UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1997 333-10635
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1816010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 EAST MAIN STREET
RICHMOND, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
(None)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
At March 15, 1998, there were 15,401,787 common shares of the registrant
outstanding.
The common shares of the Company are not currently being traded in any market.
Therefore, the common shares did not have either a market selling price or bid
and asked prices within 60 days prior to the date of this filing, and the
aggregate market value of the common shares held by non-affiliates of the
registrant is not determinable.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes No
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The portions of the registrant's Prospectus dated November 19, 1996 and
Supplement No. 7 dated February 2, 1998 as filed on November 20, 1996 and
February 11, 1998, respectively, with the Commission pursuant to Rule 424(b)
under the Securities Act of 1933, relative to the registrant's registration
statement on Form S-11 (File No. 333-10635), are incorporated by reference in
Parts I and II of this report.
The registrant's Proxy Statement dated April 3, 1998, referred to in Part III.
INTRODUCTION
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such 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 or the
properties, as the case may be, and adverse changes in the real estate markets
and general and local economies and business conditions. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore there can be no assurance that such statements included in this Annual
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, 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 statements or
the objectives and plans of the Company will be achieved. In addition, the
Company's continued qualification as a real estate investment trust involves the
application of highly technical and complex provisions of the Internal Revenue
Code. Readers should carefully review the Company's financial statements and the
notes thereto, as well as the risk factors described in the Company's filings
with the Securities and Exchange Commission.
PART I
Item 1. Business
Apple Residential Income Trust, Inc. (together with its subsubsidiaries, Apple
Limited, Inc., Apple General, Inc., and Apple REIT Limited Partnership, the
"Company"), a Virginia corporation, was incorporated in August 1996. Operations
of rental property commenced in January, 1997. The business of the Company is to
acquire existing residential apartment complexes located in Texas and the
southwestern region of the United States. The Company owned eleven properties
comprising 2,776 apartment units within that region as of December 31, 1997. The
complete investment objectives and policies of the Company are described under
the caption "Investment Objectives and Policies" on pages 26 through 34 of the
Company's Prospectus dated November 19, 1996 (the "Prospectus") filed with the
Securities and Exchange Commission pursuant to Rule 424 (b) (3) on November 20,
1996 relative to the Company's Registration Statement on Form S-11 (Registration
No. 333-10635), which are hereby incorporated herein by reference. The Company's
eleven property acquisitions in 1997 are described on pages S-4 through S-26 of
Supplement No. 7 dated February 2, 1998 ("Supplement No. 7") to the Prospectus
(filed pursuant to Rule 424 (b) (3) on February 11, 1998), which are hereby
incorporated by reference. The discussion of the Company's investment objectives
and policies as set forth in the portion of the Prospectus herein incorporated
by reference is subject to and supplemented by the developments described on
pages S-2 through S-26 of Supplement No. 7, which are hereby incorporated herein
by reference.
Originally, the properties were acquired and owned directly by Apple Residential
Income Trust, Inc. without the interposition or use of any subsidiary companies.
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 interest 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 to the effect of which would be to transfer the
apartment properties of Apple Residential Income Trust, Inc. to a
newly-organized limited partnership indirectly wholly-owned by Apple Residential
Income Trust, Inc. The shareholders approved this proposal on December 19, 1997.
Apple Residential Income Trust, Inc. transferred the properties to a Virginia
limited partnership, the partners of which are two newly created, wholly-owned
subsidiaries of the Company. Apple Residential Income Trust, Inc. formed the two
wholly-owned subsidiaries, Apple Limited, Inc. and Apple General, Inc., as
Virginia corporations. Apple Residential Income Trust, Inc. 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
2
<PAGE>
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. The Partnership now holds the
properties and conducts the business activities of the Company associated with
the properties.
Shareholders effectively continue to hold the same ownership interest in the
properties following the transactions described above, through Apple Residential
Income Trust, Inc.'s 100% ownership of Apple Limited, Inc. (which owns a 99%
interest in the Partnership), and 100% ownership of Apple General, Inc. (which
owns 1% interest in the Partnership). Apple General, Inc., as general partner of
the Partnership, manages the affairs of the Partnership. Apple Residential
Income Trust, Inc. 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 Apple Residential Income Trust, Inc., is the sole director and President of
Apple General, Inc.
Information with respect to the Company's unsecured line of credit used to fund
property acquisitions is hereby incorporated herein by reference to the material
under the caption "Unsecured Line of Credit" on pages S-3 and S-4 of Supplement
No. 7.
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.
The following is a summary of the property acquisitions made by the Company
during 1997.
On January 28, 1997, the Company acquired the Brookfield Apartments in Dallas,
Texas. Information with respect to this property is hereby incorporated herein
by reference from pages S-4 through S-6 of Supplement 7.
On January 30, 1997, the Company acquired the Eagle Crest Apartments in Irving,
Texas. Information with respect to this property is hereby incorporated herein
by reference from pages S-7 through S-9 of Supplement 7.
On January 31, 1997, the Company acquired the Tahoe Apartments in Arlington,
Texas. Information with respect to this property is hereby incorporated herein
by reference from pages S-9 through S-11 of Supplement 7.
On February 21, 1997, the Company acquired the Mill Crossing Apartments in
Arlington, Texas. Information with respect to this property is hereby
incorporated herein by reference from pages S-11 through S-13 of Supplement 7.
On March 31, 1997, the Company acquired the Polo Run Apartments in Arlington,
Texas, the Wildwood Apartments in Euless, Texas, and the Toscana Apartments in
Dallas, Texas. Information with respect to these properties is hereby
incorporated herein by reference from pages S-13 through S-18 of Supplement 7.
On April 25, 1997, the Company acquired The Arbors on Forest Ridge in Bedford,
Texas. Information with respect to this property is hereby incorporated herein
by reference from pages S-18 through S-20 of Supplement 7.
On June 24, 1997, the Company acquired the Pace's Cove Apartments in Dallas,
Texas. Information with respect to this property is hereby incorporated herein
by reference from pages S-20 through S-22 of Supplement 7.
On August 6, 1997, the Company acquired the Chaparosa and Riverhill Apartments
(which were subsequently combined and renamed "Remington Hills at Las Colinas"),
in Irving, Texas. Information with respect to these properties is hereby
incorporated herein by reference from pages S-22 through S-24 of Supplement 7.
On November 24, 1997, the Company acquired the Copper Crossing Apartments in
Fort Worth, Texas. Information with respect to this property is hereby
incorporated herein by reference from pages S-25 through S-26 of Supplement 7.
RECENT DEVELOPMENTS
On February 4, 1998, the Company acquired the Main Park Apartments, a 192-unit
apartment complex in Duncanville (southwest of Dallas), Texas for a purchase
price of $8,000,000. On February 13, 1998, the Company purchased the Timberglen
Apartments, a 304-unit apartment complex in Dallas, Texas for a purchase price
of $12,000,000.
3
<PAGE>
Item 2. Properties
PROPERTY DESCRIPTIONS AND CHARACTERISTICS
As of December 31, 1997, the Company owned 11 apartment communities comprising
2,776 apartment units. The properties are located in Texas.
The following table sets forth specific information regarding the properties:
<TABLE>
<CAPTION>
Total December
Investment Average Average Year-to Date
Initial Total Number Per Unit Size Rent Per Economic
Year Date of Acquisition Investment at of Unit at (Square Month Occupancy
Property Location Completed Acquisition Cost 12-31-97(1) Units 12-31-97 Feet) 1997 (2) 1997 (3)
-------- -------- --------- ----------- -------- ----------- ----- -------- ------- -------- --------
TEXAS
- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mill Arlington 1979 February 1997 $4,544,121 $5,046,908 184 $27,429 691 $462 96%
Crossing.....
Polo Run.... Arlington 1984 March 1997 6,858,974 7,545,163 224 33,684 854 556 97%
Tahoe....... Arlington 1979 January 1997 5,690,560 6,641,227 240 27,672 671 460 88%
The Arbors Bedford 1986 April 1997 7,748,907 8,315,672 210 39,598 804 588 96%
on Forest
Ridge........
Brookfield.. Dallas 1984 January 1997 5,458,485 5,946,299 232 25,631 714 472 95%
Paces Cove.. Dallas 1982 June 1997 9,277,355 9,536,559 328 29,075 670 507 92%
Toscana..... Dallas 1986 March 1997 5,854,531 6,222,223 192 32,407 601 500 95%
Wildwood.... Euless 1984 March 1997 3,963,519 4,389,742 120 36,581 755 590 93%
Copper Fort 1981 November 1997 4,750,000 4,875,751 200 24,379 739 524 89%
Crossing..... Worth
Eagle Crest. Irving 1983/1985 January 1997 15,650,000 17,299,740 484 35,743 887 595 93%
Remington Irving 1984/1985 August 1997 13,100,000 13,815,064 362 38,163 957 727 94%
Hills ..... ----------- ---------- --- ------ --- --- ---
TOTAL/AVERAGE ............... $82,896,452 $89,634,348 2,776 $32,289 758 $555 93%
============ ============ ====== ======== ==== ===== ====
</TABLE>
(1) "Total Investment" includes the purchase price of the property plus real
estate commissions, closing costs and improvements capitalized since the date of
acquisition.
(2) Average rent per month reflects December's monthly gross potential rent less
concessions divided by the property's number of units.
(3) Economic occupancy reflects year-to-date gross potential rent less
concessions and bad debt expense divided by the year-to-date gross potential
rent.
Item 3. Legal Proceedings
None.
4
<PAGE>
Item 4. Submission of Matters to A Vote of Security Holders
As described under "Business" in Item 1 of Part I of this Report, Company
management proposed to the Board of Directors a plan for the transfer of the
apartment properties held by Apple Residential Income Trust, Inc. to a
newly-organized limited partnership indirectly wholly-owned by Apple Residential
Income Trust, Inc. Based on this proposal, 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 (defined for purposes of these resolutions
as Apple Residential Income Trust, Inc.) 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 "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 interest 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 LLP, 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.
5
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
There is currently no established public market in which the Company's common
shares are traded.
On March 15, 1998, there were 6,616 shareholders of record of the Company's
common shares.
Distributions of $3,249,098, were made to the shareholders during 1997.
Distributions were $.20 per common share for the second, third and forth
quarters in 1997.
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 Report on Form 10-K. All of the Common Shares are
being sold for the account of the Company.
The following tables set forth information concerning the Offering and the use
of proceeds from the Offering as of December 31, 1997:
<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
Common Shares Sold:
-------------------
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
10,287,383.33 Common Shares $10 per Common Share $ 102,873,833
Totals: 11,954,050.00 Common Shares $ 117,873,833
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Expenses of Issuance and Distribution of Common Shares
<S> <C> <C>
1. Underwriting discounts and commission $ 11,787,383
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 $ 755,991
Total Expenses of Issuance and Distribution of
Common Shares $ 12,543,374
Net Proceeds to the Company $105,330,459
1. Purchase of real estate (including repayment of
indebtedness incurred to purchase real estate) $ 79,136,452
2. Interest on indebtedness $ 458,384
3. Working capital $ 24,058,452
4. Fees to the following (all affiliates of officers of the Company):
a. Apple Advisors, Inc. $ 14,894
b. Apple Realty Group, Inc. $ 624,382
c. Cornerstone Realty Income Trust, Inc. 1,037,895
5. Fees and expenses of third parties:
a. Legal $ ---
b. Accounting $ ---
6. Other (specify ___________) $ ---
Total of Application of Net Proceeds to the Company $105,330,459
</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 6. Selected Financial Data
The following table sets forth selected financial data for the registrant and
should be read in conjunction with the financial statements and related notes of
the Company included under Item 8 of this report.
7
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997 1996
<S> <C> <C>
OPERATING RESULTS
Rental Income $ 12,005,968 --
Net Income 3,499,194 --
Distributions Declared and Paid 3,249,098 --
PER SHARE
Net Income $ .54 --
Distributions $ .60 --
Distributions Representing Return of Capital 0% --
Weighted Average Shares Outstanding 6,493,114
BALANCE SHEET DATA
Investment in Rental Property $ 89,634,348 --
Total Assets $ 112,485,520 $100
Shareholders' Equity $ 109,340,555 $100
Shares Outstanding 12,371,829 10
OTHER DATA
Cash Flows from:
Operating Activities $ 7,075,025 --
Investing Activities $ (88,753,814)
Financing Activities $ 105,841,261 --
Number of Properties Owned at Year-End 11 --
FUNDS FROM OPERATIONS CALCULATION
Net Income $ 3,499,194 --
Depreciation of Real Estate $ 1,898,003 --
-------------- ---------
Funds from Operations (a) $ 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion is based on the consolidated financial statements of
the Company as of December 31, 1997. This information should be read in
conjunction with the selected financial data and the Company's financial
statements included elsewhere in this annual report. The Company is operated and
has elected to be treated as a real estate investment trust (REIT) for federal
income tax purposes.
8
<PAGE>
RESULTS OF OPERATIONS - 1997
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
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>
9
<PAGE>
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
public 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.
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.
10
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data
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. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Richmond, Virginia
February 13, 1998
11
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
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; 109,090,459 $100
issued and outstanding 12,371,829 shares and 10 shares,
respectively
Class B convertible stock, no par value, 20,000 20,000
authorized 200,000 shares; issued
and outstanding 200,000 shares
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.
12
<PAGE>
Consolidated Statement of Operations
For the Year Ended December 31, 1997
- ------------------------------------------------------ -------------------
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
===================
See accompanying notes.
13
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Shareholders' Equity
Common Stock Convertible Class B Stock
- ----------------------------------------------------------------------------------
Receivable Net Income Total
Number Number From Greater Than Shareholders'
Of Shares Amount Of Shares Amount Principal Distributions Equity
Shareholder
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10 $ 100 200,000 $20,000 $(20,000) $ 0 $ 100
Net proceeds from the sale 11,756,545 103,552,905 -- -- -- -- 103,552,905
of shares
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
Realty Income Trust, Inc. 417,778 3,760,000 -- -- -- -- 3,760,000
Shares issued through
Additional Share Option 197,496 1,777,454 -- -- -- 1,777,454
---------------------------------------------------------------------------------------------
Balance December 31, 1997 12,371,829 $109,090,459 200,000 $20,000 $(20,000) $ 250,096 $109,340,555
=============================================================================================================================
</TABLE>
See accompanying notes.
14
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
For the Year Ended December 31, 1997
- -----------------------------------------------------------------------------------------------
From operating activities:
<S> <C>
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.
15
<PAGE>
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 the company 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. ("Cornerstone")
(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 Statement 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 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.
16
<PAGE>
NOTE 2 Investment in Rental Property
<TABLE>
<CAPTION>
The following is a summary of rental property owned at December 31, 1997:
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.
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:
17
<PAGE>
Gross Proceeds Raised from Number of Common Shares
Sales of Common Shares through Through Conversion of One
Date of Conversion Class B Convertible Share
- --------------------------------------------------------------------------------
$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. 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:
1997
- --------------------------------------------------------------------------------
Weighted-Average
Options Exercise Price
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
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:
18
<PAGE>
1997
- --------------------------------------------------------------------------------
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
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. 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.
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:
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenue $1,155,766 $2,826,712 $3,789,266 $ 4,234,224
Income before interest
income (expense) 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
- --------------------------------------------------------------------------------
19
<PAGE>
NOTE 8 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1997
- --------------------------------------------------------------------------------
Numerator:
Net income numerator for basic
and diluted 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
- --------------------------------------------------------------------------------
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.
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.
Unaudited Pro Forma Totals 1997
- --------------------------------------------------------------------------------
Revenue $17,398,526
Net income 5,047,475
Basic earnings per share .53
- --------------------------------------------------------------------------------
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.
20
<PAGE>
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the Company's directors and director nominees
see the information under "Ownership of Equity Securities" and "Election of
Directors" in the Company's Proxy Statement dated April 3, 1998, which
information is hereby incorporated herein by reference. For information with
respect to the Company's executive officers see "Executive Officers" in the
Company's Proxy Statement dated April 3, 1998, which information is hereby
incorporated herein by reference.
Item 11. Executive Compensation
For information with respect to compensation of the Company's executive officers
and directors, see the information under "Compensation of Executive Officers"
and "Compensation of Directors" in the Company's Proxy Statement Dated April 3,
1998, which information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the information under "Ownership of Equity Securities" in the Company's
Proxy Statement dated April 3, 1998, which information is hereby incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
For information on certain relationships and related transactions, see the
information under "Certain Relationships and Agreements" in the Company's Proxy
Statement dated April 3, 1998, which information is hereby incorporated herein
by reference.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of the report
1. Financial Statements
The following consolidated financial
statements of the registrant are included in
Item 8:
Independent Auditors' Report
Ernst & Young LLP
Consolidated Balance Sheets
December 31, 1997 and 1996
Consolidated Statement of Operations
Year Ended December 31, 1997
Consolidated Statement of Shareholders' Equity
Year Ended December 31, 1997
Consolidated Statement of Cash Flows
Year Ended December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated
Depreciation (Included on page 23 of this
Form 10-K Report)
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.
3. Exhibits
Incorporated herein by reference are the
exhibits listed under "Exhibits Index" on
pages 26 through 28 of this Form 10-K
Report.
(b) Reports on Form 8-K
During the last quarter of 1997, the Company
filed the following Current Reports on Form
8-K:
On October 20, 1997, the registrant filed a
Report on Form 8-K/A to a Report on Form 8-K
dated August 6, 1997. The item reported was
Item 7. The financial statements filed were
Statements of Income and Direct Operating
Expenses (exclusive of certain items) for
Chaparosa and Riverhill Apartments for the
twelve months ended June 30, 1997. Also
included were a Pro Forma Statement of
Operations for the six months ended June 30,
1997, Pro Forma Balance Sheet as of June 30,
1997, and Pro Forma Statement of Operations
for the year ended December 31, 1996.
On December 8, 1997, the registrant filed a
Report on Form 8-K. The item reported was
Item 2 (the acquisition of the Copper
Crossing Apartments).
22
<PAGE>
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1997)
<TABLE>
<CAPTION>
Subsequently
Initial Cost Capitalized
Encum- -----------------------------------------------------------------
Description brances Land Bldg. & Impr. Impr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1) Brookfield $0 $1,146,282 $4,312,203 $487,814
* Dallas, TX
* Multi-family housing
2) Eagle Crest $0 $2,973,500 $12,676,500 $1,649,740
* Irving, TX
* Multi-family housing
3) Tahoe Apartments $0 $1,081,206 $4,609,354 $950,667
* Arlington, TX
* Multi-family housing
4) Mill Crossing $0 $772,501 $3,771,620 $502,787
* Arlington, TX
* Multi-family housing
5) Polo Run $0 $891,667 $5,967,307 $686,189
* Arlington, TX
* Multi-family housing
6) Wildwood Apartments $0 $832,339 $3,131,180 $426,223
* Euless, TX
* Multi-family housing
7) Toscana Apartments $0 $819,634 $5,034,897 $367,692
* Dallas, TX
* Multi-family housing
8) Arbors on Forest Ridge $0 $697,402 $7,051,505 $566,766
* Bedford, TX
* Multi-family housing
9) Paces Cove $0 $1,948,245 $7,329,110 $259,204
* Dallas, TX
* Multi-family housing
10) Remington Hills $0 $3,144,000 $9,956,000 $715,064
* Irving, TX
* Multi-family housing
11) Copper Crossing $0 $855,000 $3,895,000 $125,750
* Fort Worth, TX
* Multi-family housing
$15,161,775 $67,734,677 $6,737,896 (2)
================================================================================
<CAPTION>
Gross Amount Carried
------------------------------------------------- Date of Date
Description Land Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1) Brookfield $1,203,420 $4,742,879 $5,946,299 $166,694 1984 Jan. 28, 1997 27.5 yrs.
* Dallas, TX
* Multi-family housing
2) Eagle Crest $3,077,332 $14,222,408 $17,299,740 $483,740 1983 Jan. 30, 1997 27.5 yrs.
* Irving, TX 1985
* Multi-family housing
3) Tahoe Apartments $1,128,570 $5,512,657 $6,641,227 $199,049 1979 Jan. 31, 1997 27.5 yrs.
* Arlington, TX
* Multi-family housing
4) Mill Crossing $802,354 $4,244,554 $5,046,908 $136,519 1979 Feb. 21, 1997 27.5 yrs.
* Arlington, TX
* Multi-family housing
5) Polo Run $935,852 $6,609,311 $7,545,163 $191,302 1984 Mar. 31, 1997 27.5 yrs.
* Arlington, TX
* Multi-family housing
6) Wildwood Apartments $880,841 $3,508,901 $4,389,742 $98,645 1984 Mar. 31, 1997 27.5 yrs.
* Euless, TX
* Multi-family housing
7) Toscana Apartments $858,233 $5,363,990 $6,222,223 $147,777 1986 Mar. 31, 1997 27.5 yrs.
* Dallas, TX
* Multi-family housing
8) Arbors on Forest Ridge $727,692 $7,587,981 $8,315,673 $187,034 1986 Apr. 25, 1997 27.5 yrs.
* Bedford, TX
* Multi-family housing
9) Paces Cove $1,838,745 $7,697,814 $9,536,559 $141,850 1982 June 24, 1997 27.5 yrs.
* Dallas, TX
* Multi-family housing
10) Remington Hills $3,061,324 $10,753,740 $13,815,064 $133,270 1984 Aug. 6, 1997 27.5 yrs.
* Irving, TX 1985 Aug. 6, 1997
* Multi-family housing
11) Copper Crossing $882,460 $3,993,290 $4,875,750 $12,123 1981 Nov. 25, 1997 27.5 yrs.
* Fort Worth, TX
* Multi-family housing
$15,396,823 $74,237,525 $89,634,348(1) $1,898,003
=======================================================================
</TABLE>
(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>
<CAPTION>
<S> <C> <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
====================
(4) The following is a reconciliation of accumulated depreciation:
Balance at January 1, 1997 $ 0
Depreciation expense 1,898,003
--------------------
Balance at December 31,1997 $ 1,898,003
====================
</TABLE>
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March,
1998.
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
--------------------
Glade M. Knight,
President
Pursuant to the requirements of the Securities Exchange Act
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ Glade M. Knight Director, President, March 30, 1998
- ---------------------------- Chief Executive
Glade M. Knight Officer, Chief
Financial Officer
(and Principal
Accounting Officer)
/s/ Penelope W. Kyle Director March 30, 1998
- ----------------------------
Penelope W. Kyle
/s/ Bruce H. Matson Director March 30, 1998
- ----------------------------
Bruce H. Matson
/s/ Lisa B. Kern Director March 30, 1998
- ----------------------------
Lisa B. Kern
24
<PAGE>
Supplemental Information to Be Furnished
With Reports Filed Pursuant to Section 15 (d)
Of the Act by Registrants Which Have Not
Registered Securities Pursuant To
Section 12 of the Act
The Company's Definitive Proxy Statement incorporated by reference in response
to certain items in this Form 10-K Annual Report will be furnished to security
holders after the date of the filing of this Annual Report. Such Definitive
Proxy Statement will be furnished to the Securities and Exchange Commission when
it is sent to the security holders.
25
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
3.1 Articles of Incorporation of Apple Residential Income Trust, Inc.
(Incorporated by reference to Exhibit 3.1 filed in the
registrant's registration statement on Form S-11; File No.
333-10635).
3.2 Articles of Amendment to the Articles of Incorporation of Apple
Residential Income Trust, Inc. (Incorporated by reference to
Exhibit 3.3 filed in the registrant's registration statement on
Form S-11; File No. 333-10635).
3.3 Articles of Amendment to the Articles of Incorporation of Apple
Residential Income Trust, Inc. (Incorporated by reference to
Exhibit 3.4 filed in the registrant's registration statement on
Form S-11; File No. 33-10635).
3.4 Amended and Restated Bylaws of Apple Residential Income Trust,
Inc. (Amended and Restated Through December 19, 1997).
(Incorporated by reference to Exhibit 3.5 filed in the
registrant's registration statement on Form S-11; File No.
333-10635).
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. (Incorporated by reference to Exhibit 4.1 filed in the
registrant's registration statement on Form S-11; File No.
333-10635).
4.2 Amendment to Loan Agreement dated as of August 1, 1997, by and
between Apple Residential Income Trust, Inc. and First Union
National Bank of Virginia. (Incorporated by reference to Exhibit
4.2 filed in the registrant's registration statement on Form
S-11; File No. 333-10635).
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. (Incorporated by reference to Exhibit
4.3 filed in the registrant's registration statement on Form
S-11; File No. 333-10635).
10.1 Advisory Agreement between Apple Residential Income Trust, Inc.
and Apple Residential Advisors, Inc. (Incorporated by reference
to Exhibit 10.1 filed in the registrant's registration Statement
on Form S-11; File No. 333-10635).
10.2 Form of Property Management Agreement between Apple Residential
Income Trust, Inc. and Apple Residential Management Group, Inc.
(Incorporated by reference to Exhibit 10.2 filed in the
registrant's registration statement on Form S-11; File No.
333-10635.)
10.3 Property Acquisition/Disposition Agreement between Apple
Residential Income Trust, Inc. and Apple Realty Group, Inc.
(Incorporated by reference to Exhibit 10.3 filed in the
registrant's registration statement on Form S-11; File No.
333-10635).
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan
(Incorporated by reference to Exhibit 10.4 filed in the
registrant's registration statement on Form S-11; File No.
333-10635).
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors
Stock Option Plan. (Incorporated by reference to Exhibit 10.5
filed in the registrant's registration statement on Form S-11;
File No. 333-10635).
10.6 Right of First Refusal Agreement. (Incorporated by reference to
Exhibit 10.6 filed in the registrant's registration statement on
Form S-11; File No. 333-10635).
26
<PAGE>
Exhibit Number Description
10.7 Advisory Agreement Subcontract among Apple Residential Income
Trust, Inc., Apple Residential Advisors, Inc. and Cornerstone
Realty Income Trust, Inc. (Incorporated 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).
10.8 Property Management Agreement Subcontract among Apple Residential
Income Trust, Inc., Apple Residential Management Group, Inc. and
Cornerstone Realty Income Trust, Inc. (Incorporated 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).
10.9 Agreement and Bill of Transfer and Assignment among Apple
Residential Income Trust, Inc., Apple Realty Group, Inc. and
Cornerstone Realty Income Trust, Inc. (Incorporated 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).
10.10 Common Share Purchase Option Agreement between Apple Residential
Income Trust, Inc. and Cornerstone Realty Income Trust, Inc.
(Incorporated herein by reference to Exhibit 10.8 filed to Form
S-3 of Cornerstone Realty Income Trust, Inc. (File No. 333-23693)
filed on March 20, 1997).
10.11 Articles of Incorporation of Apple Limited, Inc. (Incorporated by
reference to Exhibit 10.12 filed in the registrant's registration
statement on Form S-11; File No. 333-10635).
10.12 Bylaws of Apple Limited, Inc. (Incorporated by reference to
Exhibit 10.13 filed in the registrant's registration statement on
Form S-11; File No. 333-10635).
10.13 Articles of Incorporation of Apple General, Inc. (Incorporated by
reference to Exhibit 10.l4 filed in the registrant's registration
statement on Form S-11; File No. 333-10635).
10.14 Bylaws of Apple General, Inc. (Incorporated by reference to
Exhibit 10.15 filed in the registrant's registration statement on
Form S-11; File No. 333-10635).
10.15 Certificate of Limited Partnership of Apple REIT Limited
Partnership. (Incorporated by reference to Exhibit 10.16 filed in
the registrant's registration statement on Form S-11; File No.
333-10635).
10.16 Limited Partnership Agreement of Apple REIT Limited Partnership.
(Incorporated by reference to Exhibit 10.17 filed in the
registrant's registration statement on Form S-11; File No.
333-10635).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
27
<PAGE>
Exhibit Number Description
10.21 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).
10.22 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)
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
21 Subsidiaries of Apple Residential Income Trust, Inc. FILE
HEREWITH.
27 Financial Data Schedule. FILE HEREWITH
99.1 Portions of pages 26 through 34, of the Prospectus dated November
19, 1996 of Apple Residential Income Trust, Inc. FILED HEREWITH.
99.2 Portions of pages S-3 through S-26 of Supplement No. 7 dated
February 2, 1998 to the Prospectus dated November 19, 1996 of
Apple Residential Income Trust, Inc. FILED HEREWITH.
28
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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 24,162,572
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 89,634,348
<DEPRECIATION> 1,898,003
<TOTAL-ASSETS> 112,485,520
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 109,090,459
<OTHER-SE> 250,096
<TOTAL-LIABILITY-AND-EQUITY> 112,485,520
<SALES> 0
<TOTAL-REVENUES> 12,005,968
<CGS> 0
<TOTAL-COSTS> 8,271,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 458,384
<INCOME-PRETAX> 3,499,194
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,499,194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,499,194
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
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
obSectives and policies of the Company in a way not furthered by the Company's
direct investment in real property. For example, although not presently
anticipated, the Company could decide to further its diversification objective
by acquiring an equity interest in a REIT owning properties in other regions of
the United States, rather than seeking to invest directly in real
27
<PAGE>
properties located in such other region. Any such decision would be based upon
the perceived best interests of the Company and the Shareholders at the time.
Furthermore, any such investment would be based upon a determination by the
Board of Directors, based upon advice of counsel to the Company, that such
investment would not adversely impact the Company's continued qualification as a
REIT for Federal income tax purposes. If the Company undertook any such
investment, such investment could be made in listed or publicly-traded equity
securities or, alternatively, in securities of a private issuer.
If undertaken at all, the Company would expect to invest only in a Company
engaged principally in the ownership and operation of multi-family apartment
communities. Subject to that limitation, the Company would not necessarily limit
itself to investments in other companies of any specific size or with any
specific period of prior operations.
INVESTMENT CRITERIA
The Advisor is charged with identifying and recommending to the Company
suitable investments. The Advisor will make such recommendations based upon such
relevant factors as (i) the potential for realizing capital appreciation; (ii)
current and projected cash flow and the ability to increase rental income
through capable management; (iii) neighborhood location, condition and design of
the property; (iv) historical and projected occupancy rates; (v) prospects for
liquidity through sale, financing or refinancing; (vi) economic conditions in
the community; (vii) geographic location and type of property in light of the
Company's diversification objectives; and (viii) the purchase price of the
property as it relates to prices of comparable properties in comparable
locations.
The Company's management believes there is substantial opportunity for
growth from acquisitions of multi-family properties in Texas and the
southwestern region of the United States. Management believes that the current
real estate environment is conducive to advantageous acquisitions of existing
multi-family properties that meet the Company's investment criteria. In many
instances, such acquisitions may be made for less than the cost of new
construction.
Generally, the Advisor is not required to, and will not, advise the Company
on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
will make its own decisions with respect to such temporary securities
investments.
Apple Realty Group, Inc., an Affiliate of the Advisor, will receive a 2%
real estate commission upon each purchase by the Company of a property. See "The
Advisor and Affiliates -- Apple Realty Group, Inc."
Any property acquisition made with proceeds representing the Minimum
Offering amount ($15 million) will require the approval of the Executive
Committee of the Board of Directors. Otherwise the acquisition of any property
with a contract purchase price not greater than $15,000,000 may be undertaken by
the President acting alone (unless it is an acquisition from an Affiliate of the
Advisor). Any property acquisition with a contract purchase price exceeding
$15,000,000 will require the consent of the Executive Committee of the Board of
Directors. Any acquisition from an Affiliate of the Advisor will require the
consent of a majority of all Independent Directors and of the entire Board.
TYPES OF INVESTMENTS
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. The Company does not
intend to invest in undeveloped land except in connection with the acquisition
of an existing apartment community. The Company does not intend to make or
invest in any mortgage loans (except that the Company may hold purchase money
obligations secured by mortgages on properties sold by it). Except in connection
with permitted joint venture investments (see "Joint Venture Investments,"
below) and except with respect to permitted temporary investments (see "General"
above), the Company will not invest more than 20 percent of its total assets in
equity securities of or interests in other issuers for a period in excess of 18
months. Within certain limitations, the Board of Directors can change the
investment objectives and policies of the Company. See "Changes in Objectives
and Policies," below.
28
<PAGE>
In addition, the Company's Bylaws prohibit it from engaging in certain
investment and other activities, including: (i) investing more than 10 percent
of the total assets of the Company in unimproved real property or mortgage loans
on unimproved real property; (ii) investing in commodities or commodity future
contracts or effecting short sales of commodities or securities, except when
done solely for hedging purposes; (iii) investing in or making mortgage loans on
property unless the Company obtains a mortgagee's or owner's title insurance
policy or commitment as to the priority of the mortgage or the condition of the
title; (iv) investing in contracts for the sale of real estate unless they are
recordable in the chain of title; (v) making or investing in mortgage loans,
including construction loans, on any property if the aggregate amount of all
mortgage loans outstanding on the property (at the time the Company makes or
invests in its mortgage loan), including the loans of the Company, would exceed
85 percent of the appraised value of the property; (vi) investing in junior
mortgage loans (provided that this and the foregoing limitations shall not apply
to the Company taking back secured debt in connection with the sale of any
property); (vii) issuing securities that are redeemable; (viii) issuing debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known changes is sufficient properly to
service the higher level of debt or unless the cash flow of the Company (for the
last fiscal year) excluding extraordinary, nonrecurring items, is sufficient to
cover the debt service on all debt securities to be outstanding; (ix) investing
more than 20% of its total assets in the equity securities of any
non-governmental issuers, including other REITs or limited partnerships, for a
period in excess of 18 months; (x) issuing equity securities on a deferred
payment basis or other similar arrangement; (xi) incurring any indebtedness,
secured or unsecured, if such indebtedness would result in an aggregate amount
of indebtedness in excess of 100 percent of Net Assets, before subtracting
liabilities (unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws); (xii) allowing aggregate borrowings of the Company to exceed 50 percent
of the Adjusted Net Asset Value (before subtracting any liabilities) of the
Company unless the excess borrowing is similarly approved by the Independent
Directors and disclosed to the Shareholders; (xiii) engaging in any short sale
of or underwriting or distributing, as an agent, securities issued by others, or
engaging in trading, as compared with investment activities; and (xiv) acquiring
securities in any company engaging in activities or holding investments
prohibited by the above prohibitions, the Code or Virginia law.
DIVERSIFICATION
One of the Company's investment objectives is to own properties in various
geographic locations within Texas and the southwestern United States, thereby
minimizing the effects of changes in specific industries, local economic
conditions or similar risks. The extent of geographic diversification depends
upon the number of separate properties which can be purchased. There can be no
assurance that the Company will achieve significant diversification. There is no
limit on the amount or percentage of net proceeds from the sale of Shares which
may be invested in any single property.
JOINT VENTURE INVESTMENTS
Some of the Company's investments may be made through partnerships or joint
ventures. The Company's partner or joint venturer could be an Affiliate of the
Advisor. While each such partnership or joint venture agreement may vary in
form, depending on negotiations, in no case will the co-venturer have any legal
right to take action which would prevent the Company from carrying on its
business as described in this Prospectus. Any joint venture investment of the
Company would be subject to the same conditions, limitations and restrictions
applicable to a Company investment not undertaken as a joint venture, and the
use of a joint venture structure would not itself be designed to alter or expand
the investment objectives and policies of the Company. Investment through a
joint venture could, for example, permit the Company to invest in a property
which is too large for the Company to acquire by itself.
The Company anticipates that any joint venture investment it might undertake
would involve only the ownership and operation of apartment communities of the
same general type sought to be acquired directly by the Company. The Company
could, for example, use a joint venture investment to acquire one or more
apartment communities located outside of the regions in which the Company
normally operates with a view toward minimizing risks otherwise associated
entering new markets. Although the
29
<PAGE>
Board of Directors would seek to contract only with a joint venture partner
which is competent and financially secure, the Company has not set any other
specific criteria which it would follow in connection with the identification of
joint venturers.
Joint venture arrangements may under certain circumstances involve risks
not otherwise present in investments directly in properties themselves,
including, for example, the risk of impasse and risks associated with the
possibility that the co-venturer may at any time experience adverse business
developments or have economic or business interests or goals which are
inconsistent with the economic or business interests or goals of the Company.
There is no limitation on the percentage of the proceeds of the offering
that can be invested in joint ventures.
BORROWING POLICIES
To maximize potential cash flow and minimize risk to the Company, the
Company intends to purchase its properties either on an "all-cash" or
unleveraged basis, or using the limited interim borrowing described under
"Business and Properties-Properties Owned by the Company." The Company will
endeavor to repay any interim borrowings with proceeds from the sale of Shares
and thereafter to hold its properties on an unleveraged basis. However, for the
purpose of flexibility in operations, the Company will have the right, subject
to the approval of the Board of Directors, to borrow.
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits at properties already owned.
Furthermore, although not anticipated, properties may be financed or refinanced
if the Board of Directors deems it in the best interests of Shareholders
because, for example, indebtedness can be incurred on favorable terms and the
incurring of indebtedness is expected to improve the Shareholders' after-tax
cash return on invested capital. See "Sale and Refinancing Policies" below. See
"Risk Factors -- Real Property Investment Risks -- Possible Borrowing; Debt
Financing May Reduce Cash Flow and Increase Risk of Default."
Loans obtained by the Company may be evidenced by promissory notes secured
by mortgages on the Company's properties. In addition, the Company may grant
other forms of security to a lender, including a conditional assignment of
leases and rents of the Company's properties. As a general policy, the Company
would seek to obtain mortgages securing indebtedness which encumber only the
particular property to which the indebtedness relates, but recourse on such
loans may include all of the Company's assets. If recourse on any loan incurred
by the Company to acquire or refinance any particular property includes all of
the Company's assets, the equity of the Company in its other properties could be
reduced or eliminated through foreclosure on that loan.
Subject to the approval of the Board of Directors, the Company may borrow
from the Advisor or its Affiliates or establish a line of credit with a bank or
other lender. The Advisor and its Affiliates are under no obligation to make any
such loans, however. Any loans made by the Advisor or its Affiliates must be
approved by a majority of the Independent Directors as being fair, competitive
and commercially reasonable and no less favorable to the Company than loans
between unaffiliated lenders and borrowers under the same circumstances.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Subject to the
foregoing limitations on the permitted maximum amount of debt, there is no
limitation on the number of mortgages or deeds of trust which may be placed
against any particular property.
30
<PAGE>
MANAGEMENT OF PROPERTIES
Day-to-day property management services for the Company's residential
properties will be provided by Apple Residential Management Group, Inc., an
Affiliate of the Advisor, subject to review by the Board of Directors. For such
services, Apple Residential Management Group, Inc. will receive a monthly
Property Management Fee equal to 5% of the monthly gross revenues of the
properties. The Company intends that Apple Residential Management Group, Inc.
will also be responsible for the accounting and financial reporting
responsibilities for each of the properties the Company acquires. Apple
Residential Management Group, Inc. will be reimbursed for expenses, including
salaries and related overhead expenses, associated with such accounting and
financial reporting responsibilities. The Company believes that the monthly 5%
property management fee it pays to Apple Residential Management Group, Inc. is
commercially reasonable. However, such fee may represent an expense which is
greater than the management expenses of self-administered REITs, which do not
use an outside property management company.
The Company will enter into a property management agreement (the "Property
Management Agreement") with Apple Residential Management Group, Inc. with
respect to each of the Company's residential properties at the time the Company
acquires each such property. The agreement will have an initial term of two
years and thereafter will be renewed automatically for successive two-year terms
until terminated as provided therein or until the property is sold. A copy of
the form of that agreement has been filed as an exhibit to the registration
statement of which this Prospectus is a part; reference is made to the agreement
itself for a complete statement of its provisions. See "Conflicts of Interest"
and "Compensation."
Depending on the location of the Company's real property investments,
unaffiliated, independent property management companies may also render
day-to-day property management services pursuant to contracts with the Company.
Such contracts with the Company may provide for unaffiliated property managers
to receive either fixed or performance-based incentive fees for property
management services, subject to the condition that compensation to such property
managers must be fair, competitive and commercially reasonable. It is intended
that the management capabilities of the property managers will maximize rental
revenues of specific properties through renewing leases at higher market rates;
renovating and retenanting under-performing properties; and constructing
additional rental space on the sites of existing properties, where appropriate.
Apple Residential Management Group, Inc. currently manages no apartment
complexes.
RESERVES
A portion of the proceeds of this offering will be reserved to meet working
capital needs and contingencies associated with the Company's operations. The
Company will initially allocate to its working capital reserve not less than
0.5% of the proceeds of the offering. As long as the Company owns any
properties, the Company will retain as working capital reserves an amount equal
to at least 0.5% of the proceeds of the offering, subject to review and
re-evaluation by the Board of Directors. If such reserves and any other
available income of the Company become insufficient to cover the Company's
operating expenses and liabilities, it may be necessary to obtain additional
funds by borrowing, refinancing properties or liquidating the Company's
investment in one or more properties.
SALE AND REFINANCING POLICIES
The Company is under no obligation to sell its investment properties, and
currently anticipates that it will hold its investment properties for an
indefinite length of time. However, sale may occur at any time if the Advisor
deems it advisable for the Company based upon current economic considerations,
and the Board of Directors concurs with such decision. In deciding whether to
sell a property, the Advisor will also take into consideration such factors as
the amount of appreciation in value, if any, to be realized, federal, state and
local tax consequences, the possible risks of continued ownership and the
anticipated advantages to be gained for the Shareholders from sale of a property
versus continuing to hold such property.
31
<PAGE>
Currently, the Company expects that within approximately three (3) years
from Initial Closing, it will use its best efforts either (i) to cause the
Shares to be listed on a national securities exchange or quoted on the NASDAQ
National Market System or (ii) to cause the Company to dispose of substantially
all of its properties in a manner which will permit distributions to
Shareholders of cash or marketable securities. The taking of either type of
action would be conditioned on the Board of Directors determining such action to
be prudent and in the best interests of the Shareholders, and would be intended
to provide Shareholders with liquidity either by initiating the development of a
market for the Shares or by disposing of properties and distributing to
Shareholders cash or other securities then being actively traded. However, the
Company is under no obligation to take any of the foregoing actions, and any
such action, if taken, might be taken after the referenced three-year period.
At such time as the Company, acting through its Board of Directors,
determines that sale of a property is in the best interests of the Company, the
Company must first offer such property for sale to Cornerstone Realty Income
Trust, Inc. Cornerstone Realty Income Trust, Inc. is a Virginia corporation
which is a public real estate investment trust. Cornerstone Realty Income Trust,
Inc. was founded by Glade M. Knight, who currently serves as the Chairman of the
Board, President and a Director of that entity. Mr. Knight also serves as
Chairman of the Board, President and a Director of the Company. See
"Management-Directors and Officers." Any such sale of a property by the Company
to Cornerstone Realty Income Trust, Inc. would require the consent of a majority
of both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company.
The Company has also agreed with Cornerstone Realty Income Trust, Inc. that
if the Company proposes the sale or disposition of the Company or substantially
all of its assets, business or stock (whether such transaction is structured as
a sale, exchange, merger, consolidation, lease, share exchange or otherwise)
(any such transaction, a "Sale of the Company"), it will first offer Cornerstone
Realty Income Trust, Inc. the right to become the acquiring party in any such
proposed transaction before concluding the proposed Sale of the Company to a
third party. As in the case of a sale of an individual property by the Company
to Cornerstone Realty Income Trust, Inc., any such Sale of the Company to
Cornerstone Realty Income Trust, Inc. would require the consent of a majority of
both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company. Depending upon the form of any such
transaction, it might also require the consent of Shareholders owning a majority
of the outstanding Shares.
If the third party offers cash for the property, assets, stock or business
of the Company, Cornerstone Realty Income Trust, Inc. must offer cash if it
wishes to exercise its right of first refusal. If the third party offers
property other than cash, Cornerstone Realty Income Trust, Inc. will be
permitted to offer property of a like character with the same value. The value
of the property offered by the third party and Cornerstone Realty Income Trust,
Inc. will be the market value if the property has a readily ascertainable market
value (such as listed stock), and otherwise will be determined in good faith by
agreement of the boards of directors of the Company and Cornerstone Realty
Income Trust, Inc., or if such boards are unable to agree, by the average of two
appraisals undertaken by two qualified independent appraisers, one selected by
each board of directors.
If the Company defaults in its obligation to grant to Cornerstone Realty
Income Trust, Inc. a first right to acquire a property or to become the
acquiring party in a proposed Sale of the Company, the Company will be obligated
to pay Cornerstone Realty Income Trust, Inc. as liquidated and agreed-upon
damages cash in the amount of 3% of the aggregate consideration agreed to be
paid for the property, assets, stock or business by any third party in the
transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price. However, the presence of the right of first refusal
held by Cornerstone Realty Income Trust, Inc. with respect to the various sale
or disposition transactions which may be sought or proposed by the Company may
materially hamper the Company's ability to obtain the highest possible price for
its properties, assets, stock or business from a third party. A third party may
be reluctant to engage in negotiations and due diligence with respect to a
possible purchase or acquisition transaction knowing that Cornerstone Realty
Income Trust, Inc. can
32
<PAGE>
substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus, the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although the requirement for the approval of a
majority of the Independent Directors of the Company is intended to overcome any
potential conflict of interest which might be involved in any such sale to
Cornerstone Realty Income Trust, Inc., there can be no assurance that a sale by
the Company to Cornerstone Realty Income Trust, Inc. would be on terms as
favorable as a sale by the Company to a third party, since there may be no
alternative to selling assets to Cornerstone Realty Income Trust, Inc.
Unless required to maintain REIT status, the Company does not intend to
borrow or refinance to make distributions. Although not anticipated, in some
cases it might be advantageous for the Company to incur mortgage indebtedness
on, or finance or refinance, a property to further the Company's investment
objectives. If the original mortgage indebtedness, if any, on a property has
been significantly reduced and/or if a particular property has increased
substantially in value, then financing (or refinancing of existing
indebtedness), if achievable, may permit the Company to realize a portion of the
appreciation in value of the property and retain the property. See "Risk Factors
- - -- Real Property Investment Risks -- Possible Borrowing; Debt Financing May
Reduce Cash Flow and Increase Risk of Default."
Under its Property Acquisition/Disposition Agreement with the Company,
Apple Realty Group, Inc., an Affiliate of the Advisor, may receive a 2% real
estate commission upon each sale by the Company of a property. Apple Realty
Group, Inc. will not be entitled to any disposition fee in connection with a
sale of a property by the Company to Cornerstone Realty Income Trust, Inc. or
any Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs
in marketing such property. See "Investment Objectives and Policies -- Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
It is also possible that Apple Realty Group, Inc., or an Affiliate, will
render services, and receive compensation, in connection with Company financings
and refinancings, although there are no specific agreements for such services as
of the date of this Prospectus. See "The Advisor and Affiliates -- Apple Realty
Group, Inc."
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the Articles of Incorporation, the Bylaws and
the Virginia Stock Corporation Act, the powers of the Company will be exercised
by or under the authority of, and the business and affairs of the Company will
be controlled by, the Board of Directors. The Board of Directors also has the
right and power to establish policies concerning investments and the right,
power and obligation to monitor the procedures, investment operations and
performance of the Company.
In general, the Articles of Incorporation and the Bylaws can be amended
only with the affirmative vote of a majority of the outstanding Common Shares,
except that the Bylaws may be amended by the Directors if necessary to comply
with the REIT provisions of the Code or with other applicable laws and
regulations. The Bylaws contain certain restrictions on the activities of the
Company and prohibit the Company from engaging in certain activities. See "Types
of Investments."
Within the express restrictions and prohibitions of the Bylaws, the
Articles of Incorporation and applicable law, however, the Board of Directors
has significant discretion to modify the investment objectives and policies of
the Company, as stated in this Prospectus. The Company has no present intention
to modify any of such investment objectives and policies, and it is anticipated
that any such modification would occur only if business and economic factors
affecting the Company made the Company's stated investment objectives and
policies unworkable or imprudent. By way of illustration only, owing to a
significant change in economic conditions, the Board of Directors could elect to
acquire apartment communities outside of Texas and the southwestern region of
the United States, or to acquire one or more commercial properties in addition
to residential properties.
Thus, while this Prospectus accurately and fully discloses the current
investment objectives and policies of the Company, prospective Shareholders must
be aware that the Board of Directors, acting consistently
33
<PAGE>
with the Company's organizational documents, applicable law and their fiduciary
obligations, may elect to modify or expand such objectives and policies from
time to time. Any such action by the Board of Directors would be based upon the
perceived best interests of the Company and the Shareholders.
34
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 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 417,777 Shares of the Company for approximately $3.76 million.
Cornerstone owns approximately 3.38% of the Shares of the Company outstanding on
December 31, 1997.
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.
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 has 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, have agreed to provide certain
Company
S-2
<PAGE>
management, property management and property acquisition and disposition
services to the Company in exchange for certain compensation described therein.
ARA and ARMG have 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 acquired all the assets of
ARG (consisting principally of ARG's contract with the Company) for
consideration totalling $2 million, 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.
CORNERSTONE OPERATIONS. Through December 31, 1997, Cornerstone had sold
approximately $354 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.
DEVELOPMENTS AFFECTING DIRECTORS; COMMITTEE MEMBERS
In addition to those persons listed as Directors under "Management" in the
Prospectus, Lisa B. Kern has been added as a Director. 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 1, 1998, Ted W. Smith resigned as a Director of the
Company. Mr. Smith also resigned as an officer of ARMG. The Board thus currently
consists of four individuals, although the Board has the authority to fill the
position resulting from Mr. Smith's resignation if it so desires.
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 and Lisa B. Kern.
The current members of the Compensation Committee are Bruce H. Matson, Penelope
W. Kyle and Lisa B. Kern. 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."
UNSECURED LINE OF CREDIT
As contemplated by the discussion in the Prospectus under the heading
"Business and Properties - Properties Owned by the Company" the Board of
Directors authorized, and the Company obtained, an unsecured line of credit,
which is designed to facilitate the timely acquisition of properties deemed
attractive by management. The unsecured line of credit the ("Unsecured Line of
Credit") is from First Union National Bank of Virginia. The borrowing is a
revolving loan for a principal amount not to exceed at any time $20 million. The
loan bears interest at a floating rate equal to the one month London interbank
offered rate ("LIBOR") plus 2%, requires monthly payments of interest and has a
due date
S-3
<PAGE>
of March 31, 1998. Although the Unsecured Line of Credit is currently unsecured,
the lender may require the securing of the loan with first mortgages on the
Company's properties if the principal amount of any advance is not repaid within
six months of the date of funding. As of December 31, 1997, there was no unpaid
balance on the Unsecured Line of Credit.
As of the date of this Supplement, the documents evidencing the Unsecured
Line of Credit have not yet been amended to reflect the reorganization
transactions described below in this Supplement under "Transfer of Assets to
Subsidiary Partnership." Unless and until such documents are so amended, with
the consent of the lender, the Unsecured Line of Credit will not be available
for 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. The
terms of such borrowing are the same of those under the Unsecured Line of
Credit.
As the size of the Company grows, it is possible that the size of the
Unsecured Line of Credit will be increased or that the Company will obtain
another unsecured line of credit to facilitate the timely acquisition of
properties.
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
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
</TABLE>
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.
S-4
<PAGE>
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 $232,000 (and as of December 31, 1997 had expended approximately
$215,000) for repairs and improvements, including clubhouse renovation,
painting, wood replacement, parking lot repair, interior upgrades (including new
appliances) and pool improvements.
The Property offers seven different unit types. The unit mix and rents
being charged new tenants as of December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------------ ------------ --------
<S> <C> <C> <C>
39 One bedroom, one bath 578 $445
9 One bedroom, one bath (view) 578 465
36 One bedroom, one bath w/sunroom 658 490
12 One bedroom, one bath w/sunroom (view) 658 500
24 One bedroom, one bath w/WD connections 669 510
48 One bedroom, one bath w/WD connections,
FP, bookshelves 661 525
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.
S-5
<PAGE>
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 woodburning 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 now averages
approximately 96%.
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 December 31, 1997, the Property was
97% occupied. The residents are 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 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 (currently estimated at about $4,718,834) 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 $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.
S-6
<PAGE>
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.
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 $968,000 (and as of December 31, 1997 had expended approximately
$774,000) 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.
S-7
<PAGE>
The Property offers a wide range of units types. The unit mix and rents
being charged new tenants as of December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------------------- ------------ ---------
<S> <C> <C> <C>
116 One bedroom, one bath 698 $ 550
120 One bedroom, one bath 796 575
4 One bedroom, one bath, sunroom, bar 798 610
48 One bedroom, one bath 896 620
24 Two bedrooms, one bath 912 620
63 Two bedrooms, two baths 1023 695
80 Two bedrooms, two baths 1089 725
1 Two bedrooms, two baths, sunroom 1123 745
4 Two bedrooms, two baths, sunroom, bar 1189 785
21 Two bedrooms, two baths 1124 780-790
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 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 now averages
approximately 94%.
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 December 31, 1997, the Property was
94% occupied. The tenants are a mix of white-collar and blue-collar workers.
S-8
<PAGE>
The following tables set forth the 1997 real estate tax information on the
Property:
PHASE I
<TABLE>
<CAPTION>
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>
PHASE II
<TABLE>
<CAPTION>
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 (currently estimated at about $13,744,466) 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.
TAHOE 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 seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,690,000, 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.
S-9
<PAGE>
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 $900,000 (and as of December 31, 1997 had expended approximately
$705,000) 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 December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------- ------------ --------
<S> <C> <C> <C>
64 One bedroom, one bath 480 $400
64 One bedroom, one bath 575 430
48 One bedroom, one bath 634 465
32 Two bedrooms, two baths 941 640
32 Two bedrooms, two baths 1,027 695
</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.
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 woodburning 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 now averages
approximately 94%.
S-10
<PAGE>
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 December 31, 1997, 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 RATE TAX
- ------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
County of Tarrant ...... $5,451,821 $1.995196 $ 108,774.52
City of Arlington ...... 5,451,821 0.63800 34,782.62
------------
Total .................. $ 143,557.14
</TABLE>
The basis of the depreciable residential real property portion of the
Property (currently estimated at about $5,296,527) 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.
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 $400,000 (and as of December 31, 1997 had expended approximately
$333,000) for repairs and improvements, including painting, clubhouse
renovations, parking lot repair, interior upgrades (including new appliances),
landscaping and pool improvements.
S-11
<PAGE>
The Property offers several different unit types. The unit mix and rents
being charged new tenants as of December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------------- ------------ --------
<S> <C> <C> <C>
24 Efficiency 452 $400
48 One bedroom/one bath 553 425
24 One bedroom/one bath downstairs 652 460
24 One bedroom/one bath upstairs 652 470
24 Two bedrooms/two baths downstairs 860 600
24 Two bedrooms/two baths upstairs 860 610
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
woodburning 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 now averages
approximately 94%.
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 December 31, 1997, the Property was
91% 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 0.63800 26,796.00
-----------
Total .................. $110,594.24
</TABLE>
S-12
<PAGE>
The basis of the depreciable residential real property portion of the
Property (currently estimated at about $4,182,047) 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 $400,000 (and as of December 31, 1997 had expended
approximately $350,000) for repairs and improvements, including painting, siding
repairs, pool renovations, clubhouse renovations and interior upgrades
(including new appliances).
The Property offers four units types. The unit mix and rents being charged
new tenants as of December, 1997 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 $495
16 One bedroom, one bathroom w/fireplace and dining
room 720 535
88 Two bedrooms, two bathrooms w/fireplace and dining
room 913 620
64 Two bedrooms, two bathrooms w/fireplace, dining
room and vanity 981 650
</TABLE>
S-13
<PAGE>
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 now averages
approximately 94%.
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 December 31, 1997, the Property was
92% 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 0.63800 33,007.66
------------
Total .................. $ 136,231.43
</TABLE>
The basis of the depreciable residential real property portion of the
Property (currently estimated at about $6,480,250) 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 $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.
S-14
<PAGE>
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 $225,000 (and as of December 31, 1997 had expended
approximately $198,000) 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 December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------------- ------------ --------
<S> <C> <C> <C>
17 One bedroom, one bathroom 525 $469
7 One bedroom, one bathroom (upgraded) 525 499
12 One bedroom, one bathroom 650 544
12 One bedroom, one bathroom (upgraded) 650 564
13 One bedroom, one bathroom 750 569
19 One bedroom, one bathroom (upgraded) 750 589
16 Two bedrooms, two bathrooms 900 780
24 Two bedrooms, two bathrooms 1,000 810
</TABLE>
The apartments provide a combined total of approximately 90,000 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 $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.
S-15
<PAGE>
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 now
averages approximately 94%.
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 December 31, 1997, the Property was
93% 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 (currently estimated at about $3,402,216) 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 $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.
S-16
<PAGE>
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 $192,000 (and as of December 31, 1997 had expended approximately
$95,000) 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 December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------------- ------------ --------
<S> <C> <C> <C>
64 Efficiency 500 $450
52 One bedroom, one bathroom 600 530
12 One bedroom, one bathroom 650 540
8 One bedroom, one bathroom 650 550
42 One bedroom, one bathroom 700 560
14 One bedroom, one bathroom (upgraded) 700 575
</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.
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 now averages
approximately 95%.
S-17
<PAGE>
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 December 31, 1997, 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 (currently estimated at about $5,332,335) 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.
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
$250,000 (and as of December 31, 1997 had expended approximately $230,000) for
repairs and improvements, including painting, siding repairs, pool renovations,
clubhouse renovations, interior upgrades and landscaping.
S-18
<PAGE>
The Property offers a variety of unit types. The unit mix and rents being
charged new tenants as of December, 1997 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 $520
10 Contemporary One Bedroom/One Bath w/Fireplace 581 565
2 Contemporary One Bedroom/One Bath large 604 525
8 Contemporary One Bedroom/One Bath large 615 535
w/Fireplace
9 Luxury One Bedroom/One Bath Down 684 575
9 Luxury One Bedroom/One Bath Up 684 585
14 Luxury One Bedroom/One Bath Down w/Fireplace 684 615
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 684 640
8 Conventional One Bedroom/One Bath Lofted Study 716 585
11 Conventional One Bedroom/One Bath Lofted Study 716 600
w/Fireplace
9 Conventional One Bedroom/One Bath Lofted Study 750 620
Large w/Fireplace
12 Executive One Bedroom/One Bath Down 775 600
12 Executive One Bedroom/One Bath Up 775 610
12 Executive One Bedroom/One Bath Down w/Fireplace 775 610
12 Executive One Bedroom/One Bath Up w/Fireplace 775 620
10 Executive One Bedroom/One Bath Study Down 871 670
10 Executive One Bedroom/One Bath Study Up 893 685
4 Executive One Bedroom/One Bath Study Down 871 720
w/Fireplace
4 Executive One Bedroom/One Bath Study Up 893 735
w/Fireplace
6 Executive One Bedroom/One Bath Study 871 735
Down w/View
6 Executive One Bedroom/One Bath Study Up w/View 893 745
</TABLE>
The apartments provide a combined total of approximately 169,000 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 ("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
S-19
<PAGE>
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 now averages
approximately 94%.
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 December 31, 1997, the Property was
95% 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 (currently estimated at about $7,477,108) 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.
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.
S-20
<PAGE>
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 $75,000 (and as of December 31, 1997 had expended approximately
that amount) 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 December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------------- ------------ --------
<S> <C> <C> <C>
42 One bedroom/one bath 504 $440
42 One bedroom/one bath upstairs 504 450
40 One bedroom/one bath 572 460
40 One bedroom/one bath upstairs 572 470
42 One bedroom/one bath w/fireplace 690 530
42 One bedroom/one bath w/fireplace upstairs 690 540
20 One bedroom/one bath/den w/fireplace 757 605
30 Two bedrooms/two baths w/fireplace 925 660
30 Two bedrooms/two baths w/fireplace 1,026 695
</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.
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 now averages
approximately 94%.
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 December 31, 1997, the Property was 96%
occupied. The residents are a mix of white-collar and blue-collar workers.
S-21
<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>
City of Dallas ......... $9,448,220 $0.443070 $ 41,862.23
County of Dallas ...... 9,448,220 2.11213 199,558.69
-----------
Total .................. $241,420.92
</TABLE>
The basis of the depreciable residential real property portion of the
Property (currently estimated at about $8,631,504) 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.
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.
S-22
<PAGE>
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
December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------- ------------ --------
<S> <C> <C> <C>
42 One bedroom/one bath 713 $660
32 One bedroom/one bath 830 695
42 Two bedrooms/two baths 1,077 865
34 Two bedrooms/two baths 1,148 890
20 Two bedrooms/two baths TH 1,222 905
</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
December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------- ------------ --------
<S> <C> <C> <C>
32 One bedroom/one bath 665 $650
36 One bedroom/one bath 773 675
16 One bedroom/1.5 baths TH w/den 928 805
24 Two bedrooms/two baths 974 825
48 Two bedrooms/two baths 1,062 850
36 Two bedrooms/2.5 baths TH 1,176 890
</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 December 31, 1997 had expended
approximately $311,000) 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. 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 woodburning fireplace and outside storage. Each
S-23
<PAGE>
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 now averages
approximately 95%.
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 December 31, 1997, occupancy at the Property was 91%. 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 (currently estimated at about $10,705,670) 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 $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.
S-24
<PAGE>
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 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, Apple Residential
Advisors, Inc. 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 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,
single-family, 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 December, 1997 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- --------------- ---------------------------- ------------ --------
<S> <C> <C> <C>
56 One bedroom/one bathroom 563 $425
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.
The Company currently has budgeted approximately $100,000 for additional
capital improvements to the Property. These improvements will include clubhouse
renovations and upgrading the landscaping at the Property. In addition, at the
time that the Company acquired the Property there were 12 apartment units which
had been damaged by fire. These damaged apartment units are currently being
repaired and are all expected to be available for occupancy by April 1998. All
costs of the repair are being funded with the proceeds of Property casualty
insurance.
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.
S-25
<PAGE>
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 woodburning
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 now averages
approximately 94%.
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 December 31, 1997, the Property
was 91% occupied, counting as vacant the 12 units recently damaged by fire. Of
the 188 units available for rental, 182, or 96% of 188, were rented as of
December 31, 1997. 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 (currently estimated at about $3,988,383) 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 $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.
S-26
