
not owned by the Company. The weighted average life of the property
depreciated was 27.5 years.
(D) Represents the interest expense for 5 of the 13 properties for the period in
which the properties were not owned for the three months period ended March
31, 1998, interest was computed based on interest rates on the properties
debt that was assumed at acquisition.
(E) Represents additional common shares assuming the properties were acquired on
January 1, 1997 with the net proceeds from the "best efforts" offering of $9
per share (net $7.83 per share) for the first $15 million and $10 per share
(net $8.70 per share) above $15 million.
(F) Represents properties acquired during 1997 for the period of time during
1997 not owned by the company, see page F-74.
F-72
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PARK HAYDENS PACE'S PEPPER
VILLAGE COTTONWOOD CROSSING POINT SQUARE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
DATE OF ACQUISITION 7/1/98 7/9/98 7/24/98 7/17/98 7/17/98
- -------------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income .................................... $ 1,282,097 $ 1,130,293 $ 920,520 $ 2,001,209 $ 915,474
Rental expenses:
Property and maintenance ........................ 448,932 433,721 322,981 598,984 267,618
Taxes and insurance ............................. 159,700 148,133 105,530 245,347 130,185
Property management ............................. -- -- -- -- --
General and administrative ...................... -- -- -- -- --
Amortization .................................... -- -- -- -- --
Depreciation of rental property ................. -- -- -- -- --
----------- ----------- --------- ----------- ---------
Total expenses ................................... 608,632 581,854 428,511 844,331 397,803
Income before interest income (expense) .......... 673,465 548,439 492,009 1,156,878 517,671
Interest income .................................. -- -- -- -- --
Interest expense ................................. -- -- -- -- --
- -------------------------------------------------- ----------- ----------- --------- ----------- ---------
Net income ....................................... $ 673,465 $ 548,439 $ 492,009 $ 1,156,878 $ 517,671
Basic and diluted earnings per common share ......
Wgt. avg. number of common shares outstanding.....
<CAPTION>
EMERALD
NEWPORT OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENT ADJUSTMENTS
------------- ------------- -------------- ----------------------
DATE OF ACQUISITION 7/24/98 7/24/98 7/27/98 --
- -------------------------------------------------- ------------- ------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Rental income .................................... $ 1,177,562 $ 1,793,934 $ 1,650,389 --
Rental expenses:
Property and maintenance ........................ 403,047 488,345 482,765 --
Taxes and insurance ............................. 188,357 229,570 214,029
Property management ............................. -- -- -- $ 1,047,121 (A)
General and administrative ...................... -- -- -- 204,500 (B)
Amortization .................................... -- -- -- --
Depreciation of rental property ................. -- -- -- 3,155,180 (C)
----------- ----------- ----------- --------------
Total expenses ................................... 591,404 717,915 696,794 4,406,801
Income before interest income (expense) .......... 586,158 1,076,019 953,595 (4,406,801)
Interest income .................................. -- -- -- --
Interest expense ................................. -- -- -- (1,833,108)(D)
- --------------------------------------------------- ----------- ----------- ----------- --------------
Net income ....................................... $ 586,158 $ 1,076,019 $ 953,595 ($ 6,239,909)
Basic and diluted earnings per common share ......
Wgt. avg. number of common shares outstanding..... 9,402,287 (E)
<CAPTION>
TOTAL
PRO FORMA
DATE OF ACQUISITION --
- -------------------------------------------------- --------------
<S> <C>
Rental income .................................... $ 36,450,948
Rental expenses:
Property and maintenance ........................ 12,015,585
Taxes and insurance ............................. 4,944,236
Property management ............................. 1,999,201
General and administrative ...................... 622,843
Amortization .................................... 28,490
Depreciation of rental property ................. 5,845,257
------------
Total expenses ................................... 25,455,612
Income before interest income (expense) .......... 10,995,336
Interest income .................................. 222,676
Interest expense ................................. (2,291,492)
- --------------------------------------------------- ------------
Net income ....................................... $ 8,926,520
Basic and diluted earnings per common share ...... $ 0.47
Wgt. avg. number of common shares outstanding..... 19,001,806
</TABLE>
F-73
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (CONT.)
The following schedule provides detail of 1997 acquisitions by property included
in the Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
BROOKFIELD EAGLE CREST ASPEN HILLS MILL CROSSING POLO RUN WILDWOOD
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
DATE OF ACQUISITIONS 1/31/97 1/31/97 1/31/97 2/28/97 03/31/97 03/31/97
- ----------------------------------- ------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income ..................... $99,879 $266,385 $100,023 $151,389 $326,137 $202,389
Expenses
Property and maintenance ......... 32,430 74,735 51,643 77,882 121,983 78,111
Taxes and insurance .............. 12,720 36,546 12,099 19,230 40,508 25,216
Property management .............. -- -- -- -- -- --
General and administrative........ -- -- -- -- -- --
Depreciation of real estate....... -- -- -- -- -- --
Amortization ..................... -- -- -- -- -- --
------- -------- -------- -------- -------- --------
45,150 111,281 63,742 97,112 162,491 103,327
Income before interest income...... 54,729 155,104 36,281 54,277 163,646 99,062
Interest income ................... -- -- -- -- -- --
Interest expense .................. -- -- -- -- -- --
------- -------- -------- -------- -------- --------
Net income ........................ $54,729 $155,104 $ 36,281 $ 54,277 $163,646 $ 99,062
<CAPTION>
COPPER
TOSCANA THE ARBORS PACES COVE CHAPAROSA RIVERHILL CROSSING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITIONS 03/31/97 4/25/97 6/30/97 8/6/97 8/6/97 11/25/97
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income ..................... $270,812 $460,338 $916,348 $ 801,713 $ 892,295 $ 904,850
Expenses
Property and maintenance ......... 82,722 102,132 314,521 286,943 338,906 420,181
Taxes and insurance .............. 35,674 60,729 128,306 97,242 124,028 114,641
Property management .............. -- -- -- -- -- --
General and administrative........ -- -- -- -- -- --
Depreciation of real estate....... -- -- -- -- -- --
Amortization ..................... -- -- -- -- -- --
-------- -------- -------- --------- --------- ---------
118,396 162,861 442,827 384,185 462,934 534,822
Income before interest income. 152,416 297,477 473,521 417,528 429,361 370,028
Interest income ................... -- -- -- -- -- --
Interest expense .................. -- -- -- -- -- --
-------- -------- -------- --------- --------- ---------
Net income ........................ $152,416 $297,477 $473,521 $ 417,528 $ 429,361 $ 370,028
<CAPTION>
TOTAL
PRO FORMA
-------------
DATE OF ACQUISITIONS
- -----------------------------------
<S> <C>
Rental income ..................... $5,392,558
Expenses
Property and maintenance ......... 1,982,189
Taxes and insurance .............. 706,939
Property management .............. 0
General and administrative........ 0
Depreciation of real estate....... 0
Amortization ..................... 0
----------
2,689,128
Income before interest income. 2,703,430
Interest income ................... 0
Interest expense .................. 0
----------
Net income ........................ $2,703,430
</TABLE>
F-74
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (UNAUDITED)
The accompanying Unaudited Pro Forma Consolidated Balance Sheet as of March 31,
1998 is presented as if the Company had owned the properties included in the
table below as of March 31, 1998. In the opinion of management all adjustments
necessary to reflect the effects of the Offering have been made.
The Unaudited Pro Forma Consolidated Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual financial
position of the Company would have been at March 31, 1998, nor does it purport
to represent the future financial position of the Company. This Unaudited Pro
Forma Consolidated Balance Sheet should be read in conjunction with, and is
qualified in its entirety by, the Company's respective historical financial
statements and notes thereto.
<TABLE>
<CAPTION>
BITTER SUMMER
HISTORICAL CREEK TREE
BLANCE PRO FORMA PRO FORMA
SHEET ADJUSTMENTS ADJUSTMENTS
----------------- ---------------- ---------------
DATE OF ACQUISITION 5/8/98 6/1/98
- -------------------------------------- ---------------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in rental property
Land ................................ $ 19,242,535 $ 3,168,273 $ 3,023,280
Building and improvements ........... 95,914,449 10,606,827 2,790,720
Furniture and fixtures .............. 1,410,819 -- --
------------- -------------- ------------
116,567,803 13,775,100 5,814,000
Less accumulated depreciation........ (2,787,548) -- --
------------- -------------- ------------
113,780,255 13,775,100 5,814,000
Cash and cash equivalents ........... 36,601,110 (13,775,100) (5,814,000)
Prepaid expenses .................... 90,784 -- --
Other assets ........................ 774,271 -- --
------------- -------------- ------------
37,466,165 (13,775,100) (5,814,000)
------------- -------------- ------------
Total Assets ......................... $ 151,246,420 $ -- $ --
============= ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable ....................... -- -- --
Accounts payable .................... $ 355,938 -- --
Accrued expenses .................... 2,143,818 -- --
Rents received in advance ........... 23,902 -- --
Tenant security deposits ............ 492,175 -- --
------------- -------------- ------------
3,015,833 -- --
Shareholders' equity
Common stock ........................ 148,058,824 -- --
Class B convertible stock ........... 20,000 -- --
Receivable from officer-
shareholder ......................... (20,000) -- --
Distributions greater than net in-
come ................................ 171,763 -- --
------------- -------------- ------------
148,230,587 -- --
------------- -------------- ------------
Total Liabilities and Sharehold-
ers' Equity ......................... $ 151,246,420 $ -- $ --
============= ============== ============
<CAPTION>
PARK HAYDEN'S PACE'S PEPPER
VILLAGE COTTONWOOD CROSSING POINT SQUARE NEWPORT
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
--------------- --------------- ------------- --------------- ------------- -------------
DATE OF ACQUISITION 7/1/98 7/9/98 7/24/97 7/17/98 7/17/98 7/24/98
- -------------------------------------- --------------- --------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in rental property
Land ................................ $ 856,800 $ 465,120 $ 1,042,283 $ 1,951,401 $ 1,675,594 $ 511,658
Building and improvements ........... 6,283,200 5,348,880 3,695,369 9,527,427 3,560,637 5,884,065
Furniture and fixtures .............. -- -- -- -- -- --
------------- ------------- ----------- ------------ ----------- -----------
7,140,000 5,814,000 4,737,652 11,478,828 5,236,231 6,395,723
Less accumulated depreciation........ -- -- -- -- -- --
------------- ------------- ----------- ------------ ----------- -----------
7,140,000 5,814,000 4,737,652 11,478,828 5,236,231 6,395,723
Cash and cash equivalents ........... (7,140,000) (5,814,000) -- -- -- --
Prepaid expenses .................... -- -- -- -- -- --
Other assets ........................ -- -- -- -- -- --
------------- ------------- ----------- ------------ ----------- -----------
(7,140,000) (5,814,000) -- -- -- --
------------- ------------- ----------- ------------ ----------- -----------
Total Assets ......................... $ -- $ -- $ 4,737,652 $ 11,478,828 $ 5,236,231 $ 6,395,723
============= ============= =========== ============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable ....................... -- -- $ 3,072,399 $ 7,713,617 $ 3,643,424 $ 3,043,873
Accounts payable .................... -- -- -- -- -- --
Accrued expenses .................... -- -- -- -- -- --
Rents received in advance ........... -- -- -- -- -- --
Tenant security deposits ............ -- -- -- -- -- --
------------- ------------- ----------- ------------ ----------- -----------
-- -- 3,072,399 7,713,617 3,643,424 3,043,873
Shareholders' equity
Common stock ........................ -- -- 1,665,253 3,765,211 1,592,807 3,351,850
Class B convertible stock ........... -- -- -- -- -- --
Receivable from officer-
shareholder ......................... -- -- -- -- -- --
Distributions greater than net in-
come ................................ -- -- -- -- -- --
------------- ------------- ----------- ------------ ----------- -----------
-- -- 1,665,253 3,765,211 1,592,807 3,351,850
------------- ------------- ----------- ------------ ----------- -----------
Total Liabilities and Sharehold-
ers' Equity ......................... $ -- $ -- $ 4,737,652 $ 11,478,828 $ 5,236,231 $ 6,395,723
============= ============= =========== ============ =========== ===========
<CAPTION>
EMERALD
OAKS ESTRADA
PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------------- ------------- -----------------
DATE OF ACQUISITION 7/24/98 7/27/97
- -------------------------------------- --------------- -------------
<S> <C> <C> <C>
ASSETS
Investment in rental property
Land ................................ $ 881,191 $ 1,812,030 $ 34,630,165
Building and improvements ........... 10,133,695 7,724,970 161,470,239
Furniture and fixtures .............. -- -- 1,410,819
------------ ----------- -------------
11,014,886 9,537,000 197,511,223
Less accumulated depreciation........ -- -- (2,787,548)
------------ ----------- -------------
11,014,886 9,537,000 194,723,675
Cash and cash equivalents ........... -- -- 4,058,010
Prepaid expenses .................... -- -- 90,784
Other assets ........................ -- -- 774,271
------------ ----------- -------------
-- -- 4,923,065
------------ ----------- -------------
Total Assets ......................... $ 11,014,886 $ 9,537,000 $ 199,646,740
============ =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable ....................... $ 6,685,706 -- $ 24,159,019
Accounts payable .................... -- -- 355,938
Accrued expenses .................... -- -- 2,143,818
Rents received in advance ........... -- -- 23,902
Tenant security deposits ............ -- -- 492,175
------------ ----------- -------------
6,685,706 -- 27,174,852
Shareholders' equity
Common stock ........................ 4,329,180 9,537,000 172,300,125
Class B convertible stock ........... -- -- 20,000
Receivable from officer-
shareholder ......................... -- -- (20,000)
Distributions greater than net in-
come ................................ -- -- 171,763
------------ ----------- -------------
4,329,180 9,537,000 172,471,888
------------ ----------- -------------
Total Liabilities and Sharehold-
ers' Equity ......................... $ 11,014,886 $ 9,537,000 $ 199,646,740
============ =========== =============
</TABLE>
Notes to Pro Forma Balance Sheet
Pro Forma adjustments represent the purchase price of the related property,
including the 2% acquisition fee to Cornerstone Realty Income Trust, Inc.
allocated between land and building. Adjustments to cash and common stock
reflect the use of net proceeds from sales of common stock from the Company's
continuous offering to purchase properties. Adjustments to notes payable reflect
the debt assumed on 5 of the 13 acquistions.
F-75
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection
with the issuance and distribution of the securities to be registered:
<TABLE>
<S> <C>
SEC registration fee ................. $ 86,208
NASD filing fee ...................... 25,500
Printing and engraving fees .......... 300,000
Legal fees and expenses .............. 350,000
Accounting fees and expenses ......... 200,000
Blue Sky fees and expense ............ 50,000
Escrow agent and registrar ........... 20,000
Registrant travel expense ............ 30,000
Marketing Expense Allowance .......... 6,250,000
Contingency .......................... 38,292
----------
Total ............................... $7,350,000
==========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. for $100 cash.
On February 10, 1997, in response to a request from Cornerstone Realty
Income Trust, Inc. ("Cornerstone"), the Registrant's Board of Directors
authorized the grant to Cornerstone of a continuing right to purchase such
number of Common Shares of the Registrant as would, following any such purchase,
be up to but not in excess of 9.8% of the total number of Common Shares of the
Registrant then outstanding. This right will continue for so long as the
Registrant's offering pursuant to this registration statement, as amended,
continues, and the purchase price for such Common Shares under such right will
be the current public offering price less the Selling Commissions and Marketing
Expense Allowance payable with respect thereto. Shares sold to Cornerstone
pursuant to this right would be in addition to, and not part of, the offering
made pursuant to this registration statement, as amended.
On April 25, 1997, Cornerstone exercised the right described above and
purchased 417,778 Common Shares of the Company for approximately $3.76 million.
Cornerstone owned approximately 2.1% of the Common Shares of the Company
outstanding on June 30, 1998.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. for $100 cash, in a transaction that was exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
On November 14, 1996, the Registrant sold 200,000 Class B Convertible Shares to
Glade M. Knight for $20,000 cash, in a transaction that was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
The Company's Registration Statement on Form S-11 (File No. 333-10635) was
originally declared effective by the Securities and Exchange Commission on
November 19, 1996, and on that date the Company commenced an on-going
best-efforts offering (the Offering") of its Common Shares, no par value. The
managing underwriter is David Lerner Associates, Inc. The Offering is continuing
as of the date of filing this Post-Effective Amendment. All of the Common Shares
are being sold for the account of the Company.
II-1
<PAGE>
The following tables set forth information concerning the Offering and the
use of proceeds from the Offering as of March 31, 1998:
<TABLE>
<CAPTION>
COMMON SHARES REGISTERED:
--------------------------
<S> <C> <C> <C> <C>
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
23,500,000.00 Common Shares $10 per Common Share $ 235,000,000
Totals: 25,166,666.67 Common Shares
</TABLE>
<TABLE>
<CAPTION>
COMMON SHARES SOLD:
--------------------
<S> <C> <C> <C> <C>
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
14,624,361.33 Common Shares $10 per Common Share $ 146,243,613
Totals: 16,291,028.00 Common Shares $ 161,243,616
</TABLE>
<TABLE>
<S> <C>
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 16,124,362
2. Expenses of underwriters $ --
3. Direct or indirect payments to directors or officers of the
Company or their associates, to ten percent shareholders, or
to affiliates of the Company $ --
4. Fees and expenses of third parties $ 820,430
Total Expenses of Issuance and Distribution of Common
Shares $ 16,944,792
Net Proceeds to the Company $144,298,824
1. Purchase of real estate (including repayment of indebted-
ness incurred to purchase real estate) $103,661,452
2. Interest on indebtedness $ 470,885
3. Working capital $ 36,409,371
4. Fees to the following (all affiliates of officers of the Compa-
ny):
a. Apple Advisors, Inc. $ 14,894
b. Apple Realty Group, Inc. $ 624,382
c. Cornerstone Realty Income Trust, Inc. $ 3,117,840
5. Fees and expenses of third parties:
a. Legal $ --
b. Accounting $ --
6. Other (specify ___________) $ --
Total of Application of Net Proceeds to the Company $144,298,824
</TABLE>
In addition to the foregoing, on April 25, 1997, the Company sold to
Cornerstone Realty Income Trust, Inc. 417,778 Common Shares at $9.00 per Common
Share (total proceeds of $3,760,000) in a transaction not involving any public
offering within the meaning of Section 4(2) of the Securities Act of 1933. The
offer and sale of these Common Shares was effectuated on a negotiated basis to
an accredited institutional investor satisfying the standard described in Rule
506(b)(2)(ii) under the Securities Act of 1933. No underwriting discounts or
commissions were paid in connection with this sale of Common Shares.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
II-2
<PAGE>
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The Registrant's Articles of
Incorporation, as permitted by the Virginia Act, eliminate the damages that may
be assessed against a director or officer of the Registrant in a shareholder or
derivative proceeding. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws. Reference also is made to the indemnification provisions
set forth in the form of Agency Agreement filed as Exhibit 1 hereto.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
ITEM 35. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Financial Statements in the
Prospectus and Supplement No. 11 for the financial statements which are
included in the Prospectus and in Supplement No. 11, respectively.
(b) Financial Statement Schedules: Schedule III -- Real Estate and
Accumulated Depreciation.
All other financial statement schedules have been omitted because they
are not applicable or not required or because the required information is
included elsewhere in the financial statements or notes thereto.
II-3
<PAGE>
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
SUBSEQUENTLY
INITIAL COST CAPITALIZED GROSS AMOUNT CARRIED
----------------------------- --------------------- -----------------------------
ENCUM-
DESCRIPTION BRANCES LAND BLDG. & IMPR. IMPR. LAND BLDG. & IMPR.
- ---------------------------- --------- ------------- --------------- --------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1) Brookfield $0 $ 1,146,282 $ 4,312,203 $ 487,814 $ 1,203,420 $ 4,742,879
Dallas, TX
Multi-family housing
2) Eagle Crest $0 $ 2,973,500 $12,676,500 $ 1,649,740 $ 3,077,332 $14,222,408
Irving, TX
Multi-family housing
3) Tahoe Apartments $0 $ 1,081,206 $ 4,609,354 $ 950,667 $ 1,128,570 $ 5,512,657
Arlington, TX
Multi-family housing
4) Mill Crossing $0 $ 772,501 $ 3,771,620 $ 502,787 $ 802,354 $ 4,244,554
Arlington, TX
Multi-family housing
5) Polo Run $0 $ 891,667 $ 5,967,307 $ 686,189 $ 935,852 $ 6,609,311
Arlington, TX
Multi-family housing
6) Wildwood Apartments $0 $ 832,339 $ 3,131,180 $ 426,223 $ 880,841 $ 3,508,901
Euless, TX
Multi-family housing
7) Toscana Apartments $0 $ 819,634 $ 5,034,897 $ 367,692 $ 858,233 $ 5,363,990
Dallas, TX
Multi-family housing
8) Arbors on Forest Ridge $0 $ 697,402 $ 7,051,505 $ 566,766 $ 727,692 $ 7,587,981
Bedford, TX
Multi-family housing
9) Paces Cove $0 $ 1,948,245 $ 7,329,110 $ 259,204 $ 1,838,745 $ 7,697,814
Dallas, TX
Multi-family housing
10) Remington Hills $0 $ 3,144,000 $ 9,956,000 $ 715,064 $ 3,061,324 $10,753,740
Irving, TX
Multi-family housing
11) Copper Crossing $0 $ 855,000 $ 3,895,000 $ 125,750 $ 882,460 $ 3,993,290
Fort Worth, TX
Multi-family housing
$15,161,775 $67,734,677 $ 6,737,896 (2) $15,396,823 $74,237,525
=========== =========== ============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DATE OF DATE
DESCRIPTION TOTAL ACC. DEP. CONST. ACQUIRED DEP. LIFE
- ---------------------------- ---------------------- ------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C>
1) Brookfield $ 5,946,299 $ 166,694 1984 Jan. 28, 1997 27.5 yrs.
Dallas, TX
Multi-family housing
2) Eagle Crest $ 17,299,740 $ 483,740 1985 Jan. 30, 1997 27.5 yrs.
Irving, TX
Multi-family housing
3) Tahoe Apartments $ 6,641,227 $ 199,049 1979 Jan. 31, 1997 27.5 yrs.
Arlington, TX
Multi-family housing
4) Mill Crossing $ 5,046,908 $ 136,519 1979 Feb. 21, 1997 27.5 yrs.
Arlington, TX
Multi-family housing
5) Polo Run $ 7,545,163 $ 191,302 1984 Mar. 31, 1997 27.5 yrs.
Arlington, TX
Multi-family housing
6) Wildwood Apartments $ 4,389,742 $ 98,645 1984 Mar. 31, 1997 27.5 yrs.
Euless, TX
Multi-family housing
7) Toscana Apartments $ 6,222,223 $ 147,777 1986 Mar. 31, 1997 27.5 yrs.
Dallas, TX
Multi-family housing
8) Arbors on Forest Ridge $ 8,315,673 $ 187,034 1986 Apr. 25, 1997 27.5 yrs.
Bedford, TX
Multi-family housing
9) Paces Cove $ 9,536,559 $ 141,850 1982 June 24, 1997 27.5 yrs.
Dallas, TX
Multi-family housing
10) Remington Hills $ 13,815,064 $ 133,270 1985 Aug. 6, 1997 27.5 yrs.
Irving, TX
Multi-family housing
11) Copper Crossing $ 4,875,750 $ 12,123 1981 Nov. 25, 1997 27.5 yrs.
Fort Worth, TX
Multi-family housing
$ 89,634,348 (1) $1,898,003
============= ==========
</TABLE>
(Footnotes on next page)
II-4
<PAGE>
(Footnotes for preceding page)
- ----------
(1) Represents the aggregate cost for Federal Income tax purposes.
(2) Included real estate commissions, closing costs and improvements
capitalized since the date of acquisition.
(3) The following is a reconciliation of the carrying amount of real estate
owned:
<TABLE>
<S> <C>
Balance at January 1, 1997 .................... $ 0
Real estate purchased ......................... 84,147,726
Improvements, furniture and fixtures .......... 3,606,088
-----------
Balance at December 31, 1997 .................. $87,753,814
===========
</TABLE>
(4) The following is a reconciliation of accumulated depreciation:
<TABLE>
<S> <C>
Balance at January 1, 1997 ........... $ 0
Depreciation expense ................. 1,898,003
----------
Balance at December 31,1997 .......... $1,898,003
==========
</TABLE>
(c) Exhibits. Except as noted, the Exhibits have been previously filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
<S> <C>
1.1 Agency Agreement between the Registrant and David Lerner Associates, Inc. with form of
Selected Dealer Agreement attached as Exhibit A thereto.
1.2 Escrow Agreement among the Registrant, First Union National Bank of North Carolina and
David Lerner Associates, Inc.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Articles of Amendment to the Articles of Incorporation of the Registrant.
3.4 Articles of Amendment to the Articles of Incorporation of the Registrant.
3.5 Amended and Restated Bylaws of the Registrant (Amended and Restated through Decem-
ber 19, 1997).
4.1 Loan Agreement dated as of March 1, 1997, by and between Apple
Residential Income Trust, Inc. and First Union National Bank of
Virginia.
4.2 Amendment to Loan Agreement dated as of August 1, 1997, by and between Apple Resi-
dential Income Trust, Inc. and First Union National Bank of Virginia.
4.3 Amended and Restated Promissory Note dated August 1, 1997, from Apple
Residential Income Trust, Inc. to the order of First Union National
Bank of Virginia.
4.4 Instruments Defining the Rights of Lenders (with respect to the Pace's
Point, Pepper Square, Emerald Oaks, Hayden's Crossing and Newport
Apartments). (Incorporated by reference to Exhibit 4 to Current Report
on Form 8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.;
File No. 0-23983).
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality
of the securities being registered.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
10.1 Advisory Agreement between the Registrant and Apple Residential Advisors, Inc.
10.2 Form of Property Management Agreement between the Registrant and Apple Residential
Management Group, Inc.
10.3 Property Acquisition/Disposition Agreement between the Registrant and Apple Realty
Group, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------------- -----------------------------------------------------------------
<S> <C>
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors
Stock Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement.
10.8 Advisory Agreement Subcontract among the Registrant, Apple
Residential Advisors, Inc. and Cornerstone Realty Income Trust,
Inc. Incorporated herein by reference to Exhibit 10.4 to Form S-3
of Cornerstone Realty Income Trust, Inc. (File No. 333-23693)
filed on March 20, 1997.
10.9 Property Management Agreement Subcontract among the Registrant,
Apple Residential Management Group, Inc. and Cornerstone Realty
Income Trust, Inc. Incorporated herein by reference to Exhibit
10.5 to Form S-3 of Cornerstone Realty Income Trust, Inc. (File
No. 333- 23693) filed on March 20, 1997.
10.10 Agreement and Bill of Transfer and Assignment among the
Registrant, Apple Realty Group, Inc. and Cornerstone Realty
Income Trust, Inc. Incorporated herein by reference to Exhibit
10.6 to Form S-3 of Cornerstone Realty Income Trust, Inc. (File
No. 333-23693) filed on March 20, 1997.
10.11 Common Share Purchase Option Agreement between the Registrant and
Cornerstone Realty Income Trust, Inc. Incorporated herein by
reference to Exhibit 10.8 to Form S-3 of Cornerstone Realty
Income Trust, Inc. (File No. 333-23693) filed on March 20, 1997.
10.12 Articles of Incorporation of Apple Limited, Inc.
10.13 Bylaws of Apple Limited, Inc.
10.14 Articles of Incorporation of Apple General, Inc.
10.15 Bylaws of Apple General, Inc.
10.16(a) Certificate of Limited Partnership of Apple REIT Limited
Partnership.
10.17(a) Limited Partnership Agreement of Apple REIT Limited Partnership.
10.16(b) Certificate of Limited Partnership of Apple REIT II Limited
Partnership. (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K dated July 9, 1998 of Apple Resi-
dential Income Trust, Inc.; File No. 0-23983).
10.17(b) Limited Partnership Agreement of Apple REIT II Limited
Partnership. (Incorporated by reference to Exhibit 10.6 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.16(c) Certificate of Limited Partnership of Apple REIT III Limited
Partnership. (Incorporated by reference to Exhibit 10.2 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.17(c) Limited Partnership Agreement of Apple REIT III Limited
Partnrship. (Incorporated by reference to Exhibit 10.7 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.16(d) Certificate of Limited Partnership of Apple REIT IV Limited
Partnership. (Incorporated by reference to Exhibit 10.3 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.17(d) Limited Partnership Agreement of Apple REIT IV Limited
Partnership. (Incorporated by reference to Exhibit 10.8 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.16(e) Certificate of Limited Partnership of Apple REIT V Limited
Partnership. (Incorporated by reference to Exhibit 10.4 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------------- -----------------------------------------------------------------
<S> <C>
10.17(e) Limited Partnership Agreement of Apple REIT V Limited
Partnership. (Incorporated by reference to Exhibit 10.9 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.16(f) Certificate of Limited Partnership of Apple REIT VI Limited
Partnership. (Incorporated by reference to Exhibit 10.5 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.17(f) Limited Partnership Agreement of Apple REIT VI Limited
Partnership. (Incorporated by reference to Exhibit 10.10 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.18 Property Management Agreement for Brookfield Apartments.
(Incorporated by reference to Exhibit 10.7 to Current Report on
Form 8-K dated January 28, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.19 Property Management Agreement for Eagle Crest I & II Apartments.
(Incorporated by reference to Exhibit 10.8 to Current Report on
Form 8-K dated January 28, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.20 Property Management Agreement for Tahoe Apartments. (Incorporated
by reference to Ex- hibit 10.9 to Current Report on Form 8-K
dated January 28, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
10.21 Property Management Agreement for Mill Crossing Apartments.
(Incorporated by reference to Exhibit 10.3 to Current Report on
From 8-K dated February 21, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.22 Property Management Agreement for Polo Run Apartments.
(Incorporated by reference to Exhibit 10.4 to Current Report on
Form 8-K dated March 31, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.23 Property Management Agreement for Wildwood Apartments.
(Incorporated by reference to Exhibit 10.6 to Current Report on
Form 8-K dated March 31, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635)
10.24 Property Management Agreement for Toscana Apartments.
(Incorporated by reference to Exhibit 10.6 to Current Report on
Form 8-K dated March 31, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.25 Property Management Agreement for the Arbors on Forest Ridge
Apartments. (Incorporated by reference to Exhibit 10.2 to Current
Report on From 8-K dated April 25, 1997 of Apple Residential
Income Trust, Inc.; File No. 333-10635).
10.26 Property Management Agreement for Pace's Cove Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated June 24, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.27 Property Management Agreement for Remington Hills at Las Colinas
(formerly Chaparosa and Riverhill) Apartments. (Incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K dated
August 6, 1997 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.28 Property Management Agreement for Copper Crossing Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated November 24, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.29 Property Management Agreement for Main Park Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated February 4, 1998 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.30 Property Management Agreement for Timberglen Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated February 13, 1998 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ---------- ---------------------------------------------------------------------
<S> <C>
10.31 Property Management Agreement for Copper Ridge Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated March 31, 1998 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.32 Property Management Agreement for Bitter Creek Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated May 8, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.33 Property Management Agreement for Summer Tree Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated June 2, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.34 Property Management Agreement for Park Village Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated July 1, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.35 Property Management Agreement for Cottonwood Crossing Apartments.
(Incorporated by reference to Exhibit 10.18 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.36 Property Management Agreement for Pepper Square Apartments.
(Incorporated by reference to Exhibit 10.20 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.37 Property Management Agreement for Pace's Point Apartments.
(Incorporated by reference to Exhibit 10.19 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.38 Property Management Agreement for Emerald Oaks Apartments.
(Incorporated by reference to Exhibit 10.21 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.39 Property Management Agreement for Hayden's Crossing Apartments.
(Incorporated by reference to Exhibit 10.22 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.40 Property Management Agreement for Newport Apartments.
(Incorporated by reference to Exhibit 10.23 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential In- come Trust,
Inc.; File No. 0-23983).
10.41 Property Management Agreement for Estrada Oaks Apartments
(Incorporated by reference to Exhibit 10.24 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.42 Property Management Agreement Subcontract pertaining to Pace's
Point Apartments. (Incorporated by reference to Exhibit 10.25 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.43 Property Management Agreement Subcontract pertaining to Pepper
Square Apartments. (Incorporated by reference to Exhibit 10.26 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.44 Property Management Agreement Subcontract pertaining to Emerald
Oaks Apartments. (Incorporated by reference to Exhibit 10.27 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.45 Property Management Agreement Subcontract pertaining to Hayden's
Crossing Apartments. (Incorporated by reference to Exhibit 10.28
to Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.46 Property Management Agreement Subcontract pertaining to Newport
Apartments. (Incorporated by reference to Exhibit 10.29 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
21 Subsidiaries of Apple Residential Income Trust, Inc. FILED
HEREWITH.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ---------- ---------------------------------------------------------------------
<S> <C>
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in
Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP. FILED HEREWITH
23.3 Consent of L.P. Martin & Company, P.C. FILED HEREWITH
24.1 Power of Attorney of Glade M. Knight.
24.2 Power of Attorney of Ted W. Smith.
24.3 Power of Attorney of Penelope W. Kyle.
24.4 Power of Attorney of Bruce H. Matson.
24.5 Power of Attorney of Lisa B. Kern.
</TABLE>
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed.
(d) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant undertakes to send to each Shareholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the Shareholders the financial
statements required by Form 10-K for the first full fiscal year of operations of
the Registrant.
The Registrant undertakes to file during the offering period a sticker
supplement pursuant to Rule 424(c) under the Act describing each property not
identified in the Prospectus at such time as there arises a reasonable
probability of investment in such property by the Registrant and to consolidate
all
II-9
<PAGE>
such stickers into a post-effective amendment filed at least once every three
months with the information contained in such amendment provided simultaneously
to the existing Shareholders. Each sticker supplement will also disclose all
compensation and fees received by the Advisor or its Affiliates in connection
with any such investment. The post-effective amendment shall include audited
financial statements meeting the requirements of Rule 3-14 of Regulation S-X
only for properties acquired during the distribution period.
The Registrant undertakes to file, after the end of the offering period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment not previously disclosed in the Prospectus or a supplement thereto
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
Shareholders at least once each quarter after the end of the offering period.
The Registrant undertakes to file the financial statements required by Form 10-K
for the first full fiscal year of operations and will provide the financial
information contained therein to the Shareholders. The Registrant undertakes to
file a final report on Form SR pursuant to Rule 463 of the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commis- sion
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than for expenses incurred in a
successful defense) is asserted by such officer, director or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, and will be governed by the final adjudication of such
issue.
II-10
<PAGE>
ITEM 37.
TABLE VI: ACQUISITION OF PROPERTIES BY CORNERSTONE
Cornerstone acquired the following properties since inception in 1993. All
properties acquired are residential communities. All of Cornerstone's
acquisitions are done on a mortgage-free basis. Cost of acquisition represents
the total cost of the purchase price including any downpayment. The following
information is as of December 31, 1997.
<TABLE>
<CAPTION>
CONTRACT
NAME OF DATE OF NUMBER PURCHASE
PROPERTY(1) LOCATION PURCHASE OF UNITS PRICE
- ----------------------- ----------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
GEORGIA
West Eagle Greens Augusta 1996 165 $ 4,020,000
Savannah West Augusta 1996 456 $ 9,843,620
Carlyle Club Lawrenceville 1997 243 $ 11,580,000
Ashley Run Norcross 1997 348 $ 18,000,000
Dunwoody Springs Dunwoody 1997 350 $ 15,200,000
Barrington Parc Norcross 1997 188 $ 7,850,000
NORTH CAROLINA
Chase Mooring Wilmington 1994 224 $ 3,594,000
Wimbledon Chase Wilmington 1994 192 $ 3,300,000
Osprey Landing Wilmington 1995 176 $ 4,375,000
Sailboat Bay Charlotte 1995 358 $ 9,100,000
Meadow Creek Charlotte 1996 250 $ 11,100,000
Beacon Hill Charlotte 1996 349 $ 13,579,203
Hanover Landing Charlotte 1995 192 $ 5,725,000
Bridgetown Bay Charlotte 1996 120 $ 5,025,000
Summerwalk Charlotte 1996 160 $ 5,660,000
The Meadows Asheville 1996 176 $ 6,200,000
Glen Eagles Winston Salem 1995 166 $ 7,300,000
Mill Creek Winston Salem 1995 220 $ 8,550,000
Wind Lake Greensboro 1995 299 $ 8,760,000
The Landing Durham 1996 200 $ 8,345,000
The Hollows Raleigh 1993 176 $ 4,200,000
The Trestles Raleigh 1994 280 $ 10,350,000
Paces Glen Charlotte 1996 172 $ 7,425,000
Signature Place Greenville 1996 171 $ 5,462,948
Heatherwood Charlotte 1996 476 $ 17,630,457
Highland Hills Carrboro 1996 264 $ 12,100,000
Parkside at Woodlake Durham 1996 266 $ 14,663,886
Deerfield Durham 1996 204 $ 10,675,000
Paces Arbor/Forest Raleigh 1997 218 $ 12,061,700
Charleston Place Charlotte 1997 214 $ 9,475,000
Clarion Crossing Raleigh 1997 228 $ 10,600,000
Sterling Arbor Raleigh 1997 180 $ 9,800,000
Sterling Place Raleigh 1997 136 $ 7,900,000
SOUTH CAROLINA
Polo Club Greenville 1993 365 $ 4,300,000
Magnolia Run Greenville 1995 212 $ 5,500,000
Breckinridge Greenville 1995 236 $ 5,600,000
Stone Ridge Columbia 1993 191 $ 3,325,000
Arbors at Windsor Columbia 1997 228 $ 10,875,000
Westchase Charleston 1997 352 $ 11,000,000
VIRGINIA
County Green Lynchburg 1993 180 $ 3,800,000
Ashley Park Richmond 1996 272 $ 12,205,000
Trolley Square Richmond 1996 320 $ 10,242,575
Trophy Chase Charlottesville 1996 185 $ 3,710,000
Bay Watch Pointe Virginia Beach 1995 160 $ 3,372,525
Harbour Club Virginia Beach 1994 214 $ 5,250,000
Arbor Trace Virginia Beach 1996 148 $ 5,000,000
Mayflower Seaside Virginia Beach 1993 263 $ 7,634,144
Tradewinds Hampton 1995 284 $ 10,200,000
Hampton Glen Richmond 1996 232 $ 11,599,931
Greenbrier Fredericksburg 1996 185 $ 11,099,525
<PAGE>
<CAPTION>
OTHER TOTAL AVERAGE
NAME OF ACQUISITION EXPENDITURES ACQUISITION SQUARE FT.
PROPERTY(1) FEE CAPITALIZED COST OF UNITS
- ----------------------- ------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
GEORGIA
West Eagle Greens $ 80,000 $ 1,956,355 $ 6,056,355 796
Savannah West $ 196,080 $ 2,461,609 $ 12,501,309 872
Carlyle Club $ -- $ 657,864 $ 12,237,864 1,089
Ashley Run $ -- $ 684,443 $ 18,684,443 1,150
Dunwoody Springs $ -- $ 1,394,594 $ 16,594,594 948
Barrington Parc $ -- $ 103,881 $ 7,953,881 937
NORTH CAROLINA
Chase Mooring $ 71,880 $ 1,508,242 $ 5,174,122 867
Wimbledon Chase $ 66,000 $ 2,095,662 $ 5,461,662 863
Osprey Landing $ 87,500 $ 2,380,454 $ 6,842,954 981
Sailboat Bay $ 182,000 $ 3,916,131 $ 13,198,131 906
Meadow Creek $ 222,000 $ 973,434 $ 12,295,434 860
Beacon Hill $ 266,000 $ 672,592 $ 14,517,795 734
Hanover Landing $ 114,500 $ 1,425,357 $ 7,264,857 832
Bridgetown Bay $ 100,000 $ 638,770 $ 5,763,770 868
Summerwalk $ 114,000 $ 1,365,674 $ 7,139,674 963
The Meadows $ 124,000 $ 1,136,262 $ 7,460,262 1,066
Glen Eagles $ 146,000 $ 1,417,487 $ 8,863,487 952
Mill Creek $ 171,000 $ 674,861 $ 9,395,861 897
Wind Lake $ 175,200 $ 881,850 $ 9,817,050 727
The Landing $ 168,000 $ 1,314,290 $ 9,827,290 961
The Hollows $ 84,000 $ 1,578,730 5,862,730 903
The Trestles $ 207,000 $ 788,191 $ 11,345,191 926
Paces Glen $ -- $ 602,477 $ 8,027,477 905
Signature Place $ -- $ 1,264,487 $ 6,727,435 1,037
Heatherwood $ -- $ 1,273,485 18,903,942 942
Highland Hills $ -- $ 1,801,839 $ 13,901,839 1,000
Parkside at Woodlake $ -- $ 266,022 $ 14,929,908 865
Deerfield $ -- $ 420,295 $ 11,095,295 888
Paces Arbor/Forest $ -- $ 568,234 $ 12,629,934 891
Charleston Place $ -- $ 532,406 $ 10,007,406 806
Clarion Crossing $ -- $ 212,429 $ 10,812,429 769
Sterling Arbor $ -- $ 87,449 $ 9,887,449 840
Sterling Place $ -- $ 82,291 $ 7,982,291 1,098
SOUTH CAROLINA
Polo Club $ 86,000 $ 2,518,635 $ 6,904,635 842
Magnolia Run $ 110,000 $ 1,140,125 $ 6,750,125 849
Breckinridge $ 112,000 $ 1,184,124 $ 6,896,124 726
Stone Ridge $ 66,500 $ 2,221,092 $ 5,612,592 1,027
Arbors at Windsor $ -- $ 464,651 $ 11,339,651 948
Westchase $ -- $ 1,199,764 $ 12,199,764 706
VIRGINIA
County Green $ 76,000 $ 1,327,820 $ 5,203,820 1,000
Ashley Park $ 244,100 $ 493,702 $ 12,942,802 765
Trolley Square $ 120,000 $ 2,184,434 $ 12,547,009 559
Trophy Chase $ 72,000 $ 2,699,964 $ 6,481,964 803
Bay Watch Pointe $ 67,451 $ 1,441,932 $ 4,881,908 911
Harbour Club $ 105,000 $ 749,145 $ 6,104,145 813
Arbor Trace $ 100,000 $ 767,816 $ 5,867,816 850
Mayflower Seaside $ 152,683 $ 1,731,086 $ 9,517,913 698
Tradewinds $ 204,000 $ 485,492 $ 10,889,492 929
Hampton Glen $ -- $ 857,570 $ 12,457,501 788
Greenbrier $ -- $ 714,289 $ 11,813,814 851
</TABLE>
Note: (1) Cornerstone does not have any mortgages on its properties nor
have down payments outstanding. In addition all cash expenditures incurred in
the acquisition of a community are capitalized.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Post-Effective
Amendment No. 7 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richmond, Commonwealth of
Virginia, on August 3, 1998.
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
------------------------------------
Glade M. Knight
President, and as President, the
Registrant's Principal Executive
Officer, Principal Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 7 to Registration Statement has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
- --------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ Glade M. Knight Director and President, and As August 3, 1998
- ------------------------- President, the Registrant's Principal
Glade M. Knight Executive Officer, Principal Financial
Officer and Principal Accounting
Officer
* Director August 3, 1998
- -------------------------
Penelope W. Kyle
* Director August 3, 1998
- -------------------------
Bruce H. Matson
* Director August 3, 1998
- -------------------------
Lisa B. Kern
</TABLE>
*By: /s/ Glade M. Knight
--------------------------------
Glade M. Knight, as attorney-in-
fact for the above-named persons
II-12
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
<S> <C>
1.1 Agency Agreement between the Registrant and David Lerner
Associates, Inc. with form of Selected Dealer Agreement attached
as Exhibit A thereto.
1.2 Escrow Agreement among the Registrant, First Union National Bank
of North Carolina and David Lerner Associates, Inc.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.5 Amended and Restated Bylaws of the Registrant (Amended and
Restated through Decem- ber 19, 1997).
4.1 Loan Agreement dated as of March 1, 1997, by and between Apple
Residential Income Trust, Inc. and First Union National Bank of
Virginia.
4.2 Amendment to Loan Agreement dated as of August 1, 1997, by and
between Apple Resi- dential Income Trust, Inc. and First Union
National Bank of Virginia.
4.3 Amended and Restated Promissory Note dated August 1, 1997, from
Apple Residential Income Trust, Inc. to the order of First Union
National Bank of Virginia.
4.4 Instruments Defining the Rights of Lenders (with respect to the
Pace's Point, Pepper Square, Emerald Oaks, Hayden's Crossing and
Newport Apartments). (Incorporated by reference to Exhibit 4 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the
legality of the securities being registered.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain
tax matters.
10.1 Advisory Agreement between the Registrant and Apple Residential
Advisors, Inc.
10.2 Form of Property Management Agreement between the Registrant and
Apple Residential Management Group, Inc.
10.3 Property Acquisition/Disposition Agreement between the Registrant
and Apple Realty Group, Inc.
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors
Stock Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement.
10.8 Advisory Agreement Subcontract among the Registrant, Apple
Residential Advisors, Inc. and Cornerstone Realty Income Trust,
Inc. Incorporated herein by reference to Exhibit 10.4 to Form S-3
of Cornerstone Realty Income Trust, Inc. (File No. 333-23693)
filed on March 20, 1997.
10.9 Property Management Agreement Subcontract among the Registrant,
Apple Residential Management Group, Inc. and Cornerstone Realty
Income Trust, Inc. Incorporated herein by reference to Exhibit
10.5 to Form S-3 of Cornerstone Realty Income Trust, Inc. (File
No. 333- 23693) filed on March 20, 1997.
10.10 Agreement and Bill of Transfer and Assignment among the
Registrant, Apple Realty Group, Inc. and Cornerstone Realty
Income Trust, Inc. Incorporated herein by reference to Exhibit
10.6 to Form S-3 of Cornerstone Realty Income Trust, Inc. (File
No. 333-23693) filed on March 20, 1997.
10.11 Common Share Purchase Option Agreement between the Registrant and
Cornerstone Realty Income Trust, Inc. Incorporated herein by
reference to Exhibit 10.8 to Form S-3 of Cornerstone Realty
Income Trust, Inc. (File No. 333-23693) filed on March 20, 1997.
10.12 Articles of Incorporation of Apple Limited, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------------- -----------------------------------------------------------------
<S> <C>
10.13 Bylaws of Apple Limited, Inc.
10.14 Articles of Incorporation of Apple General, Inc.
10.15 Bylaws of Apple General, Inc.
10.16(a) Certificate of Limited Partnership of Apple REIT Limited
Partnership.
10.17(a) Limited Partnership Agreement of Apple REIT Limited Partnership.
10.16(b) Certificate of Limited Partnership of Apple REIT II Limited
Partnership (Incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(b) Limited Partnership Agreement of Apple REIT II Limited
Partnership (Incorporated by reference to Exhibit 10.6 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.16(c) Certificate of Limited Partnership of Apple REIT III Limited
Partnership (Incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(c) Limited Partnership Agreement of Apple REIT III Limited
Partnership (Incorporated by reference to Exhibit 10.7 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.16(d) Certificate of Limited Partnership of Apple REIT IV Limited
Partnership (Incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(d) Limited Partnership Agreement of Apple REIT IV Limited
Partnership (Incorporated by reference to Exhibit 10.8 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.16(e) Certificate of Limited Partnership of Apple REIT V Limited
Partnership (Incorporated by reference to Exhibit 10.4 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(e) Limited Partnership Agreement of Apple REIT V Limited Partnership
(Incorporated by reference to Exhibit 10.9 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.16(f) Certificate of Limited Partnership of Apple REIT VI Limited
Partnership (Incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(f) Limited Partnership Agreement of Apple REIT VI Limited
Partnership (Incorporated by reference to Exhibit 10.10 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.18 Property Management Agreement for Brookfield Apartments.
(Incorporated by reference to Exhibit 10.7 to Current Report on
Form 8-K dated January 28, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.19 Property Management Agreement for Eagle Crest I & II Apartments.
(Incorporated by reference to Exhibit 10.8 to Current Report on
Form 8-K dated January 28, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.20 Property Management Agreement for Tahoe Apartments. (Incorporated
by reference to Exhibit 10.9 to Current Report on Form 8-K dated
January 28, 1997 of Apple Residential Income Trust, Inc.; File
No. 333-10635).
10.21 Property Management Agreement for Mill Crossing Apartments.
(Incorporated by reference to Exhibit 10.3 to Current Report on
From 8-K dated February 21, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.22 Property Management Agreement for Polo Run Apartments.
(Incorporated by reference to Exhibit 10.4 to Current Report on
Form 8-K dated March 31, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ---------- ---------------------------------------------------------------------
<S> <C>
10.23 Property Management Agreement for Wildwood Apartments.
(Incorporated by reference to Exhibit 10.6 to Current Report on
Form 8-K dated March 31, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635)
10.24 Property Management Agreement for Toscana Apartments.
(Incorporated by reference to Exhibit 10.6 to Current Report on
Form 8-K dated March 31, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.25 Property Management Agreement for the Arbors on Forest Ridge
Apartments. (Incorporated by reference to Exhibit 10.2 to Current
Report on From 8-K dated April 25, 1997 of Apple Residential
Income Trust, Inc.; File No. 333-10635).
10.26 Property Management Agreement for Pace's Cove Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated June 24, 1997 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.27 Property Management Agreement for Remington Hills at Las Colinas
(formerly Chaparosa and Riverhill) Apartments. (Incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K dated
August 6, 1997 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.28 Property Management Agreement for Copper Crossing Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated November 24, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.29 Property Management Agreement for Main Park Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated February 4, 1998 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.30 Property Management Agreement for Timberglen Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated February 13, 1998 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.31 Property Management Agreement for Copper Ridge Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated March 31, 1998 of Apple Residential Income Trust,
Inc.; File No. 333-10635).
10.32 Property Management Agreement for Bitter Creek Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated May 8, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.33 Property Management Agreement for Summer Tree Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated June 2, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.34 Property Management Agreement for Park Village Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K dated July 1, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.35 Property Management Agreement for Cottonwood Crossing Apartments.
(Incorporated by reference to Exhibit 10.18 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.36 Property Management Agreement for Pepper Square Apartments.
(Incorporated by reference to Exhibit 10.20 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.37 Property Management Agreement for Pace's Point Apartments.
(Incorporated by reference to Exhibit 10.19 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.38 Property Management Agreement for Emerald Oaks Apartments.
(Incorporated by reference to Exhibit 10.21 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.39 Property Management Agreement for Hayden's Crossing Apartments.
(Incorporated by reference to Exhibit 10.22 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ---------- ---------------------------------------------------------------------
<S> <C>
10.40 Property Management Agreement for Newport Apartments.
(Incorporated by reference to Exhibit 10.23 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential In- come Trust,
Inc.; File No. 0-23983).
10.41 Property Management Agreement for Estrada Oaks Apartments
(Incorporated by reference to Exhibit 10.24 to Current Report on
Form 8-K dated July 9, 1998 of Apple Residential Income Trust,
Inc.; File No. 0-23983).
10.42 Property Management Agreement Subcontract pertaining to Pace's
Point Apartments. (Incorporated by reference to Exhibit 10.25 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.43 Property Management Agreement Subcontract pertaining to Pepper
Square Apartments. (Incorporated by reference to Exhibit 10.26 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.44 Property Management Agreement Subcontract pertaining to Emerald
Oaks Apartments. (Incorporated by reference to Exhibit 10.27 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.45 Property Management Agreement Subcontract pertaining to Hayden's
Crossing Apartments. (Incorporated by reference to Exhibit 10.28
to Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
10.46 Property Management Agreement Subcontract pertaining to Newport
Apartments. (Incorporated by reference to Exhibit 10.29 to
Current Report on Form 8-K dated July 9, 1998 of Apple
Residential Income Trust, Inc.; File No. 0-23983).
21 Subsidiaries of Apple Residential Income Trust, Inc. FILED
HEREWITH.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in
Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP. FILED HEREWITH
23.3 Consent of L.P. Martin & Company, P.C. FILED HEREWITH
24.1 Power of Attorney of Glade M. Knight.
24.2 Power of Attorney of Ted W. Smith.
24.3 Power of Attorney of Penelope W. Kyle.
24.4 Power of Attorney of Bruce H. Matson.
24.5 Power of Attorney of Lisa B. Kern.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF APPLE RESIDENTIAL INCOME TRUST, INC.
The following are wholly-owned by Apple Residential Income Trust, Inc.:
Apple General, Inc., a Virginia corporation
Apple Limited, Inc., a Virginia corporation
Apple General, Inc. and Apple Limited, Inc. are the sole general partner
and the sole limited partner, respectively, of:
Apple REIT Limited Partnership, a Virginia limited partnership.
Apple REIT II Limited Partnership, a Virginia limited partnership.
Apple REIT III Limited Partnership, a Virginia limited partnership.
Apple REIT IV Limited Partnership, a Virginia limited partnership.
Apple REIT V Limited Partnership, a Virginia limited partnership.
Apple REIT VI Limited Partnership, a Virginia limited partnership.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 13, 1998 in Post-Effective Amendment No. 7
to the Registration Statement (Form S-11 No. 333-10635) and related Prospectus
of Apple Residential Income Trust, Inc. for the registration of 25,166,666.67
shares of its common stock.
Our audits also included the financial statement schedule of Apple
Residential Income Trust, Inc. listed in Item 35(b). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Richmond, Virginia /s/ Ernst & Young LLP
July 30, 1998
EXHIBIT 23.3
L.P. MARTIN & COMPANY, P.C.
4132 INNSLAKE DRIVE
GLEN ALLEN, VIRGINIA 23060
PHONE: 804-346-2626
FAX: 804-346-9311
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We hereby consent to the inclusion of the following reports prepared by us
in the Registration Statement on Form S-11 (File No. 333-10635) of Apple
Residential Income Trust, Inc. filed with the Securities and Exchange Commission
by Apple Residential Income Trust, Inc., and in the Prospectus (including
supplements thereto) included therein and to the references to us under
"Experts" therein:
(1) Our report dated March 19, 1997 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Brookfield Apartments for the twelve-month
period ended December 31, 1996, (2) our report dated March 27, 1997 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Eagle Crest
Apartments for the twelve-month period ended December 31, 1996, (3) our report
dated April 11, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Tahoe Apartments for the twelve-month period ended
December 31, 1996, (4) our report dated April 29, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Mill Crossing
Apartments for the twelve-month period ended January 31, 1997, (5) our report
dated May 21, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Polo Run Apartments for the twelve-month period ended February 28,
1997, (6) our report dated June 4, 1997 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Wildwood Apartments for the twelve-month
period ended February 28, 1997, (7) our report dated June 4, 1997 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Toscana Apartments
for the twelve-month period ended February 28, 1997, (8) our report dated June
4, 1997 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property The Arbors on Forest Ridge Apartments for the twelve-month period ended
February 28, 1997, (9) our report dated July 22, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Paces Cove
Apartments for the twelve-month period ended May 31, 1997, (10) our report dated
September 24, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Chaparosa Apartments for the twelve-month period ended June 30,
1997, (11) our report dated September 24, 1997 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Riverhill Apartments for the
twelve-month period ended June 30, 1997, (12) our report dated December 16, 1997
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property Copper
Crossing Apartments for the twelve-month period ended October 31, 1997 (13) our
report dated March 25, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Main Park Apartments for the twelve-month period
ended December 31, 1997, (14) our report dated April 6, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Timberglen
Apartments for the twelve-month period ended December 31, 1997, (15) our report
dated April 14, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Copper Ridge Apartments for the twelve-month period
ended February 28, 1998, (16) our report dated May 14, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Bitter Creek
Apartments for the twelve-month period ended March 31, 1998, (17) our report
dated July 16, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments for the twelve-month period ended May 31,
1998, (18) our report dated July 17, 1998 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Park Village Apartments for the
twelve-month period ended May 31, 1998, (19) our report dated July 21, 1998 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property
Cottonwood Crossing Apartments for the twelve-month period ended May 31, 1998,
(20) our report dated May 14, 1998 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Pace's Point Apartments for the twelve-month
period ended March 31, 1998, (21) our report dated May 14, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Pepper Square
Apartments for the twelve-month period ended March 31, 1998, (22) our report
dated May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Emerald Oaks Apartments for the twelve-month period ended March 31,
1998, (23) our report dated May 14, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Hayden's Crossing Apartments for the
twelve-month period ended March 31, 1998, (24) our report dated May 14, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property
Newport Apartments for the twelve-month period ended March 31, 1998, and (25)
our report dated July 15, 1998 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Estrada Oaks Apartments for the twelve-month
period ended June 30, 1998.
Richmond, Virginia /s/ L. P. Martin & Co., P.C.
August 1, 1998